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TODAY @ 1PM, Slides | Inside the Organic Food Industry Call

Takeaway: Expert call today @ 1pm. New Best Idea (short HAIN) call Thursday @ 1pm.

DIAL-IN

Toll Free Number:

Direct Dial Number:

Conference Code: 515973#

 

MATERIALS LINK: CLICK HERE

 

TODAY, August 12th @ 1PM

 

This call will feature guest speaker Bob Burke, Principal at Natural Products Consulting Group.  

 

Since 1998, Bob Burke has provided assistance in bringing natural, organic and specialty products to market across most classes of trade. This includes work in strategic planning, writing sales, marketing and business plans, building distribution, broker selection and management, organizational development and compensation, strategic options, financing, branding, trade spending and assistance around M&A, due diligence and venture strategy groups.  He is also the co-author of the Natural Products Field Manual, 6th Edition and The Sales Manager’s Handbook. Prior to consulting, Bob was with Stonyfield Farm Yogurt for 11 years as Vice President, Sales & Corporate Development.

 

During the call, Mr. Burke will focus on:

  • The state of the organic industry
  • GMO labeling and its impact on the food industry and supply chain
  • Thoughts on publicly traded organic stocks

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 12, 2014


As we look at today's setup for the S&P 500, the range is 51 points or 2.01% downside to 1898 and 0.62% upside to 1949.                                        

                                                                                       

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.99 from 1.99
  • VIX closed at 14.23 1 day percent change of -9.77%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business Optimism, July, est. 96 (pr 95)
  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 11:30am: U.S. to sell $50b 4W bills
  • 1:00pm: U.S. to sell $27b 3Y notes
  • 2pm: Monthly Budget Statement, July, est. -$96b (prior -$97.6b)
  • 4:30pm: API weekly oil inventories

 

GOVERNMENT:

    • Senate, House on Aug. recess; Obama on Martha’s Vineyard
    • Conn., Minn., Wis. hold primaries
    • U.S. ELECTION WRAP: Hawaii Primary; Democrats, GOP Cross Lines

 

WHAT TO WATCH:

  • Apple’s suppliers said to start production of new iPads
  • GM says China JV contacted by anti-monopoly regulator
  • Gross cuts govt-related debt in July amid Fed rate wagers
  • Sprint CEO plans cost cuts to compete aggressively for users
  • Caesars CEO: no qualified bidders for Revel in Atlantic City
  • Goldman, QNB said to arrange loan for Travelex acquisition
  • Tesla Model S defects emerged over time, Consumer Reports says
  • Samsung, Apple to lose global smartphone mkt share, Fitch says
  • Electronic Arts preps expanding games subscriptions worldwide
  • California smartphone anti-theft bill nears final approval
  • Barclays quant trading unit said to take employees in spinout
  • Russia sends aid convoy to Ukraine as U.S. warns on invasion
  • Maliki bid to block successor al-Abadi escalates Iraq crisis
  • Israel says no progress in Gaza talks as Egypt presses truce
  • German investor confidence slumps as Ukraine crisis worsens
  • Rio Tinto CFO questions Oyu Tolgoi mine expansion, JPM says
  • Mapp Pharma says supply of Ebola drug is exhausted

 

AM EARNS:

    • CST Brands (CST) 7am, $0.49
    • Flowers Foods (FLO) 6am, $0.24
    • Insys Therapeutics (INSY) 7am, $0.30
    • Kate Spade (KATE) 7:34am, break-even  - Preview
    • Towers Watson (TW) 6am, $1.25
    • Tribune Media (TRBAA) 8am, $0.62
    • Valspar (VAL) 7:30am, $1.16

 

PM EARNS:

    • Cree (CREE) 4:01pm, $0.41
    • Element Financial (EFN CN) 5:06pm, C$0.10
    • Fossil (FOSL) 4:01pm, $0.96
    • Jack Henry (JKHY) 4:15pm, $0.60
    • JDS Uniphase (JDSU) 4:05pm, $0.13
    • King Digital (KING) 4pm, $0.59 - Preview
    • Myriad Genetics (MYGN) 4:05pm, $0.46
    • Russel Metals (RUS CN) 5:05pm, C$0.47
    • Tahoe Resources (THO CN) 4:25pm, $0.21 - Preview
    • URS (URS) 4:05pm, $0.74
    • ViaSat (VSAT) 4:05pm, $0.14

