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Cartoon of the Day: What Inflation?

Takeaway: Rising inflation? Well, maybe. But only if you include food, rent, gasoline and basically anything that costs money.

Cartoon of the Day: What Inflation? - Inflation cartoon 07.22.2014


SALES RISE, AS EXPECTED, WHILE PRICES DECELERATE FURTHER

Takeaway: June Existing Home Sales in-line with where PHS would have predicted. Absolute inventory grows, though months supply cools off a bit.

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. 

 

SALES RISE, AS EXPECTED, WHILE PRICES DECELERATE FURTHER - Compendium 072214

 

Today's Focus: Existing Home Sales & FHFA HPI

 

FHFA HPI

The FHFA HPI for May showed home prices decelerated a further -70bps sequentially to +5.5% YoY.  With Corelogic and Case-Shiller data for June and April, respectively, reflecting a similar slope of improvement, the three primary HPI measures continue to tell a cohesive story of discrete price deceleration.   

 

SALES RISE, AS EXPECTED, WHILE PRICES DECELERATE FURTHER - FHF NSA YoY   TTM

 

 

Existing Home Sales 

The National Association of Realtors (NAR) released its monthly Existing Home Sales report for June earlier this morning. 

 

As we've stated here before, there's limited usefulness in the EHS report on the sales side since the data is well-telegraphed by the Pending Home Sales report. We show this in the chart below, where we've offset the EHS data by one month to show its correlation to PHS on a 1-month lag. That being said, there is value in the data on inventory and the composition of sales (first-time buyers, cash buyers, investor share). 

 

SALES RISE, AS EXPECTED, WHILE PRICES DECELERATE FURTHER - PHS VS EHS

 

 

EHS Quick Take:

Total Existing Home Sales increased +2.6% MoM against upwardly revised May figures.  The year-over-year rate of change remained negative but improved to -2.3% vs -4.7% prior.  As highlighted above, the sequential improvement in Existing Home sales was not particularly surprising given the strong +6.1% MoM gain in Pending Home sales reported in May. From a growth perspective, comps peak next month (July 2013 was +17.2% YoY) before getting progressively easier through the balance of 2H.   

 

Regional:  All regions showed sequential improvement in the rate of change in YoY growth on a seasonally adjusted basis.  Growth in the Northeast/Midwest/West held negative while the South saw +1.0% growth in sales Y/Y – the first month of positive growth since January.

 

Inventory:  On a unit basis, existing home inventory increases 2.2% MoM and +6.48% YoY, marking the fourth consecutive month of accelerating YoY growth in supply.  On a months supply basis, inventory declined -0.4% MoM and rose +9.0% YoY as the gain in sales more than offset the inventory increase. Months supply currently stand at 5.5, down from 5.6 last month.

 

Home Prices:  Median home prices continued to increase in the mid-single digits across the South, Midwest and West.  Notably, the median home prices in the Northeast registered its 3rd straight month of negative growth.

 

Other:  Distressed sales declined to 11% of the market, Cash sales held at 32% of the market, 1st time homebuyers remained depressed at 28% of the market, and median time on the market improved for a 6th straight month to 44 days (vs 47 prior).

 

 

SALES RISE, AS EXPECTED, WHILE PRICES DECELERATE FURTHER - EHS LT 

 

SALES RISE, AS EXPECTED, WHILE PRICES DECELERATE FURTHER - EHS Regional 5Y 

 

SALES RISE, AS EXPECTED, WHILE PRICES DECELERATE FURTHER - EHS Regional June 

 

SALES RISE, AS EXPECTED, WHILE PRICES DECELERATE FURTHER - EHS Inventory Units 

 

SALES RISE, AS EXPECTED, WHILE PRICES DECELERATE FURTHER - EHS Inventory Months Supply

 

 

 

About Existing Home Sales:

The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.

 

Frequency:

The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.

 

Joshua Steiner, CFA

 

Christian B. Drake


FLASHBACK: A Castle-in-the-Air (Or Why You Should Short Del Frisco's $DFRG)

This prescient note was originally published July 02, 2014 at 08:11 in Morning Newsletter. As of this posting, shares of Del Frisco's (DFRG) are down over 17%. Click here for information on how you can subscribe to Morning Newsletter. 

