prev

QE: Visualizing the Markets Vote

The Fed kept its level of asset purchasing unchanged because it was worried about the level/trajectory of growth and inflation. 

 

Ironically, but not surprisingly, the effect, from a market perspective, has been the opposite of that intended. 

 

Inflation expectations have rolled over, slow growth exposure has outperformed and pro-growth leverage has been marked lower alongside treasury yields, the yield spread and the dollar.    

 

No particularly groundbreaking analysis here, just a quick visual illustrating the market vote on the Feds decision. 

 

Perhaps the Pavlovian response to stimulus policy has officially faded and consensus is coming around to the point we’ve been harping on all year:  #StrongDollar + #RatesRising both reflects and helps perpetuate sustainable real growth, and vice versa.  The graphic below, unfortunately, reflects the “vice versa”. 

 

To Growth,

- Hedgeye Macro

 

QE: Visualizing the Markets Vote -  Un Love Triange 2


JCP: WE'LL TAKE THE OTHER SIDE

Takeaway: Not particularly a high-quality 'feel good' call, but everything has a price. We'll take the other side of today's JCP sell-off.

Editor's note: What follows below is a brief, complimentary excerpt from a report just issued by Hedgeye Retail Sector Head Brian McGough. It comes on the heels of J.C. Penney's shares' precipitous plunge to 13-year lows. To learn more about how to subscribe to McGough's  "Hedgeye Retail Pro" research please click here.  

 

JCP: WE'LL TAKE THE OTHER SIDE - jcp

Bottom Line 

We’re buyers of J.C. Penney (JCP) on today’s sell-off. Let’s be clear about what kind of call this is, because it’s definitely not for the faint of heart.

 

We still know nothing about the long-term strategy or upcoming management transition, and are still living with the balance sheet baggage from the past two years.

 

This is a company with no square footage growth, where the average consumer could care less if it exists or not. (Sounds great, huh?).  But everything has a price.  And at $10, way too much credence is being given to the ‘terminal’ call.

 

We can say a lot of bad things about JCP, but we definitely don’t think it is terminal and our recent work suggests that much of the business lost is definitely recoverable.

 

As it relates to liquidity, we think that the only reason why the company would act now is to ensure that it has the best pool of CEO candidates possible (questions around liquidity would otherwise weed out the best candidates).


JCP: We'll Take the Other Side of Today's Sell-Off

Takeaway: Not particularly a high-quality 'feel good' call, but everything has a price. We'll take the other side of today's JCP sell-off.

Conclusion: We’re buyers of JCP on today’s sell-off. Let’s be clear about what kind of call this is, because it’s definitely not for the faint of heart. We still know nothing about the long-term strategy or upcoming management transition, and are still living with the balance sheet baggage from the past two years. This is a company with no square footage growth, where the average consumer could care less if it exists or not. (Sounds great, huh?).  But everything has a price.  And at $10, way too much credence is being given to the ‘terminal’ call. We can say a lot of bad things about JCP, but we definitely don’t think it is terminal and our recent work suggests that much of the business lost is definitely recoverable. As it relates to liquidity, we think that the only reason why the company would act now is to ensure that it has the best pool of CEO candidates possible (questions around liquidity would otherwise weed out the best candidates).

 

1) Some Consumer Insights From Our Recent Survey Work

  • Our recent survey work of JCP’s customers suggests that they left (or are spending less) for reasons that are fixable. Such as a) poor pricing, and b) lack of sales/promotions…

JCP: We'll Take the Other Side of Today's Sell-Off - chart1
  

  • Consumers noted, on the whole, that they will return to JCP if these items are fixed.

JCP: We'll Take the Other Side of Today's Sell-Off - chart2

  • Another big negative… elimination of exclusive brands like Arizona, St. John’s Bay, etc…

JCP: We'll Take the Other Side of Today's Sell-Off - chart3

 

  • Consumers went to KSS and M more than any other retailers. We think KSS (which got about 19% of JCP’s business lost) will be particularly easy to target for customer re-acquisition. We’re talking about $800mm.

