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Bullish TREND: SP500 Levels, Refreshed

Takeaway: This US stock market is back in a Bullish Formation for the right fundamental economic reasons.

POSITION: Short Commodities, Long Consumer

 

This US stock market is back in a Bullish Formation for the right fundamental economic reasons. Deflating commodity inflation is one of the very few policies the government has tried yet. That, of course, is because it would require them to get out of the way.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1435
  2. Intermediate-term TREND support = 1419
  3. Long-term TAIL support = 1366

 

In other words, bullish is as bullish does until it doesn’t. The volume signals in this market are beyond alarming at this point. I get that, but also get that consensus hedge funds tend to capitulate and cover at no-volume lower-highs when the VIX hits 14.

 

So there’s plenty to consider as you risk manage this very manageable Risk Range (1). What was TREND resistance (1419) is still confirming itself as newfound support.

 

If it doesn’t hold, we’ll change our position.

KM 

 

Keith R. McCullough
Chief Executive Officer

 

Bullish TREND: SP500 Levels, Refreshed - SPX


RH: Idea Alert. Buying the Freak-Out

Takeaway: $RH should be up 9%, not down 9%. It's off for all the wrong reasons -- giving a great opportunity to invest in a solid double.

We're adding RH to the long side of the ledger in the Hedgeye Virtual Portfolio. With the stock down 9% on an otherwise great quarter, it's a great time for us to get involved on a high conviction research call. The Street does not like the lack of guidance -- particularly given the bumps and bruises around short term events like Sandy and the West Coast Port Strike. Based on what we see, the company is executing on its its growth strategy. We have that confidence, plus our own research -- and that's all we need. We'll let the Street stress about not being spoon-fed. We'll buy on the down days.

 

We were asked this morning what we thought a fair value for RH was. Our response sounded something like this.

"I rarely like to ‘pick a multiple out of nowhere’, but the way I look at the earnings power, we’re coming off $0.57 last year headed to $3.00 in 4-years. I’m ahead of the consensus by 40% next year alone. With a 30% earnings CAGR could I justify a 25x earnings multiple? I think so. Apply that to $3.00 in calendar 2015 and I get a $75 stock. I discount that back at a hefty 20% discount rate and I get a $62 stock in 2 years, and $52 1-year out." 

 

RH: Idea Alert. Buying the Freak-Out - 1111

 

Here's our Thoughts on the Print

This story is still full steam ahead, which is notable given that investor interest around the name has been paltry at best since the day after IPO. Comps are crushing it at +29%, the new Design Gallery in Scottsdale opened at or ahead of plan, and the company announced two new catalog businesses to launch this Spring – RH Tableware and RH Objects of Curiosity. It also announced RH Fine Art, which is likely an ASP-lifter. There’s usually not this much new info out of a recent IPO, but we definitely liked what we heard. There's noise around 4Q-to-date trends given the port stroke and lingering impact of Sandy, but that's hardly a sign of real underlying trends.

 

We’re taking up our Direct Numbers my next year about 4k catalogs without any degradation in revenue per page. This takes up our total Direct revs by about 800-900bp, and total RH sales by about 400bp.

 

There seemed to be some concern on the call about the Gross Margin. That shouldn’t be the case. The company went up against up a +450bp gross margin in this quarter last year. On a 2-year run rate, the gross margin was up 200bp despite an incremental shift to furniture which is lower GM (COGS includes shipping costs). This not a Gross Margin story on a longer term basis. It is about sheer top-line growth leveraging SG&A (which only  grew 12.9% vs 22% sales growth).

 

We still like this one a lot. The key rationale is that…

1)      We think that the company can leverage mid single digit square footage growth into double digit growth, and 20% top line. The company can then leverage fixed costs and grow EBIT by 30%, and EPS approaching 40% while it pays down debt. It is not without its volatility – especially on a quarter to quarter basis, but the growth algorithm works.

 

2)      Scale is critical in this business. That’s not a problem for RH if you measure by number of stores given that it has 73 locations as it can leverage a national distribution platform. Unfortunately, store count is a pretty useless metric when your average store is so small that it can only show 25% of the assortment. Categories like apparel might be ok in showing a prospective customer an item in an iPad 'lookbook' in hopes of placing an order. But when buying a sofa, desk, or bunk beds, people need to touch and feel. The shift to the company’s Design Galleries allow the ENTIRE assortment to be visible in the appropriate places.

