“Understanding the errors may afford new light.”
As I was banging around NYC client meetings yesterday, the US stock market was hitting fresh September highs (new YTD high of +23.5% for the Nasdaq), and the sun was shining. It was a great day. It’s been a great year.
On this day in 2001, many of us were devastated. My thoughts are with all my friends and those families who are still feeling that pain. While it will always be there, we still need to find the courage to carry on. We can only do that together.
As families, friends, and firms, we share that opportunity every day. It’s an opportunity to listen to one another and learn from our many human mistakes. Risk managing markets is a lot like life that way. For the open-minded, there is always a light to be found somewhere. Her virtues are time, patience, and change.
Back to the Global Macro Grind…
One of the most obvious changes I’ve had the pleasure and privilege in seeing in our client base over the course of the last 5 years is dismissing many of the economic dogmas of academia. You (as in the buy-side) are way ahead of the world on that.
Yes, these are early days. Change takes time. But we are finally getting broad-based and cross-disciplinary support on this front from some of the most coincident indicators there are – books.
Whether it’s from the behavioral side of economics (Dan Kahneman’s Thinking Fast, and Slow) or the more recent applications of Chaos Theory to market-based economics (George Gilder’s Knowledge and Power) it’s getting out there – and the new light I wake up to every morning certainly feels good.
In Chapter 7 of Knowledge and Power, Gilder does a great job summarizing the history of economic theory:
“During much of the century, they clustered in tribes around three or four major totemic light sources: Adam Smith, with his magical self-extending markets; John Maynard Keynes, with his amazing self-fulfilling demand… Meanwhile Hayek and Samuelson defended the spontaneous order and equilibrium of Walras and Marshall.” (pg 62)
All the while, the entrepreneurial spirit of capitalists crushed Smith’s invisible hand; Keynes government spending ideas morphed into multipliers of mass currency destruction; and some people who gave up on both Smith and Keynes just decided to be Hayekian because they had no idea what else to sign up for…
Like most fictional stories in human history, enlightenments like the one we are experiencing in economics put all of these dogmas to bed. Eventually, everyone who gets it moves on. And we have the opportunity to start growing intellectually again.
I don’t worship at the altar of a social science. I’m not a Hayekian. I’m no Keynesian either. I am Mucker. I have my own team and market based models. Here’s what Mr. Market has been telling me to think about for the last 10 months:
- Bullish on the US Dollar
- Bullish on US Growth Stocks
- Bearish on almost everything Slow-Growth (Gold, Bonds, etc)
In our multi-factor, multi-duration model, the 2nd derivative matters most (visually speaking, it’s the slope of the line). That’s why we’ve been bullish on US #GrowthAccelerating. A #StrongDollar and #RatesRising perpetuate that.
For those of your friends who are still locked-down in the dark ages by their textbooks and compensation structures, here’s a friendly fact for them on how impactful a “weak currency” was to “export growth”:
- US Dollar Index hit a 40yr low in Q2 of 2011 (post Nixon abandoning the Gold Standard in 1971)
- US Net Exports in Q4 of 2011 were down (as in negative) -0.6% in terms of their quarterly contribution to US GDP
In other words, a strong currency coincides with a strong country. Strength in currency = strength in consumption, confidence, and character. This is not a new light I am shining on our failed academic institutions this morning. This is economic history.
And yes, after moves like we’ve had to start September (the US Dollar has been up for 4 weeks in a row and the SP500 is up +3.12% for the month-to-date), it’s scary to be chasing the stocks you could have bought with the VIX 20% lower in August…
So don’t do that – the SP500 and QQQ’s are immediate-term TRADE overbought (within their bullish TREND), so sell some of what you bought when everyone was whining about another opportunity to buy things on sale. And enjoy the rest of your day.
UST 10yr 2.86-3.03%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Today at 11:00am EDT we will be hosting an expert conference call titled "Are Energy Drinks Harmful? A Debate with Dr. Deborah Kennedy".
On the call we will host a lively debate with Dr. Deborah Kennedy about energy drinks and what may be looming for energy drink producers in the future. A live Q&A session will be held directly after the call for all listeners.
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 835129#
TOPICS WILL INCLUDE
- What's the science behind caffeine consumption?
- Where does the medical community stand on energy drinks and caffeine in foods?
- What legal action has been taken against energy drink makers?
- How have energy drinks been regulated and what could the future hold?
ABOUT DR. DEBORAH KENNEDY
Dr. "Deb" is the founder of Build Healthy Kids and has been at the forefront of nutritional studies and consumer awareness for almost two decades. Her experience ranges from pediatric nutrition and nutritional oncology to product development and kids' education programs.
Dr. Deb made national headlines from a March 2013 Build Healthy Kids newsletter in which she warned her subscribers that energy drinks can be dangerous, and told kids to "Never drink energy drinks: They can harm you" (alongside a cartoon skull 'n" crossbones and a generic energy drink can). Monster (MNST) took issue with Dr. Deb's language, and demanded that she retract the "defamatory statements" and correct them or else Monster would draw a legal suit. Following the action, she gained the support of Senator Richard Blumenthal (alongside Senator Richard Durbin and Congressman Edward Markey), who addressed Monster CEO Rodney Sacks in a letter stating that it's unclear why Monster would single out Build Healthy Kids since the company was never named and considering that Monster does not target the Build Healthy Kids demographic. To date, there is no formal legal suit against Dr. Deb or Build Healthy Kids.
