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Retail Callouts (9/24): KSS, BBBY, TGT, WMT, Holiday Sales

Takeaway: KSS Short call at 11am. BBBY finally turns – how long will it last? TGT.ca going heavy on price. Deloitte Holiday survey bullish, as always.

EVENTS TO WATCH

 

KSS CALL TODAY AT 11am -- Why We Think It's a Short

Toll Free Number:

Direct Dial Number:

Conference Code: 765136#

Materials: CLICK HERE

 

Thursday (9/25)

NKE - Earnings Call: 5:00pm

 

Friday (9/26)

FINL - Earnings Call: 8:30:am

 

 

COMPANY HIGHLIGHTS

 

BBBY - 2Q14 Earnings

This is the first solid print for BBBY in a very long time. For those (including us) who missed the event, we'd simply ask...if BBBY could disappoint repeatedly for the better part of two years, why should we assume that the positive turn lasts only one quarter? The company took up numbers, but our sense is that there's a lot more room to go. We're adding this one to our long bench -- need to dig in to gauge additional upside.

 

Retail Callouts (9/24): KSS, BBBY, TGT, WMT, Holiday Sales - 9 24 chart1

 

 

TGT, WMT - Kantar Retail: Target Canada beats Walmart Canada on pricing

(http://www.chainstoreage.com/article/kantar-retail-target-canada-beats-walmart-canada-pricing>

 

  • "Target Canada is aggressively repositioning to drive its price value, according to a basket pricing study by Kantar Retail."
  • "'Target’s price leadership in Canada has clearly shifted,' noted Robin Sherk, director of retail insights, Kantar Retail, and contributor to the study. 'We found that the price of Target Canada’s overall basket was 3.9% less expensive than Walmart’s. In our initial study, the retailers’ basket values were effectively even.'"

 

Takeaway: This might very well be the right move for Target Canada, as it needs to dramatically improve traffic to it's stores. But we can't shake the concern that a) in the end, Wal-Mart will not lose on price...even if it sells product below cost, and b) winning on price is a strategy of last resort. We want to see Target win on assortment, or value-add, or customer experience, or some other factor that sets it apart from the competition. Once you go become a price leader, or attempt to, there's really no going back.

 

Deloitte Sees Holiday Sales Rising 4.5% as Incomes Gain

(http://www.bloomberg.com/news/2014-09-24/deloitte-sees-holiday-sales-rising-4-5-as-incomes-gain.html)

 

  • "U.S. retail sales may increase as much as 4.5 percent this holiday season, exceeding last year’s gain, as improving incomes and job prospects encourage consumers to open their wallets, according to Deloitte LLP."
  • "Sales, excluding purchases of motor vehicles and gas, may climb to as much as $986 billion in November through January, Deloitte, a New York-based consulting firm, said today in a statement. Holiday sales by that measure rose 2.8 percent last year, according to the company."

 

Takeaway: These forecasts are interesting, but we can't really use them. Deloitte historically has proven that it does not know how to forecast a sales number outside of a band of 3-5%. It was right in 2012, when sales in Nov/Dec grew by 3.6%. But its' 2013 forecast of 4-4.5% was a bust, with sales only growing 1.9%. Let's not forget that this group is part of the organization that is the auditor for a couple dozen major retailers, including Best Buy, Gap, Sears, Dick's, Nordstrom, Coach and Toys R Us.  We're not saying that results are compromised, but it's certainly not incentivized to tell the world that the holiday sales outlook is bad.

 

 

OTHER NEWS

 

AMZN - In Germany, Amazon Keeps Unions at Bay

(http://online.wsj.com/articles/in-germany-amazon-keeps-unions-at-bay-1411525804)

 

  • "German unions are accustomed to wielding formidable influence. Union officials sit on supervisory boards at blue-chip companies. They have a track record of wearing down foreign employers."
  • "Not so at Amazon.com Inc.  For the 16 years the online retailer has done business in Germany, it has shunned the nation's consensus-driven labor model. It ignores trade unions and largely dictates contract terms at its nine German distribution centers, where it employs about 9,000."

 

BBY - Best Buy Teams With Designers for Tech Accessories

(http://www.wwd.com/accessories-news/hats-gloves-and-more/best-buy-teams-with-designers-7938435?module=Retail-latest)

 

  • "A new line of tech accessories — designed by Nanette Lepore, Anna Sui and Isaac Mizrahi New York — will be sold exclusively at all Best Buy stores.
  • The collections, which include smartphone, tablet and laptop cases, will launch at bestbuy.com and Best Buy stores on Oct. 5 and are available for pre-order, beginning today."

