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I'm Boorish!

“He is illiterate and boorish; austere and offensive.”

-The Mercantile Agency, May 1853

 

In some of Americas most formative years of free market capitalism and innovation, the authorities of perceived wisdom wrote that about one of the greatest wealth creators in US history – Cornelius Vanderbilt.

 

His response:

 

It is said that I am always in opposition, and that the same spirit of resistance which has often hitherto governed my action has influenced it now… I have only to say that this is the same spirit which founded this great Republic.” (The First Tycoon, pg 161)

 

And that’s all the man needed to say about that.

 

Back to the Global Macro Grind

 

In this day and age, the more real-time market illiterate a politician is, the more offensive (to me at least) he becomes. Other than the brilliant financial market mind that is Maxine Waters, these characters are usually he’s by the way – we men think we know everything.

 

While I can’t comprehend how consensus economists are getting to a +3-4% US GDP ramp in the coming quarters, I guess I’ll just have to be all boorish for the next few months and reiterate how ridiculous the Old Wall’s linear forecasting process has become.

 

On a cheerier note, it’s jobs Friday! And while I am sure everyone wants to know what Steve Liesman has for his NFP guess, my boy, Mr. Bond Market, has already front-ran the entire circus:

 

  1. US 10yr Yield got smoked yesterday to 2.63%, taking it DOWN 40 basis points YTD! (consensus is still short Treasuries)
  2. US 10yr minus 2yr Yield (The Yield Spread, which is a growth proxy) compressed another 3bps day-over-day
  3. As our long bond position (TLT) ripped to fresh YTD highs, anything equities that looked like a bond did too

NEWSFLASH (to those waiting on the next qualitative “survey” from our competitors): Bonds rip when growth is slowing.

 

Anything that looks like a bond is called #YieldChasing (they’re ripping too):

 

  1. Utilities (XLU) up another +0.5% yesterday (with the SPX flat) to new YTD high of +14.3%!
  2. REITS (VNQ) punched another fresh YTD high too up at +13.5% YTD

As for the 80% of America that is going to eat both inflation and growth slowing:

 

  1. US Consumer Discretionary Stocks (XLY) are still down -4.1% YTD
  2. US Housing (ITB) is still sucking wind at -4.9% YTD

For the style-factor illiterate who gets on TV and says ‘but the market is up’ (even though both the Nasdaq and Russell are down YTD), in mathematical terms we call this risk developing underneath the US stock market’s hood SECTOR VARIANCE. In chaos theory speak, variance rises when major macro factors are undergoing the initial stage of what physics fans call a PHASE TRANSITION.

 

Phase transitions (like water approaching a waterfall) are really cool, because consensus doesn’t realize what’s happening a foot below the visible surface… Then kabooom! A proactively predictable point of entropy occurs. Variance, Phase Transition, Entropy – offensive terms for those who haven’t evolved their process = excellent defensive strategies for you to deploy.

 

If you want to consistently beat beta in this game, you have to know A) when to go on defense and B) how to rotate offensively from that defensive position. More commonly known as sector rotation, you get what I mean. Our process takes the sector rotation idea up another 10,000 feet because we go all cross-country-cross-asset-class on you.

 

At the beginning of Q2, on the long side here’s where we continued to rotate to (Investment Conclusions – slide 48 of our Q214 Global Macro Themes deck, which all of our Institutional Research customers can get an updated copy of anytime):

 

  1. Bonds (BND)
  2. Long-Term Treasuries (TLT)
  3. Gold (GLD)
  4. Agricultural Commodities (DBA)
  5. Utilities (XLU)
  6. REITS (VNQ)
  7. India (EPI)
  8. Brazil (EWZ)

No matter what this jobs report says today, we want you to keep doing more of this because A) it’s still nowhere in the area code of consensus and B) it’s working.

 

Instead of calling us bearish, bullish, or boorish, I say you call us flexible. This is the opposite position our process suggested you be in at this time last year. Having resistance versus a broken consensus isn’t easy. But being a capitalist in America today isn’t either.

