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Time & Truth

This note was originally published at 8am on November 20, 2012 for Hedgeye subscribers.

“Time in truth, discovers everything.”

-Thales

 

Bertrand Russell once claimed that, “Western philosophy begins with Thales.” And while I am not so sure about that being the truth, Thales was closer to getting to my definition of the truth than most Greek philosophers – he used math.

 

Thales used geometry to solve problems such as calculating the height of pyramids and the distance of ships from the shore. He is credited with the first use of deductive reasoning applied to geometry… he has been hailed as the first true mathematician.” (Wikipedia)

 

The aforementioned quote comes from a book I started reading this past weekend titled Pythagoras The Mathemagician (pg 87). Since we’re in the midst of a bull market in Old Media storytelling, I needed to suspend disbelief and consider magic too.

 

Back to the Global Macro Grind

 

Yesterday was a hoot. On no-volume (21% below the average US stock market down day volume in November), the SP500 melted up +1.99% to 1386. That was the biggest up day since September 6th (+2.04%). Back above my TAIL risk line of 1364. Hoowah!

 

Let’s not talk about September though. That was a time when The Bernank’s stock market magic stopped. As a friendly reminder, inclusive of yesterday’s squeezage, the SP500 is still down -6% from the September 14th YTD high.

 

But why? What is the truth? Have stock and commodity markets been going down for 2 months only because of the #KeynesianCliff? Or did a few things related to economic gravity (growth and earnings) have something to do with it?

 

To review, our Top 3 Global Macro Themes for Q4 are as follows:

  1. Earnings Slowing
  2. Bubble #3 (Commodities)
  3. Keynesian Cliff

So, I’m not saying that Theme #3 doesn’t matter. I’m not saying that Bubble #3 doesn’t either (we re-shorted Oil on yesterday’s ramp, and bought Natural Gas). I’m simply saying what I always say – embrace uncertainty, because the global marketplace’s interconnected risks are much more encompassing than a manic media sound-bite about timing the cliff.

 

Back to reality. Now that Q312 Earning’s Season is winding down, per Darius Dale’s scorecard, what has Time & Truth told us about #EarningsSlowing?

 

1.   Roughly 96% of the way through the Q3 earnings season, 58.7% of SP500 companies have missed on the top line and 30.7% have missed on the bottom line (478 total). That compares with 57.8% and 26.8%, respectively, in 2Q12. If the season wraps up as things currently stand, 3Q12 will have reported the lowest percentage of companies beating on the top line since 1Q09.

 

2.   72% of companies that have issued 4Q12 EPS guidance have issued projections below the mean EPS estimate. That compares with a ratio of 80% on the negative side at this time during the previous earnings season. Despite this improvement, we continue to warn that consensus estimates for 4Q12 and 2013 remain dramatically inflated relative to any reasonable economic GROWTH scenario.

 

3.   Bloomberg consensus still has SP500 constituent EPS growing an average of +7.1% YoY per quarter over the NTM vs. +0.9% YoY in 3Q12 and a trailing four quarter average of +3.1% YoY. While down from a projected quarterly average NTM EPS growth rate of +9.9% YoY when we first called out consensus’ poor modeling technique back on OCT 8, we still contend these estimates remain out to lunch.

 

Out to lunch? Yes. As in no soup fo you Mr. Sell-Side consensus. It’s been a long year for you on GDP growth and earnings forecasts. Maybe we should just pretend those 2012 predictions didn’t happen. Long live Hyman’s 569 “global easings” instead.

 

Money printing, of course, is not magic. The slope of growth in money supply is just math. If Bernanke doesn’t double or triple his monthly debt monetization soon, the slope of the Fed’s balance sheet will continue to slow. That’s bullish, on the margin, for the Dollar.

 

Perversely, in the immediate-term what’s good for the Dollar is bad for stocks. Part of yesterday’s fun times at no-volume high was that the US Dollar was having its biggest down day in 3 weeks. A -0.45% down day on the USD Index = a +2.8% up day for Basic Materials (XLB) stocks. Hooray.