Dr. Deb has worked at Yale, Columbia, Tufts and Cornell University. She is a coauthor of Beat Sugar Addiction Now! for Kids and author of Nutrition Bites. She is currently working on her third book which deals with children's eating personalities.
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Takeaway: People are asking the wrong questions about RH. THE key question is when it will earn $8.00 per share. We think the answer is 2018.
Conclusion: People are asking the wrong questions about RH. THE key question is when it will earn $8.00 per share. We think the answer is 2018.
It was absolutely painful listening to analysts grilling management on the RH Q&A wanting to be spoonfed precise guidance in the coming quarters. We love math as much as anyone – probably more. But seriously…this is a company that should earn about $1.50 per share this year, and people are asking for guidance on items that account for maybe a nickel a share? Here’s a better question… How long will it take for RH to earn $8.00?
Our current math suggests that we’ll see that number around 2018. That’s $6.50 in incremental earnings in 5-years. Put a different way, that’s a 40% earnings CAGR. Use that as ammo next time anyone tells you that RH is too expensive or that ‘they already missed it’. If you want to use a simple PEG on today’s 12-month forward earnings, you’re looking at a $90 stock within 1-year based on our model. 2-years is $125, 3-years is $175. You get the idea… If you want to review the detailed modeling assumptions, join us for our Best Ideas call on RH in 2-weeks. (We did one at the IPO at $32, and while the stock has worked, we think that the thesis has evolved to an even greater unrealized degree.)
Now…here are a couple of puts and takes on the quarter.
1) The print itself was solid. Right in line with our model with adjusted EPS coming in at $0.49 vs the Street at $0.42.
2) Revenue was in-line with our above-consensus estimate, but the composition was off. RH comped 26%, which was well-below our expectation of near 40% and the consensus of 29%. But the RH Direct business (not in the comp) came in meaningfully higher, accounting for 47% of total sales. They washed each other out. But people will always want to see the comp higher. I guess it just sounds better. This ordinarily wouldn’t matter – but with a 9.4% run in the stock 10-days leading into the quarter – the company really needs perfection to keep the treadmill going. 26% is sub-perfect.
3) On the flip side of that, RH guided up 3Q revenue by nearly 7% -- setting expectations for higher comps (high 30s). No one is upping revenue guidance in the consumer space these days. The confidence management has in its business is extreme.
4) RH eliminated the Fall Source Book – the 8 pound catalogue package that your mailman hates delivering. We give the company all the credit in the world given the sheer costs associated with the mailers and limited economic benefit. The marketing dollars will be spent with more experiential forms of advertising.
5) Combining the higher comp expectation for 3Q with the cost saves from the elimination of the mailer, RH raised EPS guidance to $0.27-$0.29 vs. the Street at $0.16. Again, a huge delta in guidance change.
6) RH appears to be on a track of Gross Margin recovery. After weakness in 1H, 3Q GM should be closer to flat, with full recovery by 4Q.
All in, the reported numbers were excellent. The cadence of strategic change to achieve the long-term earnings growth we’re looking for was there. The revenue composition combined with investors badgering management about guidance to a greater degree than usual is not going to help the stock. But we’re talking a very short window. 2H square footage is accelerating, comp is improving, and gross margins are on the rebound. And all of this is in the context of what we think is an extremely favorable 5-year growth trajectory.
Takeaway: Global sales surprise, but U.S. sales disappoint. We remain bearish on MCD.
This note was originally published September 10, 2013 at 13:17 in Restaurants
MCD reported August global same-store sales growth of +1.9% versus +3.7% in 2012. However, the two-year trend ticked up 245 bps sequentially.
The U.S. and Europe regions showed same-store sales growth of +0.2% and +3.3%, respectively. The U.S. missed consensus expectations by 60 bps, while Europe beat by 340 bps. The two-year trends accelerated sequentially to +1.6% in the U.S. and +3.2% in Europe. The APMEA region reported same-store sales growth of -0.5% versus +5.7% a year ago, beating consensus expectations by 40 bps. The two-year trend accelerated sequentially to +2.6%.
Overall, August sales were slightly better than we had expected—but not enough to change our fundamental view. Although Global sales were better than estimates, U.S. sales disappointed and remain a point of concern for us. MCD continues to refer to the U.S. environment as “persistently challenging,” which, interestingly enough mirrors the chatter we have been hearing from a majority of the larger casual dining companies more so than that of other QSRs.
Despite a flurry of recent initiatives regarding new items and menu changes propelling the stock higher, we remain comfortable with our thesis. In fact, we’ve had a rather bearish take on this news, as we believe these initiatives could add to the operational complexities of McDonald’s stores. Please see our recent note “MCD: A Pending Mighty Disaster” for more thoughts on this topic.
We continue to believe there is a disconnect between investors’ expectations and the company’s fundamentals. MCD will present tomorrow morning at the Goldman Sachs Global Retailing Conference. We’ll post on anything incremental following the presentation.
Dubai is ripping. Again.
The country’s stock index surged +8.5% today after Obama said the US would put a Syrian strike on hold if they surrender its chemical weapons. (Evidently, the United Arab Emirates likes the no-action in Syria call too.)
UAE is up over 55% year-to-date now. Can you begin to imagine what happens if the world doesn't come to an end? Lots to consider.
Because despite Nasdaq up over 20% YTD, every downtick in US growth stocks still has everyone and their sister on the edge of their seats worried about it.
(Editor's note: This is a brief excerpt from Hedgeye CEO Keith McCullough's morning research. For more information on how you can begin receiving our research, please click here.)
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