Trade Of The Day: WTW

Today, we shorted Weight Watchers International (WTW) at $55.82 a share at 11:55 AM EDT in our Real Time Alerts. With the stock trending lower over the past week, we saw an opportunity to short it on green. The company recently lowered guidance and put the blame on Superstorm Sandy as well as investment costs. We think there's more to the story as the stock fails to trade above its TAIL risk line.


Trade Of The Day: WTW - image001


Neil Barofsky: What Will The President Do Now?

Neil Barofsky: What Will The President Do Now? - A


"We need to convince those seeking or trying to retain power that they will not get our votes unless and until they commit to meaningful change of [our] financial system."
                  -Neil Barofsky 



The Hedgeye Macro Team lead by, CEO Keith McCullough, and DOR Daryl Jones, will be hosting an Expert Conference Call with Neil Barofsky, the former Inspector General of the Troubled Asset Relief Fund (TARP). The call will be held Wednesday, November 7th at 11:00am EST, following the Presidential Election to determine the future path of fiscal, monetary and economic policy. 


Barofsky is extremely familiar with the inner workings of Washington; in late 2008 he was appointed to oversee the Treasury Department's administration of the $700 billion Wall Street/TARP bailout where he remained until his resignation in February 2012. He has become known for his relentless criticism of Treasury officials, often highlighting Tim Geithner as a particular problem. Barofsky officiated as an aggressive and outspoken overseer monitoring for waste and fraud. During his time as with the U.S. Treasury more than $550 million in fraud losses were avoided and $150 million fraudulent earnings were recovered for taxpayers. Given his experience and knowledge of the treasury it will be invaluable to hear his brutally honest thoughts on the outcome of the election and his insider's perspective on how it will economically effect our country moving forward.



Please dial in 5-10 minutes prior to the 11:00am EST start time using the number provided below. Contact   if you have any further questions.

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 345918#


Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail

Takeaway: Energy: Fuel shortage won't last long. Industrials: Near great Express & Courier entry point. Retail: Discounted goods and lower earnings.


Hedgeye Internal Dialogue



ENERGY: Refined Product Shortage Will Not Last Long


Takeaway: The refining, distribution, and marketing of refined product in the greater NYC metro area is clearly the segment of the energy industry most impacted by Sandy. We suspect that this “shortage” will not last much longer.


The area was ill-prepared for such a disaster. Gasoline and distillate inventories in the Atlantic Districts and New England were at the lowest level in five years heading into the storm.  There are a few key reasons for this:

  1. Refined product demand remains weak across the entire U.S.  When demand is weak, there is less chance of a “demand shock,” therefore less need to hold product in inventory.
  2. Futures curves are backwardated (higher prices today than in the future), dis-incentivizing storage.
  3. Refined product production is low in the Northeast because of poor refining margins (high Brent price, weak demand for products, excess capacity).  Indeed, several Northeast refineries have closed or are running at reduced rates due to profitability issues over the last two years.

The pre-Sandy inventory figures were 48MM bbls of gasoline and 39MM bbls of diesel in the Northeast.  Compare this to 3.1 MM bbls/d of demand for gasoline (15.5 days of supply) and 1.2 MM bbls/d of demand for diesel (32.5 days of supply).


The waive of the Jones Act (only U.S. flagged ships can move refined product from U.S. port to U.S. port) allows ships to take product inventory from the U.S. Gulf Coast and move it up to the New York area.  At least two companies are in the process of doing that. 


There is little risk of a gasoline shortage, in our view.  With 15 days of inventory, refineries already coming back online and increased shipments from the Gulf via pipeline and tanker, there will be enough gasoline to support demand in the Northeast market. 


The issue is that so many gas stations were without power last week (more than 50%), that the ones that had power were jammed and ran out of fuel.  Now, nearly 100% of stations have power, and the ones that never lost power are waiting on the new supplies.  That should come quickly.  We suspect that this “shortage” will not last much longer.


Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail - 1


INDUSTRIALS: Airfreight/Express & Courier Services Entry Point


Takeaway: We believe we are looking at a really good entry point for airfreight/express & courier services – particularly FDX.


There have been 4 huge headwinds:

  1. Inventories have been building
  2. Global trade has fallen over the past couple of quarters
  3. Capacity in airfreight has just started to tighten after years of slack
  4. Containership prices have increased relative to airfreight since 1Q after years of lost pricing.

Those have depressed margins and understated profitability and may be turning. A port disruption would be icing on that last point’s cake on relative pricing.


