This note was originally published at 8am on November 06, 2013 for Hedgeye subscribers.
“Why do we have noses that run and feet that smell?”
The Fed’s English can be confusing too. As you can see in our Chart of The Day, that’s what’s been driving unprecedented volatility in the US bond market this year. Confusion about @FederalReserve policy is starting to breed contempt.
But oh no, no, no – silly Mucker must have this all wrong. The Fed has a “study” that proves pretty much anything they want to prove. The latest data-mining propaganda coming out of the head of the anti-dog-eat-dog-Fed-Monetary-Affairs-Division, William English, insinuates that it’s time for Bernanke and Yellen to move the goal posts again on the unemployment target. #Wonderful
Huh? This is what Bush/Obama empowered - an un-elected and un-checked central planning agency that is trying to prove out their academic dogma versus well established forces (like gravity). The Fed can pretty much keep making up the rules as they go here until the entire Bond Bubble blows up. Isn’t that awesome? History will write plenty of English “papers” on this!
Back to the Global Macro Grind…
Since the Fed was wrong on its US growth forecast again (this time they and #OldWall were too low at the beginning of 2013, and the bond market started front-running them as tapering expectations perpetuated the 2-stroke engine of #StrongDollar + #RatesRising), and the unemployment rate is getting too close to their policy change target of 6.5%, they need to change the target.
Or is it? I’ll be doing another full day of institutional client meetings in NYC today and I’ll tell you that (especially for clients who aren’t in the business of being levered-long bonds that they can’t get out of) this expectations game isn’t cool.
- 1. Dollar Down + Rates Down = US Growth Expectations Down (see US economic history for details)
- For the last month, you’ve seen every growth “Style Factor” start to underperform slow-growth yield chasing
- If we’re going back to slow-growth yield chasing (long Gold, Consumer Staples, and Bonds) that’s a big shift
The Fed won’t have a “study” on this because that would prove that incrementally dovish policy does 2 things:
- Devalues America’s Currency (which they are supposed to be protecting)
- Represses rates and growth expectations (as Dollar Debauchery perpetuates inflation, not real-growth)
All the while, the same western academic dogma that we imported from Europe remains in parts of Europe. This morning’s central planning bureau headline out of Italy’s Finance Minister is begging Mario Draghi to cut rates and devalue the Euro!
To review, from December 2012 to August 2013, a #StrongCurrency policy (tapering):
- Crushed inflation expectations
- Ramped real (inflation adjusted) growth expectations
But these damn bureaucrats see that very Deflating of The Inflation (from the world’s all-time high inflation readings of Gold and Food prices in 2011-2012) as a threat to their failed policies!
Moving along, I bought more exposure to our #EuroBull Macro Theme yesterday via:
- Eurostoxx50 Index (FEZ) which tested and held my immediate-term TRADE line of support
- Swiss stocks (EWL) which were holding support and have bounced a full +1% this morning
Why buy US Growth anymore if we’re going to let these clowns at the Fed blow up our currency again? This all started with Keynes in Britain, and even the British have given up on the QE thing (thank God) at this point. Carney (the Canadian who doesn’t do crack cocaine) replacing Mervyn King at the Bank of England is like replacing Bernanke with me (or something like that).
#StrongPound in the United Kingdom continues to perpetuate rising UK growth expectations. When growth expectations rise, government bond yields rise (bonds go down). The 10yr UK Gilt Bond Yield is +10 basis points in the last 2-days as the UK printed the best Services PMI reading in 16 years (UK industrial production growth just accelerated to +2.2% y/y as well).
The final point to be made this morning is that after perpetuating Gold, Bond, and Utility Bubbles with his 0%-interest-rates-forever thing (formally known in a Hedgeye “paper” as Yield Chasing), Bernanke is probably going to get tagged with creating another US stock market bubble too. Today’s II Bull/Bear Sentiment Spread just clocked a fresh YTD high at +3960bps wide to the bull side.
I am still recommending prayer for those at the Fed who still don’t yet know about the “paper” on the definition of insanity. The summary of the paper is in plain English too – doing the same thing over and over again, and expecting different results.
Our immediate-term Risk Ranges are now:
UST 10yr Yield 2.55-2.69%
Swiss Market 8113-8299
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Position: Tactically short on strength.
Campbell’s had a rough quarter to say the least; the stock is trading down -6% intraday on management lowering FY guidance.
Despite concerted efforts to reduce costs (CPB completed the sale of its European Simple Meals business, the exit of 4 plants in the past two years, and plans to save an additional $40 in FY 2014) we struggle to get behinds CPB’s plan to increase its marketing spend (and likely promotion) as it accelerates the launch of eight new soups in the next two quarters (Fiscal Q2 and Q3). The drivers under the hood suggest further top-line pressure on increasingly more difficult comps and continued gross margin and operating margin pressure over the next two quarters. We also don’t think the company has not hit the mark on soups, launching hearty and healthier higher premium soups that look to be missing on the consumer’s value perception given the still very strapped labor market and macro environment.
In short, CEO Denise Morrison continues to under-deliver on her promise to turn around an ailing portfolio; US Simple Meals and US Beverages were clearly significant laggards in the quarter. Fiscal Q1 revenues of $2.17B fell -7.3% in the quarter (underwhelming consensus of $2.29B) and EPS declined -21% to $0.66 (vs consensus $0.86). Management attempted to explain away the decline citing unexpected light retailer inventory building and this year’s late Thanksgiving that will push more shipments into next quarter (Q2).
