prev

Taxing Profits

This note was originally published at 8am on November 28, 2012 for Hedgeye subscribers.

“The fuel that makes people work is profit.”

-Tom Girdler

 

If you want to know one of the critical business leadership differences between Obama and FDR, I highly recommend reading the book I just finished reviewing, Freedom’s Forge, “How American Business Produced Victory in WWII”, by Arthur Herman.

 

The aforementioned quote comes from an excellent chapter (page 244) near the end of the book titled “Victory Is Our Business.” Being a businessman, I absolutely loved it.  Empowering the best and brightest of this country to lead is the answer, not Congress.

 

Tom Girdler was a steel man. He was tough; he was an innovator; and he knew how to get things done. Bill Knudsen and Henry Kaiser (key FDR businessmen) were doers leading from the front too. These guys would put Harry Reid and Johnny Boehner to shame.

 

Back to the Global Macro Grind

 

If you want to tax me and my profits, that’s fine – I’ll just have less money to hire with. So just know that. I am not Warren Buffett. Most of us aren’t. Using him as a beacon for making the USA more like France is a joke. It’s elitist too.

 

The US stock market took an intraday nose dive yesterday after Harry Reid spoke about whatever he was trying to say. Today’s market “catalyst” is Obama “speaking with business leaders.” A market that hangs on the government’s next move is no “free” market. Yes They Can do this – and yes, they (Bush and Obama, Republicans and Democrat politicians) built this.

 

This is called a bubble in US Politics. So, when you are forced to live in a bubble of Big Government Intervention (government has been taxing and slowing growth in this country for a decade), what do you do?

  1. You buy Bonds (10yr UST Yield falls again this morning to 1.62%)
  2. You hold a large Cash position (our asset allocation to Cash = 58%)
  3. You pray that someone issues you more cash now (special dividend)

Prayer, of course, is not a risk management process for your portfolio – but if God is listening, he can provide you some perks. Check out these “special dividends” from the likes of Las Vegas Sands (LVS) and Costco (COST) in the last 48 hours. Special.

 

Now, if you aren’t long Costco this morning, you aren’t getting anything special (US futures down 5). If you are Costco, you are explicitly telling your investors that what you see coming down the pike isn’t special either. Taxing Profits changes behavior.

 

In other globally interconnected news:

  1. Chinese stocks move to within a hair of crash mode (-19.9% since March)
  2. Russian stocks move back into crash mode (-20.1% since March)
  3. Brazilians stocks are only down -17.6% since March (not quite crashing yet)

Perma Bull marketing firms used to call the B, R, and C (Brazil, Russia, China) a big component of the “BRICs.” Remember those? Those were the big growth engines of the world, until Bernanke started taxing their profits.

 

There are two big taxes that I, the businessman, can see, real fast:

  1. Tax Rate
  2. Rising Expenses

In the people business (provided that you give your employees great benefits like healthcare, dental, etc.), costs to run a small business in America are going up. If you work for the US Political Bubble and don’t get that, try it with your own money.

 

In Global Cycle businesses (transports, mining, etc.), when Bernanke devalues the currency in which your cost of goods sold (food, energy, etc.) are primarily priced, your margins are going down.

 

Since long-term commodity, healthcare, etc. inflation is sticky, there’s deleverage to your profits when global growth slows (sales slow faster than your costs). Then businesses are forced to right size their cost structure (i.e. fire people).

 

And on and on the profit cycle goes…

 

Or so it should. This is the fulcrum fault line in Keynesian Economic (Central Planning) assumptions – these people that both Bush and Obama empowered aren’t business people. They are academics who fundamentally believe they can “smooth” the profit cycle.

 

In March 2012, when we started making the global #GrowthSlowing call, this is why we got so loud about it. Yes, Bernanke was able to suspend the pricing of this economic gravity for 3 months. But now we are all hostage to it, again.

 

On Qe3, Emerson said that “for every benefit you receive, a tax is levied.” On taxing under the veil of class warfare, Andrew Jackson reminded Americans that “the wisdom of man never yet contrived a system of taxation that would operate with perfect equality.”

 

I’m here to remind you that a tax is a tax – and it’s up to you to figure out who is in your back pocket before it’s too late.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1730-1758, $107.52-110.38, $3.43-3.56, $80.06-80.63, $1.28-1.30, 1.55-1.68%, and 1383-1419, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Taxing Profits - 44. tax

 

Taxing Profits - 44.vp


Tackling The Political Class

 

Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money this evening to discuss the market and the fiscal cliff. Essentially, the political class is exploding and has acted as a bullish market catalyst in ways. It would be good for Congress to come to an agreement on the cliff but the question remains: what level of liberties do you want compromised to get a deal done?

 

Watch the video posted above for Keith's full take on the fiscal cliff.


Nike: Stepping on the Digital Accelerator

Takeaway: $NKE continues to take small steps securing its future dominance in the global athletic marketplace.

