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LIZ: Much Beneath the Surface

 

There’s a lot to read into with today’s CFO announcement. They passed over some stars. Overwhelming focus on operational/financial/digital integration and growth. All in, a great announcement with low risk.

 

 

This morning’s announcement by LIZ that George Carrera joined the company as CFO might not seem notable at face value. But we think it’s rather big. The punchline relates not only to whom they chose, but to who they passed over. Our sense is that the others that were in the running were extraordinarily strong from an operational perspective – particularly as it relates to growing solid brands in a digital age outside the U.S. while not missing a beat operationally, logistically, and financially.

 

Additionally, our sense is the candidates did not have great (if any) capital markets experience. Carrera spent the better part of 10 years as CFO/COO of Tommy Hilfiger, including the period during which it was bought by Apax Partners for $1.6bn and subsequently sold for $3bn to PVH.

 

The knock for some investors on more of an internal vs external focus would be that someone focused on capital markets might want to monetize Kate ASAP. We’re not worried there. That’s a CEO/Board level decision, and would not happen until 2H at the earliest (after McComb’s contract renews). Also, if/when such a monetization event happens, it is likely to be a stub to establish value rather than to sell outright. 

 

Our big concern would be if they brought on someone that can pander to the capital markets while leaving operational gaps in the infrastructure. Then we’d be left with the corporate version of Ben Bernancke. Now we’re far less likely to think that this concern comes to fruition.

 

All-in, this is a great event.

 

Here are a couple bullets on Carrara:

  • Apax Partners bought Tommy in May 2006 for $1.6Bn
  • Carrara was the COO/CFO at Tommy from 9/06-2/11 during which time it was turned around and then bought by PVH for $3Bn in March 2010

LIZ: Much Beneath the Surface  - LIZ CarraraLinkedIn

(Source: LinkedIn Profile)

 

LIZ: Much Beneath the Surface  - LIZ TommyRevs

(Source: Company Documents)

 

Brian McGough

Managing Director


THE HBM: MCD, DRI

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Commentary from CEO Keith McCullough

 

Greek students fighting stray dogs in the streets – nice:

  1. SPAIN – despite the concept that all is fine in no-volume rallies until it isn’t, the rest of the world’s deficit/debt problems do not cease to exist. The recent breakdown in Spanish stocks and bonds show you that in pictures – now the Euro is failing to overcome $1.32 resistance as well. Sov Debt risk never goes away, but its intensity focuses the mind when country currencies, stocks, and bonds do the same thing at the same time.
  2. US Deficit – I know it doesn’t matter anymore, right? Right. At -$237B for FEB that’s a new US record for monthly deficit print and should remind genius growth forecasters that tax revenues are collected on a real-basis too. Inflation at the pump finally running as headline headwind for Obama even in the NY Times poll this morning. US Tax revs are down y/y in FY 2012 vs FY 2012, despite the GDP “recovery”… spin.
  3. TREASURIES – either 2s and 10s are testing a breakout in the US this morning b/c credit risk is rising on the margin (deficit) and/or Bernanke is going to be less dovish than he has been for the last 6yrs at today’s FOMC whisperings. Asymmetric risk lives on as long as this ridiculously short-sighted game of chasing yield does. Breakout lines for 2s and 10s = 0.26% and 2.03%, respectively.

Bullish on strays.

 

KM

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: MCD, DRI - subsector

 

 

QUICK SERVICE

 

MCD: Per our post this morning, McDonald’s is launching baked goods offerings in New England.  The strategy is directly aimed at Dunkin’s market share.

 

MCD: McDonald’s was maintained “Buy” at Deutsche Bank with a price target of $108. 

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

COSI: Cosi gained 4.9% on accelerating volume.

 

DNKN: Dunkin’ Brands gained 2.4% on accelerating volume.

 

GMCR, CBOU: Green Mountain and Caribou declined -4.6% and -2.3%, respectively, on accelerating volume.

 

 

CASUAL DINING

 

DRI: Olive Garden introduced a new $6.95 lunch special yesterday on its Facebook page called “Create Your Own”.

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

RUTH: Ruth's Chris gained 2.7% on accelerating volume.

 

 

THE HBM: MCD, DRI - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


MCD VS DNKN – GAME ON

Yesterday McDonald’s launched a new Breakfast initiative in New England.  We see this as a move to steal share from Dunkin’ Donuts that could make life difficult for DNKN longer-term.

 

According to the Boston Globe, McDonald’s new “menu items include cheese Danish, two kinds of muffins, banana bread, and vanilla scones. Unlike the traditional McDonald’s breakfast menu, which features offerings such as oatmeal, pancakes, and variations of the long-popular Egg McMuffin, the baked goods will be available all day.”

