Takeaway: After the noise around EPS relative to expectations, we see that of all four, JCP comes out ahead in the 'rate of change' contest.




Performance in the department store group this quarter diverged as meaningfully as we've seen in recent memory. We don't think its appropriate to simply look at where the companies came in relative to the Street (ie guidance). The best thing for us to do is triangulate the sales/inventory/margin performance for each of the four major department stores, and see how they have changed over the past four quarters relative to one another.


Bigger picture, each department store has a point where inventories are intersecting with margins.  None of those points are within a stones throw of one another. Not even close. The trends are becoming more divergent as to the other way around.


  • KSS: Widely viewed to be a positive print, margins headed back to zero-barrier (even with last year) but inventories slid the most out of the group -- so mush that we had to readjust the vertical axis on the chart.


  • JWN: Conversely, viewed as the biggest disappointment of the group. Yes, margins eroded sequentially, but JWN also showed proportionally the best improvement in inventories out of the group. In another two quarters, compares get much easier for JWN, and it's on a trend of improving inventories.


  • M: The steady performer in the group, but proportionally showed the worst inventory move aside from KSS. This is more of a concern for M given that it has been in the upper right hand quadrant for five-quarters and margins remain positive. In other words, it has more to lose.


  • JCP: Lastly, JCP is in its own little cycle. EPS was a disaster this quarter, and both inventory and margins are triangulating with sales in the dangerous lower left quadrant of this analysis (inventories up, margins down). But it is the only company that sequentially posted a moved headed up and to the right. When evaluating stock price movements, it does not matter as much which quadrant a company is in, but rather which one it is pointed toward.  Ironically enough, out of all four, JCP comes out ahead in the 'incremental rate of change' contest.


JCP/KSS/M/JWN: JCP Winning? - department store sigma


Takeaway: Housing starts appear to have weakened sharply, but here's our take on what the data is really telling us.

This note was originally published May 16, 2013 at 14:57 in Financials

Do Starts Matter More than Permits?

Yesterday (Wednesday), after the close, we published a note on why we think it's increasingly likely that housing starts will work their way back to a 2.0 million run rate in the coming years. The timing of that note could have been better, in light of this morning's (Wednesday morning's) 16.5% month-over-month decline in April housing starts. Our view on getting to 2 million, however, is unchanged, and we'd encourage you to take a look at our note when you have a chance. Here's our take on today's data.


The first point is that the weakness in the starts data this morning was on the multi-family side, where starts dropped 155k MoM. Single family starts fell by 13k to 623k. The second point is that while starts were weak, permits were strong. The second chart shows permits. Single family permits rose 18k MoM while multi-family permits rose 109k. The strength in permits largely offsets the weakness in starts, and the single-family starts/permits dynamic is much less of an "event" than the multi-family data. In looking at the trend lines in the permits chart, we see little cause for concern.


For those curious which is the better indicator, starts or permits, we've looked into this question in the past. It turns out the answer is neither. Our analysis found no discernible lead/lag relationship between starts and permits. We realize it's intuitive that permits lead starts, but in practice they don't. We've run correlations between the series at varying lead/lag intervals and found that the strongest relationship occurs on a no-lag basis. 


One interesting consideration, however, is that the Census dept points out that you need only 2 months of permits data to draw conclusions, whereas 4 months of starts data is needed. On that basis, we'd be slightly more inclined to believe the permits numbers.


Here's the full disclosure they provide: In interpreting changes in the statistics in this release, note that month-to-month changes in seasonally adjusted statistics often show movements which may be irregular.
It may take 2 months to establish an underlying trend for building permit authorizations, 4 months for total starts, and 6 months for total completions.












China Calling, Dollar Matters

Client Talking Points

China Calling

Don’t look now, but the China stock market closed up 1.4% overnight, its third consecutive winning day. The market there is now up, albeit barely, for the year-to-date. That’s telling us that while things might not be great there, the world isn’t ending, either.

Dollar Days

With the US dollar falling yesterday after powering to year-to-date highs earlier in the week, the S&P lost a bit of ground yesterday. As has been our call, a strong dollar leads to a strong US equity market. We’re seeing that this morning as the dollar is back up, and futures are heading higher.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 


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.

Three for the Road


“It’s all about the storytelling, folks.” -- @KeithMcCullough



“Well begun is half done.” -- Aristotle


$92.24, the price of each share of Tesla’s 3.39 million share secondary offering

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Renaissance Man

This note was originally published at 8am on May 03, 2013 for Hedgeye subscribers.

“Self-control is more indispensible than gunpowder.”

-Henry Morton Stanley   


Henry Morton Stanley was one the most well known African explorers of the late 19th century.  He is probably most famous for finding the lost Scottish missionary David Livingstone in the small village of Ujiji after an eight month search.  Stanley reported that the first words he uttered when finding Livingstone were the now famous, “Dr. Livingstone, I presume?”


To say Stanley was a remarkable man would be an understatement.  He was orphaned at an early age and spent his formative years in a work house in Wales.  At the age of 15, he crossed the Atlantic as a crewman of a merchant ship and jumped off in New Orleans where he befriended a local merchant and took his name.  He then fought in the Civil War before launching a career in journalism.  Clearly, Stanley was a bit of a 19th century “Renaissance Man”.