 

3)      With the larger (25,000 square foot) Galleries, the company can also get into new categories like we’re seeing it do in the Spring of 2013. These will allow the company to cherry pick the best and most appropriate mix of product in each region and for each store to maximize sales productivity.

 

4)      While it opens Design Galleries, the existing base of stores allows the company to backfill existing markets with the new categories that are being tested in its new concepts.

 

5) It has only scratched the surface with its design services offering. Ever try to furnish a home with the help of a designer? Plan on spending 2x your budget.

 

6)      In the end, the Home category is one of the most fragmented in retail. Though people are quick to complain that prices are too high, we'd be quick to answer that there's a difference between high price and expensive. RH’s existing prices on like-for-like items are very competitive, and there are no other retailers that are doing what RH is trying to do with the same scale. It has had ‘defacto SKU proliferation’ in the past that held back profitability – which was only the case because it did not have the real estate to show 75% of its product in the way it needs to be presented to consumers. 

 

RH remains one of our top picks for those with a higher risk tolerance.

 


JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY

Takeaway: Initial claims were impressively low last week. The tailwinds of the last 3 years are returning again this year and will last through Feb.

Labor Market: Surprisingly Strong

Last week was another surprisingly strong week of improvement for initial jobless claims. As we've been doing the last few weeks, we again ran the analysis to see whether over-representation by NY, NJ and PA is distorting the numbers. As a reminder, state-level data is released on a one-week lag vs. national data. As of two weeks ago, when national claims were 370k, NY, NJ and PA were still being over-represented in the series by 7.1% vs their normal proportional weightings. This suggests that the normalized run-rate in claims is actually 370 / 1.071 = 345k. Interestingly, that's almost exactly what we saw this week: 343k. 

 

This week's claims print of 343k is significant for a few reasons. Foremost, it matters because it represents a new low in claims post the crisis. Second, it matters because it returns claims to the seasonal trajectory we've seen over the last three years. In other words, the seasonality mal-adjustment tailwind we've often called out is back in full effect, and will continue, as a reminder, through February. So, to reiterate, the jobs data is improving, but the perception of the rate of improvement will be stronger than the underlying reality for the next two and a half months. This, coupled with momentum in the housing market, will provide a strong, ongoing tailwind to the sector.

 

Jobless Claims - The Numbers

This week initial jobless claims fell 27k to 343k from 370k. The prior week's number was revised up by 2k to 372k. Incorporating this upward revision, claims were lower by 29k. Rolling claims, meanwhile, fell 27k WoW to 381.5k and non-seasonally adjusted claims fell 72k to 429k. Additionally, the NSA rolling year-over-year change, which we monitor because it excludes the effects of seasonality, was -4.9% YoY, down from +2.1% in the prior week.

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 1

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 2

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 3

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 4

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 5

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 6

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 7

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 8
 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 9

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 10

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 11

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 12 

 

September SNAP: Another 608k People on Food Stamps

While the trend in joblessness is improving, the number of people receiving government assistance to buy food in the U.S. continues to rise. In September, SNAP participation reached 47,7101,324, or 15.3% of the population. In terms of households, there are roughly 23 million households receiving assistance, or about 20% of all U.S households. In September, an additional 608k people joined the program. The number of people on food stamps has risen 79% since June of 2007. 

 

If there's any silver lining here its that the rate of growth in the program has been slowing. In the first chart below, we show the total number of participants in the blue grey columns and the year-over-year rate of change in the black line. The current growth rate is 3.1% year-over-year. which is down from the 5.1% year-over-year growth rate we were seeing at the beginning of this year. 

 

JOSHUA STEINER: JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 13

 

Joshua Steiner, CFA

 

Robert Belsky


Early Look

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Jobless Claims: Happy Endings

Today’s Jobless Claims numbers came in at 343,000, another strong showing on a week-over-week basis that suggests Hurricane Sandy is no longer affecting the data. The 343k print is significant because it represents a new low in claims post-financial crisis. It also returns claims to the seasonal trajectory we’ve seen in the last three years (i.e. the seasonality mal-adjustment tailwind is back in full effect). 

 

 

Jobless Claims: Happy Endings - Katrina

 

 

Jobs data continues to improve but more importantly, the perception is even more positive than reality and perception is everything. The rate of improvement will continue to be strong through February of 2013. Between jobless claims and the recovery in the housing market, there’s a lot to be excited about here.

 

Jobless Claims: Happy Endings - NSA YoY linear

 

Jobless Claims: Happy Endings - S P


JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY

Takeaway: Initial claims were impressively low last week. The tailwinds of the last 3 years are returning again this year and will last through Feb.