JCP: We'll Take the Other Side of Today's Sell-Off - chart4

 

2) Gross Margin: Don’t underestimate the GM opportunity here. Johnson took away $2.5bn in revenue at 48% GM%, and substituted it it with under $1bn of revenue at 33% GM%. That’s a 500bp opportunity right there.

 

JCP Historical Gross Margin Change

JCP: We'll Take the Other Side of Today's Sell-Off - chart5

JCP: We'll Take the Other Side of Today's Sell-Off - chart6

 

3) Liquidity: Our analysis (below) suggests that JCP’s liquidity will definitely be tight – starting in about 6 quarters – but will not crimp its ability to self-finance its recovery. The company has in excess of $1bn of sources to monetize before tapping capital markets (which is not included in the analysis below).   Here’s a catch: They’re searching for a CEO. Having a cash-filled balance sheet broadens the pool of candidates. As such, they might tap markets simply to get the right talent on Board.
JCP: We'll Take the Other Side of Today's Sell-Off - chart7

 

4) Re today’s price movement: Five things combined to create the massive sell-off you see today.

  • A research firm came out today saying JCP 3Q sales are weak and that the company won’t comp in 4Q
  • JCP in court today for MSO/M case – something that absolutely no longer matters.
  • CEO Ullman is having a meeting with a broker today
  • GS Hi Yield analyst out last night saying that equity is worthless
  • Zerohedge glomming on to the fact that GS profited from the JCP secured term loan that it issued (and currently holds) in April, and now it is trying to make money on the other end while it pushes for JCP to file.

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

McCullough: Bernanke Channels Nero

Takeaway: This is the first 2013 US stock market “correction” that I will not be buying because of Ben Bernanke.

Editor's note: Forbes published an opinion piece written by Hedgeye CEO Keith McCullough earlier this morning. The following is an excerpt. Please click on the link at the conclusion to continue reading.

 

McCullough: Bernanke Channels Nero - im1

 

Central planners have been clipping coins and devaluing the The People’s hard-earned currency for at least two thousand years.  The Roman Emperor Nero of course devalued the Roman currency for the first time in the Empire’s history.

 

...If you don’t understand the history of un-elected politicians devaluing currencies, you have some reading to do. Most people who aren’t paid not to “get” it understand this now. Self-education is the best long-term path to avoid becoming a lemming.

 

Look, I’m not that smart. Most people who have seen my SAT scores would agree. But I work hard and I recognize that Mr. Market is a very smart cookie. What I tend to get on a lag, is what Mr. Market is telling me to get. Unlike our Fed Chief, I don’t wake up every morning trying to bend economic gravity.

 

Ben Bernanke believes he can “smooth” gravity, economic cycles, etc. He’s basically telling the entire bond, currency, and stock markets that they are all wrong. So let’s stop, rewind the tapes and go to the score – what have markets done since Bernanke decided not to taper?

 

Click here to continue reading on Forbes.

 

McCullough: Bernanke Channels Nero - im2

(Image courtesy of the Bureau of Labor Statistics)

 


BOOK REVIEW: ANTIFRAGILE

Takeaway: Buy the book. A must read.

I’ve had many of you ask me for my thoughts on Nassim Taleb’s latest risk management book, Antifragile. So, in the spirit of the main criticism I’d give the book (it’s repetitive), here are some brief notes (< 1000 words = Top 50 highlights):

 

Summary Thoughts

  1. He doesn’t like academic/unaccountable government policy. Neither do I.
  2. He likes the recent work of Dan Kahnemann (Thinking, Fast and Slow). So do I.
  3. He’s transitioning from market practitioner to philosopher. I wouldn’t do that.

Bottom line: Buy the book. A must read as we continue to narrow the gap between Chaos Theory and Behavioral Finance.