“Dreams of castles in the air, of getting rich quick, do play a role – at times a dominant one – in determining actual stock prices.” -Burton G. Malkiel

The big picture

For the past several days, I’ve been reading a gem of a book recommended by my colleague, Howard Penney.  Malkiel’s A Random Walk Down Wall Street is a timeless, thought provoking piece that most curious investors would enjoy reading poolside on a beautiful summer day.  I certainly did.  After all, restaurant research isn’t limited to cheeseburgers and fries.  In fact, a large part of our job pertains to understanding both human and market psychology.  The castle-in-the-air theory, which concentrates on the psychic values of investors, serves as a constant reminder of this fact. 

 

For those unfamiliar with its origin, the castle-in-the-air theory was popularized by John Maynard Keynes in 1936.  While we tend to disagree with Keynes’ and his disciples on a number of economic issues, the notion that stocks trade off of mass psychology is widely appealing.  Accordingly, some investors attempt to front run this onslaught of groupthink, not by identifying mispriced stocks, but rather by identifying stocks that are likely to become Wall Street’s next darling.  All told, this can be a profitable strategy – until it’s not.  

 

FLASHBACK: A Castle-in-the-Air (Or Why You Should Short Del Frisco's $DFRG) - castle

Macro grind

We believe we’ve identified one of Wall Street’s current darlings and recently added it to the Hedgeye Best Ideas list as a short.  Del Frisco’s Restaurant Group (DFRG) owns and operates three distinctly different high-end steak chains.  After coming public in July 2012, the stock has gained over 114%; quite impressive, by any measure.  More importantly, however, we believe cheerleading analysts and the subsequent madness of the crowd have propelled the stock during this time.  Is it reasonable to call a company whose adjusted EPS declined 7% in 2013 one of the greatest growth stories in the restaurant industry?  We think not. 

 

As Malkiel goes on to say:

 

“Beware of very high multiple stocks in which future growth is already discounted, if growth doesn’t materialize, losses are doubly heavy – both the earnings and the multiples drop.”

 

Beware indeed.

 

The truth is, the company currently screens as one of the most expensive stocks on both a Price-to-Sales and EV-to-EBITDA basis in the casual dining industry.  While we’re not insinuating DFRG is the beneficiary of a “get-rich quick speculative binge,” we are confident the stock is severely dislocated from its intrinsic value.

 

Part of the hype has been driven by the company’s positioning within the restaurant industry.  Del Frisco’s caters to the high-end consumer; a cohort that the stock market would suggest is doing quite well.  While this may be true, we believe the high-end consumer has been slowing on the margin as inflation in the things that matter (food, energy, rent, etc.) continues to accelerate.  Contrary to popular belief, high-end consumers can feel the pinch too and two-year trends at the company’s hallmark concept, Del Frisco’s Double Eagle Steakhouse, would suggest the same. 

 

Admittedly, the Double Eagle Steakhouse, though slowing, is a healthy concept.  But it’s only 25% of the overall portfolio.  The other 75% consists of a fundamentally broken concept (Sullivan’s) and an unproven growth concept (Grille).  Naturally, the Street is discounting an immediate turnaround at Sullivan’s and a flawless rollout of the Grille, neither of which we see materializing.  In fact, we continue to expect restaurant level and operating margin deterioration throughout 2014.  This has less to do with all-time high beef prices (32.8% of Del Frisco’s 2013 cost of sales) and the recent wave of minimum wage increases (25% of Del Frisco’s restaurants have exposure), than it does with the fact that the company is systematically growing at lower margins and, consequently, returns.

 

More broadly, there are a number of red flags that the Street is unwilling to acknowledge right now including decelerating same-store sales and traffic trends, declining margins, declining returns, increasing cost pressures, expensive operating leases, peak valuation, positive sentiment and high expectations.  We simply refuse to give the company credit for what it has not proven and while we can’t hit on all the minutiae of our thesis in this note, we do have a 67-page slide deck that does precisely that (email sales@hedgeye.com for more info).  In short, our sum-of-the-parts analysis suggests significant downside.

 

You can delay gravity, but you can’t deny it.  Needless to say, we don’t expect this particular castle-in-the-air to stay there much longer.

  • CASH: 16
  • US EQUITIES: 6
  • INTL EQUITIES: 15
  • COMMODITIES: 22
  • FIXED INCOME: 26
  • INTL CURRENCIES: 15

Our levels

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.50-2.59%

SPX 1949-1976

RUT 1169-1208

VIX 10.61-12.74

Brent Oil 111.51-115.43

Gold 1310-1330 

 

Stay grounded,

 

Fred Masotta

Analyst

 

FLASHBACK: A Castle-in-the-Air (Or Why You Should Short Del Frisco's $DFRG) - new


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Retail Callouts (7/22): ICSC, WMT, TGT, DKS, TIF, GPS, NKE

Takeaway: ICSC - positive trends continue. Walmart sets tone for Back to School.