                                                                                                                               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Brent Crude Falls a Third Day With WTI as IEA Sees Supply Glut
  • Gold Is Little Changed Below 3-Week High in London on Ukraine
  • Nickel’s 56% Rally Spurs Mine Restarts Amid Ore Ban: Commodities
  • El Nino Signs Re-Emerge as Weakening Trade Winds Warm Pacific
  • Zinc Leads Industrial Metals Higher as Geopolitical Risks Ease
  • Wheat Extends Decline Before USDA Report on U.S. Crop Outlook
  • Palm Oil Futures Rebound From Lowest Level in More Than One-Year
  • Rubber Closes Near 4-Week Low on Concern China Demand Waning
  • China Aims to Approve Rare Earth Groups by Year-end: Sec. Daily
  • California Drought Alters Markets as Growers See Dry Future
  • Weakest Oil Demand Growth Since ’12 Allays Supply Risk, IEA Says
  • Tepco Said to Seek Spot LNG Cargoes for Delivery in Oct., Nov.
  • Dam Burst Won’t Delay Startup of New Mine, Imperial Says
  • Robusta Coffee Falls in London on Vietnam Supplies; Sugar Gains

 

THE HEDGEYE DAILY OUTLOOK - 5A

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6A

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


August 12, 2014

August 12, 2014 - Slide1

BULLISH TRENDS

August 12, 2014 - Slide2

August 12, 2014 - Slide3

August 12, 2014 - Slide4

August 12, 2014 - Slide5

 

BEARISH TRENDS

August 12, 2014 - Slide6

August 12, 2014 - Slide7

August 12, 2014 - Slide8

August 12, 2014 - Slide9

August 12, 2014 - Slide10

August 12, 2014 - Slide11
August 12, 2014 - Slide12


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RH - Real Estate Oppty Grossly Misunderstood

Takeaway: Our analysis suggests that RH stores should be far bigger, and will be much cheaper than the Street thinks. Numbers are too low.

Conclusion: We’ve spent a lot of time on the road discussing RH over the past three weeks, and most specifically, our recent 45-page deep dive on RH’s real estate. The punchline of our analysis is that a) RH stores could (and probably should) get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. This analysis supports our $11 earnings power in five years (double the consensus), as well as our view that that this stock is headed well above $200. Here are some of the slides that we kept revisiting in our conversations.

 

DETAILS


1. Market Share Trumps Store Productivity: For the most, people underestimate the ramp in RH’s addressable market as the company continues to expand into new categories. Over the next five years, there should be $45bn upside in market opportunity for RH simply by expanding its presence into new categories at retail, including kitchens. An important note is that we analyzed every market of the US, and isolated only consumers making over $100k annually. The government’s aggregate numbers include every income level. But the fact of the matter is that the average American spends $857 annually on home furnishings, while those making over $100k spend $1,779.  

 

RH - Real Estate Oppty Grossly Misunderstood - rh 2 1

 

2. Real Estate Methodology. In our analysis, we look at each market at a micro level. That is, we isolate the existing store, and then look at the demographics within a specific driving radius. We look for income levels, home values, and ultimately, how much money consumers at each income level spend on the categories where RH is expanding. This chart below shows Seattle, but we did this for every existing and potential RH market in the US and Canada.

 

RH - Real Estate Oppty Grossly Misunderstood - rh2 2

 

3. Store can get MUCH bigger. The key to how we model RH is based entirely on market share. There are three factors that mater…store size, productivity, and market share. It’s absolutely impossible to pinpoint any one of those without knowing the other two. We think we can get pretty close. We already know that the highest productivity FLDGs are running at 8-9% share of their respective markets – and that’s before adding new categories like kitchens. Our model assumes that each FLDG hits 10% share in year five of our model, and generates $1,200 per foot (reasonable based on what we’re seeing today). That leaves us with an implied store size. In some markets like New York, it suggests that RH could have a store over 100,000 feet. Same for Houston (we think it expands its existing store). Most people we talk to cringe when we discuss anything bigger than the 20-25k box that we’ve seen built over the past two years. But this analysis suggests that RH could support 30 stores over 50,000 square feet, and all but 5 can support a 25,000 foot FLDG.

