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$TROW: Casteleyn Likes It

Takeaway: TROW is a prime beneficiary of the positively trending U.S. stock market.

Editor's note: What follows below is an excerpt from Hedgeye Financials Equity Analyst Jonathan Casteleyn in this weekend's Investing Ideas. Investing Ideas is for the longer-term investor looking for actionable long-only opportunities. With your subscription, you'll know immediately when one of our analysts uncovers a new idea or changes a current one. Every Saturday morning you'll receive our special newsletter full of all the important investing information of the week. Click here to subscribe.

 

$TROW: Casteleyn Likes It - trowe

T Rowe Price

During our recommendation of T Rowe Price as a core long position, we have solely been using industry information on equity flows from the Investment Company Institute (ICI), the trade group for the asset management industry.  However, there is a private survey of asset management performance and flows called Simfund which we don’t use that projected a very positive outlook for TROW separately from our research process using ICI data.

 

Last week, this private Simfund survey calculated that in October alone that T Rowe has netted over $1.8 billion in new net inflows, more than the prior 3 months combined which totaled just $1.2 billion. Thus it is safe to say that the fourth quarter has started in very strong fashion for this leading equity manager.

 

$TROW: Casteleyn Likes It - cast888

 

In addition, Simfund projected that TROW’s industry leading performance gap has widened favorably, meaning TROW’s mutual fund families have increased their lead as the best performing mutual funds of the public asset managers. According to Simfund, now 70% of TROW’s assets are 4 or 5 star Morningstar rated, the only mutual fund products that have historically generated any significant inflow (see annual 4 and 5 star inflow versus 1 to 3 star rated products below).

 

In a nutshell, TROW stock is a prime beneficiary of the positively trending U.S. stock market with industry leading performance and improving retail equity mutual fund flows.

 

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What's New Today in Retail (11/25)

Takeaway: Great CEO move by WMT. WWW’s McCarthy refocuses Merrell. JCP purposefully irreverent in dispute with Kmart. ANF fire in Paris. JNY SHLD LTD

EVENTS TO WATCH OVER THE NEXT 24 HOURS

 

CHS - Earnings Call: Tuesday 11/26 8:30 am

DSW - Earnings Call: Tuesday 11/26 8:30 am

TIF - Earnings Call: Tuesday 11/26 8:30 am

BWS - Earnings Call: Tuesday 11/26 9:00 am

 

COMPANY NEWS

 

WMT - Doug McMillon Elected New Chief Executive Officer of Wal-Mart Stores, Inc.

(https://www.streetaccount.com/pressrelease.aspx?ticker=WMT&intraday_id=1401599)

 

  • "Wal-Mart Stores, Inc. today announced that its board of directors elected company veteran Doug McMillon, 47, to succeed Mike Duke, 63, as president and chief executive officer, effective February 1, 2014. McMillon was also elected to the company's board of directors, effective immediately."
  • "Duke will continue serving as chairman of the executive committee of the board and, in the tradition of his predecessors, stay on as an advisor to McMillon for one year. The company plans to make an announcement on McMillon's successor as CEO of Walmart International by the end of the fiscal year."

 

Takeaway: McMillon's profile has been growing inside WMT, so this is not a complete shock. But we definitely are surprised by the timing. All that said, the idea of having a 47-year old CEO with heavy International experience is extremely appetizing to us. Let's face it, there's no more unit growth in the US, and WMT can't comp consistently better than 1%. The guy can't exactly do any damage to the US business, and Int'l will have a bigger profile. This is a win-win.

 

JCP - J.C. Penney Will Be Replaced by Allegion in S&P 500 After Drop

(http://www.bloomberg.com/news/2013-11-22/j-c-penney-will-be-replaced-by-allegion-in-s-p-500-after-drop.html)

 

  • "J.C. Penney Co...will be replaced in the Standard & Poor’s 500 Index by Allegion Plc., S&P said in a statement today."
  • "The S&P 500 change will take place after the close of trading on Nov. 29…"
  • "J.C. Penney will bump Aeropostale Inc. from the S&P MidCap 400 Index, and Aeropostale will displace Corinthian Colleges Inc. from the S&P SmallCap 600."

 

Takeaway: Not a surprise for two reasons…1) JCP can't be in the S&P with its current market cap for too much longer, and 2) The stock dropped like a stone headed into this announcement. Someone had the information.

 

JNY - Sycamore in talks to buy Jones Group for less than $16/shr-sources

(http://www.reuters.com/article/2013/11/22/jonesgroup-sycamore-idUSL2N0J71XS20131122)

 

  • "Private equity firm Sycamore Partners LLC is in advanced talks to acquire apparel retailer Jones Group Inc and is working toward a deal in the next few weeks, according to sources familiar with the process."
  • "Sycamore is discussing a price of less than $16 per share - or roughly $1.3 billion based on shares outstanding - and is in the process of lining up financing for the deal, two people said on Friday."