 

Just a quick update on the Correlation Risk math (using 30-day correlations versus the US Dollar Index):

  1. SP500 = -0.90
  2. EuroStoxx600 = -0.85
  3. MSCI World Index = -0.89
  4. CRB Commodities Index = -0.84
  5. CRB Food Index = -0.79
  6. VIX = +0.44

In other words, yesterday’s rally to lower-highs (SP500 still down -1.8% for November after the +1.99% move) has nothing to do with what I called bullish in Monday’s Early Look (Food Deflation and Commodity Speculation Imploding). It had everything to do with the same old playbook the bulls who have confused stocks with the real-economic growth have been using all year.

 

Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Natural Gas, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1710-1737, $109.96-111.35, $3.56-3.88, $80.69-81.39, $1.26-1.28, 1.49-1.64%, and 1364-1401, respectively.

 

Best of luck out there today,

 

Keith R. McCullough
Chief Executive Officer

 

Time & Truth - Chart of the Day

 

Time & Truth - Virtual Portfolio


Pawn Shops Go For The Gold

Pawn shops are affected by fluctuating gold prices due to the fact that many buy gold outright and have jewelry as stock. Gold prices aveeraged $1722/oz in November, bringing the fourth quarter-to-date average price to $1735, which is up 2.9% vs 4Q11 average price of $1,686. Gold prices are acting as a tailwind for pawns right now, but volumes are also important to pay attention to. Same store gold volumes have been falling in the high teens at the year-over-year rate over the last few quarters. Rising prices do help a little but not enough to outweigh declining volumes.

 

Pawn Shops Go For The Gold - Gold

 

Who’s affected by the decline in volume the most? EZ CORP (EZPW) and Cash America (CSH) have been the hardest hit while First Cash Financial Services (FCFS) and DFC Global (DLLR) are faring well on their own. We are bearish on EZPW and CSH and bullish on FCFS and DLLR. 

 

Ultimately, one would think that the Federal Reserve’s policy of quantitative easing would be a boon to pawns as it drives up the price of gold. Hedgeye Financials Sector Head Josh Steiner explains the effects QE has had on pawn shops over the last few years:

 

“In the chart below we show how payday lenders have performed over the last three quantitative easing programs. Interestingly, QE3 has not had the same positive effect on the pawn/payday space that QE1 and QE2 had. In fact, pawn/payday is the second worst performing subsector since QE3 started. We attribute this almost entirely to the gold dynamic.”

 

Pawn Shops Go For The Gold - QE infinity


Expert Call; What's Next For Agricultural Prices?

Expert Call; What's Next For Agricultural Prices?               - Ag.Call

 

Restaurant Tickers Affected:

DRI, BLMN, TXRH, WEN, JACK, MCD, PNRA, PZZA, DPZ, YUM, CAKE, EAT and CMG

 

Food Processing Tickers Affected:
TSN, SAFM, SFD, HRL, PPC, CAG, DF and MON 

 

 

On Tuesday, December 4th, at 11:00am EST the Hedgeye Macro Team and Restaurants Team will be hosting an Agricultural and Consumer Economics Expert Call with Professor Darrel Good of the University of Illinois. Good has been part of the faculty since 1976 and took part in developing a comprehensive farm risk management website (www.farmdoc.uiuc.edu). His efforts are now focused on the performance of grain futures contracts as well as corn and soybean yield trends. 

 

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

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 611762#

 

Topics will include: 

  • Supply side - planting intentions and farmer's economics
  • Demand side - key drivers of demand - ethanol, protein, consumption (domestic and abroad)
  • General long-term trends to think about for farming - utilization, fertilizers, seed evolution
  • Thoughts on USDA projections, and their historical accuracy and what the implications are now
  • View on supply, demand, key drivers and prices for:
    • Corn
    • Wheat
    • Soybeans
    • Cattle
    • Chicken  

 

Good's Background

Darrel Good has a comprehensive understanding of the agricultural markets and economic implications. "There was a time period in the early seventies when grain markets changed dramatically," said Good. "Russia started importing grain, prices just exploded to the upside and there was renewed interest in markets and prices. I was hired to help develop a very extensive educational program in marketing and risk management."  