 

Toys'R'Us to bolster workforce with 45,000 holiday hires

(http://www.retailingtoday.com/article/toysrus-bolster-workforce-45000-holiday-hires)

 

  • "As part of its holiday strategy, Toys"R"Us plans to hire 45,000 seasonal employees at its stores and distribution centers nationwide, more than doubling the company's workforce as it continues preparing for the highly contested shopping season ahead."

 

REI makes executive appointments

(http://www.chainstoreage.com/article/rei-makes-executive-appointments-0?ad=news)

 

  • "REI announced that Annie Zipfel has been promoted to senior VP marketing. With her, REI will not hire a chief marketing officer as previously announced, but instead add a senior creative leader to the company."

 

EBAY - PayPal in partnerships with Bitcoin processors

(http://www.chainstoreage.com/article/paypal-partnerships-bitcoin-processors?ad=news)

 

  • "PayPal has made its first direct entry into the virtual currency space. The company announced via a blog post that it has entered into agreements with leading Bitcoin payment processors BitPay, Coinbase and GoCoin. The agreements let PayPal’s digital goods merchants in North America accept Bitcoin, with a simple integration through the PayPal Payments Hub."

 

RSH - Report: Major vendor won’t alter terms for RadioShack

(http://www.chainstoreage.com/article/report-major-vendor-won%E2%80%99t-alter-terms-radioshack?ad=news)

 

  • "RadioShack Corp. has reportedly so far been unsuccessful in its efforts to convince an unidentified ‘major vendor’ to modify a commercial agreement in a way that could benefit a financial restructuring. According to the Wall Street Journal, RadioShack still has not identified the vendor or exactly what terms it wants to restructure, but has been negotiating with wireless carriers including AT&T and Sprint to ease the terms under which the retailer is allowed to resell equipment."

 

Victoria Beckham Unveils First London Store

(http://www.wwd.com/retail-news/designer-luxury/victoria-beckham-unveils-first-london-store-7938423?module=hp-topstories)

 

  • "Victoria Beckham has built a dream space on Dover Street in London, her first store and 'second home' in Mayfair, where she can express her vision on the shop floor. The 6,040-square-foot space spans three floors, and has more in common with a contemporary art gallery than a typical London luxury flagship."

 


Volatility, the Consumer and China

Client Talking Points

VIX

Same #process, buy equities at the low-end of their risk range and high-end of volatility’s. The VIX risk range is now 13.13-14.99; this is not for the faint of heart, as total macro volatility comes off its most asymmetric low, ever.

U.S. CONSUMER

As in Discretionary (XLY) stocks got pounded back to flat for 2014 year-to-date yesterday; this was a sector a lot of people chased on the “down oil” thing, but its down -2.7% for the month – down oil isn’t going to change the all-time high in U.S. cost of living. Commodity deflation is setting in, but pricing is sticky.

CHINA

The only real good equity news in the last 48 hours was Chinese stocks ripping fresh year-to-date highs, up another +1.5% overnight to +14.4% year-to-date for the Shanghai Comp, running neck and neck with our preferred way to be long of U.S. #GrowthSlowing, the Long Bond (TLT) +14% year-to-date.

Asset Allocation

CASH 46% US EQUITIES 4%
INTL EQUITIES 12% COMMODITIES 4%
FIXED INCOME 30% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

TLT:

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could 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. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

HOUSING: mortgage demand continues to test fresh YTD lows - MBA weekly purchase apps down another -4.1% $ITB

@KeithMcCullough

QUOTE OF THE DAY

In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability.

-John Kenneth Galbraith

STAT OF THE DAY

China consumes over 40% of the world’s industrial metals (up from 5% in 1980).



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Adapt and Evolve

“When we are no longer able to able to change a situation – we are challenged to change ourselves.”

-Viktor E. Frankl

 

As egotistical as many successful stock investors seem on the outside, a common attribute for many of them is, ironically, their ability to change their minds.  Now often some poor analyst in their employ is blamed for the mistake, but when the facts and/or thesis changes, the position is rightfully exited.

 

Hubris is a dangerous thing and in investing it can be downright deadly.  The ability to adapt to new information and admit mistakes, on the other hand, can be an immensely valuable skill.

 

The ability to adapt, of course, is hardly new to our species.   A recent article in Smithsonian magazine based on new research actually argues that the ability to adapt is maybe the most important skills and has enabled homo sapiens to thrive over the last 1.85 million years. 

 

According to this article:

 

“What results from these analyses is the realization that there is no simple, clear picture; no obvious mechanism as to why the genus we know as Homo came to arise and dominate. What we've long thought of as a coherent picture—the package of traits that make Homo species special—actually formed slowly over time.”