EVENTS TO WATCH

 

Wednesday (7/23)

  • HBI - Earnings Call: 4:30pm
  • SKX - Earnings Call: 4:30pm

 

Thursday (7/24)

  • CRI - Earnings Call: 8:30am
  • UA - Earnings Call: 8:30pm
  • DECK - Earnings Call: 4:30pm
  • AMZN - Earnings Call: 5:00pm

 

ECONOMIC DATA

 

ICSC - Chain Store Sales Index

 

Takeaway: Another week of sales growth as measured by the ICSC. The 2.8% YY growth rate was the lowest number reported since late May. We usually don't get caught up on the commentary associated with the release, but the 'unusually cool weather' excuse is borderline ridiculous.

 

Retail Callouts (7/22): ICSC, WMT, TGT, DKS, TIF, GPS, NKE - chart1 7 22 2014

Retail Callouts (7/22): ICSC, WMT, TGT, DKS, TIF, GPS, NKE - chart2 7 22 2014

 

 

COMPANY NEWS

 

WMT, TGT - Wal-Mart Cuts Prices More Aggressively for Back-to-School

(http://www.bloomberg.com/news/2014-07-21/wal-mart-to-cut-prices-more-aggressively-in-back-to-school-push.html)

 

  • "Wal-Mart Stores Inc. plans to cut prices more aggressively during this year’s back-to-school season and will add inventory to its online store as the chain battles retailers for student spending."
  • "Wal-Mart will reduce prices on 10 percent more items this year, said Steve Bratspies, the company’s executive vice president for U.S. general merchandise. The number of back-to-school items Wal-Mart sells online will grow 30 percent to 75,000, he said."

 

Takeaway: The NRF is forecasting that spending on students in Kindergarten - High School will be flat to last year at $26.5bil. We don't put much credence in NRF forecasts, but it does help provide context to the environment WMT is operating in.  WMT sets the tone for the BTS season, and this move is all about market share. TGT, AMZN, K-Mart, etc. have almost no choice but to follow the precedent.

 

OTHER NEWS

 

TGT - Target Launches In a Snap App

(http://www.wwd.com/media-news/digital/target-launches-in-a-snap-app-7807164?module=hp-topstories)

 

  • "Target Corp. is using mobile technology to try to get more out of its print ads."
  • "The retailer said Monday it had launched In a Snap, an image recognition app for Apple devices that lets users easily buy Target items they see in ads. 'In a Snap recognizes select ads, makes a ‘snap’ sound to let you know when it’s ready, and then shows you additional info about each product in the ad, making them easy to immediately purchase or consider later,' the retailer said."

 

DKS - Ad of the Day: Dick's Sporting Goods Scores With Another Dramatic Salute to Everyday Athletes

(http://www.adweek.com/news/advertising-branding/ad-day-dicks-sporting-goods-scores-another-dramatic-salute-everyday-athletes-159015)

 

  • "Like the everyday athletes it profiles, Dick's Sporting Goods remains a bit of an unsung hero in the sports marketing world. But that continues to change, thanks to its consistently strong advertising from Anomaly."
  • "The company prefers unknown athletes to superstars, and the purity of real sports moments to the phony glitz and glamour of hero worship."

 

TIF - TIFFANY'S MICHAEL KOWALSKI TO RETIRE AS CEO IN 2015; FREDERIC CUMENAL, PRESIDENT, NAMED AS SUCCESSOR

(http://investor.tiffany.com/releasedetail.cfm?ReleaseID=860911)

 

  • "Tiffany & Co. announced that its long-standing chief executive officer, Michael J. Kowalski, will retire from the company effective March 31, 2015. Mr. Kowalski, who has been a member of the company's Board of Directors since 1995, will continue to serve on the Board, in the role of non-Executive chairman. The Board has named Frederic Cumenal, currently the company's president, to succeed Mr. Kowalski as chief executive officer effective April 1, 2015."

