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Tough Spot: SP500 Levels, Refreshed

Takeaway: I’ll go with low gross and tight net, for now.

POSITION: 6 LONGS, 4 SHORTS @Hedgeye

 

That breakdown through our immediate-term TRADE line of 1837 mattered last week. So did the VIX breaking out above our TREND line of 14.91. Now we’re in a tough spot. While 1779 TREND support is holding, the signal is registering TRADE support below that at 1769.

 

Lots of levels – but here are the ones that matter to me most:

 

  1. Immediate-term TRADE resistance = 1819
  2. Intermediate-term TREND support = 1779
  3. Immediate-term TRADE support = 1769

 

In other words, the first shots across the bow are direct hits (SPX is TRADE bearish and signaling both lower-highs and lower-lows within its immediate-term risk range). If the TREND breaks, there is no long-term TAIL support to 1678.

 

So I’ll go with low gross and tight net, for now.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Tough Spot: SP500 Levels, Refreshed - SPX


What's New Today in Retail (1/28)

Takeaway: Finally, a good week for sales. ANF bests JCP in Corp Governance?? Is the US the new China? IKEA notes furniture rebound in US. NKE AdiBok

ECONOMIC DATA

 

ICSC - Chain Store Sales Index

 

Takeaway: Nice uptick both sequentially and versus last year. Retail needed this after a horrific start to the year.

 

What's New Today in Retail (1/28) - chart1 1 28

What's New Today in Retail (1/28) - chart2 1 28

 

COMPANY NEWS

 

JCP - JCPenney Amends Stockholder Rights Plan to Protect Tax Benefits

(http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-newsCompanyArticle&ID=1894192&highlight=)

 

  • "J. C. Penney Company, Inc. today announced that its Board of Directors has acted to protect the Company's valuable net operating loss carryforwards ('NOLs') by amending and extending the Company's existing stockholder rights plan."
  • "The amendments to the Company's rights plan include extending the plan's expiration date from August 20, 2014 to January 26, 2017, and lowering the beneficial ownership threshold for a person or group to become an 'acquiring person' under the plan from 10% to 4.9%."

 

Takeaway: We like the move to protect NOLs given the high intrinsic value that JCP has built up in averted tax liabilities by way of losing so much money. But we don't like the fact that the company took down the 'acquiring person' hurdle by over 50% -- 4.9% is simply too low, especially for a company whose market cap is struggling to stay above $2bn. JCP needs to make it easier for investors to deploy capital -- not more cumbersome.

 

ANF - Abercrombie & Fitch Implements Significant Corporate Governance Enhancements: Separation of Chairman and CEO Roles, Addition of Three Independent Directors, and Elimination of Shareholder Rights Plan

(http://phx.corporate-ir.net/phoenix.zhtml?c=61701&p=irol-newsArticle&ID=1894201&highlight=)

 

  • "Abercrombie & Fitch Co. today announced that it has appointed Arthur C. Martinez, Terry Burman, and Charles R. Perrin to the Abercrombie & Fitch Board of Directors, effective immediately, and that it has separated the roles of Chairman of the Board and Chief Executive Officer. Mr. Martinez has been appointed Non-Executive Chairman."
  • "With the addition of Messrs. Martinez, Burman and Perrin, the Abercrombie & Fitch Board will expand to 12 members, all of whom are annually elected. As part of its commitment to being a leader in corporate governance practices, the Company also announced that its Board of Directors has determined to terminate the Company's Shareholder Rights Plan.  Additional information will be available in a Form 8-K to be filed today with the Securities and Exchange Commission." 
  • "Michael S. Jeffries, who has served as Chairman of the Board since 1996, will continue to serve as a Director and as the Company's Chief Executive Officer."

 

Takeaway: Do our eyes deceive us, or is ANF actually one-upping JCP on the Corporate Governance front. As it relates to ANF, however, Jeffries remaining in his current role is akin to Chip Wilson staying on for way too long at LULU. The guy's gotta go.