An estimate shows that each day of transit costs 0.6% - 2.3% of the cargo’s value in what is essentially a transport tax (lost selling days, spoilage, lost design time etc).  This is an interesting data point, even if it’s only a few days of lost cargo activity, it still matters.  Therefore, weeks of disruption could matter significantly.  Since air cargo is basically always only at +/-50% capacity utilization, there could be some switching of more critical cargo into that transport channel.  It certainly has the capacity and reliability.


People claim that improved service levels have driven air cargo to boats, we think it’s mostly that the price differential blew out.  The opposite was true around 2004, when everyone figured air cargo was a huge growth business.  That was relative pricing, too and largely unrelated to service.  The price swings are huge over time.  See the chart below from our pending Express & Courier Services Black Book (for access to this call email ).


Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail - 2


RETAIL: Sandy Destruction; Longer Term Impact


Takeaway: Reality is going to be more discounted goods, lower earnings and less cash flow. We particularly don't like the department stores in this context (M, KSS, JCP, and we'd throw GPS in there as well).


If anyone out there thinks that Sandy will not have a meaningful impact beyond a couple of weeks worth of disruption in consumer purchasing behavior, then think again. The chart below shows the absolute containerized imports into the US for apparel and footwear products over the past two years.


Number of Twenty-Foot Equivalent Units (TEUs) Imported Into The U.S.

Aftermath of Hurricane Sandy - An Internal Dialogue from Energy, Transports, and Retail - 3A


The data is through November 2, and the drop is startling. 


The reality is that we cannot simply expect the ships to dock, unload their wares, and then the retailers are off to the races.

  • The Longshoremen (already near the full capacity their strict work rules allow) will have to unload the excess containers, and then the (largely unionized) drayage drivers will need to take to either the railyard or to the hub and spoke system for an LTL trucking company (also likely unionized)
  • Then the goods get unpacked, repackaged, and shipped off around the country
  • It wouldn't be a problem if we were operating previously at less than 50% productivity, because then all we'd need to do is get people to work harder
  • But productivity is closer to 80%, which leaves little room catching up on lost work

A simple one or two week delay in shipment could snowball into a 3-4 week delay in when product hits the shelves. This is an extremely critical period logistically for the holiday shopping season. Sandy had very bad timing.


This is when 'just in time' inventory management comes back to bite U.S. businesses. Retailers will do a great job of playing the blame game on the storm. But the reality is going to be more discounted goods, lower earnings and less cash flow. We particularly don't like the department stores in this context (M, KSS, JCP, and we'd throw GPS in there as well).




Attention Students...

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NKE: Fundamentals Turning Now

Takeaway: We think that the most significant factor that has been impacting $NKE's valuation and sentiment will turn on the margin this quarter.

Nike’s stock price is all about growth in Futures, right? We’d argue that the answer is ‘Not Necessarily’, and in this instance, we think Gross Margin matters much more.

Clearly, futures matter. We’d be foolish to suggest otherwise. Chart 1 shows the stock against the change in Global Futures. Not bad. Until recently, that is.

NKE: Fundamentals Turning Now - nk1


Chart 2. Once Nike’s Gross margin started to break down, the importance of futures was taken down a notch. It was ‘all about inventories and margins.’

NKE: Fundamentals Turning Now - nke22


Chart 3. Inventories, however, have turned a corner, and are again converging with Gross Margins. The company has nudged that perhaps they are up towards the back half. But we think they could be positive in the coming quarter.

NKE: Fundamentals Turning Now - nke3


For a stock that is so universally hated right now (note worst sell-side Buy Ratio in a decade), we’ve gotta think that it can only be a positive for the stock if we’re right that this factor is turning. (Chart 4)

NKE: Fundamentals Turning Now - nke4

Energy and Elections

WTI crude oil had a nice run from late 2008 until mid-2011. Since then, the price of oil has been all over the place. Really, it comes down to tonight's election results and whether Mitt Romney wins. If he does, that's bullish for the US dollar and bearish for oil. The opposite rings true if Obama is reelected.


Energy and Elections - oil

The Golden Election

During the 2008 presidential election, gold was still around $700/oz. Since then, the Federal Reserve and Ben Bernanke have deployed multiple rounds of quantitative easing, driving the price of commodities and gold up while devaluing the US dollar. As you can see, the price of gold has increased by nearly $1000 since the last election and is likely to continue to rise if Obama is reelected. On the other hand, a Mitt Romney win is expected to bring strength to the dollar which would drive gold's price lower.


The Golden Election - gold

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