TODAY’S S&P 500 SET-UP – July 31, 2013
As we look at today's setup for the S&P 500, the range is 16 points or 0.18% downside to 1683 and 0.77% upside to 1699.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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“Through years of experience I have found that air offers less resistance than dirt.”
I was playing in a golf match at the Newport Country Club in Rhode Island yesterday and, in the final pairing of the day, found myself playing against our all-star Energy analyst (and former Princeton Hockey Captain) Kevin Kaiser.
He hit a tee-shot on a 240 yard par 3 (into the wind on the ocean side of the course) that appeared to have zero resistance until it was in the hole. #Ace
As his playing partner (former NHL’er , Jeff Hamilton) and I walked down the fairway towards the hole, Hammy said “you guys are one-down.” I had zero resistance to that comment too.
Back to the Global Macro Grind…
What if the stock market had zero resistance? That would be cool. I’ve never seen it before, but that doesn’t mean it can’t happen. What is resistance for a market price after it hits an all-time high anyway?
Higher-lows and higher-highs for market prices are bullish. Higher-lows and higher-all-time-highs, are really bullish. And no matter what fairway of life you are walking down into today’s month-end, that’s what the US stock market continues to signal in our model.
Plenty of pundits who were shorting the market since March said you “sell in May and go away.” Then they changed that to June. Now I guess they’ll just have to push that out to August, because here’s what the score card reads on the last day of July:
In other words, if you weren’t long stocks for all of July, you’ll either need a hole-in-one today, or to just go on CNBC and place your own ball in the hole (after the Herbalife thing, Ackman had to resort to something; pitching a massive long position at month-end).
As stocks continue to make higher-lows and higher-highs, the “value” buyer’s game gets tougher. Combine that perpetual waiting (to buy the dip that doesn’t come) with a massive tail-wind called fund-flows into equities, and playing into that wind gets tougher.
Why does consensus continue to chunk dirt into this epic rally?
If you look at this morning’s II Bull/Bear Spread, it’s more of the same on that front:
I’m not trying to suggest that after the Russell 2000 and SP500 are up +22.9% and +18.2% YTD that everyone is bearish. I’m not telling you to chase and buy the market on green days either. I’m just reminding you that less than ½ of the players out there are bullish!
And when month-end and YTD performance is in the hole like this, time becomes the bull’s bff…
Let’s go back to the point I made about fear crashing for a minute:
That’s a lot of baggage for a dirty ball to carry. And I think, more than anything, else – that’s the point. There’s a lot of mental baggage out there on this course. Consensus bears have been buying 25-30 the thunder and lightning VIX rain protection all year, when it’s been a clear and sunny path toward an implied VIX of 10-12.
Never underestimate the behavioral side to this game. It’s a lot like golf – and, as the great Bobby Jones once said, “Golf is a game that is played on a five-inch course – the distance between your ears.”
Our immediate-term Risk Ranges are now as follows:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: We don't like the base business one bit. But HBI is sandbagging on acquisition accretion. That's tough to bet against, for now.
Conclusion: We think that HBI has some fiercely opposing investment characteristics right now. It’s got abysmal top line growth and tougher margin compares shaping up on one end, but low expectations for the addition of the (sandbagged) MFB acquisition on the other. In the end, while we don’t think HBI is comfortably investable here, we think that the stock falls into the ‘unshortable’ category for the next year (at least at this price).
On one hand, the company is ‘growth challenged’. Let’s face it…HBI is buying Maidenform because it has to. Since it anniversaried the Gear For Sports acquisition in 2Q11, HBI’s top line growth has averaged zero percent. Yeah, there’s perhaps a 1% hit from exiting the screenprinting business, but 1% growth in aggregate is hardly anything to get too excited about. Our biggest beef is that International and Direct-to-Consumer are both smaller today than they were two years ago. FX has been a factor, we’ll give ‘em that (though it hasn’t stopped others over this time period). But DTC, which should be the low hanging fruit for any company that owns its own brand – especially one that manufacturers vertically – simply can’t seem to grow. Ironically, the MFB acquisition will not improve the proportion of Int’l or DTC, it simply fills out a different part of HBI’s bra business in US mass channels and department stores.
On the positive side, the reality on Maidenform is that a) HBI got it for a steal, b) management lowballed on accretion as they simply add it to HBI’s model, c) there’s easy margin upside as HBI unravels failed MFB programs put in place over the past two years, and d) there further upside as HBI fills out its excess capacity with MFB business (i.e. transitions MFB to an insourced model from an outsourced model). They guided to $0.15-$0.20 per share from MFB. Seriously? If we simply add on MFB’s net income after borrowing costs from last year – which was abysmal, by the way (worst in 8-years) we get to $0.25-$0.30 in accretion. When all is said and done, we think the accretion numbers will be at least 2x guidance in year 1, and could be closer to a buck versus management’s $0.60 guidance three years out.
The bottom line is that it does not matter one iota that sales are punk. We might start to see some positive benefit from HBI’s organic marketing initiatives in 2H – but that gives them maybe a point or two in growth. The big upside begins in another two quarters when HBI gets 15% sales growth alone just from adding MFB. Along the way, cash flow looks good, and the company looks on track to pay down the debt associated with the deal just over a year after it closes. Organically, we’re not fans of this story by any stretch (challenged top line and cotton-led gross margin benefit coming to a close). But the reality is that the market won’t look at the ‘organic growth and margin characteristics’, it will look at reported numbers, and lowballed expectations. As a merged entity, this one will be tough to bet against.
In preparation for HYATT's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.
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