 

Our immediate-term Global Macro Risk Ranges are now (12 macro ranges with a TREND overlay are in our Daily Trading Range product):

 

UST 10yr Yield 2.59%-2.70%

Russell2000 1106-1145

Nikkei 14156-14601

VIX 12.96-14.72

USD 79.31-79.91

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

I'm Boorish! - Chart of the Day


May 2, 2014

May 2, 2014 - Slide1

 

BULLISH TRENDS

May 2, 2014 - Slide2

May 2, 2014 - Slide3

May 2, 2014 - Slide4

May 2, 2014 - Slide5

May 2, 2014 - Slide6

May 2, 2014 - Slide7

May 2, 2014 - Slide8

BEARISH TRENDS

 

May 2, 2014 - Slide9

May 2, 2014 - Slide10

May 2, 2014 - Slide11
May 2, 2014 - Slide12


EHTH: 1Q14 Initial Thoughts

Takeaway: Initial thoughts on the quarter below. We will have a more detailed note out later today.

SUMMARY BULLETS

  1. NO IFP MEMBERSHIP GROWTH: Despite 145K approved members, EHTH only gained 4K net new members off a base of 796K.  The variance is attrition; EHTH lost 141K accounts (18% of its 4Q13 IFP Customers).  We believed attrition would be worse, but then again, EHTH’s reported membership metrics are purely a management estimate, so we have to take it for what it is.
  2. STRONG 1Q13 APPLICATIONS, BUT WILL DECLINE: 1Q14 Applications are comparable to 4Q13 (both very strong).  However, management suggested that IFP application volume will decline in both 2Q13 & 3Q13, consistent with our thesis, but may have taken some by surprise.  This also means EHTH’s 2014 prospects are tied to the flow-through of its 1Q14 applications to net IFP membership growth in 2Q14.
  3. 2Q14 IS A MIXED BAG.  We have to assume the attrition headwind will mitigate into 2Q14 since much of that was tied to forced plan cancellations that terminated at year end 2013.  Now the debate is whether EHTH lost members to the public exchanges from its limited ability to sell subsidized plans.  Given the size of the HHS enrollment figures, particularly toward the end of Open Enrollment, attrition is likely, but the magnitude is tougher to measure.
  4. EVALUATING THE SHORT POSITION: A 2014 Guidance cut seems more likely following the 1Q print, but we’re not sure that matters much at this point.  Sentiment around 2015-and-beyond growth could drive the stock higher, and we won’t have a catalyst to refute that till 3Q13 at the very earliest.  The closer we get to 2015, the less a 2014 guidance cut will matter. 

 

 If you have any questions, or would like to discuss further, let us know

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

MACAU: ANOTHER BIG FINISH TO A MONTH

April GGR finished up 11% owing to a big final 3 days. The placeholder strikes again.

 

 

As we wrote about in our Tuesday note, “WE’VE BEEN PLACEHOLDERED”, the last few days of April were likely to be volatile yet strong.  While the fundamentals remain solid, the strength in the numbers the past 3 days was probably due in part to an understatement of the prior week’s revenues.  That week sure looked like a “placeholder” week to us as reported table revenues totaled the recurring sum of exactly HK$5,425 million.

 

Daily table revenues for Monday, Tuesday, and Wednesday of this week averaged an estimated $HK1,210 million, up 34% from the disappointing prior “placeholder” week.  We saw this phenomenon occur with the big finish to March and the light last few days of January in addition to numerous other examples from prior years.

 

MACAU: ANOTHER BIG FINISH TO A MONTH - m3

 

 

So what is the conclusion?  Based on sequential trends, our math suggested April should’ve been up 13-14% yet growth fell a little short at 11%.  However, we suspect a low hold percentage early in the month may have caused the slight shortfall.  All in all, it’s business as usual in Macau despite all the consternation.  We’re still expecting a big May that should keep the newfound positive momentum (since Tuesday) going on these stocks.  WYNN continues to look the best to us over the near term.


HOT - SHAREHOLDERS SCORE A VICTORY!

HOT's negative stock performance relative to MAR should narrow and close over the coming weeks/months.

 

 

Call to Action:

We expect HOT’s negative stock performance relative to MAR to narrow and close over the coming weeks/months due to the reactivation of HOT’s share repurchase plan.

 

Details:

  • Last night, HOT announced it intends to utilize the approximately $614 million remaining on its share repurchase authorization by year-end.
  • Based on yesterday's closing price per share, the potential repurchase is about 8 million shares or 4.1% of the outstanding shares. 
  • Since the Company did not repurchase any stock since October 2013, we expect HOT to be an aggressive buyer of shares over the next several weeks.
  • Recall last week’s Q1 earnings conference call where analysts and investors lodged a very intense and vocal challenge to management for the lack of any share repurchase activity as well as an under-levered balance sheet despite a very positive and upbeat lodging industry and company outlook.  Then, on Wednesday, Starwood announced the resignation of CFO Vasant Prabhu.
  • Based on the events over the past week, it may be safe to conclude the person preventing the share repurchase was Mr. Prabhu, himself.  

