In today's Chart of the Day, we highlight a table from our housing team summarizing recent data points in housing. Of the 22 housing data points we track regularly, 18 of them are worse in the most recent period.
“You’ve got to know when to hold’em, know when to fold ‘em.
Know when to walk away, know when to run.
You never count your money when your sittin’ at the table,
There’ll be time enough for countin’ when the dealin’s done.”
It is hard to believe it, but the song “The Gambler," written by Don Schlitz and recorded by the legend Kenny Rogers is almost 36 years old. Some songs, poems, and books transcend time and this is certainly one of them.
In many ways, the song is also apropos for stock market operators like ourselves. Certainly, we don’t tell our clients that we are gambling, but some days it does feel like we are at the casino. And some days certain stock market operators go on unbelievable runs that seem to belie even the best of odds.
Take my colleague Howard Penney for example. Yesterday he introduced another Best Idea, which was to short HAIN. (If you’d like learn how to get access to his 70 page deck on the name, please email .)
To say Howard has had a hot “hand” would be an understatement to say the least. His last five short ideas have had great returns on an absolute basis and versus the market. They are as follows:
So as it relates to the restaurant and consumer staples sectors, you can gamble or if you are going to go to the stock market casino you can listen to Penney and improve your odds versus the house.
Back to the Global Macro Grind...
Speaking of casinos and gambling, former Reagan budget director David Stockman recently had a great quote saying the markets were like a branch casino of the central bank. According to Stockman:
“The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today.”
Now, casinos are great when the odds are lined up in your favor, but when the odds shift or are not aligned with your bets, it doesn’t matter how many red bulls and vodka you drink, the casino is a very frustrating place to spend the evening.
This morning, by and large, the ball has landed on green across the global markets. This comes despite, particularly in Europe, some fairly despondent growth data points over the last couple of weeks.
On the good news front, the U.K. continues to outperform as evidenced by its GDP report last night. On a year-over-year basis, GDP in the U.K. expanded by +3.2% and was up +0.8% sequentially. Interestingly, U.K. policy makers seem to get that a strong currency helps. Even the manic media is getting the point, as Reuters wrote this morning:
“The strong Pound policy from Carney seems to be a tailwind for the U.K. economy.” (Note that we bought the British Pound (via the etf FXB) on 8/13 in our Real-Time alert products.)
Hopefully, Dr. Yellen gets the memo!
Ironically, Dr. Yellen and her colleagues will actually have decent cover to become incrementally dovish (read: push out the dots) given the anemic situation in the U.S. housing market. In the Chart of the Day today, we’ve included a table from our housing team that summarizes the recent data points in housing. Of the 22 housing data points we track regularly, 18 of them are worse in the most recent period.
As my colleague Christian Drake wrote yesterday:
“The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended August 8th.
The Composite index fell -2.7% WoW as refi activity was weaker by -4.0% on the week and purchase demand slid -1.0% sequentially.
The anemia extends to August as purchase apps hold the 160 level for a 5th consecutive week and are now running -5.3% QoQ and at the lowest quarterly ave reading since 2Q 1995.
Summarily, the high frequency housing data continues to corroborate the sea of red currently blanketing our housing compendium. As we’ve highlighted repeatedly, we’re inclined to remain bearish on the housing complex until the slope of HPI deceleration inflects.”
Not surprisingly then, we recently shorted Toll Brothers (TOL) in our real-time alert products. There is nothing like fundamentals to put the odds on your favor!
Good “luck” out there today.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.38-2.48%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Takeaway: Department store SIGMAs are surprisingly good this week. But KSS should turn the other way. JWN is the worst we’ve seen in a decade.
Department Store Earnings
The big takeaway for this week is the comparative SIGMA trends for the department store group. As a reminder, the analysis triangulates sales, inventories and margins. The vertical axis is the spread between sales and inventories -- the higher on the scale, the better. The horizontal axis is the y/y change in EBIT margin. In effect, you want to be either in the upper right hand quadrant, or headed there. The opposite holds true for the lower left.
The major takeaway for the group is that 3 of the 4 department stores are on a sequentially improving SIGMA trajectory. It's been years since we've seen this happen. Clearly, JCP is the big winner, and that's no surprise. But Macy's popped into Quadrant 1, which is notable, and even KSS showed some improvement on the margin. That said, it's worth noting that this is the 11th consecutive quarter where KSS has been unable to grow sales faster than inventory. Margins were positive this quarter due to SG&A cuts. That's finite. Gross Margins are in trouble.
JWN comes out as the biggest loser. It was already in Quadrant 3 - the worst place you can be -- for two quarters in a row. But this time not only did margins fall, but inventories were up 23%, and the company really did not have a good reason as to why. This is the worst inventory positioning for JWN in at least a decade. If there's a good reason to own JWN, we definitely don't see it. Numbers appear to be at risk.
TGT - Target CEO Brian Cornell Discusses Personalization
SVU - Potential Data Breach Revealed by Supervalu
WMT - Wal-Mart Sees Disney Orders Jump, Benefiting From Amazon Dispute
ZQK - Quiksilver unveils Boardshorts made from recycled fibres
DG - Dollar General adds Paula Price to BoD’s audit committee
APP - American Apparel adds Laura Lee to BoD
WAG - Walgreens set to change operational structure
SHOO - Steve Madden Acquires Dolce Vita for $60.3M
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
This note was originally published at 8am on August 01, 2014 for Hedgeye subscribers.
