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'Long Retail' Is an Out of Consensus Call

Takeaway: If you can find 'higher sales, lower capital intensity' we think that's where you want to be. Short the inverse -- now more than ever.

This morning’s ICSC retail sales reading (out of a sample of 80 retailers) was the strongest we’ve seen in nearly 15-years. There was some noise due to weather and the calendar shift (week leading up Easter helped), but the data is telling us that we’re seeing higher highs and higher lows.

 

The out-of-consensus call right now is to be bullish on retail. As much as we find it difficult to get there given peak margins and increased levels of capital spending and SG&A (both of which would erode returns and multiples), we need to be open to the potential for outsized top-line growth that could drive the group higher. At a minimum, it seems like there’s a story of have’s and have nots, like Nike and Urban Outfitters showing strength, and others like Guess? And Carter’s showing incremental sales weakness.

 

If you can find something that exhibits 'higher sales, lower capital intensity' we think that's where you want to be. Short the inverse -- now more than ever. 

 

Longs: NKE, RH, RL, FNP, FL, KORS, URBN, WMT, and for those with a high risk tolerance and longer duration, JCP.

 

Shorts: DKS, UA, GES, CRI, M, KSS, GPS, LULU, GPS, FDO

 

'Long Retail' Is an Out of Consensus Call - icsc1


Still Bullish: SP500 Levels, Refreshed

Takeaway: Don’t expect me to join the Professional Top Calling #PTC Committee.

POSITION: 14 LONGS, 7 SHORTS @Hedgeye

 

Bullish is as bullish does. Higher-lows holding all lines of support on no-volume down days combined with higher-highs on rallies – that’s bullish.

 

#StrongDollar continues to have causal impact on both Commodity Deflation (good for US Consumption Growth) and the SP500’s return. On a 60-day basis the correlation between the US Dollar Index and the SP500 is now +0.81. That’s really bullish.

 

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

 

  1. Immediate-term TRADE resistance = 1576 (higher-highs)
  2. Immediate-term TRADE support = 1557 (higher-lows)
  3. Intermediate-term TREND support = 1501

 

In other words, when higher-highs are A) probable and B) within the context of all-time highs, don’t expect me to join the Professional Top Calling #PTC Committee.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Still Bullish: SP500 Levels, Refreshed - SPX


Meaningful Medicare?

Medicare is big business, so when companies like UnitedHealth Group (UNH) and its peers see improvement on the rates they're paid by the government to insure people on Medicare, people pay attention. But what's more important than a change in Medicare rates is that uptick in physician utilization (i.e. people going to the doctor's office). Our Healthcare team has forecast an increase a recovery in utilization for some time, as outlined in the charts below. A revision to medicare rates is irrelevant if the commercial business begins to deteriorate meaningfully this year.

 

 

Meaningful Medicare? - healthcarechart1

 

 

After a bounce in 2011 and a slowdown in 2012, 2013 is surprising everyone as utilization accelerates meaningfully. A number of factors have influenced the increase, including the worst flu season in years. accelerating maternity and cardio costs for hospitals, and premium growth continues to decelerate to multi-year lows.

 

Meaningful Medicare? - healthcarechart2


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MACAU UP 25% YOY

Please find the monthly table market shares and average daily table metrics below.  Total March GGR (including slots) increased 25.4% YoY to HK$30.4 billion, in-line with recently raised expectations but well above projections given prior to the first week of March.  We don’t yet have the full property detail so it remains to be seen how much hold contributed to the outstanding and record month.  Anecdotally, we’ve heard that VIP hold was high but that volumes were also very strong.  We believe volume growth played the majority role in the YoY growth. 

 

MACAU UP 25% YOY - 1

 

With the exception of SJM and MGM, the concessionaires posted shares almost exactly in-line with trend.  SJM’s 110bp increase in share over recent trend was pulled almost directly from MGM. 

 

MACAU UP 25% YOY - 2


Morning Reads From Our Sector Heads

Todd Jordan (GLL):

 

Maryland raising stakes in casino wars with Delaware and West Virginia (via Washington Post)

 

Kevin Kaiser (Energy):

 

LINN Energy Response to Another Round of Short Seller Comments (via LINN Energy)

 

Tom Tobin (Healthcare):

 

Humana Rises as U.S. Reverses Medicare Rate Cut Decision (via Bloomberg)

 

Jay Van Sciver (Industrials):

 

Raw-Material Bull Market Fading as Supply Expands: Commodities (via Bloomberg)

 

Rob Campagnino (Consumer Staples):

 

Anheuser-Busch InBev's 30 job cuts are in St. Louis (via St. Louis Business Journal)

 

Howard Penney (Restaurants):

 

Why an Australian town is fighting McDonald's (via KSAT)

 

Brian McGough (Retail):

 

J.C. Penney Elevating Jewelry With Bijoux Bar (via WWD)



When The Going Gets Tough

Client Talking Points

Which Way Did It Go?

Yesterday, the market started off by testing a new all-time high on the S&P 500 (1570), which failed. By the close, the market had fallen and was lucky to hold our TRADE line of support at 1556. If you bought the open or sold the close, you made the wrong move. It's easy to get pulled into the market when everyone around you is suddenly an expert on stocks ("Buy 'em" my father said yesterday). Sometimes you have to be able to step away from the computer and just say no. Yesterday was a good day to do just that. 

Making Moves

While chasing the S&P 500 was not a viable game plan yesterday, taking gains on existing positions, cutting losses and initiating new positions was. Since the S&P 500 and Russell 2000 held their line of support, we bought the Russell via IWM yesterday afternoon. We also cut a macro position that wasn't working and bought a stock that worked in our favor. It's all about timing and watching the signals.

Asset Allocation

CASH 22% US EQUITIES 26%
INTL EQUITIES 22% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

"Cyprus finance minister Michalis Sarris quits. Who thinks the rest of their govt quits this month?" -@tbuhl

QUOTE OF THE DAY

"The point of quotations is that one can use another's words to be insulting." -Amanda Cross

STAT OF THE DAY

The US Dollar rises while the Euro softens after March PMI data for the euro area showed that activity contracted at an accelerating pace in March, dropping to a three-month low of 46.8.


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