 

IKEA - Ikea Group Profit Rises as Household Consumption Strengthens

(http://www.bloomberg.com/news/2014-01-28/ikea-group-profit-increases-as-household-consumption-strengthens.html)

 

  • "Ikea Group, the world’s biggest furniture retailer, said household consumption is recovering in several markets as it reported a gain in annual profit.
  • "Net income for the 12 months ended Aug. 31 increased 3.1 percent to 3.3 billion euros ($4.5 billion…"
  • “'Household consumption has strengthened in several markets,' Chief Executive Officer Peter Agnefjaell said in a separate statement. 'It’s too early to say the difficult economic situation is over but there are positive signs.'”
  • "Important markets such as the U.S. are recovering, and Ikea sees signs of a general recovery in Europe and an improvement in several southern European countries, said Agnefjael…"

 

Takeaway: We'd like to say that this is bullish for RH, our favorite idea, but the reality is that the customers are polar opposite. Think Ford vs. Mercedes.

 

DECK - Establishes New Omni-Channel President, President of Brands and Group President - Fashion & Lifestyle Brands

(http://ir.deckers.com/phoenix.zhtml?c=91148&p=irol-newsArticle&ID=1894166&highlight=)

 

  • "Deckers Outdoor Corporation...today announced three new senior management positions, reflecting the growth and diversification of the Company's global business."
  • Dave Powers, currently President, Global Direct-to-Consumer (DTC), has been promoted to President of Omni-Channel, reporting to the CEO.  In addition to continuing to oversee Deckers' domestic DTC operations, he will also oversee all wholesale, distributor, retail and E-Commerce channels in Deckers' international regions."  
  • "...the Company has also initiated an executive search for a President of Brands.  Reporting to the CEO, the position will entail oversight of Deckers' multi-brand portfolio, including working directly with each of the Company's brand presidents…"
  • The Company also announced the promotion of Constance X. Rishwain, President, UGG Australia to the additional role of Group President – Fashion & Lifestyle Brands."

 

Takeaway: We liked Mickey Drexler's comment at ICR when he said "I have no idea what Omni-Channel means. The customer either shops in a store, or they shop online, they don't shop in an Omni-Channel."  Our sense is that the Omni-Channel title will cease to exist in five years once retail acclimates into a 'new normal'.

 

NKE - Nike reorganizes SPARQ Training, eliminates some jobs

(http://www.oregonlive.com/playbooks-profits/index.ssf/2014/01/post_28.html)

 

  • "Nike SPARQ Training, used nationwide to quantify high school athletes' performance, has been reorganized and some jobs have been cut, Nike said Monday morning."
  • "'We have made the decision to realign and integrate Nike SPARQ training more closely with our Men's and Women's Training categories to more effectively leverage our resources and support our category offense,' spokeswoman Mary Remuzzi said in a written statement. 'We expect SPARQ to continue to be the definitive assessment rating for athleticism in high school and a tool to help athletes perform at their best. A small number of positions will be eliminated as part of this transition.'"

 

Takeaway: Not surprising. Nike may have been the first major brand to develop a training/rating program for athletes. But so many others have followed suit. UnderArmour, Adidas, Reebok, and half a dozen privately-funded initiatives. It makes sense that Nike would not want to compete in a space which is actually a cost-center.  Rather, they're making it a more commercial business.

 

ADS - Rick Owens & Adidas partner on innovative women’s footwear

(http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=158902)

 

  • "For Spring/Summer 2014, designer Rick Owens and adidas collaborate to create an innovative women’s footwear silhouette which debuted at the Rick Owens Spring/Summer 2014 Women’s collection presentation during Paris Fashion Week."
  • "Subtle yet instantly iconic, the trainers display only the slightest hint of branding: a barely perceptible three-stripe perforation along the side."

 

What's New Today in Retail (1/28) - chart3 1 28

 

Takeaway: We're the first to admit that when we think shoes are ugly, it probably means that they're going to be commercially relevant.  But these beauties, which retail for $700, are anything but 'subtle yet instantly iconic.' This a small scale partnership and probably only made the headlines because they were featured in a Paris Fashion Week show, but if this is the best that Adidas can come up with while it loses marketshare and sponsorships to UA and NKE they are in for more trouble.