 

So if it was not our unique skill set that allowed us to thrive, what was it? Well, according to the article, the answer is quite straight forward:

 

“That early Homo species would have had to cope with this constantly-changing climate fits with the idea that it was not our hands, nor our gait, nor our tools that made us special. Rather, it was our adaptability.”

 

Adapt and Evolve - dj7

 

So, of course, it begs the questions: when are the Old Wall consensus economists going to adapt their projections for 3% U.S. economic grow in perpetuity?

 

Back to the Global Macro Grind...

 

The 3% growth projection noted above may seem like a non-sequitur, but the comment was actually born of out attending the Bloomberg Markets Most Influential conference earlier this week and comments from William C. Dudley, the President of the New York Fed.  Since Bloomberg radio and TV called him one of the smartest men in the world, it seems only prudent that we pay attention to his comments.

 

Aside from his comments that all will indeed be well if we hit 3% in growth in perpetuity, Dudley also indicated he doesn’t have a lot of faith in that happening.  We’ve paraphrased below, but a couple of interesting comments from Dudley were as follows:

  • The Fed is difficult to manage as it relates to the economic estimates that come in from various methods (Takeaway: this transparency and democracy stuff related to setting policy may be less effective if the inputs aren’t systematic, which they are not);
  • Dudley said not to overweight the “dots . . . he has a wide confidence interval in his dots (Takeaway: we would agree as the fascination with the dots is reaching near epic proportions, so they are certainly soon to be irrelevant);
  • According to Dudley, the Fed doesn’t care about the dollar per se, but too strong of a dollar is an economic deterrent (Takeaway: the Fed cares about the dollar, and, shockingly still doesn’t get the economic value of a strong dollar policy); and
  • There are reasons to be patient on monetary policy and as an example monetary policy was tightened too quickly during the Great Depression (Takeaway: if you didn’t know whether Dudley was dovish, now you know.  But really Bill, a Great Depression reference?).

On one hand, we certainly appreciate Dudley acknowledging the flaw in forecasting--it shows his adaptability.  Conversely, the Great Depression and strong dollar fear mongering is a little disturbing, but certainly difficult to read much from brief comments on a thirty minute panel!  And who are we to judge...

 

As for Hedgeye, we don’t know what the Fed is going to do next and frankly despite my comments above, Fed watching is a bit of fool’s errand.  In our analysis, as the data changes, we adapt.  It is that simple.

 

The most recent change for us recently has been the view that the U.S. economy is now likely in what we call Quad 4, which is an environment in which growth is slowing, inflation is slowing, and monetary policy is loose.  

 

Especially on inflation, this is an about face for us.  But that fact is that headline inflation is now down to +1.8% for the quarter, which is a deceleration.    Along with that many commodities are now deflating incrementally, and Brent Crude in particular is down more than -12% on the year.

 

Even as inflation is decidedly decelerating, we do continue to get mixed data on growth (some good, some bad).  But as my colleague Darius Dale recently highlighted, we think it’s important to highlight the risk of #GrowthSlowing given where consensus expectations for growth remain – i.e. out to lunch. Moreover, the lack of dispersion among forecasts remains a key risk.

 

Specifically, in the previous five quarters, the standard deviation of growth is 0.44% and peak to trough is 122 basis points.   Meanwhile the forward consensus projections for the next five quarters have a standard deviation of 0.02% and peak/trough spread of 18 basis points.  We don’t know much, but we do know those projections will be missed. 

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate term TREND signal in brackets)

 

RUT 1115-1149 (bearish)

Shanghai Comp 2 (bullish)

VIX 13.14-14.99 (bullish)

Pound 1.62-1.64 (bullish)

Copper 3.01-3.09 (bearish)

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Adapt and Evolve - chart of day


THE HEDGEYE MACRO PLAYBOOK

Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document.

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


Hell on Wheels

This note was originally published at 8am on September 10, 2014 for Hedgeye subscribers.

“Mr. Bohannon, Do you want to build this railroad?”

-Senator Grant in the AMC T.V. show, “Hell on Wheels”

 

Similar to our office, I’m sure most of you don’t have much time to watch T.V., but every once in a while a great show comes around that is really hard to turn off.  A popular one at Hedgeye as of late is AMC’s, “Hell on Wheels.”

 

Hell on Wheels - HOW facebook timeline 850x315

 

The show is about the epic struggle to build a trans-continental railroad. Setting aside the obvious struggles of weather, dealing with Native tribes (who felt their treaties were being violated), and limited technology, the building of the transcontinental railroad also occurred at a time when the nation was healing itself from the Civil War.  As a result many former Union and Confederate soldiers worked side-by-side on the railroad.

