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TGT – Clears The Deck For Cornell

Takeaway: TGT cleared the deck for Cornell’s 8/12 start as CEO. But just because the deck is clear, it does not mean it’s structurally sound.

We weren’t overly surprised by Target’s guide-down today due to a) the fact that our comp and Gross Margin expectations were well below consensus for the quarter, and b) it makes sense that the company would want to front-load this news along with any lingering costs associated with the data breach and its debt retirement before Brian Cornell steps into the CEO seat on August 12.  No CEO wants to step into a new role only to deal with near-term earnings events that he had nothing to do with. Look at Doug McMillon at Wal-Mart. He started at his job on Saturday February 1st, but the day before WMT guided down by 3% (meaningful for WMT).

 

While the TGT headline talks about data breach and debt retirement costs, it’s important to note that comps are flat, and that  was despite increased promotional activity. Canada was weaker than guided, though probably not much weaker than we expected. TGT reported this on the same day that we got yet another blockbuster week of retail sales data from ICSC. We’ve been looking at a string of weekly sales reports in aggregate that are better than 4% vs last year. The 2-year trend is also decidedly positive. If there was ever a time for even a mediocre retailer to surprise on the upside, we’d argue that this is it. But TGT did not. Maybe it’s because the high-end is outperforming, and TGT is going increasingly after the low-end consumer.  Or maybe the retailer still has remarkably poor traction with consumers relative to its competitive set.

 

TGT – Clears The Deck For Cornell - ICSC YoY

TGT – Clears The Deck For Cornell - ICSC 2yr

 

In the end, we’re still short TGT – though we fully acknowledge that all eyes are on Cornell at this point. We don’t yet know what he’ll do once in office. Will he patch the operation enough to boost earnings in years 1 and 2? That might be enough for the equity market to get behind the stock. Or, will he champion the investments needed to fix Target meaningfully and restore its reputation as one of the great retailers in the US? That would hurt earnings considerably near-term, but could make it a big winner in the outer years.

 

While the path that Cornell takes is in question, one thing that we think is inarguable for a long-term investor; to win big with TGT, it’s going to be very painful near-term. If the painful steps are not taken, then it does little to sharpen TGT’s positioning amongst a very tough competitive set (WMT, Department Stores, Dollar Stores, Supermarkets, and Amazon).

 

TGT – Clears The Deck For Cornell - tgt financials


CORELOGIC DATA FOR JULY - THE SLIDE CONTINUES

Takeaway: Home prices increases have decelerated by 490 bps in the last five months. The headwinds should persist for another ~6-8 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 JULY - THE SLIDE CONTINUES - Compendium 080514

 

Today's Focus: July CoreLogic Home Price Report

CoreLogic released its monthly home price report for June/July 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 +7.0% YoY in July, a deceleration vs the +7.5% in June and +8.3% in May. 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. In the last two months, however, the revision was negative. The preliminary estimate for June was +7.7% and the final number came in at +7.5%. Meanwhile, May has been downwardly revised twice in the last two month. It began at +8.9%, was cut to 8.8% and is now 8.3%.

 

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 +11.9% YoY). As such, we think the next 6-8 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 JULY - THE SLIDE CONTINUES - Corelogic NSA YoY TTM

 

CORELOGIC DATA FOR JULY - THE SLIDE CONTINUES - Corelogic ExDistressed NSA YoY TTM

 

CORELOGIC DATA FOR JULY - THE 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



Hedgeye Statistics

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

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

Cyclical Times

This note was originally published at 8am on July 22, 2014 for Hedgeye subscribers.

“In cyclical time, a society always evolves.”

-The Fourth Turning

 

Are you long Millenial evolution? “From the Arthurian Generation through today’s Millenial Generation, there have been twenty-four generations in the Anglo-American lineage. The first six were purely English. Millenials are the fourteenth in the American line.” (The Fourth Turning, pg 95)

 

So get in the burrito line. With +17% same store sales and +29% year-over-year revenue growth, evidently Millenials are eating lots of Chipotle (CMG). They are texting, tindering, and talking about things baby boomers don’t talk about too.

 

Being long new patterns of consumption and short old ones is a profitable way to look at the world. Having been on the long/short side of consumer stocks for almost my entire career, this is where I’ve seen some of the biggest moves – and they go both ways!

