prev

HedgeyeRetail: October SSS = Shrinking Sales Sample

Takeaway: This morning’s Retail Sales are littered with one off company specific callouts and little by way of broader themes.

This morning’s Retail Sales are littered with one off company specific callouts and little by way of broader themes. For the second month in a row, a major retailer (KSS) is announcing that it will no longer participate in the monthly SSS exercise confirming its increasing irrelevance. Over the last two months, the exit of both TGT and KSS represents over 30% of last year’s SSS sample that has now withdrawn. With top-line results increasingly stressed, we expect additional defections in coming months.

 

All in October results came in marginally better than last month with 12 companies coming in ahead of expectations compared to 5 misses. Here are a few callouts worth noting:

  • With retailers and consumers alike still trying to measure the impact of Sandy, few details were offered.
  • The deviation of beats and misses were relatively tight with JWN and TJX the exception coming in well above expectations.
    • At JWN, the Rack continues to succeed with comps up +10.5%
  • One of the more notable callouts is the deviation between TJX (beat) and ROST (miss) given persistent strength in the off-price channel.

    • While momentum behind ROST has already started to fade, we expect today’s results to accelerate recent weakness.
    • At TJX, Europe comps up +11% confirm favorable weather helping to drive sales overseas, which is key differentiator between the two off-pricers.
  • KSS surprised to the upside after abysmal September results. In fact, when looking at the two months in aggregate, KSS’ hit its Q3 comp outlook. A notable outcome given weakness headed into quarter-end particularly given what have been very low expectations for the retailer and its inability to capitalize on share gifted from JCP. November results will be closely monitored re the sustainability of this improvement.
  • GPS results will have investors focused on the ~10% EPS 3Q beat, but a look under the hood reveals a major slowdown at Old Navy despite the most favorable setup of the year. We think GPS’s upward trajectory is increasingly unsustainable. Old Navy and Gap Domestic have benefitted significantly from JCP. Now GPS has to anniversary it.
  • TGT missed perpetuating what now marks three consecutive sequential months of decelerating underlying 2-year comp trends. With the setup getting tougher through year-end before it eases in early 2013, near-term results will remain pressured and reliant largely on cost management to drive earnings performance.
  • With underperformance at both Old Navy and ROST, we will be keeping a close eye on this development as two of the greatest beneficiaries of JCP’s share shift…dare we say an incrementally positive data point for JCP?

 

HedgeyeRetail: October SSS = Shrinking Sales Sample - OctSSS

 

HedgeyeRetail: October SSS = Shrinking Sales Sample - GPS Comps

 






















INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY

Takeaway: Claims moved lower as our seasonality model anticipated. Real labor market conditions were slightly less positive, however.

***The following note comes from our Financials team led by Managing Director Josh Steiner. If you aren't yet receiving their work on the space, including their seminal work on the U.S. housing market, please email if you're interested in setting up a trial.***

 

 

Perceived Employment Progressing As Expected

This morning's 9k decrease in initial jobless claims (seasonally-adjusted) keeps the series on track with the improvement we expect to see from September through February. The slope is flatter thus far than the six-month averages seen over the past few years, but in looking at the prior years the improvements have tended to accelerate over the last four months (November through February) relative to September/October. While this is our baseline assumption, we would emphasize that the forward path hinges largely on the resolution of the Fiscal Cliff, which we regard as being closely tied to the outcome of the election.

 

What's Really Going On?

We're more interested in the rate of YoY change in the rolling NSA series, as that's the better indicator of how the labor market is really doing. That measure showed slight moderation WoW to -8.8% YoY vs. -9.1% in the preceding week (a lower number reflects better health in the labor market). Two weeks ago, the YoY change was -8.9%.  As such, the series is slightly worse WoW, but we tend not to put too much emphasis on a single week. 

 

The Data  

Last week, seasonally-adjusted initial jobless claims fell 6k to 363k. However, after incorporating the 3k upward revision to the prior week's data, claims fell by 9k. Rolling claims fell 1.5k WoW to 367k. On a non-seasonally adjusted basis, claims fell 5k to 340k.

 

Separately, the divergence between the S&P 500 and initial jobless claims has largely disappeared over the past month with the sell-off in equities and the improvement in claims, suggesting we're much closer to fair value at these levels.