 

BOOK REVIEW: ANTIFRAGILE - antif

 

Content Highlights

 

  1. “I’d rather be dumb and antifragile than extremely smart and fragile” (pg 4) Wall St “smart” is changing
  2. “anything that has more upside than downside from random events is antifragile; the reverse is fragile (pg 5)
  3. “This is the tragedy of modernity… those trying to help are often hurting us the most (pg 5) #agreed
  4. I.A.N.D (International Association of Name Droppers)” (pg 6) #funny
  5. “academics with too much power and no real downside and/or accountability” (pg 6) #yep
  6. “Less is more and usually more effective”, cites Steve Jobs  (pg 11); good advice, #practice it
  7. “only practitioners (or people who do things) tend to spontaneously get to the point” (pg 13)
  8. “Table 1: The Central Triad (3 Types of Exposures” (pgs 24-27) very #thoughtful/concise on Behavioral Econ
  9. “We are all… similarly handicapped, unable to recognize the same idea…” (pg 39) good pt on #context #bias
  10. “Abundance is harder for us to handle than scarcity” (pg 42)
  11. Equilibrium, Not Again” (pg 60) solid complexity theory (Stuart Kaufman) reference vs #Keynesian
  12. “Leopards… are not instructed by personal trainers on the “proper form” to lift a deer up a tree” (pg 73) #true
  13. “you learn from the errors of others…” (pg 73),  #important lessons, especially on Wall St
  14. National Entrepreneur Day” (pg 79) #Obama, please read
  15. “what is made to fly will not do well on the ground… volatility comes from volare, “to fly” in Latin” (pg 81)
  16. “Nature loves small errors… humans don’t.” (pg 85) #evolve
  17. “those experiencing a brand of variations called chaos can be stabilized by adding randomness to them” (pg 103)
  18. “For a theory is a very dangerous thing to have… Theories are superfragile.” (pg 116) #awesome quotes
  19. “Men feel good less intensely than bad.” (pg 155) good quote by Livy in the context of #Seneca’s thoughts
  20. Seneca’s Barbell” (pg 161) #important pg to read related to your #Cash position and #Drawdown risk
  21. “An agent does not move except out of intention for an end.” (pg 169) #quote from St Thomas Aquina
  22. Convex Tinkering” (pg 182) makes an #excellent risk mgt pt on asymmetry with a picture
  23. “Life is long Gamma” (pg 184) would love to hear the anti-free market #answer to that
  24. “Risk taking ain’t gambling, and optionality ain’t lottery tickets” (pg 185) this ain’t Kansas, and I ain’t Toto
  25. “Few want to jeopardize their jobs and reputation for the sake of change” (pg 192) #truth
  26. “Evolution does not rely on narratives, humans do” (pg 207) #money quote
  27. Table 4: “The difference between teleological and optionality” (pg 214) good thinkers framework
  28. Chapter 15 = “History Written by the Losers” #rant
  29. “The difference between humans and animals lies in the ability to collaborate” (pg 233), bingo #collaboratio
  30. “Nokia … began as a paper mill” (pg 235), #re-learn, find a way to win
  31. “Trial and error is freedom.” (pg 246) #RiskMgt101
  32. “You are taking the joy of ignorance out of out of the things we don’t understand” (pg 253) Fat Tony to Socrates
  33. “What is not intelligible to me is not necessarily unintelligent” (pg 256) #Nietzsche
  34. “It would be like prostitutes listening to technical commentary by nuns” (pg 264) Bernanke, comments?
  35. “Smile! A better way to understand convexity and concavity” (pg 272) #pics summarize hundreds of pages
  36. “Squeezes are exacerbated by size” (pg 279) think #HedgeFundBubble, Short Interest, etc.
  37. “If you have favorable asymmetries, or positive convexity… in the long run you will do reasonably well” (pg 300)
  38. “Innovation is saying no to 1,000 things.” (pg 305) quotes Steve #Jobs again
  39. “we are moving into the far more uneven distribution of 99/1 across many things that used to be 80/20” (pg 306)
  40. “absence of literary culture is actually a marker of future blindness” (pg 314) on some #techies vs the classics
  41. Medicine, Convexity, and Opacity” (pg 337), you can skip this chapter unless you like to rip on doctors
  42. “mention of the fragilista journalists Friedman or Krugman can lead to explosive bouts of anger” (pg 362) #lol
  43. Chapter 23 = “Skin In The Game” (pg 375) 1st three pages and Table 7 of this chapter #excellent
  44. “a person is only as respectable … as the downside he is willing to face for the sake of others” (pg 376) #skin
  45. “you can’t feel insulted by a dog” (pg 380) #woof
  46. “in traditional societies even those who fail have a higher status than those who are not exposed” (pg 383)
  47. “Isn’t this unethical?” (pg 413) crushes Princeton’s Alan #Blinder for his conflicts of interest as an academic
  48. “Everything gains or losses from volatility. Fragility is what loses from volatility and uncertainty” (pg 421) #conclusion
  49. “Prometheus is long disorder; Epimetheus is short disorder” (pg 422) #conclusion
  50. “living things are long volatility. The best way to verify that you are alive is by checking if you like variations” (pg 423)

