TODAY’S S&P 500 SET-UP – August 21, 2013
As we look at today's setup for the S&P 500, the range is 32 points or 0.63% downside to 1642 and 1.31% upside to 1674.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This note was originally published at 8am on August 07, 2013 for Hedgeye subscribers.
“A coach is someone who can give correction without causing resentment.”
I’ve been blessed with great coaches and teachers in my life. They were never easy on me. Their criticisms didn’t cause any resentment either. To the contrary, they drove me to improve. Trusting your coaches is the first step toward opening your mind.
I make a lot of mistakes. And since I’m the front man for this Hedgeye show, that means every mistake I make is front-and-center in the arena of public market debate. That’s not a bad thing. That’s right where I want to be.
What I do isn’t for everyone. I get that. But the first 5 years of building this firm alongside my teammates has given me a keen appreciation for having the opportunity to make mistakes in an open and accountable forum. It speeds my learning process.
Back to the Global Macro Grind…
One of the toughest things to do in US Equities in 2013 has been to coach myself through market corrections. The new normal correction can last anywhere from 4 hours to 4 days. I know, it’s end of the world type stuff. Remember, nothing is normal.
So, from its all-time closing high of 1709 in the SP500 last week, what will the latest US stock market “correction” be?
A) -0.9% to 1693?
B) -1.9% to 1676?
C) -4.6% to 1630?
Yes, that is a Hedgeye Poll. If you have time, ping me with A, B, or C. One of the most important aspects of working in an open/transparent forum of debate is collaboration. I’m pretty sure the days of opaque #OldWall sentiment checks are dead.
Since I actually need to #timestamp an answer to this question, I’ll choose B.
That’s the highest probability choice because the S&P futures already showed me they can snap my mo mo line of 1693 support this morning. And there’s very little fundamental and/or quantitative evidence that 1630 is in play, yet.
What is the “mo mo” line?
That’s the line I use to front-run the machines. It’s home brewed. It’s my most immediate-term risk management duration. It’s especially useful for day-trading, scalping, etc. Label me long-term cycle guy or Mucker, I’m cool with both. Better to scalp, than be scalped.
Put another way, across our core risk management durations:
The upside down of the is US Equity front-month volatility (VIX):
In other words, the bullish TREND in US Equities (and bearish TREND in Fear) isn’t in the area code of being challenged, yet. Therefore, if contextualized within the framework of our risk management process, you woke up every morning reminding yourself to not “fight the TREND”, I’d wholeheartedly agree with that. I’d rather fight the Fed than fight things like math and/or gravity.
One of the biggest challenges I have personally is trying to communicate risk management strategies to clients who all have different risk profiles, holding periods, etc. Through consistent feedback and criticism though, I’ve learned that there’s only one answer to this challenge: keep doing what I do - be Duration Agnostic, and keep working on communicating what that process means.
In my humblest of dreams, that would be my happiest retirement: that my teammates and I were successful in not only communicating our multi-factor, multi-duration Global Macro risk management process – but that the players and peers that we coached trusted us.
Trust isn’t allocated. You have to re-learn how to earn it, every day. We have a long road of learning and teaching ahead.
Our immediate-term Risk Ranges are now as follows (*we have 12 Macro Risk Ranges in our Daily Trading Ranges tool now too – as an example, this morning I’ve attached all of them; the bracketed “bullish” or “bearish” comment is on our TREND duration (3 months or more) whereas the range itself is on our most immediate-term duration):
UST 10yr 2.56-2.73% (bullish on yield)
SPX 1676-1714 (bullish)
Nikkei 13489-14137 (bullish)
FTSE 6536-6694 (bullish)
VIX 11.71-13.72 (bearish)
USD 81.49-82.43 (bullish)
Euro 1.31-1.33 (bullish)
Yen 97.01-98.94 (bearish)
Brent 107.23-109.79 (bullish)
NatGas 3.21-3.46 (bearish)
Gold 1274-1317 (bearish)
Copper 3.05-3.18 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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THE MACAU METRO MONITOR, AUGUST 21, 2013
GALAXY TO ADD MORE VIP TABLES ON SURGING DEMAND Macau Business
According to deputy chairman Francis Lui Yiu Tung, Galaxy will add 12 VIP gaming tables at its Galaxy Macau casino resort by October. "I don’t see VIP spending falling dramatically for the rest of this year,” he said. Lui said the refit of the recently acquired Grand Waldo casino resort, adjacent to the Galaxy Macau, would take six to nine months to complete. Galaxy hoped to finalize details of its Hengqin Island development in the next “few months”, he said.