Labor Market: Surprisingly Strong

Last week was another surprisingly strong week of improvement for initial jobless claims. As we've been doing the last few weeks, we again ran the analysis to see whether over-representation by NY, NJ and PA is distorting the numbers. As a reminder, state-level data is released on a one-week lag vs. national data. As of two weeks ago, when national claims were 370k, NY, NJ and PA were still being over-represented in the series by 7.1% vs their normal proportional weightings. This suggests that the normalized run-rate in claims is actually 370 / 1.071 = 345k. Interestingly, that's almost exactly what we saw this week: 343k. 

 

This week's claims print of 343k is significant for a few reasons. Foremost, it matters because it represents a new low in claims post the crisis. Second, it matters because it returns claims to the seasonal trajectory we've seen over the last three years. In other words, the seasonality mal-adjustment tailwind we've often called out is back in full effect, and will continue, as a reminder, through February. So, to reiterate, the jobs data is improving, but the perception of the rate of improvement will be stronger than the underlying reality for the next two and a half months. This, coupled with momentum in the housing market, will provide a strong, ongoing tailwind to the sector.

 

Jobless Claims - The Numbers

This week initial jobless claims fell 27k to 343k from 370k. The prior week's number was revised up by 2k to 372k. Incorporating this upward revision, claims were lower by 29k. Rolling claims, meanwhile, fell 27k WoW to 381.5k and non-seasonally adjusted claims fell 72k to 429k. Additionally, the NSA rolling year-over-year change, which we monitor because it excludes the effects of seasonality, was -4.9% YoY, down from +2.1% in the prior week.

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - Katrina

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - NSA YoY linear

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - State Level Data

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - raw 2

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - rolling

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - NSA

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - Rolling NSA

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - S P

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - Fed

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - recession

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - rolling linear

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - YoY NSA

 

September SNAP: Another 608k People on Food Stamps

While the trend in joblessness is improving, the number of people receiving government assistance to buy food in the U.S. continues to rise. In September, SNAP participation reached 47,7101,324, or 15.3% of the population. In terms of households, there are roughly 23 million households receiving assistance, or about 20% of all U.S households. In September, an additional 608k people joined the program. The number of people on food stamps has risen 79% since June of 2007. 

 

If there's any silver lining here its that the rate of growth in the program has been slowing. In the first chart below, we show the total number of participants in the blue grey columns and the year-over-year rate of change in the black line. The current growth rate is 3.1% year-over-year. which is down from the 5.1% year-over-year growth rate we were seeing at the beginning of this year. 

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - SMAP

 

Yield Spreads

The 2-10 spread rose 10 basis points WoW to 145 bps. 4QTD, the 2-10 spread is averaging 141 bps, which is higher by 4 bps relative to 3Q12.

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 2 10

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - 2 10 Spread

 

Financial Subsector Performance

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

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - Subsector Performance

 

JOBLESS CLAIMS: LABOR TAILWINDS BACK IN FULL FORCE THROUGH FEBRUARY - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 


Currency Countdown

Client Talking Points

Japanese Bonfire

Japan’s plan to devalue the Yen is hilarious in a macabre sort of way. They’re taking cues from the good old US of A and think that the solution to their problems is to devalue their currency and trashing their economy in exchange for a bullish rocketship for the Nikkei. We’ve seen how well printing money has worked for us and if Japan is keen on following the advice of Paul Krugman and Ben Bernanke, then they’re going to get exactly what they asked for. Keep a close eye on Japan; if you spot a huge ball of fire, it’s their currency burning brightly.

Not So Precious

Precious metals like gold and silver are getting smacked up, dropping -1.2% and -2.4% this morning, respectively. As we’ve said before, the commodity super-cycle is turning and commodities are popping. Throw a strong US dollar into the mix and you’ll continue to see these metals decline in price. Long-term, the dollar will continue to make higher lows. The fiscal cliff will play a part in all of this, so in turn, we’ll play the waiting game to see what effects come out of Congress.

Asset Allocation

CASH 52% US EQUITIES 12%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NKE

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“FED SAYS FED, BoC, BoE ECB & SNB EXTENDING $ SWAP LINES TILL FEB. 1, 2014 > just a buffer for a rainy day in case funding stress resurfaces” -@BergenCapital

QUOTE OF THE DAY

“Ethics are so annoying. I avoid them on principle.” -Darby Conley

STAT OF THE DAY

US Jobless Claims drop to 9-week low of 343,000.


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