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT)

Clients often remind us that we’ve had a great call on MCD this year, but also prod us not to get carried away with our bearish bias.  Admittedly, this is not an easy feat – but, as the facts change, so will our call.  Our intention is always to remain flexible in our coverage.


That being said, our bearish bias has not changed.  Below we highlight four recent events and their potential implications.

  1. The stock outperformed the S&P 500 over the past month
  2. The current Mighty Wings promotion
  3. Changes in the Eurozone
  4. Personnel changes in the U.S.

Stock Price Performance – MCD is up +2.8% over the past month, outperforming the S&P 500 and its quick-service peer group by 80 bps and 200 bps, respectively.  Given that the stock had underperformed the S&P 500 by -20.9% YTD, we knew the slightest whiff of good news would push the stock higher.  So where is the good news coming from?

 

Mighty Wings – MCD hasn’t generated as much buzz around a limited-time offer (LTO) since the McRib promotion.  But, at the end of the day, it is just a LTO.  The recent buzz might create a month or so of stronger sales trends, but we don’t view this promotion as a game changer for the company.  Selling chicken wings may temporarily boost sales, but, in the long run, we fear that it will end up inflicting more harm than good.  Asking the currently disgruntled franchisee community to prepare yet another product, with a slower than normal preparation time, will only add to the service issues the company is already experiencing.  In our view, this is likely to lead to further deterioration of the MCD brand.

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - MCD US SSS

 

 

Changes in the Eurozone – MCD has been trading better since the release of August comps on September 10th.  Global trends in August were stronger due in large part to better than expected results in Europe.  The company reported Europe same-store sales growth of +3.3%, on top of +3.1% growth a year ago, as the UK, Russia, and France were strong.  Several of the MACRO indicators we monitor in Europe continue to show improvement in the region, specifically in Germany, MCD’s most important European region.  Today, the forward-looking German Consumer Confidence Indicator from the GfK Survey rose to 7.1 for October, surpassing consensus expectations.  GfK notes that, “despite a fall in income expectations, German consumers are almost euphoric when it comes to their propensity to consume.”  Investors also got some good news from Italy, another market that has given MCD considerable headaches in the past.  Today, Italy’s Consumer Confidence Index jumped to 101.1, its highest level since June 2011.

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - MCD EURO SALES

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - cons conf

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - MCD Chart4

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - germany income expect

 

 

Personnel Changes in the U.S. – Yesterday we learned that MCD’s Neil Golden plans to retire early next year.  Given the importance of MCD’s marketing message, it is clear that the company does not have its act together, particularly in its most important region, the U.S.  Despite the recent limited-time offer of Mighty Wings, McDonald’s continues to struggle in the region.

 

 

Summary

The stock is having a strong month and Europe is looking stronger, on the margin, for the company.  However, the U.S. continues to struggle and we believe it will be a while before the company returns to high-single digit EPS growth.

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - mcd chart6

 

 

 

Howard Penney

Managing Director

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next