 

HBC -  Saks Sets First Two Canada Openings

(http://www.wwd.com/retail-news/department-stores/saks-to-open-two-canadian-stores-7396680)

 

  • "HBC will carve out about 150,000 square feet of its 750,000-square-foot downtown Toronto Hudson’s Bay flagship to open its first Saks store in Canada in fall 2015. In spring 2016, Saks will open a second Canadian unit, a 130,000-square-foot store at Sherway Gardens, also in Toronto."

 

Takeaway: Being acquired by Hudson Bay is that best thing that ever happened to Saks. The fact that Doug Scovanner is serving as CFO is a plus.

 

INDUSTRY NEWS

 

China Seeks Low-Cost Production

(http://therobinreport.com/china-seeks-low-cost-production/)

 

  • "In a perverse kind of irony, it appears that the United States may be evolving into a low-cost country, wooing China-based manufacturers to set up shop here — at least in the textile and yarn industries — which the US lost to Asia and the Far East in the 70s and 80s."
  • "With energy costs lower than in China, and non-union labor costs low enough to be offset by the ability to ship yarn to manufacturers in Central America where finished garments can be sent back to the US duty free, the total cost for yarn production is now less in the US than in China. A kilogram of yarn spun in the US in 2003 cost $2.86 vs. $2.76 in China.  By 2010, the US cost was $3.45 per kilogram vs. $4.13 in China."
  • "As China literally pushes its economy to make this conversion, it is simultaneously ramping up the standard of living, and along with it, higher wages. Thus, its once lowest-cost manufacturing base is eroding and losing share to other lower-cost countries.  However, to offset these losses in certain industries, Chinese companies are either acquiring or building new manufacturing plants in the lower- cost countries, as well as acquiring existing companies around the world to fuel its rising consumer economy."

 

Takeaway: This one is definitely thought-provoking.

 

 

 

 

 


WTW: Best Idea Call

Takeaway: Please join us for a brief call on Thursday, January 30th at 11:00am EST to discuss the key points of our thesis and field questions.

WTW: Best Idea Call  - WTW client 2

 

The Hedgeye Internet & Media and Healthcare Teams, led by sector heads Hesham Shaaban and Thomas Tobin, are adding SHORT Weight Watchers (NYSE: WTW) to our Best Ideas list. We will host a brief call on Thursday, January 30th at 11:00am EST to discuss the key points of our thesis and field questions.

 

 

WTW IS A HIGH-CONVICTION SHORT IDEA GIVEN THE COMPANY'S

  • Secular headwinds from heightened competition and cheaper options
  • Waning investment in member acquisition
  • Expectations for pronounced weakness in 2014 trends

 

ABOUT WTW 

Weight Watchers International, Inc. (WTW) is a leading, global-branded consumer company and the world's leading provider of weight management services, operating globally through a network of Company-owned and franchise operations.  The company provides group meetings, Internet subscription products sold by WeightWatchers.com, products sold at meetings, licensed products sold in retail channels and magazine subscriptions and other publications.

 

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 923753#
  • Materials: CLICK HERE (slides will be available approximately one hour prior to the call)

 

Please email for more details.

 

 


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Emerging Markets: Were You Prepared?

Takeaway: We remain broadly bearish on EM assets and continue to think that absolute returns for EM assets will be negative over the intermediate term

Editor's note: This complimentary, unlocked research note was originally published January 27, 2014 at 13:23 in Macro. For more information on how you can subscribe to Hedgeye click here.

Emerging Markets: Were You Prepared? - bull9

CONCLUSIONS:

