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Retail Callouts (10/27): Hedgeye Retail Idea List, W, NKE/AAPL, VFC, WMT

Takeaway: Hedgeye Retail Idea List. W premium to RH hard to reconcile. NKE wearables plan on track with AAPL. VFC Frisk timing questionable.

HEDGEYE RETAIL IDEA LIST

Retail Callouts (10/27): Hedgeye Retail Idea List, W, NKE/AAPL, VFC, WMT - 10 27 chart1B

No changes this week.

 

EVENTS TO WATCH

 

Tuesday (10/27)

CROX - Earnings Call: 5:00pm

 

Tuesday (10/28)

COH - Earnings Call: 8:30am

 

Wednesday (10/29)

RL - Earnings Call: 9:00am

HBI - Earnings Call: 4:30pm

 

Thursday (10/30)

SHOO - Earnings Call: 8:30am

COLM - Earnings Call: 5:00pm

 

 

COMPANY HIGHLIGHTS

 

W - Wayfair Comes off Post-IPO Research Restriction

 

Takeaway: Eight out of Nine initiations are 'Buy', which is not a big shocker given that the stock is trading 13% below the IPO price, and 34% below where it closed on the first day of trading.  But even after the massive sell-off, the stock is still trading at a slight premium to RH. We're looking at price/sales (1.9x vs RH at 1.8x). There's no way we could justify the two names trading anywhere in the same ballpark. RH has a real brand, a plan to triple its business, and double its margins. