Takeaway: Risk happens fast.
Takeaway: You just saw 40 handles of upside from our 1842 oversold signal and now you have 30 handles of downside from our overbought signal.
Editor's Note: Hedgeye CEO Keith McCullough released the following note on April 01, 2014. The Nasdaq has fallen approximately -5% since 4/2. Follow Keith on Twitter @KeithMcCullough.
POSITION: 8 LONGS, 8 SHORTS
In my last SP500 Levels note, “Bubble Up” (March 26th) I signaled that we’d like re-test the all-time-bubble-highs. Now that bubble is signaling immediate-term TRADE overbought.
While buying-the-damn-bubble #BTDB felt pretty darn good at the beginning of last March, Biotech and Social Media stocks were only down -15-45% from that prior capitulation high. I trust no one forgets that. Risk happens fast.
Across our core risk management durations, here are the lines that matter to me most:
- Immediate-term TRADE overbought = 1885
- Immediate-term TRADE support = 1854
- Intermediate-term TREND support = 1823
In other words, you just saw 40 handles of straight upside from our 1842 oversold signal – and now you have 30 handles of downside from the overbought signal.
Don’t chase beta. Fade it.
Keith R. McCullough
Chief Executive Officer
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Hedgeye CEO Keith McCullough discusses the outside-consensus macro themes we've been running with YTD as well as what's working in the markets right now and what's getting whacked.
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Let’s cut right to the chase. For a whole host of reasons, (not least of which is the continuing fallout from the credit card data breach disaster) we think Target is one of the better shorts in retail right now. And if we were able to sit down, face-to-face, with CEO Gregg Steinhafel for five minutes, we would want answers to three key critical uncertainties that exist in the minds of investors right now.
Here are the three questions we’d ask:
1. Who exactly are you guiding? In other words, who are you addressing with your company guidance—Wall Street or Main Street? In the two decades I’ve been doing this, I’ve never once had to ask this question before to a CEO. But the reality is that you’re saying that you are going to comp positive this year and Gross Margins will be up in the US and in Canada. And all of this will happen while you are lowering prices to win back customers who left after the data breach? Good luck. It all seems like a Mission Impossible combination.
That leads us back to the original question – are you giving guidance to Wall Street or consumers?
What’s going on right now with Target reminds me of what cruise companies do during their peak booking season – they generally issue positive comments because they’re talking to travel agents, not to Wall Street. If they say that bookings are weak, then agents will discount price more heavily. So, is Target sending out this perplexing message to keep consumer opinion high, even if it means opening up the possibility of lowering Wall Street expectations later in the year?
2. Share Loss. Who do you think is gaining the most business from customers who headed for the exits following the data breach debacle? For argument’s sake, let’s assume that it’s Wal-Mart. Do you think that WMT is prepared to let that business to come-and-go so easily? Will you match Wal-Mart if it comes down to price?
In reality, the shoppers that left Target did not leave because of price. They left because of trust. You might be able to buy back trust, but you’ll have to undercut Wal-Mart on price rather significantly.
If that’s true, please refer to question #1.
3. What does Target want to be when it grows up? That may sound like a ridiculous question at face value. But the reality is that it used to be “Wal-Mart vs. Target” – in share of market, share of mind, and share of investment dollars. But as bad as Wal-Mart’s rap sometimes can be, the fact remains that it has over 10,000 stores under 71 banners in 27 countries. It has several formats – from Supercenters, to warehouse clubs, to neighborhood markets, and it is even beta-testing C-stores/gas stations. At least it’s trying to evolve.
Meanwhile, Target just has one primary format in North America, with a token operation in India.
The point here is that as far as perception is concerned, Target used to be right there with WMT – but now it seems to be somewhere between WMT and Kohl’s. When you look out five to 10 years, what will Target look like?
Bonus Question (if he hung around an extra 2 minutes). Do you think you fired your customer? JC Penney fired its customer. Former CEO Ron Johnson said at the time that he did not. Lululemon fired its customer. CEO Chip Wilson said at the time that he did not. The reality is that both of those retailers fired their customers. It will likely take them 2-3 years to get an acceptable portion of their customers back.
So, do you think that you fired your customer? Your current lofty guidance suggests that the answer is No.
(Note: we’d give Target’s CEO all the credit in the world if he said Yes. Why? Because it would suggest that he’s actually doing something about it).
