THE HEDGEYE DAILY OUTLOOK
TODAY’S S&P 500 SET-UP – November 7, 2013
As we look at today's setup for the S&P 500, the range is 20 points or 0.93% downside to 1754 and 0.20% upside to 1774.
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 October 24, 2013 for Hedgeye subscribers.
“The will of man is not shattered, but softened, bent, and guided…”
-Alexis de Tocqueville
If we need a French guy to tell us what, precisely, is wrong with an un-elected US Federal Reserve whose Chairman has unlimited power over both the value of your currency and rate of return on your savings, so be it.
“… men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which government is the shepherd.”
Isn’t it sad? But which part is the saddest? Is it the cowardice in free-market leadership, or the groupthink grounded in how much people will pander to a man that gets them paid? I don’t know anymore. I read this Tocqueville passage at a picnic table at a rest stop in Maine last night. I lit up a cigar, and I felt like I was going to puke.
Back to the Global Macro Grind…
The thought of Gold ripping and #GrowthSlowing because an un-accountable central planner doesn’t allow economic gravity to get marked-to-market makes me sick to my stomach. I run a small business in America. I have a payroll to meet and people to inspire – it gets a lot tougher when the economy slows than when it’s accelerating.
Not that anyone in Washington cares, but I’ll be fine. I started this firm during the thralls of 2008 when Bernanke thought the “shock and awe” rate cuts to 0% were going to save government from itself. So I can take a P&L punch. But if the buck keeps burning and rates keep falling, Bernanke, Obama, and “progressive” Republicans are going to knock some people right out.
I don’t agree with everything he says or thinks, but I think Mark Levin has this part of it right: “The nation has entered an age of post constitutional soft tyranny” (The Liberty Amendments, pg 4). And I’m not talking about politicized social issues or anything outside of my domain of required reading – I’m talking about the economy and markets.
How else would you describe a market that hangs on every breath of what an un-elected body @FederalReserve says and/or hints next? Forget the soft stuff – this is hard core tyranny.
So, after being the US #GrowthAccelerating bulls for the better part of the last year, how do we reposition for?
1. Down Dollar
2. Rates Falling
Whether you like the probability of these things occurring or not, it’s officially rising. But you already know that. You can see the “growth style factors” in your portfolio slowing.
Yesterday’s US stock market correction (from the all-time highs) was led by the Financials (XLF). The only S&P Sectors in our 9 Sector Model that were up on the day were the 2 slowest growth sectors – Utilities (XLU) and Consumer Staples (XLP).
What else has been working this week?
Isn’t that just great? Think about that for another few seconds – AT THE ALL-TIME HIGH IN THE US STOCK MARKET, GOLD, BONDS, and VOLATILITY WENT UP! And CNBC’s big government access ratings hit new lows.
This has never happened before… that’s why it “enervates, extinguishes, and stupefies people.”
Why has it never happened before? That’s easy. We have never been at these all-time highs before – and the Bush/Obama Bernanke legacy now has plenty of “this time is different” economic policy that history will have plenty of time to review.
Is this time really different? Is it still 2008? Or do the people in Washington who are plundering your currency for political gain look like they are living through Bernanke’s said 1936 depression?
Or is it 2013 – the year when de Tocqueville finally nails it on US monetary policy being that soft tyranny that we are all so numb to that we just allow it to exist?
2013 FACT: as US economic growth accelerated (Dollar Up, Rates Up), the bond, currency, and stock markets all had this right. That’s why Gold got tapered. On September 18th, 2013, Ben S. Bernanke restrained market forces from acting as they were.
I don’t think torching the currency, starving savers or a risk free-rate of return, and trying to arrest economic gravity ends well for Americans. That’s why I went to 58% cash yesterday and I still feel like I am going to puke.
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.47-2.60%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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Takeaway: We give the print a C, quality of EPS = D- and cash conversion = F. If you doubt RL is in serious transition, this conf call is your proof.
CONCLUSION: We did not like RL's quarter one bit. Almost every line of the P&L failed to impress us, and the erosion in the cash cycle further impeded RL's ability to convert GAAP profit to cash. Though CFO Peterson crushed it on the call, Roger Farah was definitely missed. We took our numbers down to be about in-line with RL's guidance. This is the first time in nearly a decade that we don't have confidence that RL will meaningfully beat expectations. We need a sit-down with management to reignite our confidence in the story.
This quarter did nothing to ease our growing concerns about RL. We were upbeat into the print, but despite the beat, we did not like the quarter one bit. Specifically…
RL SIGMA IS ONE OF THE WORST IN RETAIL THUS FAR THIS EARNINGS SEASON
HERE'S OUR NOTE FROM EARLIER THIS WEEK
RL: ST and LT Calls Are Very Different
CONCLUSION: We have a bifurcated view on RL right now. We like it from both a TRADE and TREND perspective, as expectations are too low headed into Wednesday's print, as RL guided to a msd decline in EPS, but in reality they’re going to post EPS growth of at least 1,000bps higher. Furthermore, the company will begin to show a meaningful acceleration in EPS growth over the next two quarters (near 30%) that should put it in the top decile of earnings growers in retail.
But from a TAIL vantage point, we're far less constructive. As much as we like how the company is executing on its long-term initiatives (international expansion, dot.com, and real estate), we're concerned about the recent changes in the C-suite. In the end, our degree of confidence in how the company will be executing three-years out is partially diminished.
So why are we concerned about management? Roger Farah shifting 50% of his time away from the company simply does not sit well with us. The fact is that Roger has been incredibly effective over the past decade. Ralph might be the CEO, but Roger has basically executed on everything that is outside of the creative side of the organization. Yes, it's a positive that the company still has him given that it was a risk that he'd leave entirely. But we just don't buy the concept of a part-time COO. The way we see it, you're ether in or you're out. It's like being half pregnant.
On the flip side, the promotion of Chris Peterson is a big positive. He's one of the top 5 retail CFOs we've met -- which says a lot. At P&G he was heavily responsible for parts of the organization outside that of a traditional CFO (and his division of P&G was 5x the size of RL).
Similarly, Jackie Nemerov, who was also promoted and reports directly to Ralph Lauren, is far more capable than many on Wall Street likely give her credit for. There's no one at the company (perhaps with the exception of Ralph himself) who has earned more respect and loyalty by her direct and indirect reports. In the end, as incredibly effective as Roger has been over the years, the reality is that some of that was likely Nemerov adding to the size of his halo.
Lastly, we need to consider Ralph Lauren himself. He's one of the more successful CEOs in retail, and has created one of the best brands in apparel. But we can't ignore the fact that he just turned 74. There's not a whole lot of CEO's in the S&P that are over 70. In fact, there are only 14 CEOs in America who are older than 74. Not that there is a set formula for when a person needs to stop working, but it’s worth noting that the average retirement age for CEOs is between 60-65.
We're not questioning Mr. Lauren's competence. How could we? But he's such a powerful force inside the company, and the likelihood of him being the boss in another five years -- at least in his current capacity -- is not too great. We don't have a problem with this at all. But where we're more concerned is that we're not sure the Board has any clear succession plans for Mr. Lauren. That's probably because the Chairman of the Board is also the CEO -- and he has no plans to go anywhere anytime soon.
In the end, there are two things that are certain; 1) The company is executing and has increasing momentum in its business, but 2) The company is undergoing the most significant period of transition in the executive offices that RL has seen since before 2000.
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As an example, the chart below shows where the survey was taken and the corresponding stock price moves for Carnival (CCL). The red circles indicate a bearish pricing trend while the green circles indicate a bullish pricing trend.
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