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TODAY’S S&P 500 SET-UP – October 7, 2014

As we look at today's setup for the S&P 500, the range is 41 points or 1.42% downside to 1937 and 0.67% upside to 1978.                                                      













  • YIELD CURVE: 1.88 from 1.89
  • VIX closed at 15.46 1 day percent change of 6.25%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 10am: JOLTs Job Openings, Aug., est. 4.7m (prior 4.673m)
  • 10am: IBD/TIPP Economic Optimism, Oct. est. 45.1 (prior 45.2)
  • 11:30am: U.S. to sell 4W bills
  • 1pm: U.S. to sell $27b 3Y notes
  • 3pm: Consumer Credit, Aug., est. $20.0b (prior $26.006b)
  • 2:30pm: Fed’s Kocherlakota speaks in Rapid City, S.D.
  • 3pm: Fed’s Dudley speaks in Troy, N.Y.
  • 4:30pm: API weekly oil inventories
  • 4:30pm: Fed’s Potter speaks in New York



    • Senate, House out of session
    • 8am: FCC Chairman Wheeler lecture at Newseum event
    • 8:45am: Treasury’s Lew speaks at Peterson Institute on global economy ahead of IMF/World Bank meetings in Washington
    • 8:45am: CFPB’s Thomas Kearney, FTC’s Malini Mithal speak at American Bar Assn conference on consumer financial svcs
    • 10am: Supreme Court hears case involving religious rights in prison
    • 1pm: Woodrow Wilson Center holds discussion on “The Politics and Process of Keystone XL”
    • U.S. ELECTION WRAP: Senate Debates in N.H., Colo.; Gay Marriage



  • IBM Said to Resume Talks to Offload Chip Unit to Globalfoundries
  • Time Warner’s Turner to Eliminate 10% of Jobs to Boost Profit
  • Paulson Says AIG Harsh Loan Terms Needed as Geithner to Testify
  • U.S. Banks Said to Face Another Round of Charges by DOJ: NYT
  • Banks Face 25% Loss-Absorbency Rule in FSB Too-Big-to-Fail Plan
  • Lundin Agrees to Buy Freeport Chile Copper Mine for $1.8b
  • Allergan Asks Judge to Block Ackman From Voting Stock at Meeting
  • AT&T Says Employee Gained Unauthorized Access to Customer Data
  • HP Going It Alone in PCs Faces Tough Suppliers, Shrinking Market
  • HP Seeks Judge’s Approval of Revised Autonomy Deal Settlement
  • U.S. Holiday Sales Seen Rising Most Since 2011 on Job Gains
  • Amazon Said to Face EU Antitrust Probe Over Luxembourg Tax Deal
  • German Industrial Output Drops Most Since 2009 as Risks Rise
  • Samsung Earnings Slump 60% as Galaxy Smartphones Sales Struggle
  • Bank of Japan Sees Wider Dissent on Inflation Language
  • Tesla Seen Adding All-Wheel-Drive Model S Version by Analysts
  • Sanofi Notifies U.S. Authorities on Bribery Allegations
  • Hong Kong Tensions Ease on Talks as City Weighs Cost of Protests
  • Social Finance to File for $200m-$250m IPO Next Yr: WSJ



    • International Speedway (ISCA), 7:30am, $0.01
    • Yum Brands (YUM) 4:15pm, $0.83



  • Brent Crude Falls With WTI as German Output Fans Growth Concern
  • Palm Production in Malaysia Seen Declining Most Since February
  • Gold Trades Above 2014’s Low Before China Returns From Holiday
  • Rio Tinto Jumps After Saying It Rejected Glencore Approach
  • Copper Declines Amid Concern European Demand Is Set to Weaken
  • Cotton Glut Eroding Cost for Gap as China Buys Less: Commodities
  • Soybeans Drop From Two-Week High in Chicago on Rising Reserves
  • Palm Oil Climbs a Second Day as Malaysian Output Seen Dropping
  • Indonesia’s Tin Exports Climb Most in Four Months in September
  • Iron Ore Futures Volume in Sept. Seen by TSI Overtaking Swaps
  • Chile Top Renewable Market on Sunny Desert, Windy Shores: Energy
  • EU Manufacturing Reaps $2.5 Billion Permit Win: Carbon & Climate
  • Occidental Said to Seek Buyer for $3 Billion Bakken Oil Business
  • Glasenberg’s Designs on Rio Tinto Hinge on China Inc.’s Approval


























The Hedgeye Macro Team

















Retail - TIME CHANGE: Department Store Black Book

Takeaway: In this Black Book, we dive into everything from Dept Store current trends (survey) to what the group will look like in the next eco cycle.