 

Takeaway: Looking back as far as 10-years, JNY has managed its M&A pricing through the press. Whenever it sold an asset, there was always a lot of noise around how many bidders there were, and what they were willing to pay.  It seemed as if WWD was their banker, and not Morgan Stanley. This one is no exception. The press talked about 3 bidders at a price North of $16, and now we're down to 1 bidder at a price South of $16. We won't miss JNY after it goes private.

 

WWW - Merrell's Gene McCarthy Spells Out His Plans

(http://www.wwd.com/footwear-news/business/merrells-gene-mccarthy-spells-out-his-plans-7289942?module=Footwear%20News-Business-second)

 

  • "The company has to return to something very simple: hiking and trail, outdoor and performance. So my message internally and externally will be this 'Out.Perform' message. It can be a tagline, but it needs to be more of a mantra. Everything we do needs to be tethered to the idea of outdoors and performance. We want to keep these legacy items, like the Jungle Moc or the Moab, but we want to keep them in their rightful place. I don’t want to lead with them."
  • "I need to integrate apparel and footwear. And that, to me, [means] I don’t want to be a footwear, apparel and accessories brand. I just want to be a brand. Apparel needs to have a visual place with footwear [in our stores] because you need to create mindshare with apparel before you can get market share."

 

What's New Today in Retail (11/25) - chart3 11 25

 

Takeaway: So nice to hear that McCarthy is not going to lead with a dinosaur like the Jungle Moc. We wish it would go away, but the reality is that it's a great comfort shoe for people that don't care how they look and are too lazy to tie their shoes.

 

JCP, SHLD - JC Penney Gets Sassy With Kmart Over 'Jingle Bells' Ad

(http://mashable.com/2013/11/21/jc-penney-kmart-twitter/?utm_medium=feed&utm_source=rss)

 

What's New Today in Retail (11/25) - chart1 11 25

What's New Today in Retail (11/25) - chart2 11 25

 

Takeaway: This exchange speaks for itself. JCP remains irreverent in its marketing (which is a good thing).

 

WMT, AMZN - Wal-Mart Lowers Free Shipping Minimum to Compete with Amazon

(http://www.fierceretail.com/story/walmart-lowers-free-shipping-minimum-compete-amazon/2013-11-22)

 

  • "Effective today, Walmart has lowered its free shipping minimum price on Walmart.com from $50 to $35 just in time for the holiday season. The new price makes Walmart's online shipping minimum exactly the same amount as Amazon's."

 

Takeaway: The key consideration is not a war between AMZN and WMT, but rather the precedent that WMT is setting for every other retailer than competes with either of the two goliaths. 

 

LTD - L Brands, Inc. (Formerly Known As Limited Brands, Inc.) Announces New Stock Ticker Symbol

(http://www.prnewswire.com/news-releases/l-brands-inc-formerly-known-as-limited-brands-inc-announces-new-stock-ticker-symbol-233061131.html)

 

  • " L Brands, Inc. announces today that in relation to the March 2013 announcement in which the company changed its name from Limited Brands, Inc. to L Brands, Inc., the company will change its NYSE stock ticker symbol from LTD to LB, effective Dec. 2, 2013."

 

SHLD, SCC - Eddie Lampert considers sale of Sears Canada

(http://nypost.com/2013/11/24/sears-ceo-considering-sale-of-company/)

 

  • "Lampert is interviewing multiple banks including Goldman Sachs about conducting a prospective process, according to sources close to the situation. Spokesmen for Sears and Goldman declined to comment."

 

Takeaway: This is a no-brainer. SHLD has nearly 4,000 stores, and can't turn a profit. They need to monetize anything that's not nailed down.

 

Moncler - Moncler Gets Green Light for IPO

(http://www.wwd.com/business-news/financial/moncler-gets-green-light-for-ipo-7289174?module=hp-markets)

 

  • "Moncler SpA on Friday received the green light from the Italian Stock Exchange to proceed with its public listing."
  • "The Italian luxury brand still needs to wait for approval from Consob, Italy’s equivalent of the Securities and Exchange Commission, which is expected next week, before it kicks off its two-week road show."
  • "Sources indicate that the IPO is expected to take place in mid-December and that the company will float around 30 percent of its total shares. Industry sources said Moncler’s IPO could value the company at around 2 or 2.4 billion euros, or $2.68 to $3.22 billion at current exchange."

 

ANF - Fire Ravages Abercrombie Flagship in Paris

(http://www.wwd.com/retail-news/retail-features/fire-ravages-abercrombie-flagship-in-paris-7290525?module=hp-topstories)

 

  • "A fire has ravaged the Abercrombie & Fitch Co. flagship on Avenue des Champs-Elysées in Paris, and the store will require a full refit before it can reopen, according to a spokesman for the Paris fire brigade."
  • "The blaze broke out in a clothing display section on the second floor of the four-story unit shortly before 7 a.m. on Sunday and destroyed 1,075 square feet of retail space, said Lieutenant colonel Frédéric Grosjean."