  1. We continue to think it’s of utmost importance for investors to proactively prepare their portfolios for what we continue to see as the next cycle of emerging market crises.
  2. We remain broadly bearish on EM assets and continue to see them for what they are: overpriced relative to a long-term TAIL investment cycle that has clearly turned in favor of DM assets, at the margins. For some long ideas in the DM space, look no further than our #EuroBulls theme, which continues to augur well for appreciation across the UK and German capital and currency markets.
  3. We continue to think that absolute returns for EM assets will be negative over the intermediate term. In fact, we continue to believe that EM assets lose in two out of the three most probable intermediate-term global macro scenarios. As such, we don’t think discretion is overly warranted until investors drill down into the country level.
  4. Here are three more important things to highlight: 1) the US Dollar Index remains broken TREND and TAIL (old news); 2) the 10Y Treasury Yield is now below its TREND line (new news); and 3) the CRB Index is now trading above its TREND line (new news). If this setup continues to manifest in the face of declining risk aversion, then we could get behind EM assets on the long side for trade.
  5. For now, however, we’re comfortable with our current positioning. The SPX is now testing its TREND line of support (1779); a confirmed breakdown below that level in conjunction with the VIX remaining above its TREND line does not augur well for declining risk aversion with respect to the intermediate term.

 

Needless to say, last week was a brutal week if you were running a EM FX carry-trading strategy(ies) or, if you’ve been conditioned by the past ~10Y to be permanently bullish on emerging market assets.

 

As of Friday’s close, the JPM EM Currency Index had fallen -1.8% WoW; LatAm – which remains our favorite region on the short side of EM capital and currency markets – led decliners with the Bloomberg/JPM LatAm Currency Index falling -3.2% WoW. The iShares MSCI Emerging Markets Index ETF (EEM) declined nearly -4% last week and is now down -8.5% for the YTD.

 

Emerging Markets: Were You Prepared? - dale1

*As of Friday's close.

 

Emerging Markets: Were You Prepared? - FX

*As of Friday's close.


The Argentine peso was undoubtedly the life of the party, declining over -15% last week. If you missed our note from last Thursday titled: “ARGENTINE DEFAULT 2.0?”, we encourage you to review it whenever you have a few minutes to spare; it’s a must-read for any investor attempting to understand the myriad of idiosyncratic risks that one must consider when allocating capital to emerging markets at this stage in the cycle.

 

We continue to think it’s of utmost importance for investors to proactively prepare their portfolios for what we continue to see as the next cycle of emerging market crises. Contrast the following preparation below with the hyperbolic and emotional research that you’ve likely been spammed with from the sell-side over the past ~72 hours:

 

 

All told, we remain broadly bearish on EM assets and continue to see them for what they are: overpriced relative to a long-term TAIL investment cycle that has clearly turned in favor of DM assets, at the margins. For some long ideas in the DM space, look no further than our #EuroBulls theme, which continues to augur well for appreciation across the UK and German capital and currency markets.

 

When we last left off, we had a number of ways to play this view within the construct of EM assets; below is a review of that strategy:

 

Emerging Markets: Were You Prepared? - OW LONGS

 

Emerging Markets: Were You Prepared? - UW SHORTS

 

  • ASSET CLASS LEVEL: a cumulative -117bps of equal-weighted performance
    • Overweight EEM: -6.5%
    • Underweight EMLC: -5.4%
  • REGIONAL LEVEL: a cumulative +18bps of equal-weighted performance
    • Overweight GUR: -7.5%
    • Underweight GML: -7.7%
  • COUNTRY LEVEL: a cumulative +614bps of equal-weighted performance
    • Overweight EWW: -8.6%
    • Overweight EPOL: -3.6%
    • Overweight RSX: -9.5%
    • Overweight EWY: -6.6%
    • Overweight EWT: -2.4%
    • Underweight EWZ: -8.6%
    • Underweight ECH: -7.4%
    • Underweight EIDO: +1.2%
    • Underweight THD: -5.9%
    • Underweight TUR: -14.7%

 

Obviously if we were running a fund, we would not have these positions on in equal weights; we’ve obviously been the loudest EM bears on the street since last APR, so it would only make sense to size the shorts appropriately larger than the longs.

 

From here, we continue to think that absolute returns for EM assets will be negative over the intermediate term. In fact, we continue to believe that EM assets lose in two out of the three most probable intermediate-term global macro scenarios. As such, we don’t think discretion is overly warranted until investors drill down into the country level.