 

Cyclical Times - millenials

 

Back to the Global Macro Grind

 

BREAKING: US Orange Juice Sales Fall To Record Low –Wall Street Journal

 

Yep. Damn Millenials are drinking the fruitier and frumpier stuff that costs 10x more. But, no worries, there’s no inflation in food/beverages – ask the Fed. With Orange Juice prices up another +0.4% in a down US Equity tape yesterday to +12.3% YTD, there’s deflation in whoever is short OJ demand.

 

As we age in this business (I’m a 13th gen dude and will be 40 within the next 6 months) we learn that most things we learned early on were in some way, shape, or storytelling form, false.

 

Risk managing macro, for example, rarely has anything to do with “valuation” or even reported supply and demand metrics. Most of the big moves in macro happen on the margin when there is a phase transition in price momentum, volume, and volatility.

 

How about long Copper (JJC)?

 

  1. Worldwide supply is hitting all-time highs
  2. But prices are starting to breakout from a TREND signal perspective

 

Or are they?

 

I’m not wed to a Millenial or Copper. I am happily married with three children and a risk management process that will hopefully allow me to be less wrong than I have been over the course of the last 15 years.

 

But in Real-Time Alerts I issued a buy signal in Copper on last week’s pullback. This morning I am getting buy signals for both the Shanghai Composite Index (China) and the Hang Seng. Both broke out above my intermediate-term TREND signal. We don’t have a research call to support that signal (yet), but do you always need one? Or is Mr. Macro Market telling you that you are going to get one?

 

What is a phase transition?  

 

A phase transition is the transformation of a thermodynamic system from one phase or state of matter to another by heat transfer.” –Wikipedia

 

And, in modern macro times, the heat transfer of price, volume, and volatility is measurable.

 

So why don’t more investors care about multi-duration, multi-factor, risk analytics. Why do so many still hinge on some gospel like “valuation” for direction, when reality is that market multiples expand and contract much more on economic and/or market phase transitions than anything else?

 

If you can answer all these questions, let me know. Because I can’t.

 

What are the most interesting big macro time/price cycles (for asset classes) that have gone from bearish to bullish from 2013 to 2014?

 

  1. US Treasuries
  2. Commodities
  3. Gold
  4. Emerging Market Equities
  5. Chinese Equities?

 

That last one I won’t buy until Darius Dale gives me the green light. But there’s no reason to sit in 50% cash when very liquid asset classes like this are getting people paid. On the bear side, we’re all about shorting USA baby-boom #ConsumerSlowing patterns:

 

  1. US Housing
  2. US Casual Dining Stocks
  3. Broadline Retailers

 

In macro investing, it’s important to contextualize where you are in the cycle. Almost every single short idea we have that isn’t purely bottom-up is what we call an “early cycle” call. Plenty of the mid-to-late-cycle ideas out there (like being long inflation) will eventually run their course. It’s our job to always evolve our process and try to signal when they do.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.46-2.56%

SPX 1958-1985

RUT 1132-1155

VIX 11.94-14.99

Gold 1299-1324

Copper 3.18-3.24

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Cyclical Times - Chart of the Day


NO VOLUME BOUNCE

Client Talking Points

JAPAN

Taiwan and the Nikkei led Asian losers overnight in what was an uncharacteristically weak relative session, but if the Nikkei can hold 15,062 TREND support we may be looking at a bearish to bullish TREND reversal in the making – stay tuned.

VIX

The front-month VIX corrected from overbought highs last week, but didn’t A) didn’t break 11.94 TREND support and B) has a wicked wide immediate-term risk range now of 13.84-17.82 (usually means more volatility pending).

GOLD

Gold is up +0.3% to $1291 and while it held $1271 TREND support, we don’t like how it or the commodity complex (CRB Index) acts as of late – could be QUAD 4 in our model (Inflation and Growth Slowing).

Asset Allocation

CASH 36% US EQUITIES 4%
INTL EQUITIES 16% COMMODITIES 8%
FIXED INCOME 26% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
HOLX

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.

OC

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.

LM

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

RUSSIA: leads losers (again) -1.1% to new 2mth lows, -13.8% YTD

@KeithMcCullough

QUOTE OF THE DAY

The quality of an individual is reflected in the standards they set for themselves.

-Ray Kroc

STAT OF THE DAY

Toyota Motor Corp. surprised with record profits as U.S. SUV Sales surged, net income in the April-to-June period rose to 587.8 billion yen ($5.7 billion).


CHART OF THE DAY: Vanished Volume

Takeaway: Volume accelerates on DOWN days, and decelerates on UP ones for the Russell 2000.

 

CHART OF THE DAY: Vanished Volume - Chart of the Day


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