Takeaway: NKE files patent for form fitting shoe. WMT beats TGT to market on chip & pin. New Indian PM could be lifting FDI restraints
EVENTS TO WATCH
- FIVE - Earnings Call: 4:30pm
- PVH - Earnings Call: 9:00am
- VNCE - Earnings Call: 9:00am
NKE - NKE Files Patent for Form Fitting Shoe
- "A footwear customization kit is disclosed. The kit comprises a container including an article of footwear, a stand, a steaming bag and a set of instructions. The article of footwear includes a customizable portion that can be deformed when heated. The stand and the steaming bag can be used to heat the article of footwear in a steam environment. The stand includes a base portion and a footwear engaging portion. The stand can also include a detachable portion configured to engage the base portion in one position and the footwear engaging portion in another position."
Takeaway: NKE leads the footwear category in innovation and the margin isn't even close. We're not as excited for a form fitting shoe as we are for the in-store FlyKnit customizer, but it's another arrow in NKE's quiver that differentiates it from its competition. It's much easier to take price when its associated with technical innovation. Even if the wholesale partners (FL, FINL, DKS, etc…) don't initially carry this technology, it is something that Nike can wave in front of them as an incentive to strengthen its leverage over these retailers.
WMT - Sam's Club to Issue MasterCard-Branded Card With Security Chip
- "Sam's Club...said it would unveil a new credit card that features chip-enabled security technology."
- "The new card—co-branded with MasterCard Inc. and issued by GE Capital Retail Bank—represents the first active adoption of the technology by a mass retailer, Sam's Club said."
- "The new card, along with a new rewards program linked to it, will become available June 23, Sam's Club said."
Takeaway: Talk about a punch in the gut for TGT. Target announced its intent to roll out chip and pin enabled cards this year, but gets beat to market by WMT. This is as much about PR as it is about security. TGT needs to prove that it's going above and beyond in the security department to win back its customers, but is unable to move quick enough in order to win the PR battle.
AMZN, WMT - Exclusive: India likely to ease restrictions for foreign online retailers next month
- "India could allow global online retailers such as Amazon.com Inc to sell their own products as early as next month, removing restrictions that could boost competition in one of the world's biggest, and most price-sensitive, retail markets."
- "The decision, which is likely to be announced in the budget, is one of the first tangible signs of economic reform by the business-friendly government of Prime Minister Narendra Modi, who was sworn in 10 days ago."
- "The move is also likely to allow the government to circumvent political opposition to opening up India's $500 billion retail sector to global retail giants such as Wal-Mart Stores Inc."
Takeaway: New PM and the first signs that some of the FDI restraints may be lifted.
DECK - Teva Strikes Licensing Deal With BBC International
- "Deckers Outdoor Corp.’s Teva brand has inked a licensing deal with footwear firm BBC International to distribute the label’s children’swholesale business in the U.S."
- "The partnership will commence this month, with the transition expected to impact the Teva’s spring ’15 product offering."
BOSS - Mark Brashear Exits Hugo Boss
- "Hugo Boss said Tuesday that Mark Brashear, chairman and chief executive officer of the brand in the Americas, has left the company. Claus-Dietrich Lahrs, ceo of the Metzingen, Germany-based company, will oversee the Americas until a successor is named."
- "Brashear joined Hugo Boss to oversee the Americas in 2009. Before that, he was with Nordstrom for nearly 23 years, from 1985 to 2008, where he was executive vice president. From 2001 to 2007, he was chief executive officer of Façonnable, which was owned by Nordstrom during those years. He could not be reached for comment Tuesday."
Client Talking Points
The latest II US Equity Bull/Bear Sentiment Survey pins Bulls at all-time highs vs. Bears. Bulls rip to fresh cycle highs of 62.2% as Bears plummet to 17.4% - +4480bps to the Bull side. That’s right – slow-growth Style Factors (at the US Equity Sector level) continue to tell the tale of the tape in 2014. Slow-growth Utilities (XLU) are up +13% vs. #ConsumerSlowing (XLY) down -1.6% YTD. Got 2014 Sector Variance?
US Housing Demand continues to crash as bond yields fall. MBA weekly US mortgage purchase applications dropped another -3.6% last week after falling -1.1% in the week prior. We call that #HousingSlowdown. Reminder: yesterday's Core Logic US Home Price read-through for May … it was the worst of 2014. In related news, the 10-year bounce to lower-highs of 2.58% registers as a buy-more-bonds signal.
Oil +0.7% leads the #InflationAccelerating charge as socialists beg for moar printing. OIL registered another BUY signal in #RealTimeAlerts yesterday. WTI Crude upside to $104.88. In related news, the OECD has now moved toward the Hedgeye #InflationAccelerating theme, albeit on 6 month delay.
|FIXED INCOME||25%||INTL CURRENCIES||25%|
Top Long Ideas
Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration. The first survey tool measures 3-D Mammography placements every month. Recently we have detected acceleration in month over month placements. When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner. With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.
Three for the Road
TWEET OF THE DAY
Now that the UK and Europe has deflated the inflation tax w/ stronger currencies, macro morons call it "deflation" risk @KeithMcCullough
QUOTE OF THE DAY
"A journey of a thousand miles must begin with a single step." - Lao-Tsu
STAT OF THE DAY
California residents have voted for a plan to spend $600 million to build houses for homeless veterans in the state with the highest number of ex-servicemen without a roof in the United States. (Reuters)
the macro show
what smart investors watch to win
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
“Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.”