 

Emerging Markets: Were You Prepared? - Global Macro Scenarios

 

In that vein, the only change we would make there would be to remove Russia (RSX) and Mexico (EWW) from the overweight ideas. Crude oil is now bearish TREND and TAIL on our quant factoring and we no longer wish to seek out that exposure on the long side. Indonesia (EIDO) is nowhere near as compelling on the short side as it once was, given the recent acceleration in hawkish rhetoric out of Bank Indonesia; still, we’d like to see them put their money where their mouth is in that regard (i.e. hike rates again) before we can get behind a turnaround story here.

 

Emerging Markets: Were You Prepared? - Crude Oil

 

Here are three more important things to highlight: 1) the US Dollar Index remains broken TREND and TAIL (old news); 2) the 10Y Treasury Yield is now below its TREND line (new news); and 3) the CRB Index is now trading above its TREND line (new news). If this setup continues to manifest in the face of declining risk aversion, then we could get behind EM assets on the long side for trade.

 

Emerging Markets: Were You Prepared? - DXY

 

Emerging Markets: Were You Prepared? - 10Y UST Yield

 

Emerging Markets: Were You Prepared? - CRB Index

 

For now, however, we’re comfortable with our current positioning. The SPX is now testing its TREND line of support (1779); a confirmed breakdown below that level in conjunction with the VIX remaining above its TREND line does not augur well for declining risk aversion with respect to the intermediate term.

 

Emerging Markets: Were You Prepared? - SPX

 

Emerging Markets: Were You Prepared? - VIX

 

For more details about our multi-factor, multi-duration quantitative overlay, please refer to slide #5 of our 1Q14 Macro Themes presentation. It remains unclear to us how so many strategists make calls on markets without a proven process to contextualize critical inflection points in global markets in real-time, but to each his/her own.

 

At any rate, we’ll stick with our process for marrying bottom-up macro fundamentals (e.g. our proprietary EM Crisis Risk Index and our deep-dive research on the previous two EM crisis cycles) with a top-down overlay (e.g. our quantitative market timing signals).

 

Don’t fix it if it ain’t broken!

 

DD

 

Darius Dale

Associate: Macro Team


No Silver Linings: December Durable Goods

The weather, expiration of investment tax credits, exclusion of commercial aircraft orders in the advance estimate (Boeing orders that will probably show up in the Jan data) and seasonality will all be held out as potential distortions in the December figures. 

 

With Durable Goods being one of the more volatile series, subject to significant revision, and negatively diverging from the ISM mfg data for December, we may indeed see a positive revision and sequential acceleration next month, but the reality is that the deceleration reflected in this morning’s durables data agrees with the sequential slowdown observed more broadly across the domestic macro data. 

 

Headline Durable Goods printed its worst number in five months, accelerating to the downside sequentially with New Orders declining -4.3% MoM while decelerating meaningfully on both a YoY and 2Y basis. 

 

Core Capex Orders growth accelerated to the downside as well, declining -1.3% MoM and >300bps on a 2Y.  If there was a lone positive in the release, it’s that core capital goods orders growth did accelerate 70bps sequentially to 6.2% from +5.6% in November. 

 

Additionally, both headline New Orders and Core Capex figures for November were revised lower by -80bps and -150bps, respectively.

 

No silver linings to be had in the sub-aggregates either with (perhaps) the cleanest read on household consumerism - New Durable Goods Orders Ex-Defense & non-defense Aircraft - decelerating on a MoM, 1Y and 2Y.  

 

In short, today’s durable goods data agrees with our expectation for a sequential slowdown in domestic growth and suggests some emergent weakness in what has been a key source of macro strength over 2H13 (with wage inflation still muted and services consumption growth flagging). 

 

As we highlighted in our 1Q14 Macro themes call (HERE), easy 1H14 inflation comps and our expectation for a deceleration in the rate of change in reported growth has us incrementally more cautious on U.S. equities than we have been over the TTM.   

 

Now, with the risk management/price signals flashing red with a breakout in equity volatility above TREND resistance and the S&P500 flirting with a TREND breakdown (SPX Trendline = 1779), in the more immediate term, we’ll keep our net exposure to domestic equities relatively tight.

 

No Silver Linings: December Durable Goods - Durable Goods

 

No Silver Linings: December Durable Goods - Eco Table 012814

 

 

Christian B. Drake

@HedgeyeUSA

 


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