VERSACE, SJM TO BUILD FIVE-STAR PALAZZO VERSACE IN COTAI Macau Business
SJM and fashion house Gianni Versace SpA will open a five-star Palazzo Versace hotel at SJM’s casino resort in Cotai. The agreement will be signed at the Grand Lisboa hotel-casino on September 5. The Palazzo Versace Macau will be the first Palazzo Versace hotel in Asia.
MACAU CONSUMER PRICE INDEX FOR JULY 2013 DSEC
July 2013 increased by 5.38% YoY and 0.43% MoM. Higher charges for outbound package tours and rentals for dwellings drove up the price index of Recreation & Culture; and Housing & Fuels by 3.01% and 1.03% respectively.
MACAU CASINOS EMPLOY MORE WORKERS, SALARIES HIGHER Macau Daily Times
At the end of 2Q, the Gaming Sector had 54,554 full-time employees, up by 5.5% YoY. In June 2013, the average earnings (excluding bonuses and allowances) of full-time employees stood at MOP18,900, up by 6.5% YoY.
Takeaway: We still have a positive bias on JCP, but lack of any lt strategy gives us pause. We'll be ok getting involved higher. Def don't short it.
CONCLUSION: We continue to have a net positive bias on JCP, and think that shorting it is a very risky bet. That said, we cannot get fully on board while the current CEO is at the helm. The reality is that he is there to stabilize the business until a new CEO can step in. For now, there is zero long term strategy, and we’re left with a CEO that is good at selling below average product at a heavily discounted price to very average Americans. That’s not much to sink out teeth into. If we could say with 100% certainty that the company will NOT go with Ullman as permanent CEO, then perhaps we’d take a leap of faith. But we can’t, so we won’t. All-in, we’ll be fine getting involved a few bucks higher once our confidence grows. If this story really starts to play out, we could build to it being a 2-3-bagger from here, and won’t mind buying in the mid-high teens.
There’s no shortage of cross currents out there today on JCP, but there were a items that stuck out to us as being particularly noteworthy.
1) The fact that the company hit the liquidity levels it guided toward at quarter-end is notable. Add on the fact that capex next year is guided to be down as far as $300mm, and the liquidity picture looks less pressured. We’d argue that these two factors are the sole reasons why the stock was up today. Why?
Let’s stress test the model. We quarterized our model for the next three years using the following assumptions a) JCP reaches 2012 sales per square foot levels in 2015, with a gradual comp lift throughout, b) the company generates 37% gross margins – a level we think there is no structural reason it can’t hit again relatively quickly (we know we'll get pushback on that -- but will happily entertain the debate), EBIT margins don’t turn positive until 2016, c) capex increases by $50mm each year, d) working capital patterns are similar to what we saw before 2012.
Source: Hedgeye Estimates
In tracking the cumulative liquidity for the next three years, there are two periods where it definitely gets dicey for JCP (the worst is 3Q15 -- in two years) – close enough such that it will likely need to find some asset sales that are not already tied to the GS secured debt offering. But even without assuming a miraculous turn at the company, we don’t get to a big liquidity event.
2) One thing we can’t stress enough is that for this management team, a $300mm capex budget is music to our ears. We don’t want them spending money. You don’t need to spend capital to stabilize a business like this. That said, the most we could give JCP is $1.5-$2.0Bn in sales on an anemic capex budget. If we want to start to think big with the top line, we’re going to think bigger with a re-capitalization.
3) The fact that JCP’s sales sequentially improved throughout each month in the quarter cannot be overlooked. Yes, we know they still stunk something awful. But we can’t ignore the simple fact that JCP’s sales were better in the margin at the precise time that other retailers are feeling some pain. There is a higher level of competition for Consumers’ apparel dollar today than there was last year when JCP was writing a $4.3billion check to anyone else who wanted a piece.
4) Listening to Ullman talk on that conference call about the importance of Worthington, St. Johns Bay and Arizona was borderline painful. It confirms what we’ve always known to be true – that Ullman’s strength is in selling below average product at heavily discounted prices to Average Americans. That said, Average Americans ditched JCP over the past two years, and subsequently destabilized the company. Ullman is probably the right guy to do it.
5) Our worst nightmare would be if we’re sitting here in another 3-6 months and the Board comes to a realization that Ullman is the right long-term guy for the job. That’s simply the wrong call. We think being short JCP here is unwise. But if that press release ever hit the tape, we’d likely sell every share we could find.
Takeaway: RL is making all the right investments, and the TAIL story is a winner. But where the consensus numbers come out near-term is critical.
