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Selling: Russell Levels, Refreshed

Takeaway: As you think about how painful it might be to short the domestic growth style factor right here, it probably felt the same in March too.

POSITION: 7 LONGS, 8 SHORTS

 

I #timestamped my most recent cover signal on the Russell 2000 on June 12th, so there’s been a lot of waiting and watching going on for the better part of the last 3 weeks. While not perfect, over the years I have had to teach myself to act on my signals, not my emotions.

 

Being bearish on US consumption growth (and the highest multiple growth stocks within the Russell that are tied to US demand) doesn’t have to be accepted at every time and price. Hedge fund consensus dog piled the short side of the market in May. I think June’s meltup had a lot to do with that.

 

Which brings us to today – Happy Canada Day! And a fresh SELL signal at 1208.

 

There are a few things to note about the 1208 line. Most importantly, it’s where you could have sold the Russell before its 10% draw-down. And maybe as importantly, now it’s easier to see all the reasons why you’d have sold growth in March (and bought inflation and slow-growth #YieldChasing).

 

For now, across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1208
  2. Intermediate-term TREND support = 1169

 

In other words, my risk management model considers a -3% correction from this level more than improbable. And as you think about how painful it might be to short the domestic equity style factor of the market right here and now, it probably felt the same way in March too.

 

From a fundamental research perspective, we still think #Q3Slowing will be the story Consensus Macro will have to re-adjust for from now until September. We’ll host our Q3 Macro Themes call on why next Friday.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Selling: Russell Levels, Refreshed - Slide1


Podcast: Keith Answers Questions from Institutional Subscribers


Retail Callouts (7/1): ICSC, NKE, WMT, KORS, CHS, Retail Losers

EVENTS TO WATCH

 

World Cup: USA(Nike) vs Belgium(Burrda) - Today 4PM

 

 

ECONOMIC DATA

 

ICSC - Chain Store Sales Index

 

Takeaway:  This was a massive week for sales growth -- the biggest in over four years. Then again, it's comping against a horrible week in 2012 and 2013. The two-year trend is worth looking at this week, which is decent-enough on the margin.  Less notable than the 3.25% 2-yr reading for this week is the steady climb since retail sales hit a trough around week 13. That's when the winter finally passed, and we got back to a normalized sales level -- perhaps with a bit of snap-back.  Not a major statement about the US consumer, but good-enough numbers for the retailers to be staring at  as they enter the last month of the retail quarter.

 

 

Retail Callouts (7/1): ICSC, NKE, WMT, KORS, CHS, Retail Losers - Chart1 7 1 2014

 

 

Retail Callouts (7/1): ICSC, NKE, WMT, KORS, CHS, Retail Losers - Chart3 7 1 2014

 

 

COMPANY NEWS

WMT - Walmart pushes healthy food agenda on Twitter

(http://www.retailingtoday.com/article/walmart-pushes-healthy-food-agenda-twitter)

 

"The Walmart Foundation has kicked off a summer-long initiative to help children and families gain access to nutritious meals and learn healthy-eating habits. Walmart is also collaborating with Chef Lorena Garcia, chef and author with TV appearances on Bravo’s “Top Chef Masters” and NBC’s “Biggest Loser,” to launch the Eat Healthy Together Challenge on Twitter."

"The family-focused initiative includes $15 million in grants that will provide meals and nutrition education to 1.4 million children and families in more than 1,500 communities."

 

Takeaway: Kudos to Walmart on this one -- even though $15mm is chump change to WMT.  The real commitment will come when WMT takes Cap'n Crunch, Capri-Sun, Mallomars, Pop-Tarts, and other foods packed with sugar and high-fructose corn syrup off its shelves. We understand that this would be devastating to the top line -- if WMT is unable to substitute it with the healthy food that it is hitting consumers with on Twitter. But look at CVS -- earlier this year, the company eliminated cigarettes from its shelves. Sales have been pressured, but the stock is up 19%. The market likes companies that make the tough decisions to help consumers lead healthier lives. If CVS can do it, why can't WMT?

 

NKE, ADS - Nike and Adidas Duke it Out Digitally

(http://www.wwd.com/footwear-news/markets/nike-and-adidas-duke-it-out-digitally-7777243?module=hp-fn)

 

"There is little correlation between World Cup sponsorship and social media success for the 2014 games..."