Implications:

  1. HOT average daily trading volume for the prior 10 and 20 days was:  2.18 million and 1.80 million shares respectively.
  2. Assuming average daily trading volume increases to 2.5 million shares per day and HOT is a 10% VWAP buyer (250,000 shares per day), the company could complete the repurchase transaction over 32 business days. 
  3. However, given the market announcement, HOT could be more aggressive as a percent of daily volume and thus complete the repurchase more quickly.
  4. Most recent data indicated HOT short interest of 2.3 million shares or 1.19% of the outstanding
  5. On a YTD basis, HOT -4.3% vs. MAR +18.6%, more than two standard deviations of underperformance.
  6. Over the last twelve months, HOT +17.9% vs. MAR +36.7%, a 3.2 standard deviation of underperformance.

TGT - Why We Think TGT Is A Short

Takeaway: This model leaves no room for error. We’re 27% below consensus by Yr3. 2.5/1 down/up. TGT has more to worry about than just the data breach.

Conclusion: We’re short Target. We think that the model that management is selling to the Street leaves no room for error. Everything has to go right, and nothing can go wrong. We’re in the twilight of a department store margin cycle, margins are at peak, our proprietary survey shows that visitation at Target stores is down materially, and worse yet, the share appears to be going to Wal-Mart. We could make a case that target.com is one of the worst e-commerce businesses in retail, and it is certainly not making up for the shortfall in stores. Lastly, Canada expectations are extremely high, and our analysis of demographics around new Canadian stores leaves us with the view that management growth and profitability expectations are a pipe dream. In the end, we’re 27% below the consensus in year 3 of our model – which is a huge delta for this company. We get to downside to the high $40s ($13/14) if we’re right, but about $5/$6 upside if we’re wrong – that’s nearly 2.5 to 1. We’ll take that anyday on a sleepy mega cap retailer like Target.  

 

TGT - Why We Think TGT Is A Short - tgt financials

 

Earlier this week, we published our 47-page deck on why we think Target is a short.  We can’t print all the slides here, but here are five that we think are among the most notable.

 

1. The Macro Setup is not pretty. We just finished the fifth year of a margin expansion cycle for department stores. When we look back historically, we don’t think that there’s ever been a ‘year 6’. And by a country mile, we’re trading at peak valuations on these margins. The core of the TGT call goes far beyond this, but this is an extremely uninspiring backdrop.

 

TGT - Why We Think TGT Is A Short - tgt1

 

2. Visitation is down. We’re all tired of hearing about the Data Breach. But the reality is that the fallout is extremely notable. We just conducted our third Department Store consumer survey and we can gauge sequential changes in visitation intent on an absolute basis, and relative to other retailers. This shows how TGT went from 13 visits (TTM) in 3Q, to near 14 in 4Q (pre-Breach), to 11 today. That might not seem severe, but that’s 20% by our math.

 

TGT - Why We Think TGT Is A Short - tgt2

 

3. Share is going to Wal-Mart. Not exactly the retailer we’d want to lose share to if we were Target. When WMT takes share, it has a tendency to not give it back. We have a lot of research in our deck that shows how consumers rank them on price, discounts, and product quality. The trends are compelling.

 

TGT - Why We Think TGT Is A Short - tgt3

 

4. Dot.Com can’t save TGT. When other retailers get into trouble with their stores, often e-commerce makes up the difference. Our analysis of target.com’s traffic trends suggest that dot.com is performing just as poorly as the stores – if not worse. Based on our research, we can make a case that Target has one of the worst e-commerce businesses in all of retail.

 

TGT - Why We Think TGT Is A Short - tgt4

 

5. Canada can’t save Target, either. We pulled up the lats and longs for both Canada and US stores, and then analyzed demographics in a 20-minute driving radius. Canada lacks the density and income characteristics around its stores that Target enjoys in the US. That’s not to mention that there is a cannibalization issue given that 11% of target customers already shop in Target US stores. Consensus revenue estimates assume that Target Canada outstrips share of wallet levels Target has in the US. The company’s guidance assumes productivity levels above US levels. We think both are extremely unrealistic.

 

TGT - Why We Think TGT Is A Short - chart5

 

Call replay can be accessed by clicking the link below:

Replay: CLICK HERE


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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
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