This note was originally published August 07, 2013 at 14:11 in Retail
We were negative on RL coming out of the print in May – not because we did not like what the company was doing – quite the opposite, actually. RL was investing in IT systems, stepping up its Retail and e-commerce investments on a global scale, and preparing to take in the Chaps license from Warnaco. But these initiatives cost money, and the outward capital flow unfortunately precedes turning on the revenue spigot by at least 9-12 months. Simply put, there’s almost no way that returns can turn up when this is happening, and valuation multiples don’t expand when returns are going down. Given that RL’s multiple was sitting near peak, it made sense to us to wait to get involved until the market to freaked out over sloppy results.
The financial results played out as we thought, but the reality is that if you asked us a couple of days ago if we’d see a sell-off this quarter, we’d have said ‘probably not’. Don’t get us wrong, the quarter itself was poor, with 4% sales growth de-levering to an 11% decline in EBIT. Comps came in down -1%, and inventory growth outstripped sales growth by a factor of 2x. Again, not return-enhancing metrics – consistent with our concern last quarter. But that said, we think that expectations were set appropriately headed into this print. 2Q guidance of lsd growth and margins down 300-350bp vs last year seemed to be the big culprit, as they suggest EPS in the range of $2.25-$2.20 vs the consensus at $2.57. The question, therefore, is likely whether that is the real number, or if it is a sandbag.
Our sense is that financial reality is somewhere in between guidance and current estimates. We’re coming out at $2.31 for 2Q, and where the consensus lands will be critical as it relates to our near-term take on the stock. We’ll watch that in the coming days, and will be back accordingly.
Long-term, we continue to like RL in that the actions that the company is taking today should propel RL’s top line over $10bn within 3-years, push EBIT margin into the 17-18% range, and take RNOA from 24% today to 35% as asset turns increase on top of a higher margin business. Those characteristics are tough to find. But the catch, once again, is that our estimates are hovering right on top of the Street’s for the next three years (based on last night’s consensus numbers – see table below). That’s rare for us and RL. We’re usually far above. That tells us that the Street finally has it right, or we’re missing something. Either way, we don’t have the conviction to jump in at current levels – at least not while it is still in the early half of its ‘investing year’.
Ralph Lauren Investment Summary
RL Profitability Roadmap: Solid Outlook Over Our TAIL (3-Year) Duration
HERE'S OUR NOTE AFTER RL'S 4Q RESULTS
RL: The Market Is Not Recognizing The Risk
Takeaway: Stocks don't go up when sales slow, costs increase, capex goes up materially and the stock is at 20x EPS. A textbook 'investing year.
Conclusion: We like what RL is doing, but the near-term financial implications will not be pretty and EBIT growth trajectory and RNOA will suffer. Even though this impact will likely be temporary, investors will need to wait until near the end of this calendar year until the risk profile improves. Until then, valuation matters.
We're surprised that RL was not down more on its 4Q print. Yes, the company overdelivered -- in typical RL fashion. But there are enough factors that are changing negatively on the margin that we think will make RL a good candidate for multiple compression in the sloppy quarters that lie ahead in the upcoming fiscal year.
We like this company as much as we ever have. It continually reinvests in its intellectual property to elevate the retail experience and gain share -- something that has worked for RL without fail.
Case in point…we kept a little scorecard of all the times that retailers and brands mentioned the words 'omni-channel' in press releases and earnings calls this earnings season. We stopped count at 100, and no, it did not take us long to get there. This has officially become the biggest cliché buzzword since 'supply chain' made it on to the scene 15 years ago. We swear that half of the execs talking about omni-channel don't even know what it means (if there even is a universally-understood definition). They're just following the cool kids.
Ralph is one of the cool kids. It did not discuss 'omni-channel' once on its call or press release. Why? The reality is that it has been implementing a true omni-channel strategy for much of the past five-years…at a time when no one knew what it even was. Now RL is implementing retail and e-commerce models that others will be trying to implement in another five years. Simply put, we think that RL will continue to be a winner.
But this is one of those years where the negatives to the story are likely to outweigh the positives. Specifically…
In fairness to RL, it has proven to be an exceptional steward of capital in the past, and we have no reason to think that will change this year. But the reality is that the $150mm in extra costs puts RL in a hole for 13% EBIT growth. This would be ok if we could justify solid double-digit top line growth as an offset -- but the reality is that we cannot (even if partially due to FX). So we've got slowing sales, eroding margins, and a step-up in capex. Any way we cut it, we can't justify the combination of these factors leading to any form of multiple expansion.
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