 

As Wikipedia describes it:

 

“The First Transcontinental Railroad (known originally as the "Pacific Railroad" and later as the "Overland Route") was a 1,907-mile (3,069 km) contiguous railroad line constructed between 1863 and 1869 across the western United States to connect the Pacific coast at San Francisco Bay with the existing Eastern U.S. rail network at Council Bluffs, Iowa, on the Missouri River.”

 

The epic struggle to connect the two sides of the continent took more than six years, but once it was completed dramatically changed the face of commerce in the United States. 

 

Who knows, perhaps the iWatch will do the same?

 

Back to the Global Macro Grind...

 

In the global macro world, the epic struggle du jour seems to be related to Scottish independence.  Simply, will the Scots decide to leave the United Kingdom, or not?  

 

A few weeks ago, no one was even considering this as a potential global macro issue, but after a recent YouGov.Com poll that showed a slight majority of Scots voting Yes (51%) to independence versus No (49%), the British pound was sold dramatically and Scottish independence became a hot topic with the manic media.

 

Hell on Wheels - dj

 

So, will the Scots vote for independence on September 18th?  If we rely strictly on the YouGov.com poll, it would seem there is a real chance of this occurring.   Practically speaking, though, as we have written often in the past it is very unwise to rely strictly on one poll.  In fact, there are a couple of key quantitative points that speak in contrast to the YouGov.com poll:

  • First, the YouGov poll that showed a 2% edge for the Yes side was literally the second poll ever (of those polls approved by the British Polling Council) to show the Yes side ahead.  The other Yes poll was taken by the Scottish National Party back in mid-2013;
  • Second, the most recent poll aggregates (though some admittedly occurred before the most recent debate in which pro-independence leader Alex Salmond was widely judged to have won) still show a lead for the No vote outside the margin of error.  Specifically, a poll aggregate issued by Strathclyde University on September 1st showed the No side ahead by 10 points and a poll aggregate from The Guardian on September 3rd showed a similar 10 point lead.
  • Finally, the online betting website, Bet Fair, shows the market for Scottish Independence at more than 2:1 for No independence.  (Incidentally, there have been almost $5 million pounds wagered on Bet Fair for this topic.)

In the Chart of the Day below, we show the impact that the series of YouGov.com polls have had on the British Pound.   While certainly there are other factors at play, the increasingly pro-Independence polls have been a defined catalyst for aggressive selling of British Pounds.

 

Setting aside the polls and betting markets, the most notable reasons for Scotland to stay a part of Great Britain are related to the Scottish economy itself.  Hedgeye’s European Analyst Matt Hedrick highlighted a number of major risks to the Scottish economy should the Scots pursue independence, including:

  • Currency – UK politicians have stated that Scotland could not use Sterling. The country would have to issue its own currency
  • Central Bank – until the formation of a central bank there is no backstop for sovereign debt
  • Massive Capital Flight –investors could pull money out of Scottish banks en masse that would destabilize the financial system 
  • EU Membership – it’s unclear if an independent Scotland would be granted EU membership, which could have huge trade implications
  • Regulation – uncertainty if banks would remain regulated under the UK regulatory authority? Tax and trade regulations also uncertain
  • Economic Drag – prominent financial firms likely to move to London
  • Budget –  the Institute for Fiscal Studies pointsout that Scotland's Deficit could be 4.6% if independent. Low credit quality could negatively impact debt raises, and push the country's debt and deficit levels higher, a vicious cycle.

It is certainly possible, even if unlikely, that the most recent YouGov.com poll is the harbinger of Scottish Independence.  But for this to be accurate it would fly in the face of all other polls, the betting markets, and really any semblance of rational analysis by the Scots related to their own economy.  So our view continues to be that the No vote will prevail and the British Pound will rally accordingly.

 

That said, given the weak nature of the Scottish economy and the fact that 2 out of every 3 Scots are on some form of social welfare, over the long run a Great Britain without Scotland might actually be a stronger economy and certainly more healthy from a fiscal perspective.  So on some level, perhaps the British Pound is in a win-win situation given its recent sell off.  A No vote leads to a relief rally and a Yes votes leads currency traders to asses s United Kingdom’s much improved fiscal health without Scotland, which leads to a long term tail wind for the Pound.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.31-2.52%

SPX 1982-1999

RUT 1151-1171

Shanghai Comp 2261-2362

VIX 11.34-13.83

Brent 98.74-102.99 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Hell on Wheels - UK EL


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