As a token of our appreciation, we would like to extend an invite to join us at Mad46 from 5-7 p.m. tomorrow, August 14th. Mad46 is located at the corner of 46th and Madison atop the 19th floor of Roosevelt Hotel.  


Representatives from all ten sectors will be present, and you're welcome to bring colleagues and friends. 


Hesham Shaaban


COCKTAIL EVENT: New York - Cocktail event 2

M – Not a Bad Qtr, But Expectations Still Too High

Takeaway: Still cautious on M – not due to the disappointing qtr, but bc of the limited upside in the financial model. Street numbers look too high.

Conclusion: The quarter was more balanced than the print suggested, but we struggle with how to model anything in the ballpark of the Street’s numbers in the out years. Margins are tapped and costs are accelerating. That’s not in expectations.


We struggle with this Macy’s print to some degree. It’s easy for us to jump on the bandwagon of the company missing EPS and taking down comp guidance – obviously negative developments. But in reality, this was probably not as bad as the headline otherwise suggests. A financial algorithm of a 3.4% comp, 6.9% EBIT growth, and 10.7% EPS, and 53% cash from operations is tough to label as an outright #fail. Macy’s is the best in the business at driving its financial model, and we’ve got to respect that. But when all is said and done, we simply have a tough time justifying that there’s enough room to evolve the financial model into something that’s meaningfully better than we see today.


One of the most telling points of the conference call for us was when CFO Hoguet compared Macy’s to how the company looked a year before the economic melt-down in 2008. Since that prior peak; a) square footage is down 2%, b) sales are up by $1.95 bn, or 7.4%, c) Gross Margins are flat at 40% (peak), d) SG&A dollars are down in absolute terms by $170mm, or 2%.  She’s right to call it out. It’s a heck of an accomplishment. But it’s also what gives us pause in modeling material upside over the next three years.


The department store group is in year six of a margin recovery cycle – and it has never gone more than five years without a correction in the past (see chart below). The company is up-front about its gross margin pressure, but then (responsibly) admits that it needs to keep spending on key initiatives to drive the top line. Management notes that it will absolutely hit a 14% EBITDA margin (70bps above current run rate), but that 15% is not likely. Whenever a management team in retail is that certain about hitting a margin target, it is usually due to lower SG&A. Our point here is that it sounds like Gross Margins are completely tapped, and SG&A leverage is in the 8th inning. In the absence of square footage growth, this tells us that we need to rely on capturing market share to drive the top line, or financial engineering to enhance EPS in order for this model to work.


M – Not a Bad Qtr, But Expectations Still Too High - dept margins


Could the company earn the Street’s $5.05 next year? It’s possible. If Macy’s really wants to get there, it could. But if it accelerates investment to sustain any form of comp alongside a peak Gross Margin, then we think we’re looking at $4.50 at best.


The stock is admittedly cheap at face value. But it’s easy to forget what can happen to a department store stock that misses expectations meaningfully. People think that 7-8x EBITDA is cheap today – but these names have traded at 7x EARNINGS on the back end of past cycles.  We’re not making the call today that we see this again. At least not yet. But for all these reasons, we simply would not touch Macy’s on the long side.  


M – Not a Bad Qtr, But Expectations Still Too High - m financials

M – Not a Bad Qtr, But Expectations Still Too High - M Sentiment


As a token of our appreciation we would like to extend an invite to join us at Mad46 from 5-7 p.m. tomorrow, August 13th. Mad46 is located at the corner of 46th and Madison atop the 19th floor of Roosevelt Hotel.   


Representatives from all ten sectors will be present, and you're welcome to bring colleagues and friends. 


COCKTAIL EVENT: New York  - Hedgeye Client Cocktails Map


COCKTAIL EVENT: New York  - Hedgeye Client Cocktails



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Buying British Pound on a Correction (FXB)

This morning we issued a buy signal on the GBP/USD (via the etf FXB) in our Real-Time Alerts with the cross reaching our immediate-term TRADE oversold level ($1.67) within our bullish long-term TAIL view (support = $1.65).

Buying British Pound on a Correction (FXB) - z. gbpp


The GBP/USD has corrected -2.2% M/M and took a leg down this morning (~50bps) following the BoE’s release of its August Inflation Report. We believe today’s weakness reflects:

  • UK wage growth that fell -0.2% in Q2 Y/Y (the first decline since 2009)
  • BoE Governor Mark Carney rhetorically pushing out expectations for a rate hike to at least late 1H 2015 (though no specific guidance was given)

That said, the GBP/USD is up +12% since it troughed on 7/5/13 and continues to be supported by healthy underlying fundamentals that we expect to persist in 2H (and especially versus the Eurozone – click here for more on our negative outlook on European equities and the EUR/USD):

  • UK unemployment rate fell 10bps M/M to 6.4%, the lowest level since 2008, and is now expected to drop below 6.0% by year end
  • The Bank revised up its expectation for near-term growth to 3.5% in 2014
  • CPI of 1.9% Y/Y is managed toward 2.0% target

Buying British Pound on a Correction (FXB) - zz. unemploy


Further, we expect a more dovish policy response from the ECB and Fed versus the BoE over the intermediate to longer term that should be supportive of the Pound versus the USD and EUR:

  • Janet Yellen’s commentary suggests she remains an uber dove: (See Reuters article yesterday with current and former Fed officials indicating that Yellen and core decision-makers at the U.S. central bank are determined not to raise interest rates too early and risk hurting the fragile U.S. economy). We’ll be watching her Jackson Hole commentary beginning August 21 for a confirming dovish outlook.
  • ECB’s Mario Draghi looks poised to issue QE over intermediate term. Following the June announcement of the issuance of the TLTRO programs to unlock lending, come Fall he may begin QE-lite purchases (via ABS). A hike in rates (after cutting in June) appears highly unlikely over the next year plus given underlying weak fundamentals and inflation expectations that are likely to miss on the downside. 

Matthew Hedrick

Daily Trading Ranges, Refreshed [Unlocked]

Takeaway: This is a complimentary look at Daily Trading Ranges, our proprietary buy and sell levels on major markets, commodities and currencies.

This note was originally published August 13, 2014 at 07:11 in Daily Trading Ranges. Click here to subscribe and learn more about the service.

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Keith's Macro Notebook 8/13: EUROPE COPPER UST 10YR

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