 

INDUSTRY NEWS

 

U.S., Bangladesh to Sign Accord

(http://www.wwd.com/business-news/government-trade/us-bangladesh-to-sign-accord-monday-7289166?module=hp-topstories)

 

  • "The U.S. and Bangladesh are set to sign a Trade and Investment Cooperation Forum Agreement on Monday that is said to provide an important mechanism for the two countries to discuss bilateral trade and investment issues, as well as be a forum to pursue cooperative activities."
  • "In July, the U.S. and Bangladesh agreed to a Bangladesh Action Plan, along with a statement by the U.S. on 'Labor Rights and Factory Safety in Bangladesh.' The USTR said at the time that the implementation of the actions outlined in the plan could provide a basis for the President to consider reinstatement of the Generalized System of Preferences trade benefits for Bangladesh that were suspended in June, which went into effect in September. Apparel and textiles were not covered by GSP, which included imports such as tobacco, sports equipment, porcelain china and plastic products."

 

 

 

 

 


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MONDAY MORNING RISK MONITOR: GRINDING HIGHER

Takeaway: Risk continues to fall in many key measures of the Financials complex. Fundamental measures are also improving.

Risk Monitor / Key Takeaways:

For a while now we've been flagging the particularly conducive environment for Financials on both the risk and fundamental fronts. This week remains the same. The setup remains favorable from both a short and intermediate term trend standpoint. A few of the callouts include ongoing stability/further increases in the 2-10 spread, ongoing stability and even marginal tightening in Euribor-OIS and even in the Shifon Index. Rising rates are also again becoming a general tailwind. We provide a brief summary below of some of the notable callouts across the various risk measures we track. 

 

* U.S. Financial CDS -  Another good week for the US Financials with swaps tightening 4 bps, on average. Large caps were leaders, tightening by 4-8 bps across the board.

 

* European Financial CDS - Europe's banks resume their winning ways, dropping an average of 8 bps W/W. Italian, Spanish and UK banks led the charge lower.

 

* 2-10 Spread – Last week the 2-10 spread widened to 246 bps, 5 bps wider than a week ago. 

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 13 improved / 0 out of 13 worsened / 7 of 13 unchanged

 • Intermediate-term(WoW): Positive / 9 of 13 improved / 1 out of 13 worsened / 3 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 15

 

1. U.S. Financial CDS -  Another good week for the US Financials with swaps tightening 4 bps, on average. Large caps were leaders, tightening by 4-8 bps across the board.

 

Tightened the most WoW: JPM, BAC, GS

Widened the most WoW: MMC, TRV, CB

Tightened the most WoW: MBI, AGO, WFC

Widened the most/ tightened the least MoM: SLM, XL, XL

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 1

 

2. European Financial CDS - Europe's banks resume their winning ways, dropping an average of 8 bps W/W. Italian, Spanish and UK banks led the charge lower.

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 2

 

3. Asian Financial CDS - Asia was tighter almost across the board, save for one Indian bank (+2 bps). 

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 17

 

4. Sovereign CDS – Sovereign swaps were mixed last week with the biggest up moves in the US (+5 bps) and Ireland (+4 bps) and the biggest down moves in Spain (-9 bps) and Portugal (-7 bps).

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 18

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 3

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 4.6 bps last week, ending the week at 6.00% versus 6.05% the prior week.

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 point last week ending at 1829.

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 6

 

7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 16.3 bps this week versus last week’s print of 16.71 bps.

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 275 versus 273 the prior week. As compared with the prior month, commodity prices have decreased -2.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 bps to 9 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 57 basis points last week, ending the week at 3.89% versus last week’s print of 4.45%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -1 bps, ending the week at 84 bps versus 85 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 11

 

12. Chinese Steel – Steel prices in China fell 0.3% last week, or 11 yuan/ton, to 3532 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 246 bps, 5 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.8% upside to TRADE resistance and 1.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: GRINDING HIGHER - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Overbought & Oversold...

Client Talking Points

YEN

The Yen is signaling oversold versus the US Dollar as the Nikkei signals immediate-term TRADE overbought. The Nikkei is up 1.5% to +52.6% year-to-date. #Boom. With CFTC futures/options net short position hitting new highs of -110,309 contracts, buy/cover Yen versus the US Dollar.

DAX

Germany is straight up +0.9% to register fresh new highs this morning. It's also signaling immediate-term TRADE overbought within its bullish TREND. See our Q413 #EuroBulls Global Macro Theme. Ping sales@hedgeye.com if you need access.

GOLD

Gold is down 1% to immediate-term TRADE oversold. We will be making the buy/cover call on that this morning with Gold down -27% year-to-date and gold bulls capitulating alongside John Paulson with net long position crashing another -20% last week (futures/options).

Asset Allocation

CASH 44% US EQUITIES 10%
INTL EQUITIES 10% COMMODITIES 6%
FIXED INCOME 6% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Ignorant people are more likely to doubt the truth of facts that contradict their beliefs. @UberFacts

QUOTE OF THE DAY

"Anytime you play a contest that you keep score in, there should be a winner and a loser" - Mike Ditka on tie games

STAT OF THE DAY

U.S. Stocks hit all-time highs last week with the S&P 500 up +26.5% and the Russell 2000 +32.4% year-to-date. Meanwhile, US Equity Volatility (VIX) made a higher-low, closing +0.6% on the week at 12.26 (down -32% YTD).



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