Please note NEW DATE/TIME for our Deep Dive on Department Store Fundamentals and Stocks. Our call will be next Thursday, October 16th at 11:00 am ET. Relevant tickers: JCP, M, KSS, DDS, JWN, SHLD, TGT, WMT, TJX, and GPS.


Key Topics Will Include:


1.  What will the Department Store Landscape look like (physically and financially) when we transition into the next economic cycle?

2.  Detailed Revenue analysis for all the Department Stores – by category, consumer, and demographic.  Who has the most risk/upside based on where we are in the economic cycle?

3.  Margin Sustainability: Who has the most defendable margins and levers to pull in the event of a sales downturn?


4.  The importance of Financial Engineering to earnings algorithms.


5.  Current Business Trends: Results from our detailed 1,000 consumer survey. This is the 4th iteration of the survey that we started back in 3Q of 2013

  • Visitation statistics
  • Dot.com and Mobile trends
  • Buy Online/Pick Up in Store – does anyone really use this? Which retailers have the competitive advantage?
  • Detailed category analysis – what retailers are top of mind in each category
  • Who wins on price, sales, selection, and quality

6. Real Estate Deep Dive

  • What does the competitive matrix look like across the space
  • Winners &  losers from a demographic and spending vantage point
  • Are department stores over or under-indexed to their target customer?
  • The JCP and SHLD affect – what do more store closures mean for other names in this space

7.  E-commerce – we’ll be releasing a much more in depth look at e-commerce across the retail space in a Black Book due out in the next couple of weeks – but we will preview that work with a focused look on the department store space. Most importantly which retailers have invested the capital needed to drive growth in this channel.


Call details to follow




JCP – What JCP Needs To Say

Takeaway: There’s a gap between what JCP should say vs. what it will say on Wednesday. All it needs to say is “break even in 2016.”

Ullman & Co have a pretty easy job at this Wednesday’s JCP analyst meeting. Expectations are low, and this company has not articulated a long-term plan since Ron Johnson took center stage and then proceeded to destroy $8.6bn in shareholder value – or 87% of JCP’s market cap. Talk about easy comps. We don’t think it will take much to get people excited.


There’s sure to be information overload on Wednesday, but there’s only a few simple messages we want to hear.

  1. “Sales productivity of $140 by 2016”, up from $108 today. This includes Store productivity going from $98 to $120, and JCP adding another $500mm in e-commerce sales (much of which we think will come from Kohl’s).
  2. “Positive Earnings by 2016”. This would actually be a huge news event for JCP given that the consensus has JCP losing money…well…forever. We think that positive in 2017 is very likely, but 2016 is certainly possible.
  3. “Close 300 Stores”.  Our math suggests 300 stores that need to be closed. We identified each of them in an analysis in May, and outlined some of the salient points below. We’d peg a 25% or less chance in getting this announcement on Wednesday. But we don’t see how Ullman can stand up there with a straight face and say that the company is currently running the optimal fleet size. It’s too close to the holiday for him to send a message to 25% of his rank and file that they might not have jobs anymore. We expect some acknowledgement of a small number of store closures on Wednesday, with a far greater announcement coming in the new year.



We’re in the process of compiling one of our Deep Dive Black Books and will be hosting a call next week. We’ll be discussing several things, including…

a) What the Department Store landscape should look like (operationally and financially) when we enter the next economic cycle.

b) Detailed Revenue analysis for all the Department Stores – by category, consumer, and demographic.

c) Detailed Results of our latest Consumer Survey on the department stores.

d) Real estate deep dive – including overlap with stores that are likely to go away.

e) E-commerce – growth and profitability prospects for the companies and industry.