His expeditions into Africa, which among other things established the sources of the Nile and Congo, were widely considered the most grueling of that era.  Unlike many of his contemporaries, observers marveled that Stanley never lost his discipline or civility on these long perilous expeditions in the dark heart of Africa.  Biographers discovered an interesting fact about Stanley – he spent most of life, as he called it, “experimenting with will.”


As Roy Baumeister writes in “Rediscovering the Greatest Human Strength – Willpower”:


“Having piously lectured his men about the perils of drunkenness and the need to shun sexual temptations in Arica, he knew how conscious his own lapses would be.  By creating the public persona of himself as Bula Matari, the unyielding Breaker of Rocks, he forced himself to live up to it. As a result of his oaths and image, Jeal said, “Stanley made it impossible in advance to fail through weakness of will.”


This concept of pre-commitment as a way of maintaining discipline and hitting goals has been proven in spades by Yale economists Ian Ayres through a company he started called  Ayres’ company allows individuals to create commitment contracts.  The company has found that when a contract is drawn up without a penalty, the person succeeds about 35% of the time.  Conversely, when the contract includes a referee (so is public) and a monetary penalty (so accountable) the individual succeeds 80% of the time.


So for you young hedge fund analysts that spend too much time partying in the wilds of Manhattan on the weekends, a quick stop at may not be the worst idea to re-establish some discipline. 


Back to the global macro grind . . .


This market year has certainly been one that has required the willpower of sticking with what works.  There have been many times that all of us could have been shaken out of the investment themes that have been effective this year, but growth stabilizing and strong dollar continue to play out in spades.  Nowhere is this seen more clearly than within U.S. sector performance.  On the positive have been healthcare and consumer staples which have outperformed the SP500 by about 50%.  On the negative, materials is up less than half of the SP500.  Unless the macro trends change meaningfully, the right discipline will be to continue to stick with what has been working.


My colleague, and Hedgeye’s U.S. focused economic guru Christian Drake, gave an update on this key theme of growth stabilizing yesterday when he looked at the trifecta of housing, labor and consumer confidence.  Specifically, he highlighted:

  • Employment - The positive acceleration in labor market trends continued this week with both the seasonally adjusted and non-seasonally adjusted Initial Jobless Claims series showing sharp sequential improvement.   The headline number fell 15K to 324K w/w versus the prior week’s unrevised number while the 4-week rolling average in SA claims fell -16.5K w/w to 342K.
  • Confidence - The Bloomberg Consumer Confidence Index (Chart of the Day) made a new 5Y high two weeks ago with confidence measures across age and income demographics showing broad improvement.  The index held those gains last week and made a new 5Y with this morning’s reading improving to -28.9 from -29.9 w/w.  The Conference Board Consumer Confidence as well as the University of Michigan Consumer Sentiment readings were confirmatory with the latest April readings accelerating sequentially to 68.1 and 76.4, respectively. 
  • Housing - Incremental data over the past week has reflected more of the same as Mortgage Purchase Applications remained at their YTD highs while the Pending Home Sales and Case-Shiller HPI data both accelerated sequentially.  The Purchase application data and Pending Home sales numbers both suggest forward housing demand should remain strong.  Additionally, President Obama’s likely nomination of Congressman Mel Watt to replace Ed DeMarco as head of the FHFA should be taken as a positive catalyst for housing.  DeMarco has opposed underwater principal forgiveness for GSE borrowers – a stance that may be lightened should Watt be confirmed.  

Now to be clear, not all economic data has been positive and certainly much of the European data has been depressing.  The primary push back we got with this update yesterday is that regional PMIs have been decelerating and sequestration remains a major headwind. 


While these points are valid, we continue to believe that the performance of consumer related economic indicators trump other weakness in an economy that is 70% consumption.  Last week’s GDP report validated our view as Consumption was up +3.2% year-over-year versus +2.8% and contributed +2.24% of the growth (or 90% of the incremental growth).


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1394-1489, $98.13-103.85, $81.46-83.29, $1.29-1.32, 97.11-100.63, 1.63-1.71%, 12.06-14.51, and 1585-1610, respectively.


Enjoy your weekends and stay disciplined!


Keep your head up and stick on the ice,


Daryl G. Jones

Renaissance Man


Renaissance Man - Chart of the Day


Renaissance Man - Virtual Portfolio

Macro Lullabies

Jack & Jill:  “Jack fell down and broke his crown & Jill came tumbling after”

Rock a bye baby:  “When the bough breaks, The cradle will fall, And down will fall baby, Cradle and all.”

Rub-A-Dub-Dub:  “Rub-a-dub-dub, three men in a tub”


Have you ever actually listened to the lyrics of the traditional nursery rhymes?


I honestly don’t even remember how the last one ends, but I imagine 3 men in a bath together could go downhill quickly.  Some pretty morbid content for young minds at their peak of neuroplasticity.  


Back to the Global Macro Grind…..