"So what does this mean for World Cup sponsor Adidas? The Herzogenaurach, Germany-based brand, which doesn’t appear to be sponsoring or promoting posts on Facebook, has a “limited overall reach,”"

"Meanwhile, Nike, based in Beaverton, Ore., has gone on the offensive, sponsoring posts that appear in its followers’ news feeds. These posts generate more conversations overall across Facebook and Twitter."

"By focusing on its key roster of players, including Cristiano Ronaldo and Zlatan Ibrahimovic, Nike took a creative approach with short and flashy — and sometimes humorous — videos on YouTube, upping its number of likes and comments 10 and seven times, respectively."

 

Takeaway: The number of times Nike used the word 'Digital' in its latest call = 15. Same statistic for Adidas = 2. Any surprise that Nike is winning?

 

10 biggest S&P 500 winners and losers for 2014 YTD

(http://www.marketwatch.com/story/10-biggest-sp-500-winners-and-losers-for-2014-2014-06-29?pagenumber=2)

Retail Callouts (7/1): ICSC, NKE, WMT, KORS, CHS, Retail Losers - Chart 2 7 1 2014

 

Takeaway: What does it tell you that 70% of the biggest losers YTD in the S&P 500 are retailers?

 

APP - Dov Charney builds American Apparel stake towards 50%

(http://www.ft.com/intl/cms/s/0/2181019e-00eb-11e4-b94d-00144feab7de.html?siteedition=intl#axzz36DL9vLjQ)

 

"Dov Charney, the controversial founder of US fashion chain American Apparel, has managed to increase his stake in the company towards 50 per cent, according to regulatory filings in New York."

"After the bell on Monday, it was revealed exactly how much common stock Standard General, a privately owned hedge fund, had acquired on Mr Charney’s behalf: 25m-30m shares – or a 17 per cent stake in the company."

"Combined with Mr Charney’s existing 27 per cent stake, he now has control of 44 per cent of American Apparel shares, edging him closer to 50 per cent – the critical benchmark at which he can potentially push for his own reinstatement to the board."

 

Takeaway: With an equity value of $153mm, this is not exactly a massive feat. Nonetheless, Charney is likely to get the majority stake he needs to get back in there and run the company he founded.  Unfortunately for the remaining shareholders, this means that there will be an eccentric, volatile, often inappropriate, usually incompetent person who is not only leading the company, but who also controls the Board.  Not exactly a great setup for a long.

 

 

OTHER NEWS

 

Contract Deadline Arrives for West Coast Port Workers

(http://www.wwd.com/business-news/government-trade/importers-rush-goods-ahead-of-contract-deadline-7777778?module=hp-business)

 

"The International Longshore and Warehouse Union and the Pacific Maritime Association are expected to continue negotiating a new contract today — and while the outlook is generally positive, importers are taking the better-safe-than-sorry route. A strike, were it to come, could take a toll of as much as $2.5 billion a day."

"The current six-year collective bargaining agreement is set to expire at 8 p.m. Eastern Daylight Time today"

 

KORS - Michael Kors names Stephane Lafay as President of Asia

(http://www.fibre2fashion.com/news/fashion-company-news/newsdetails.aspx?news_id=165263)

 

"Michael Kors, a global luxury lifestyle brand, announces that Stephane Lafay has been named to the newly created role of President of Asia. He will report to John D. Idol, the company’s Chairman and Chief Executive Officer."

"Mr. Lafay’s appointment, effective July 28th, 2014, reflects the brand’s powerful momentum in the region and its sustained focus on growth. “This is a pivotal moment for the brand as we continue to invest and work to build a strategic roadmap for the Asia region,” says Mr. Idol. “Stephane has a long history of building luxury businesses in Asia. His skills and experience will be a tremendous asset for us going forward.”"

 

CHS - Miki Berardelli to take over as Chico's FAS’s CMO

(http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=165286)

 

"Chico's FAS, Inc. announces that Miki Racine Berardelli will be joining the company as President, Digital Commerce, Chief Marketing Officer and Executive Vice President Chico's FAS, Inc."