Takeaway: No Gnus is Good Gnus. - Gary Gnu
Overall there remains more good news than bad when looking across a host of global Financial risk metrics. Last week we flagged a similar setup and the XLF managed a modest gain of +0.3% on the week. Some of the main callouts from this week's risk monitor are:
* European Financial CDS - Swaps tightened sharply across the European Financials complex last week. The biggest movers were in Greece, Italy, Germany and Spain. The Greek banks have posted impressive M/M moves, dropping by an average of 238 bps in just the last four weeks. Outside of Greece, the only EU banks that are still trading above our so-called "Lehman line" (+300 bps) are Sberbank of Russia.
* 2-10 Spread – Last week the 2-10 spread widened to 231 bps, 4 bps wider than a week ago.
* CRB Commodity Price Index – The CRB index rose 1.2%, ending the week at 305 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -0.9%
* TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 20.5 bps this week versus last week’s print of 19.54 bps.
* High Yield (YTM) Monitor – High Yield rates fell 6.4 bps last week, ending the week at 5.63% versus 5.70% the prior week.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 4 out of 13 worsened / 5 of 13 unchanged
• Long-term(WoW): Positive / 5 of 13 improved / 0 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS - MBIA was the sole US Financial to widen on the week, rising 15 bps to 343 bps. JPMorgan was the sole large cap US Financial not to tighten (it was flat w/w at 57 bps). While not as impressive as the move in EU Financials, this past week's tightening across the US FIG complex was decidedly one-way. Overall, swaps tightened for 24 out of 27 domestic financial institutions.
Tightened the most WoW: GNW, MET, PRU
Widened the most/ tightened the least WoW: MBI, JPM, JPM
Tightened the most WoW: GNW, MET, UNM
Widened the most MoM: MBI, AGO, TRV
2. European Financial CDS - Swaps tightened sharply across the European Financials complex last week. The biggest movers were in Greece, Italy, Germany and Spain. The Greek banks have posted impressive M/M moves, dropping by an average of 238 bps in just the last four weeks. Outside of Greece, the only EU banks that are still trading above our so-called "Lehman line" (+300 bps) are Sberbank of Russia.
3. Asian Financial CDS - Asian Financials were a mixed bag. India's banks widened across the board by an average of 10 bps. Meanwhile, Chinese and Japanese financials were narrowly changed.
4. Sovereign CDS – Sovereign swaps were tighter around the world last week. Italy, Spain and Portugal lead the charge lower, dropping by 24, 19 and 26 bps, respectively.
5. High Yield (YTM) Monitor – High Yield rates fell 6.4 bps last week, ending the week at 5.63% versus 5.70% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1857.
7. TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 20.5 bps this week versus last week’s print of 19.54 bps.
8. CRB Commodity Price Index – The CRB index rose 1.2%, ending the week at 305 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -0.9% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – 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. The Euribor-OIS spread tightened by 2 bps to 13 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 20 basis points last week, ending the week at 2.95% versus last week’s print of 2.75%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Markit MCDX Index Monitor – Last week spreads tightened -5 bps, ending the week at 61 bps versus 66 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.
12. Chinese Steel – Steel prices in China rose 0.5% last week, or 18 yuan/ton, to 3,293 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread widened to 231 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.7% upside to TRADE resistance and 0.9% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: LULU has managed to avoid a major potential negative.
- "A lawsuit accusing Lululemon Athletica Inc of defrauding shareholders by hiding defects in its yoga pants should be dismissed, a U.S. judge has concluded…"
- "In a draft decision released on Friday, U.S. District Judge Katharine Forrest in Manhattan rejected claims the Canadian company cost investors roughly $2 billion by having concealed problems in manufacturing and marketing its yoga pants."
- "Forrest on Friday also issued a draft decision that dismissed a separate lawsuit seeking to hold 13 current and former Lululemon executives and directors liable for mismanagement. The judge is expected to hold a hearing to review whether she should make the decisions final."
Takeaway From Hedgeye’s Brian McGough:
Lululemon just hurdled a major potential negative. Sure, lawsuits around product happen all the time, but the magnitude of this one was particularly huge. There's an important difference between having a poor process and weak internal controls versus deliberately burying information around product defects to defraud investors. If the decision had gone the other way, this would have been a massive headache for Lululemon. Score one for LULU.
Editor's Note: This is a complimentary research excerpt from Hedgeye Retail Sector Head Brian McGough. Follow Brian on Twitter @HedgeyeRetail.
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