“The future is not a point – a single scenario that we must predict. It is a range.”
-Chip & Dan Heath
In Chapter 10 of Decisive, “Prepare To Be Wrong”, the Heath boys nail it with that risk management thought. Translating it into Hedgeye-speak: market tops and bottoms are processes, not points.
Price, volume, and volatility are all dynamic but measurable beasts. You don’t have to be a rocket scientist to be able to visualize their patterns. All you need is a process to score them. It’s rarely an absolute price level that matters – it’s almost always about its rate of change.
Measuring rate of change (slope of the line) won’t help you much unless you contextualize it across multiple durations. We strongly advise that you stand outside your western academic confirmation biases and consider rates of change across multiple factors as well.
Back to the Global Macro Grind…
Multi-factor, multi-duration macro. Yep. That’s how we roll. And after a +64% rip in front-month US stock market volatility (since July 7th) we’re not only going to stick with that process this morning, but also remind you that it’s not Q2. It’s Q3.
They can blame Argentina or my cousin’s neighbor’s brother for yesterday’s levered-long-beta-belly-flop in US Equities (worst down day of the year), but they can’t change that the USA’s PMI print got powdered (rate of change) down to 52.6 in JULY vs 62.6 in JUNE.
They may very well have built inventories into the USA growth-hope narrative in Q2, but in Q3 the PMI (purchasing manager index) looks almost identical to the Industrial Stocks (XLI). Since US Equity volatility bottomed late June, early July:
Forget our #VolatilityAsymmetry Q3 Macro Theme. How symmetric is that?
More importantly, who gets what it’s been signaling? Who is writing about an early-cycle slowdown? These rates of change didn’t start yesterday. Depending on which factor in the US economy you have been measuring, they have been in motion now for 7 months!
What are the early-cycle slowdown sectors of the US stock market?
All three of these early-cycle sectors are down now for 2014.
“So”, if god called you and said ‘hey, here’s my survey of the US economy’:
What would you say back if you were bullish on something like +3-4% US GDP growth? I think Bill Ackman would say, “my bad.”
I’m not trying to be snarky about this. I’m actually trying to drive my Scottish-Canadian flag right into the front-line of this ongoing culture war I’ve been fighting vs. #OldWall since we started the firm in 2008. You know, and wiggle the Braveheart kilt at them.
Let’s have some bull/bear battles already. At some point, someone out there in Consensus Macro land needs to man-up and just say ‘hey, I’ve missed calling every early-cycle slowdown since 1999, and I’m tired of this Canadian-mutt doing the rate of change thing.’
Now many would argue that consensus economists and strategists in Washington and on Wall Street would rather all be wrong together than wrong all on their own (#JobSecurity). But I think our profession is better than that.
I’m betting someone who is a lot smarter than me is going to change what they are doing and fight me, Red-White-And-Blue style! In every profession in America, there’s always been a progressive rate of change in that too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.43-2.59%
Brent Oil 105.54-108.79
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
"I believe in focusing on what you do best, instead of a lot of things." -Irwin Simon CEO HAIN
We recently added HAIN to the Hedgeye best Ideas list as a SHORT.
Irwin Simon was quoted saying the above quote at the time he bought Celestial Seasonings. Given HAIN has acquired 33 companies over the ten years I’m not sure the old management style still applies.
Yesterday we published a 70 page slide deck outlining our thesis on HAIN (if you would like a copy please email me.) The thesis centers on three key points:
ACQUISITION FATIGUE - HAIN has been a serial acquirer over the past ten years, acquiring over 33 companies. Although the company owns 50 brands, the 80/20 rule applies. Management is compensated to grow revenues and earnings, incentivizing them to acquire complementary companies. Not all the companies they buy, however, are complementary including a few recent ones that have been margin dilutive. We believe the core-business, ex-acquisitions, is slowing – a fact that management is doing their best to mask.
INCREASING COMPETITIVE LANDSCAPE -April 10, 2014, the day WMT announced it would carry Wild Oats, was the day organic food went mainstream. This move by WMT won’t be ignored by other retailers and will likely force gross margins lower for a number of organic companies. The current pricing umbrella in the organic space will create significant demand for private label products at traditional grocery chains. Can HAIN sustain its current business model in light of the new industry headwinds?
SLOWING TRENDS, MARGIN PRESSURE - HAIN’s absolute gross margins are significantly below its peer group, making it difficult for the company to compete in a more competitive marketplace. The increased competitive headwinds will slow organic growth and keep pressure on gross margins, forcing the company to cut SG&A at a faster rate than anticipated. This increases the likelihood that street expectations are too aggressive. Under such a scenario, the company’s multiple would likely contract.
The last bullet point is critical. At 26%, HIAN’s gross margins are below a typically strong organic company and put the company in a difficult spot to defend against increased competition. As we said on page 55 of the slide deck the following are the characteristics of a strong organic company:
In addition, HAIN has significantly cut SG&A to levels that are also below its competitors’ making it difficult to support the business.
This has resulted in a significant improvement in operating margins.
How long can management rely on SG&A cuts to make the numbers?
Are they underinvesting in many of their brands?
We believe there will come a time when management must reinvest in their business and will be hard pressed to lever SG&A to the same degree.
If you would like to discuss HAIN further please call any time.
TODAY’S S&P 500 SET-UP – August 15, 2014
As we look at today's setup for the S&P 500, the range is 54 points or 2.52% downside to 1906 and 0.25% upside to 1960.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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