Nike launched an interesting incubator through Boulder, CO-based TechStars, which is a highly selective tech start-up company that is affiliated with some of the fastest growing startups in silicon valley. Through the program – called Nike+ Accelerator -- ten startups that use Nike+ technology will receive mentorship, coaching and administrative support to create technology that will inspire athletes across a broad range of activity and health goals including training, coaching, gaming, data visualization and ‘quantified self', according to Nike.

The Nike+ Accelerator starts in March 2013 and will run through June, culminating in technology investor demonstration days including a day at Nike HQ as well as a day in Silicon Valley.

 

This is hardly a major driver to Nike’s business near-term. But it is another small step showing how Nike is leveraging its size and is spending time in the digital arena – while competitors are still trying out how to break the 5% share mark in the US athletic footwear market. 


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

The Bernanke Bubble

Hedgeye CEO Keith McCullough recently spoke with The Money Show about how global growth has been slowing since March of 2012. From an earnings perspective, we’ve also seen earnings slowing across all sectors. As we come off peak margins at many corporations, we’re going to see several quarters of weak earnings. Keith discusses what sectors you don’t want to be exposed to and which have been inflated courtesy of the policies of the Federal Reserve. 

 

Watch the video for Keith’s full take on the global growth slowdown.

 


Twitter Is The New Tape

Hedgeye CEO Keith McCullough recently spoke with The Money Show and explained why Twitter is the new ticker tape. Traders and investors are increasingly turning to Twitter for new ideas and real-time news and Keith (@KeithMcCullough) has been a huge proponent of the movement. 

 

Keith explains how over the last 15 years, there was the actual ticker tape, then the Bloomberg terminal and now there’s Twitter. Breaking news comes at users at lightning-fast speed and now anyone can weigh in on news with their opinion in real-time. Keith explains how to sift through the noise and broken sources on Twitter to find users worth listening to.

 

You can watch Keith’s full interview on Twitter with The Money Show in the clip.

 


URBN: Still Like It

Takeaway: We think we’re at an inflection point of what we expect to be multiple upward EPS revisions in 2013. We see 25%+ upside over the next 12-mo.

We still like URBN even after the +6% move reflecting the positive QTD comp update after yesterday’s close of +HSD ahead of expectations (+5%E). It’s worth noting this outperformance came against the tougher half of the quarter – comps get easier over balance of 4Q. Revisions out over the last 24-hours will be the latest in what we expect to be a series of upward earnings revisions. We’re still +11% above consensus for F13 (half of which has been updated) and +19% above the Street for F14 representing an average of 28%+ EPS growth over the next two years.


Up next on the catalyst calendar is an update at ICR in mid-January right as Anthro is accelerating out of the turn and then earnings in early March. A year after reshuffling the senior ranks, it appears that management is hitting its stride and doing everything right.  In addition, with URBN breaking through its TRADE line of resistance at $38.92 this morning it has a bullish setup here according to Keith’s quantitative risk management levels.


With a favorable fundamental setup over the next several quarters, one of the best positioned e-commerce businesses in retail (20%+ of sales) headed into the holidays, and quantitative factors all in alignment, we see 25%+ upside from here in 2013.

 

 

Here are our thoughts from last week’s Idea Alert on URBN:

 

“We published it first on 3/22 with the stock at $28. Then again at $26 on 5/22. Today we have an opportunity to publish it again in the wake of a 'less than breathtaking' quarter. Though we think we'll have the opportunity to remind you of our thoughts again 20% higher a year out.


Underlying business trends came in largely as expected in the most recent 3Q, but importantly posted continued improvement in fundamentals. Importantly, Anthro is reaccelerating headed into a highly anticipated holiday season for the brand. With a rebound in comps along with new store, online, and international growth opportunities, we see a sustainable return to low double-digit top-line growth. Moderating markdown rates coupled with tighter inventories (see SIGMA below) is gross margin bullish at the same time the company is beginning to leverage its investment spending including its new DC. This call isn’t predicated on a return to prior peak margins (18%+) to work. In fact, we’re shaking out at +/- 16% margins over the next two years which will likely prove conservative.


The reality is that sentiment is still not overly bullish with 46% Buy ratings from the 31 firms that cover the name. While modestly more bullish than the 43% Buy rating mix YTD, it’s well below the 60%-80% mix from 2008 through 2010.


We’re shaking out ahead of the Street in the upcoming quarter as well as +12% and +20% above consensus EPS in 2013 and 2014 respectively. After nearly two years of declining estimate revisions, we think we’re at an inflection point of what we expect to be multiple upward earnings revisions in 2013. It's not cheap, and it’s a slow grind to full recovery. But from where we sit, boring can still work.”


URBN Risk Management Levels (on 12/4):

 

URBN: Still Like It - URBN TTT levels


URBN SIGMA is back in the sweet spot (sales outpacing inventory growth with margins expanding):


URBN: Still Like It - URBN SIGMA


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

next