  • Professor in the department of Agricultural and Consumer Economics, is marking his 33rd year with the University of Illinois
  • Good and two other faculty members developed a seminar called "Price Forecasting and Sales Management"
  • One of the founding members of the farmdoc team
  • He writes one of the featured newsletters on the farmdoc site, Weekly OUTLOOK , and he is a primary contributor to the AgMAS section
  • Current research includes:
    • Evaluation of the pricing performance of agricultural market advisory services
    • Evaluation of USDA production and price forecasts
    • Evaluation of pricing performance of Illinois corn and soybean producers  

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FNP: Impact of CEO Hire at Juicy

Takeaway: We have a mixed read on this morning’s new CEO hire at Juicy Coture. Net positive, but the timing of the catalyst calendar has been extended

We have a mixed read on this morning’s announcement of the new CEO at Juicy Coture (Paul Blum – from Kenneth Cole and David Yurman). On one hand, McComb has been looking to fill the co-president role alongside Chief Creative Officer LeAnn Nealz for the past year. As such, this announcement caps a very long recruitment process. That’s a positive. On the flip side, we’ve gotta think that before Blum accepted the job he looked McComb in the eye and asked for a certain commitment in time and resources to get this company back on track. We previously thought that another miss at Juicy would come alongside an announcement of a sale. Now we think that process will be longer dated. They’ll give the new CEO time. That’s a negative. We still think that the brand will be either fixed or sold, and we’re still at $0.95 in F14 – which is nearly 2x the consensus. But the timing of the catalyst calendar has been extended.


Here are our thoughts on the move:

  1. Decision Tree re Juicy: We see three potential outcomes for Juicy, #1: business improves – FNP keeps it, #2: business erodes – FNP sells it, or #3: business sputters along – FNP keeps it. As we highlighted in our note on 10/2 “FNP: Take 2,” we think the odds are likely that FNP sells Juicy. What has changed by this announcement is timing. Our original view of a sale by next summer is more likely now by the end of 2013. If fundamentals erode further over the near-term, the company now has an excuse to see its strategy through for another quarter or two more than it may have previously. But it does beg the question on timing – why spend money now if they are planning to sell?
  2. Setup into ICR: As it relates to our view on the setup headed into ICR (mid January) where we expect the  company to provide an updated brand outlook, the likelihood of an early divestiture announcement (i.e. at ICR) has been greatly reduced. This was simply a call option on the stock near-term, not the driver behind the run since 3Q results. Driving performance over the past month is confirmation that FNP is taking square footage growth materially higher at Kate and Lucky (see our note “FNP: Juicing Kate” on 10/25).
  3. Productivity: Both CEO Bill McComb and CFO George Carrera have been spending a disproportionate amount of time on Juicy focusing on stemming losses versus higher growth aspects of the business. The hire of Blum enables senior management to recalibrate their focus at the same time they just announced significantly more aggressive square footage growth plans at Kate and Lucky.
  4. Fit/Background: Blum is no stranger to designer driven companies having served in the CEO role at both David Yurman (2005-2010) and most recently at Kenneth Cole after a 15-year stint at KCP prior to Yurman. Importantly, like FNP’s other two brands Kate Spade and Lucky, the co-president structure is the norm rather than the exception at FNP.

 

All in, this moves doesn’t change our view that Juicy will be sold. However, we do think it will buy management some time from having to make a more definitive comment on the brand’s future over the near-term at ICR. In the meantime, senior management can focus on higher ROI initiatives i.e. growing Lucky and Kate Spade. FNP continues to be one of our top long ideas.


Trending Lower In Vegas

The situation in Las Vegas continues to worsen with October Strip data poised to show yet another negative month of data. We estimate that October gaming revenue for the Las Vegas Strip will fall between -5% to 9% on a year-over-year basis. The fact that October had one less Sunday and Saturday in the month certainly doesn't benefit the data. Meanwhile, McCarran airport passengers fell 1.5% while taxi trips fell 3.6% in August marking the fourth consecutive month of declines. Taxi trips tend to correlate to gaming revenues so when trips decline, revenue declines. We also believe that slot volume will continue its downward trend in October after a respite in September.

 

Trending Lower In Vegas - image005


Bearish Notes In Energy

In addition to Techology and Utilities, Energy is one of three sectors that is bearish on our TRADE (3 weeks or less) and TREND (3 months of less) durations. The Energy Select SPDR ETF (XLE) continues to fall from September with a dead cat bounce occurring late last month. Our key levels to watch are Trade resistance at $71.64 and Trend resistance at $72.09. Our adage of “get the dollar right and you get a lot of other things right” applies to energy too. Watch the aforementioned levels as they get tested with the strengthening USD.

 

Bearish Notes In Energy - xle


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