 

EXPR - EXPRESS, INC. ANNOUNCES JANUARY 2015 RETIREMENT OF MICHAEL WEISS AS CEO AND APPOINTMENT OF DAVID KORNBERG AS SUCCESSOR

(http://phx.corporate-ir.net/phoenix.zhtml?c=235276&p=irol-newsArticle&ID=1949411&highlight=)

 

  • "Express, Inc.  … announced that Chairman and Chief Executive Officer, Michael Weiss, will retire as Chief Executive Officer on January 30, 2015.  David Kornberg will assume that role in addition to his current responsibility as the Company's President.  Mr. Weiss will remain on the Board, serving as non-executive Chairman of the Company's Board of Directors, and Mr. Kornberg will join the Company's Board of Directors upon assuming the role of Chief Executive Officer."

 

GPS - Gap Inc. Announces Global Expansion Plans

(http://www.gapinc.com/content/gapinc/html/media/pressrelease/2014/med_pr_gap_slovenia_austria.html)

 

  • "Continuing to deliver on its global growth plans, Gap Inc. today announced that it will introduce the Gap brand to Slovenia and Austria through agreements with new and existing franchise partners. Magistrat International, a new partner, has been selected for the launch of Slovenia and Gottex, which currently manages the Gap franchise business in Israel and Hungary, will launch Austria."

 

NKE - Cristiano Ronaldo Debuts Footwear

(http://www.wwd.com/footwear-news/markets/cristiano-ronaldo-debuts-footwear-7807155?module=Footwear%20News-hero)

 

  • "Cristiano Ronaldo has launched a footwear line, CR7. Announcing the new project on his Facebook page, the Portuguese soccer player is hoping to score points with a luxury offering."
  • "Featuring the athlete's name stamped on the leather upper and the brand name on its sole, CR7 is made entirely in Portugal."

 

 



Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging

Takeaway: The latest survey of mutual fund trends relayed the biggest weekly outflow in U.S. stock funds in 79 weeks since the first week of 2013

This unlocked note was originally published July 10, 2014 at 09:13 in Financials. To learn more about subscribing to Hedgeye click here.

Investment Company Institute Mutual Fund Data and ETF Money Flow: 

 

In the most recent 5 day period, aggregate bond funds including both taxable and tax free products netted another $3.2 billion in new investor subscriptions. Conversely, the combined equity mutual fund complex had substantial outflows with $8.8 billion alone coming out of domestic equity mutual funds, their 10th consecutive week of redemptions and the worst outflow in 79 weeks since the first week of 2013. The broad take-away is that the U.S. retail investor has been retrenching for most of the first half of the year (with only one week of outflows in the past 21 weeks in taxable bonds and 25 consecutive weeks of tax-free or muni bond inflows). This compares to over 2 consecutive months of outflows in U.S. stock funds. We are positioned accordingly with this emerging asset allocation having removed T Rowe Price from our Best Ideas list on May 14th and are positioned more conservatively with our ongoing Long recommendation of leading fixed income manager Legg Mason.

 

Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging - 55

 

Total equity mutual funds put up a significant outflow in the most recent 5 day period ending July 2nd with $7.8 billion coming out of the all stock category as reported by the Investment Company Institute. The composition of the $7.8 billion redemption continued to be weighted towards domestic equity funds with a massive $8.8 billion coming out of domestic stock funds which was offset by a $1.0 billion inflow into international products. This significant drawdown in domestic equity funds was the biggest outflow in 79 weeks since the first week of 2013 and has become an intermediate term trend with now the tenth consecutive week of outflow in the category. The running year-to-date weekly average for equity fund flow is now a $1.9 billion inflow, which is now below the $3.0 billion weekly average inflow from 2013. 

 

Fixed income mutual fund flows had a solid week of production with the aggregate $3.2 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.2 billion. The inflow into taxable products of $2.9 billion made it 20 of 21 weeks with positive flow for the category and the inflow into municipal or tax-free products of $277 million was the 25th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.2 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

ETF results were broadly negative with outflows in both equity and fixed income products. Equity ETFs experienced $1.1 billion in redemptions, breaking two consecutive weeks of strong subscriptions, while fixed income ETFs suffered another outflow of $1.1 billion. The 2014 weekly averages are now a $1.6 billion weekly inflow for equity ETFs and a $856 million weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $11.0 billion spread for the week ($8.9 billion of total equity outflow versus the $2.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.9 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging - 56

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging - chart 2

 

Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging - chart 3

 

Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging - chart 4

 

Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging - chart 5

 

Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging - chart 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

 

Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging - chart 7

 

Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging - chart 8

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $11.0 billion spread for the week ($8.9 billion of total equity outflow versus the $2.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.9 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Fund Flows: Negative Inflection in U.S. Fund Flows, Bonds Keep Chugging - chart 9 

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com


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