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 1

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 2

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 3

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 4

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 5

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 6

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 7

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 8
 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 9

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 10 

 

Joshua Steiner, CFA

 

Robert Belsky


INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY

Takeaway: Claims moved lower as our seasonality model anticipated. Real labor market conditions were slightly less positive, however.

Perceived Employment Progressing As Expected

This morning's 9k decrease in initial jobless claims (seasonally-adjusted) keeps the series on track with the improvement we expect to see from September through February. The slope is flatter thus far than the six-month averages seen over the past few years, but in looking at the prior years the improvements have tended to accelerate over the last four months (November through February) relative to September/October. While this is our baseline assumption, we would emphasize that the forward path hinges largely on the resolution of the Fiscal Cliff, which we regard as being closely tied to the outcome of the election.

 

What's Really Going On?

We're more interested in the rate of YoY change in the rolling NSA series, as that's the better indicator of how the labor market is really doing. That measure showed slight moderation WoW to -8.8% YoY vs. -9.1% in the preceding week (a lower number reflects better health in the labor market). Two weeks ago, the YoY change was -8.9%.  As such, the series is slightly worse WoW, but we tend not to put too much emphasis on a single week. 

 

The Data  

Last week, seasonally-adjusted initial jobless claims fell 6k to 363k. However, after incorporating the 3k upward revision to the prior week's data, claims fell by 9k. Rolling claims fell 1.5k WoW to 367k. On a non-seasonally adjusted basis, claims fell 5k to 340k.

 

Separately, the divergence between the S&P 500 and initial jobless claims has largely disappeared over the past month with the sell-off in equities and the improvement in claims, suggesting we're much closer to fair value at these levels.

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - seasonality

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - Raw

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - Rolling

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - NSA

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - NSA rolling

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - S P

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - Fed

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - Recession

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - Rolling Linear

 

Yield Spreads

The 2-10 spread fell 9 bps WoW to 141 bps. So far 4QTD, the 2-10 spread is averaging 1.45%, which is up 8 bps relative to 3Q12.  

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 2 10

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - 2 10 2

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over multiple durations. 

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - Subsector performance

 

INITIAL JOBLESS CLAIMS: PERCEIVED PROGRESS CONTINUES WHILE REAL PROGRESS MODERATES SLIGHTLY - Companies

 

Joshua Steiner, CFA

 

Robert Belsky


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

BKW: Too Big To Fix?

Burger King (BKW) recently reported 3Q12 earnings and while it beat on the EPS estimates, it’s clear the company has a lot of work to do going forward. With competition from the likes of everyone from Wendy’s (WEN) to McDonald’s (MCD) to even Chipotle (CMG), BKW needs to grow SSS aggressively in the US and Canada while focusing on its four pillars strategy that involves Image, Menu, Marketing Communications and Operations. We consider this a problem that may be too big to fix.

 

BKW: Too Big To Fix?  - bkw1

 

BKW: Too Big To Fix?  - bkw2

 

Hedgeye Restaurants Sector Head Howard Penney laid out BKW’s future in our sales note this morning:

 

The performance in sales trends is what carries most weight for the Burger King investment thesis.  On that metric, the outlook is uncertain.  In the U.S., two-year average trends accelerated by 100 basis points, sequentially, from 2Q12 to 3Q12.  The U.S. constitutes almost 60% of the store-base.  As the charts below highlight, consensus is expecting a sharp acceleration in trends during the first half of 2013.  Holding current two-year trends level suggests negative same-restaurant sales trends for 1H13


Tech Mate

Client Talking Points

Tech Mate

Remember back in 2011 where you could be a great stockpicker by purchasing shares of Apple (AAPL) and letting them ride higher and higher like a balloon jammed to the gills with helium? Not the case these days, especially with management shakeups and disappointing price points on new products. Technology is performed awful in October as one of the worst sectors out there. The XLK fell a whopping -6.3% and Apple makes up a big portion of that ETF. So just think to yourself, with companies like Intel (INTL) and others missing on earnings, do you really think tech is still hot?

Asset Allocation

CASH 58% US EQUITIES 6%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
TCB

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.

PCAR

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

HCA

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road

TWEET OF THE DAY

"The irony is exquisite: Obama does his job for a couple days and everyone yells: Game changer!!!" -@JonahNRO

QUOTE OF THE DAY

"So much of what we call management consists in making it difficult for people to work." -Peter Drucker

STAT OF THE DAY

Pfizer's profits fall -14% thanks to generic Lipitor.