 

RH - Real Estate Oppty Grossly Misunderstood - rh2 3

 

RH - Real Estate Oppty Grossly Misunderstood - rh2 4

 

4. New Market Potential. In addition to existing markets, there’s another 19 markets where RH can, and should, build FLDGs. In 10 of the markets RH could add a store 45,000 feet or larger, and the biggest market – Montreal – could support an 80,000 sq. ft. store.

 

RH - Real Estate Oppty Grossly Misunderstood - rh2 5

RH - Real Estate Oppty Grossly Misunderstood - rh2 6

 

5. New Store Math is a Slam-Dunk. In this example (Cherry Creek) RH is taking over a Saks and is going from a 7,500 feet legacy store to a 56,000 foot FLDG. Implied market share at the property goes from 1.5% to 4.3% by our math, and despite the incremental $20mm in revenue, rent only goes from $1.3mm to $2.0mm. That takes occupancy costs from 12.6% to 6.5%, and likely lower as the store becomes more productive.  But the key to this algorithm is that there’s $19.5mm in build-out costs, $15mm of which is being picked up by the landlord. Inventory costs in this business are minimal at the store level. So when you add up all the economics of the store, you get to a 6 month payback. It’s tough to find that elsewhere in retail. This leads us to think that our Gross Margin estimates (which don’t go above 39%) are potentially conservative.

 

RH - Real Estate Oppty Grossly Misunderstood - RH 9

 

6. Yes, there are more of these opportunities than most people think. There’s still a nice pipeline of free-standing locations – like what RH has in Greenwich, Houston, and Boston. But we’ll see more examples of the mall-anchor space as outlined above in Denver.  Take for example the Cherry Hill mall in NJ. A high-end property with three anchor tenants – Nordstrom, Macy’s and JC Penney. Which one does not belong? JCP has less than half the productivity of Macy’s and Nordstrom, and arguably does not belong in any ‘A’ mall. That’s not where JCP’s customer shops. We think we’ll see more situations where the landlord buys out JCP, takes the space and carves it into 2 or 3 highly productive retailers – who will collectively transform that end of the mall. In this instance, we use RH, and arbitrarily pick CAKE and WFM. That would take annual REIT income from $10.1mm to $23.7mm (see second table below). That makes it pretty easy for the landlord to justify buying out JCP and building a couple million worth of walls, stair cases and escalators. As a point of reference, JCP has about 140 ‘A Mall’ properties. Yeah…big number.

 

RH - Real Estate Oppty Grossly Misunderstood - rh2 8

 

RH - Real Estate Oppty Grossly Misunderstood - rh2 9


Still Bullish on Och-Ziff $OZM

Jonathan Casteleyn, co-head of the Financials sector at Hedgeye, briefly explains why he likes shares of Och-Ziff Capital Management, an idea he highlighted in early May.


GOLD UPDATE: WAITING AND WATCHING FOR DIRECTION

The USD appears to be breaking out while both the EUR/USD and European equities are sending bearish signals. Both of these moves, should they continue, would be a headwind for Gold.


Last week we released an extensive report outlining the implications of a QUAD #4 (inflation and growth decelerating) GIP set-up through Q3. A link to that slide deck is included below:

 

What's Next For Global Financial Markets?


We are waiting and watching closely for confirmation on this potential inflection point. Our current view that domestic growth is slowing remains intact. Although with commodity disinflation from the first half of the year and recent weakness in Europe, we are watching this re-tracement closely. Recent data has opened up an internal discussion about the strength of our #ConsumerSlowing theme:

  • Commodity Disinflation
  • Marginally better consumer spending and credit growth combating the absence of a positive trend in real wage growth:
    • Household debt growth has increased from Q3 2013
    • Trailing 12-month nominal consumer spending slightly outpacing nominal incomes (re-leveraging a potential tailwind to consumer spending capacity)

We highlighted developing credit trends in a note last Friday:


SANGRE VITAL: A QUICK TOUR OF CREDIT TRENDS


Gold currently stands right in the middle of key @Hedgeye TREND/TAIL levels after trading in a tight range last week (with the exception of  a big rally Wednesday front-running Draghi’s speech.) The move suggests the market expected him to announce an asset purchase program. Gold ended the week up over +1%.