 

The initiative was organized by/for McDonald’s Boston region and will be sold in Albany, N.Y. Massachusetts, Rhode Island, Connecticut as well as a few other states in the Northeast. 

 

The New England region worked with menu management team in Oak Brook “to create a line of breakfast pastry products that they believe will resonate well with the local customer base” according to McDonald’s.   The products are par-baked and are prepared daily in the existing breakfast ovens that are used to cook McDonald’s biscuits and pies. 

 

We are hearing that the prices are very competitive and are consistent with the “extra value meal” section of the new menu initiative being launched at the end of March  The McDonald’s products include a Cheese Danish for $1.79 or $2.79 with coffee, muffins for $1.59 each, three mini scones for $1.89 and Banana Bread for $1.59 per slice.

 

We have seen several times how ruthless a competitor McDonald’s is and we do not see this foray into Dunkin’s turf as being insignificant.  The baked goods are a natural extension of the McCafé initiative launched in 2009.  The baked goods are going to be sold throughout the day and, while it’s difficult to know for sure how they will do, DNKN is clearly in MCD’s crosshairs.

 

MCD VS DNKN – GAME ON - baked goods mcd

 

Howard Penney 

Managing Director

 

Rory Green

Analyst


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Headed Higher?

This note was originally published at 8am on February 28, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If we do not change our direction, we are likely to end up where we are headed.”

-Chinese Proverb

 

In my intraday risk management note yesterday titled “Higher-Highs”, I explained why I was buying/covering on red. Fifteen SP500 points higher (+1%), I was tweeting about why I was selling/shorting green up at 1371.

 

If we do not change our direction, we are likely to get run over.

 

Back to the Global Macro Grind

 

Taking a step back, from a positioning perspective here’s what I’ve done since being bullish on everything US Growth and Consumption (pre Ben Bernanke’s Policy To Inflate, pushing US Dollar Debauchery out to 2014, on January 25th, 2011):

  1. Long Inflation
  2. Short Growth

Notwithstanding all of the single security mistakes I’ve made in the last month (11 losing positions out of my last 45), the obvious risk management lesson since January 25thhas been that perma-bulls and perma-bears rarely change direction – at least not quickly.

 

That’s the immediate-term. That’s also the rear-view mirror. Looking forward, what lessons have growth investors learned over the intermediate to long-term about the relationship between Inflation and Growth?

 

Until we get through month-end, I do not know the answer to that question. My sense is that there has not been much evolution in the risk management process over the course of the last 2 major growth slowdowns (2008 and 2011), so this time won’t be different.

 

How am I positioning the Hedgeye Asset Allocation Model into month-end markups (February ends tomorrow):

  1. CASH = 52% (down from 91% on January 25th, before the US Equity market dropped for 4 consecutive days)
  2. FIXED INCOME = 24% (Inflation Protection and Growth Slowing – TIP and FLAT)
  3. COMMODITIES = 9% (Gold – GLD)
  4. INTERNATIONAL FX = 9% (US Dollar – UUP)
  5. US EQUITIES = 6% (Utilities – XLU)
  6. INTERNATIONAL EQUITIES = 0%

Taking these positions in order, here’s the what I am thinking as of this morning:

  1. CASH: when it’s my own money, it’s going to be a big position at 3yr highs in US Equities – that’s just how I roll
  2. TIP and FLAT: both positions are shining examples of Growth Slowing As Inflation Accelerates (same call I made last year)
  3. GLD: pushing into its 12 consecutive year of going up, this repudiation of Keynesian Economics still looks like my weight
  4. UUP: I just started buying US Dollars back in the last few days as a hedge against Japan’s massive debt maturities in March
  5. XLU: I swapped out of our long Financials (XLF) position yesterday at +13.7% YTD and into Utilities which are down -2.5% YTD

As for International Equities, having a 0% asset allocation at the top of a move is also plainly described as my mistake. We were long China coming out of the December 29th2-year low – and I sold too early. The good news is that we waited until February 16thto sell Chinese Equities (CAF) for a +15.11% gain. The bad news is that China has moved higher since (+11.4% YTD).

 

Changing direction when markets are Headed Higher is not easy. Neither is buying on red or selling on green. But this is what I do. The process is both malleable and repeatable. I wake up every morning looking forward to fresh opportunities, not dwelling on mistakes.

 

Some people in our profession don’t like to talk about their mistakes. Many of those people like to call me names my Mom wouldn’t like when I call out our successes. Sadly, this won’t change direction anytime soon either. It’s just the way some people are.

 

On pages 218-219 of “Thinking, Fast and Slow” in his chapter titled The Illusions of Pundits, Daniel Kahneman nails this difficult topic of success/failure to the boards: “…experts resisted admitting that they had been wrong, and when they were compelled to admit error, they had a large collection of excuses: they had been wrong only in their timing, an unforeseeable event…” etc.