Pundit Bias

This note was originally published at 8am on October 18, 2012 for Hedgeye subscribers.

“Wherever there is human judgment there is potential for bias.”

-Nate Silver

 

That’s a quote from an excellent chapter titled “Are You Smarter Than A Television Pundit” in The Signal and The Noise. Before he moves onto baseball, Silver does a nice job differentiating between quantitative versus qualitative opinions in the partisan media.

 

So you will need to adopt some different habits from the pundits you see in TV. You will need to learn how to express – and quantify – the uncertainty in your predictions. You will need to update your forecast as facts and circumstances change.” (pg 73)

 

If that sounds familiar, it should. This is all encompassing in Hedgeye’s founding principles of establishing Transparency, Accountability, and Trust through independent research. Journalists are not analysts. And only the great analysts in our profession embrace the uncertainty of there being a high probability of being wrong. It’s ok to say it like that. We’re not on TV.

 

Back to the Global Macro Grind

 

China’s 7.4% GDP report for Q3 of 2012 provides a great example of where we were wrong this morning. In our Monday research meeting we discussed what we thought was a heightening probability that Chinese GDP surprised on the upside. It didn’t.

 

Now if you turn on the radio or TV this morning, you’ll probably see something very different than what I just wrote (or what I have been writing on Twitter). Since most of these sources are journalistically driven, they obviously don’t have forecasting models. Instead, they anchor on other people’s content (the sell-side’s), which at times can be even worse than a journalist’s opinion.

 

“China beat”, “China has bottomed”, “China is not Spain” – scanning the Old Media’s headlines will get you spew like that. Whereas I we’ll just show you the data within our analytical framework:

  1. China’s Q3 2012 GDP of 7.4% slowed sequentially (quarter-over-quarter) from 7.6% in Q2
  2. China’s Q3 2012 GDP of 7.4% slowed -19% year-over-year versus 9.1% in Q3 of 2012
  3. China’s Q3 2012 GDP of 7.4% slowed more than the low-end scenario in our forecasting model of 7.6%

In other words, across our risk management durations (TRADE, TREND, and TAIL):

  1. TAIL (3 years or less) – China continues to slow, and surprise both its government and the world on the downside
  2. TREND (3 months or more) – China continues to slow, at an accelerating rate, sequentially
  3. TRADE (3 weeks or less) – China’s stock market just moved to immediate-term TRADE overbought on the news

Maybe China has “bottomed.” But I have no high-probability edge on that and neither do you. Or, let me say that more democratically – if you can send me a model that shows me why and how China just bottomed, I’m happy to look at how you’ve analyzed the Chinese government’s made-up numbers. I’m even happier to change my mind.

 

Made-up, or Madoff? Yes, both American and Chinese guys make up the numbers. And this makes it all the more difficult to make a macro forecast that something has “bottomed” or “topped” with a straight face. It might get you on TV however.

 

Having had to learn from all the mistakes I have made the hard way, the best risk managed opinion I can give you is that both tops and bottoms are processes, not points.

 

In forecasting “Principle #1: Think Probabilistically” –Nate Silver

 

“Instead of spitting out just one number and claiming to know exactly what will happen, I instead articulate a range of possible outcomes.” (page 61)

 

I don’t love everything Silver thinks, but I do love that. That’s the closest thing I have read in the last year to what we call our Risk Range. That’s what you see at the bottom of every Early Look - our immediate-term range of probable upside/downside (risk) – and I think most people would say that’s the most accurate and repeatable forecast we give you every morning.

 

So skip my rants and go to the bottom of the note - save yourself some time.

 

One more point on China - to get Commodities right, we think you need to get the Dollar, Supply, and Demand right. If you think China has “bottomed”, you’re going to have a very different long-term forecast than ours right now. The risks are rising that there’s a decade long-cycle of price and demand topping.

 

Everything that happens in Macro that matters most happens on the margin. And if the new long-term range of Chinese GDP growth is 4-8% instead of what it’s been (8-12% for the last decade), that could matter, big time.

 

If and when we get that wrong, we’ll write about it transparently and accountably that morning.

 

Our immediate-term risk range for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Shanghai Composite, and the SP500 are now $1733-1761, $112.60-115.05, $79.01-79.69, $1.29-1.31, $1.73-1.83%, 2066-2139, and 1449-1469, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pundit Bias - Chart of the Day

 

Pundit Bias - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
next