Here’s one chart as it relates to JCP that we thought was worth sharing. Each time we conduct our Consumer Surveys, one thing we ask the 1,000 department store shoppers is to rank which are their ‘go to’ stores in each product category. We don’t necessarily look at the results compared to one another, as Macy’s will obviously get more votes across the board than Lord & Taylor or Bon-Ton, for example. But we can gauge the incremental change for each company from one survey to the next (in this instance, 1Q14 to today).


There’s only one company that improved its ranking in every single product category – and that’s JCP.


JCP – What JCP Needs To Say - jcpgrid



Here are a few select highlights of the JCP Real Estate Analysis we conducted in May.   

1. Real Estate Approach: We did this analysis from the vantage point of a) optimizing JCP’s fleet, and b) seeing what the revenue impact would be for KSS. In order to properly assess the potential, we analyzed every JCP market to see where the most likely closures are, and whether or not they overlap with KSS. For starters, we did not simply map out store locations (a feat in itself) and draw a circle around each point on the map to gauge overlap by market. We mapped out a 15-minute driving radius around every store, which as you can see by the chart below is very different for every single store location in the country. This shows Tallahassee, FL, which has two locations where JCP and KSS overlap perfectly, and another location where JCP exists without KSS as a competitor. We did this in every market in the US.


JCP – What JCP Needs To Say - jcp2


2. Productivity Analysis. This next chart shows us what the implied sales per square foot range is for JCP’s 1089 stores. What we know is that in the US, JCP has 0.47% share of wallet in apparel, home furnishings and other relevant retail goods across its portfolio in aggregate – again, we’re looking at all expenditures within a 15 minute drive of its stores. If we apply that ratio to each market, we get implied sales/square foot levels ranging from $8 to nearly $1,000 (Manhattan). We know that share is likely to vary by market, so we’re not trying to say that these are the exact productivity levels of each store. But directionally, we think we’re right. And that direction tells us that 782 stores, or nearly 72% of JCP locations, are running below the system average of $98/square foot.

JCP – What JCP Needs To Say - jcp3

3. 300 Store Closures: We think that JCP needs to close 300 locations, at a minimum. We know that the demographic profile in the surrounding area of JCP stores in aggregate is about $66k in annual household income. We also know that JCP just identified 33 stores that it is closing. We analyzed those locations, and the demographic profile is $54k annually – that’s 18% lower than the portfolio average. So we looked throughout the system of JCP stores and looked to see how many other stores fit that profile. There are 300. If these stores are closed, the average income statistic goes up for the whole portfolio by 7% to $70k.  The 300 stores closed have implied sales/square foot of less than $38 annually. There are still almost 500 stores above $38 and yet still below the system average. 


JCP – What JCP Needs To Say - jcp4

4. Revenue Impact of Closures. Our math suggests that these stores would only result in about $550mm-$600mm in revenue loss to JCP. Importantly, KSS only overlaps in 42% of these markets. Our research shows that KSS took about 19% of the $5.4bn in sales JCP hemorrhaged over the past three years. If we apply a 20% share gain level to this analysis for KSS, it suggests about $73mm, or less than 0.4% to KSS in comp. If you want to get more aggressive and assume that KSS takes 100% of that revenue (which WMT won’t allow) you’re looking at about 1.9% in comp to KSS. We think something far below 1% is closer to reality. Here’s the sensitivity analysis below.


JCP – What JCP Needs To Say - jcp5


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Cartoon of the Day: A Sad Song

Cartoon of the Day: A Sad Song - bubble cartoon 10.06.2014

Small caps. Tech stocks. IPOs. And more. There are bubbles everywhere, and it’s why #Bubbles is one of Hedgeye’s three core Macro Themes this quarter.



Subscribe to Cartoon of the day.

Food for Thought in the Restaurants Sector

Takeaway: Prices at the grocery store are rising faster than they are at restaurants. Here's what that means.

We have a favorable data point for restaurants, says Hedgeye's Restaurants sector team.


The restaurant value spread, which measures the difference between food at home and food away from home, has widened over the past three months.


In the past, we've seen evidence that when this spread widens, same-store sales for many restaurants improves.


Check out this chart below.


Food for Thought in the Restaurants Sector - Restaurant Value Spread



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