Last week I took the pen on the Early Look from Keith and talked about complacency in global markets. In that note, I highlighted both volatility (VIX) and the level of certain European peripheral yields on government debt, specifically in Spain and Italy. The simple takeaway was that there was not a lot of fear baked into market prices.
Yesterday I was forwarded a chart from the always thoughtful research firm Nautilus Capital Research. The chart looked at the trend and duration of rallies of SP500 from 1900 – Present without a 10% correction. According to their analysis, the current rally from October 2011 is greater than 97% of prior rallies over the last 114 years in duration without a correction. This is, of course, another way to say that investors are currently not very fearful.
The area of foreign policy may be one key area in which the amount of concern or fear is lower than reality warrants. From the Taliban in Pakistan, to the potential for an Iranian nuclear arsenal, to the ongoing conflict in the Ukraine, foreign policy risks remain. Certainly these global hot spots create buying opportunities more often than global calamity, but at a VIX of sub 12, not a lot of calamity is priced in.
This Friday at 10:30am EST. we will once again be joined by Yale Professor Charles Hill for a briefing on foreign affairs. Professor Hill is former Chief of Staff at the State Department, aid to U.S. Secretary of State George Schultz, and special consultant to U.N. Secretary Boutros Boutros-Ghali. He currently teaches the renowned seminar Grand Strategies at Yale.
In the briefing on Friday, Professor Hill will give us his view of the top three foreign policy risks facing both the United States and the World. The dial-in instructions will be sent to all Hedgeye Macro institutional subscribers. If you are not a subscriber, email for details.
Back to the Global Macro Grind . . .
We made a key move on the macro front on our Best Idea List as we removed the Brazilian Real (BRL) from our Best Ideas List. Since making it a key research call, the BRL posted a total return of ~+4.7% versus the U.S. dollar, which compares to a mean return of +2.7%, and is good for the sixth largest gain amongst the 24 EM Currencies tracked by Bloomberg over that time frame.
As our Asia and Latin America Analyst Darius Dale wrote late yesterday:
“Brazilian growth data is flat-out awful; as you can see in the Chart of the Day, there is a hardly a meaningful economic indicator in Brazil that isn’t rapidly decelerating on both a sequential and trending basis. That this is coming amid accelerating headline inflation means Brazilian policymakers are now forced to choose between promoting growth or combating inflation – the latter of which we still view as the country’s key political issue.
Unfortunately for investors, the Rousseff administration is resorting to the tired Keynesian playbook of fiscal stimulus ahead of the election, choosing to ramp up deficit spending ahead of what is likely to be Brazil’s most contested presidential race since 1989. Recent policy initiatives include:
A +4.5% increase in income tax exemptions starting next year;
A +10% increase in Bolsa Familia cash transfers starting next year worth R$9B… this latest increase takes Bolsa Familia transfers – which benefit ~25% of the Brazilian population – up +64% in real term since the Rousseff administration took office on JAN 1st, 2011; and
Extending a $9.7B payroll tax cut for various manufacturing industries.
These promises of fiscal sweetness come amid heighted pressure to raise the minimum wage, which has increased +42.2% in real terms since 2007. Both Rousseff and her runner-up in the latest polls, Aecio Neves, are on board with another hike.”
The combination of flat out bad Brazilian economic data combined with murky policy outlook makes us cautious on Brazil, but not on all emerging markets. In fact two that we like, in lieu of Brazil, are Taiwan and India. Although we aren’t quite ready to pound the table and add them to our Best Ideas list, both countries screen positively on our Growth, Inflation and Policy model.
Stepping back from the emerging markets, the most interesting domestic data point that our internal research team picked up yesterday was related to Treasuries. Specifically it was that J.P. Morgan’s institutional clients haven’t been this net short of Treasuries since 2006, which occurred shortly before a major crash in yields.
I’ve been emphasizing the risk of being complacent, but there is also another key risk to consider, which is the risk of being consensus. In the Treasury market, the consensus view is that yields must go higher. Unfortunately, markets normally don’t do what the crowds want them to do.
Certainly on a reversion to the mean basis the following trades make sense:
- Long VIX;
- Long Treasury Yields;
- Short Utilities;
- Long Interest rates broadly; and
- Short European peripheral sovereign debt;
The list could go on to be sure, but if there is one truism in managing global macro risk it is simply that markets can stay irrational longer than investors can stay solvent. So if you aren’t going to wait on the Hedgeye quantitative signal on these reversion to the mean plays, at least keep some fire power dry.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.42-2.61%
WTIC Oil 102.09-104.88
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Takeaway: Despite falling rates and solid labor market indicators the demand to buy homes keeps dropping.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.
Today's Focus: MBA Mortgage Applications
The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended May 30. Mortgage purchase application volume slid further this week dropping another -3.6% w/w. This brings the streak of negative sequential prints to four in a row on the purchase side. And while 2Q14 is tracking higher vs 1Q14 by 2.9%, it remains down year-over-year by just over -17%.
Activity cooled off on the refi side as well. Despite falling rates, refi application volume has been negative in both of the last two weeks, falling -2.9% this week and -1.4% in the prior week.
As a reminder, we're more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refi data is largely a reflection of rates on a coincident basis.
Trends in housing demand tend to lead price trends by 12-18 months and, as the first chart below shows, demand recently peaked in 2Q13 and has fallen significantly since. Admittedly, 2Q14 is tracking up vs 1Q14 by 2.9%, but relative to the -19% decline since mid-2013 (and the positive shift in weather) this bounce remains quite minor.
The prevailing weakness in demand suggests that as we enter the back half of this year and the first half of 2015 we should see growing downward pressure on the rate of home price appreciation.
About MBA Mortgage Applications:
The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
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