It’s been serene slumbering for the better part of the last 6 months as our macro model front-ran the inflection in domestic #growthstabilizing in late November.   TREND Macro moves are generally self-reinforcing and catching the positive or negative inflection in the slope of growth represents the REM period of actively managed alpha.  


But, alas, Rip Van Winkle and real-time, globally interconnected risk rarely make sustainable bedfellows.  After riding the expedited 300-handle advance in the SPX, we went net short yesterday for the first time since November 2012.


Does that mean we’re abandoning the #StrongDollar-Strong Domestic Consumption mantra we’ve been captaining for the last 5 months? 




Here is where it’s important to understand how the Risk Management & Fundamental Research sides of the Hedgeye model co-integrate to drive invested positioning.   


As Keith highlighted yesterday, “I am getting my first coordinated overbought (SP500) and oversold (Gold) signal of 2013. Both signals are explicitly linked to an overbought one in the US Dollar Index”


What does that mean in the context of our constructive fundamental views on the Dollar, Domestic Consumption, and Housing?  In short, it means that so long as our research view on that trinity of factors remains positive, we’ll cover shorts, buy back the same exposures we sold yesterday and get net long again when the signal indicates we’re no longer overbought or if/when we move towards the oversold 1636 line on weakness.     


Since our bull case was largely predicated on Strong-Dollar, Housing, Employment & Consumption, let’s summarily review the latest across those metrics.


$USD:  Mother Nature likes redundant systems and so do we.  With federal deficit spending declining dramatically, domestic monetary policy turning incrementally hawkish, and explicitly dovish commentary out of Japan & the EU unlikely to ebb, we think the dollar can continue to appreciate via numerous routes.  Ongoing dollar strength, perpetuated by a continuation of the above dynamics, would augur more of the same for commodity and gold price deflation.     


Employment:  We consider the 4-week rolling average in y/y, Non-seasonally Adjusted Claims to be the most accurate reflection of underlying labor market trends.  On that metric, yesterday’s update showed a 20bps deceleration WoW with rolling NSA claims going to -8.9% YoY vs. -9.1% YoY the week prior.  Despite that sequential deceleration, -8.9% YoY improvement represents a very good rate of decline.  Moreover, organic 2Q trends to date have overwhelmed any negative seasonal distortion or sequestration associated drag.  On balance, we’d still view labor market trends as positive. 


Housing:  We continue to maintain a positive view on housing broadly, but in light of yesterday’s weak headline print in housing starts, let’s narrow the focus to our expectations for starts specifically.   In short we would view a multi-year doubling of housing starts to 2M annualized units as a high probability scenario.


Consider this basic imbalance.  Since the start of 2011, new household formation has been running at an annual rate of 1.38 million.  Historically, due to factors such as Vacant Unit demand and Demolitions, the ratio of new housing demand to new household formation has run at approximately 135%-139% (see here & here for the supporting research).  At the current rate of household formation, this equates to demand for 1.89M housing units.  Instead we've begun construction on 0.845 million, or just 46% of the level needed.


Note also, against demand implied by household formation, we’ve incurred a cumulative deficit of 3M new housing units since the start of 2010.  Some percentage of this deferred demand should materialize as the economy improves, exaggerating organic demand trends over the next few years.


One month does not a trend make.  Clearly, there remains a significant delta between new housing units needed and units being created. 


Credit:  The Fed’s 2Q13 Senior Loan officer survey showed bank credit standards continued to ease while business and consumer loan demand, particularly for real estate, showed further sequential improvement.  Household debt burdens are making lower 30Y lows and household debt and debt ratios have retraced most of the exponential move in debt growth that occurred over the 2000-2008 period. 


Ongoing labor market improvement (higher income) alongside rising household net worth (primarily via housing and financial asset re-flation), should continue to support incremental debt capacity while the flow of net new credit looks favorable for credit catalyzed private consumption over the intermediate term.     


So, legitimate upside for the dollar still exists, labor markets trends remain positive, housing remains in the middle innings of a secular upswing, and the household income statement and balance sheet recovery remains ongoing alongside favorable consumer and commercial credit trends. 


Obviously, we could conjure up some bearish data points to counter some of the bullish dynamics we outlined, but employment/housing/consumption/credit have been key items of focus and key drivers capable of catalyzing positive reflexivity in the economic cycle. 


At present, trends across those metric remain positive and supportive of a bullish tilt towards consumption oriented domestic exposure….at a price. 


To clumsily bring this missive full-circle, conventional lullabies did little to placate my teething 6-month old last night.  What finally put her sleep?...Chewbacca and a 2:30am Star Wars re-run that came on accidentally when she knocked the remote onto the floor. 


Lesson?   Embrace Uncertainty - today’s market teething births tomorrow’s Chewbacca P&L opportunity.  Life, risk, and opportunity happen fast.  If fast isn’t your thing….


I hear Hedgeye made the Kessel Run in less than 12 parsecs.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $101.14-105.44, $83.04-84.43, $1.28-1.30, 100.65-103.78, 1.83-1.99%, 12.33-13.86, and 1, respectively.


Sleep tight.


Christian B. Drake

Senior Analyst 


Macro Lullabies  - Household Debt Burden


Macro Lullabies  - Virtual Portfolio

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