CPB is immediate term TRADE oversold and bearish on the intermediate term TREND. Therefore, this is a name we’re not comfortable owning over the intermediate term, and may only tactically trade around it to take advantage of price imbalances.
Given the weakness in the quarter, CPB lowered it FY 2014 guidance: sale 4% to 5% (prior 5% to 6%); EBIT 4% to 6% (prior 5% to 7%); and EPS 2% to 4% or $2.53 to $2.58 (prior $2.58-2.62).
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Takeaway: Commodities. Ugly.
It's been a disaster of a year for Commodities.
The CRB Index hit a fresh year-to-date low yesterday down -7.8% (in spite of US Dollar weakness.)
After selling Gold into Thursday's Yellen "Mother of All Doves" Bounce, our asset allocation to Commodities is back down to 0%.
We are also short Oil in RealTimeAlerts.
This is an excerpt from Hedgeye research. To learn more about becoming a subscriber click here.
Takeaway: There are many possible outcomes from JCP’s print. But there is virtually nothing JCP can say to suggest that it is not 100% fixable.
Conclusion: One of two things will happen, either we’ll get tangible evidence of the turnaround – which will make JCP worth buying even if it’s up. Or the company will ‘pull a JCP’ and scare the Street with the print, as it has grown so accustomed to. We think that’s unlikely. But we think one thing is clear, there is virtually nothing the company can or will say to suggest that this company is not 100% fixable. We’re buyers on the event.
First off, let’s be clear about where we stand on JCP. Our positive call is based on our view that not a single thing currently ailing JCP is beyond repair. This company is not broken. Johnson bullied and bruised a few dozen critical functions at the company, and though he may have tried to break them, he failed at that too. We don’t think that Ullman is the right person to rehabilitate JCP, but he is the right guy to take it off life support and administer CPR if necessary. We expect to see a new CEO announced by Spring 2014.
Another important point..we’re not arguing that JCP is a great retailer, a great brand name, or in any way deserving of the right to exist as a go-to source for consumers.
But let’s keep an important factor in mind…it’s operating at $100 per square foot. That’s embarrassing. Kohl’s, which we think has structural issues and has been at the top of our short list – is running close to $210/sq ft. Before Johnson worked his magic, JCP peaked out at $190 per foot.
Our point here is that we don’t have to assume that JCP becomes a great retailer. We don’t have to even believe that it will be an average retailer. It can remain in the lower quartile – a notch above Sears even – and operate at $140/square foot. And it can get there by simply fixing some of the factors that Johnson damaged during his triumphant reign.
Alongside the $140/ft, our other key assumption is that Gross Margins get back to 37%, which we think is very doable – despite the severe pushback we get on this assumption. Note that Ron Johnson’s decimation of JCP’s private label brands cost the company about $1bn in gross profit – that’s what happens when you remove $2.5bn in sales at a 48% gross margin and substitute with $900mm at a 33% gross margin.
All in, those assumptions get us to $1.30 per share, which is meaningfully above the high end of where even the most vocal bulls (if there are any) are posting their estimates. Will it get there tomorrow? No. But it’s math that people will begin to run within 12-month’s time. Keep in mind that over the past few years there has always been a debate alive about what the ultimate earnings power of JCP actually is. That debate today is absolutely dead. And we’re not talking about an unachievable Ackmanist-driven Hail Mary $12-EPS power. In all our travels and phone calls, we can’t find anyone that is willing to acknowledge that JCP can actually earn money. That will change, and we think it happens within 12-months.
So, what are we looking for in the quarter?
- First off, this is literally a three-year turnaround – it won’t be fixed in a quarter. What we’re looking for this quarter is a mere two or three wins on the road to fixing several dozen problems. That might sound like a shameless hedge – perhaps it is. But there’s going to be a mix of noise and good news in this quarter. That’s upside from the past two years where it’s been all bad news.
- We’re looking for about a -5% comp. The company already reported a 0.9% store comp and 38% dot.com comp for Oct. Based on commentary by virtually all retailers, October was the best month of the quarter. -5% seems about right, but could be 2-3% +/-.
- Gross Margin change is going to move inversely to comp. We have it modeled +100bps vs. last year – which would mark the first GM improvement in about 10 quarters. Our bias is to the downside on that one, as Ullman told the whole world that he’d end the quarter with positive comps, and he did a +0.9% in Oct. Sounds like he stretched. More likely than not, he told his selling and merchandising team to drive a positive comp come hell or high water. That usually does not come alongside a healthy gross margin. Nonetheless, they’re coming off such low numbers that Gross Margins could be down 100bp and still post a 150bp sequential improvement on a 2-year run rate – which is what we’ll really be looking to see.
- We’ve got an operating loss of -$292mm, which compares to the Street at -$384mm. Our number might be on the aggressive side due to gross margin, but we’re reasonably confident that JCP won’t miss the consensus.
- Usually, we don’t leave EPS for last, but the company’s print relative to expectations will be relatively meaningless due to the timing of the company’s offering and inconsistency in how people are modeling the fully-diluted share count. The Street is at -$1.70 this quarter, but the range is from -$2.36 to -$1.11. We have JCP losing a little over a buck. But again, share count is uncertain. We’ll look at the operating loss delta as the best way to gage our estimates versus consensus.
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