"A dynamic industry leader, Ms. Berardelli is rich with experience and skills that span a spectrum of customer-based strategies and marketing initiatives. She joins Chicos FAS, Inc. from Tory Burch , where she held the position of Chief Marketing Officer. Prior to that, she was Senior Vice President of Marketing at Ralph Lauren."


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Launching Coverage on Semiconductors

Launching Coverage on Semiconductors - HE SC launch

 

Hedgeye will be hosting a call today, July 1st at 11:00am EDT to welcome Craig Berger, our new Semiconductor Analyst and Technology Sector Head. Craig will offer some initial comments along with a slide deck highlighting key themes and best ideas in his space.

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 859426#  
  • MaterialsCLICK HERE (Slides will be available approximately one hour prior to the start of the call) 
  • Ping  for more information. 

 

TOPICS WILL INCLUDE:

  • What do key semiconductor revenue, profitability, and cash metrics look like?
  • What is the state of global supply chain inventories?
  • Which chip firms could see outsized dividend hikes, or new initial dividends, in coming quarters?
  • Which chip firms make attractive acquisition targets?
  • What are some interesting long and short ideas in the semiconductor space?
  • With calls on QCOM, INTC, AMD, NVDA, SLAB, IRF, and more 

 

ABOUT CRAIG BERGER, CFA, CPA  

Craig is joining Hedgeye as our Semiconductor Analyst and Technology Sector Head and has spent more than a decade as a semiconductor equity research analyst. Previously, he served as managing director for FBR Capital Markets (2007-2013), Wedbush Morgan (2005-2007), and Smith Barney Citigroup (2002-2005). Craig has won several awards from Forbes and ThomsonReuters, and has numerous media and press interactions. Beyond Wall Street, Craig worked at Intel Corp. (1) in positions of increasing responsibility in the CPU and capital spending finance groups, giving him critical industry insight and experience.


VIDEO: Keith's Macro Notebook 7/1: Canadian Dollar, Oil, Germany


CORELOGIC DATA FOR JUNE - THE SINGLE DIGIT SLIDE CONTINUES

Takeaway: Home prices increases have decelerated by 410 bps in the last four months. The headwinds should persist for another ~8 months.

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. 

 

CORELOGIC DATA FOR JUNE - THE SINGLE DIGIT SLIDE CONTINUES - Compendium 070114

 

Today's Focus: June CoreLogic Home Price Report

CoreLogic released its monthly home price report for May/June earlier this morning. Unlike S&P/Case-Shiller, which is a rolling 3-month average repeat sales index,CoreLogic is a single month index released on almost no lag. Essentially, it gives you information three months more current than what you get from Case-Shiller. 

 

CoreLogic estimates that home prices rose +7.7% YoY in June, a deceleration vs the +8.8% in May and +10.0% in April. We show this in the first chart below.

 

Interestingly, in the past few months we've seen material upward revisions to the preliminary estimates for the most recent month-ended. This month, however, the revision was almost non-existent and actually was revised lower. The preliminary estimate for May was +8.9% and the final number came in at +8.8%.

 

Its also worth noting that while sales comps begin to ease through 2H14, price comps don’t really begin to ease until Feb 2015 (hardest near-term comp is Oct which was +11.8% YoY). As such, we think the next 8 months of worsening pricing data will weigh on the housing complex.

 

Our main thesis on housing is that the rate of home price appreciation will slow meaningfully over the course of 2014 and into 2015. Historically, inflections in the rate of HPI or HPD have been major macro drivers of relative positive or negative performance.

 

CORELOGIC DATA FOR JUNE - THE SINGLE DIGIT SLIDE CONTINUES - Corelogic NSA YoY TTM

 

CORELOGIC DATA FOR JUNE - THE SINGLE DIGIT SLIDE CONTINUES - Corelogic exDistressed NSA YoY TTM

 

CORELOGIC DATA FOR JUNE - THE SINGLE DIGIT SLIDE CONTINUES - Corelogic NSA YoY LT

 

 

About CoreLogic:

CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic's property information database. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate constant-quality view of pricing trends than basing analysis on all home sales. The CoreLogic HPI covers 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."

 

Joshua Steiner, CFA

 

Christian B. Drake


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