 

@Hedgeye intermediate-term TREND support is at $1271. The long-term TAIL Line of resistance sits at $1323. We would become louder on the long-side if Gold penetrates and holds this TAIL line. The narrative remains the same:

 

1.       Growth expectations slow

2.       U.S. interest rates fall

3.       Both Gold and Long-term Treasury Bonds rise (holding the monetary policy of other reserve currencies constant over the more intermediate-term a very important factor to our gold thesis that we are watching intently right now). 


GOLD UPDATE: WAITING AND WATCHING FOR DIRECTION - Gold Levels chart

 

Ten-year yields touched YTD lows Friday reflecting skepticism around a sustainable recovery despite the +4.1% initial Q2 GDP bounce. After breaking @Hedgeye long-term TAIL support, 1.70% is the next line of defense. The ten-yr yield is down over 20% from the beginning of the year and currently sits near the lows at 2.43% (2.36% YTD low late last week). Our risk management signals suggest the momentum embedded in this trend makes further downside to 1.70% a more probable scenario than the consensus 3%+ expectation. 

 

GOLD UPDATE: WAITING AND WATCHING FOR DIRECTION - 10 YR Yield Levels Chart

 

Although this narrative for the USD outlook works both for and against the price of gold under certain scenarios, we continue to believe real growth expectations in the U.S. for the second half of 2014 remain too high. About a month ago we published a note outlining the thesis on Gold’s interaction with monetary policy by walking through its performance vs. other asset classes under different economic scenarios:

 

 STAYING LONG OF GOLD

 

Right now there are two big headwinds to our position that will have implications for Gold’s direction:  

  1. The quantitative signals suggest upside for the dollar and downside for the Euro: An apparent breakout in the dollar to the upside coupled with an incrementally more dovish Draghi is a headwind for Gold. The Euro is at a nine month low currently after topping in March of this year. European data is slowing (magnified in the countries which outperformed in the first half), and a majority of European equity indices are breaking down.

Our recommendation is short:

  • EUR/USD
  • European Equities (ETF: EZU)

 

 GOLD UPDATE: WAITING AND WATCHING FOR DIRECTION - Euro Levels chart

 

  1. Weak Europe, Dovish Draghi: The expectation for economic weakness has been somewhat priced-in with expectations that some form of easing from the ECB is right around the corner. The outlook in the U.S. is more uncertain. If growth does miss in the U.S., the fed may get more dovish.. SO MAY THE ECB

Two comments in particular from Draghi last week caught our attention:    

  • Readiness to pull the trigger on an asset purchase program.

 His tone this past week reflected his willingness to stand ready for an ABS purchase program. In fact, he more or less said that he would implement an asset-backed purchase program (QE without the government bond and public asset purchase program). Not a single economist surveyed by Bloomberg expected a change in interest rates from Draghi last week, but the bounce in Gold suggests the market may have expected some kind of easing out of Draghi Thursday.

 

  • Allusion to divergent policies in the U.K. and U.S. moving forward

The president more or less said the ECB Monetary Policy Committee cannot be outdone with regards to easy-money policy implementation. We interpreted his comments as a confident gesture that the Euro will continue to weaken against the USD and Pound over the intermediate to long-term.  

 

European equity performance ugly last week:

 

  1. Greece led the losers (-9.9%)
  2. Portugal retreated another -6.7% to -17.5% YTD
  3. The German DAX fell -2.2% to -5.7% YTD

 

Both the quant signals and our GIP model suggest Europe may slow for the next three consecutive quarters which could potentially warrant a surprisingly more dovish ECB policy. CAN DRAGHI CONVINCE THE MARKET HE’LL BE MORE DOVISH FROM HERE? Unfortunately don’t possess a crystal ball, but the recent weakness is concerning…

 

GOLD UPDATE: WAITING AND WATCHING FOR DIRECTION - Eurozone GIP

 

We DO believe growth estimates for the full year in the U.S. remain too high, and a more dovish tone will likely be received as bullish for gold on the margin. Please feel free to ping us with any comments or questions.

 

GOLD UPDATE: WAITING AND WATCHING FOR DIRECTION - U.S. GIP

 

 

Ben Ryan

Analyst

 

 

 

 

 



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