 

Sound familiar?

 

Of course it does. Whether you have worked at 4 different hedge funds like I have, or whether this is your first wonderful experience chasing alpha at an asset management firm, you know exactly who the excuse makers are – their operating principles are very different than mine.

 

The best news I can give you is that it still isn’t too late. We can still Re-think, Re-build, and Re-work all that we do in this profession. Our collective policy, strategy, and capital mistakes provide tremendous opportunity for change. If I didn’t believe that deep down in my gut, I wouldn’t feel like our firm is Headed Higher this morning either.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), Utilities (XLU), Inflation Protection (TIP), Growth Slowing (FLAT), US Dollar (UUP), and the SP500 are now $1752-1798, $121.93-126.34, $34.72-35.41, $118.11-119.66, $58.01-59.65, $21.71-22.12, and 1358-1373, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Headed Higher? - Chart of the Day

 

Headed Higher? - Virtual Portfolio



Resist The Crowd

“Resist the crowd: cherish numbers only.”

-Jeremy Grantham

 

Doesn’t that sound hard core? We all aspire to know all of the numbers. We all want to sell every top, and buy every bottom. This is easy, right?

 

Whether I’m looking at rising US Equity futures this morning or whether I was looking at them in either March of 2008 or 2011, it’s the same old grind. In the last 4 years, literally every time US Stock Market Volatility (VIX) has tested the 14-15 zone, you’ve been paid to Resist The Crowd.

 

This time, despite the lowest trading volumes in US stock market history – oh, and the highest monthly US government deficit in US history (FEB = -$237.7B US Deficit) – is going to be different. Right?

 

Back to the Global Macro Grind

 

Flying back from California last week, I had the opportunity to crush my reading pile. Long-time readers of my rants know that from a process perspective, I just love digging into my pile.

 

Here are the 3 market views that jumped out of the required reading:

  1. Your Grandchildren Have No Value” - Grantham’s Quarterly Letter
  2. Defense” – Bill Gross Monthly
  3. S&P 1,700” – Birinyi Associates

Addressing these in the reverse order that they appear (not suggesting causality), the big round number from Laszlo Birinyi was backed up by the least impressive risk management process. If I recall his market views correctly from right around this time last year (pre 30% crashes in everything small cap, cyclicals, and commodities), they haven’t really changed.

 

After seeing his newly minted academic CEO, Mohamed El-Erian, get roughed up by Doubleline’s lynx-eyed Jeff Gundlach last year, Bill Gross’ title explains exactly how he feels after calling for US Credit Risk and a melt-down in US Treasuries (again, right around this time last year) – he’s playing defense. The most obvious defense for PIMCO is probably firing Mohamed.

 

Finally, back to Grantham, his longest Quarterly Letter ever was highlighted by the following 3 risk management thoughts:

  1. “Recognize your advantages over the professionals… the individual is far better positioned to wait patiently…”
  2. “Try to contain natural optimism… not easy, but easier…”
  3. “We can agree that in real life, as opposed to theoretical life… the enthusiasm of the crowd is hard to resist.”

Accuse me of having a confirmation bias towards Grantham – I’ll take that as a compliment. Like me, he’s had his own performance issues in this game. Unlike most, he’s self effacing in addressing our innate weaknesses as human beings. Markets humble the “smart.”

 

I personally do not think that calling for big round numbers and “year-end targets” in major indices requires any risk management process whatsoever. Neither does writing Op-Eds to support theoretical views that have no actual precedent.

 

The only thing I am certain of in this business is that the more I know about what it is that my competition thinks they know, the less I know about what is going to happen next.

 

Embrace Uncertainty.

 

Can Global Equities go a lot higher? Evidently yes. After that, can they go a lot lower (May-Aug of 2008, 2010, 2011)? Evidently yes.

 

So what do you do now? For me, the answer is always changing:

  1. Last Tuesday at 1129AM EST with the SP500 30 points lower, I was buying
  2. This Tuesday at some point in/around 10AM EST, I’ll probably be selling

That definitely doesn’t mean I nailed it. It just means that in the immediate-term, I am proactively managing the risk of the price range as both volume and volatility signals instruct me to front-run people staring at single factor-model moving averages.

 

Why “cherish the numbers” in our Global Macro Research (Growth, Inflation, Policy) model? Because over the intermediate to long-term (2007-2012), Resisting The Crowd’s career risk management decisions to ignore those numbers has worked.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, US Equity Volatility (VIX), and the SP500 are now $1, $123.87-126.79, $79.34-80.24, 15.23-17.98, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Resist The Crowd - 22. VIX

 

Resist The Crowd - 22. VP


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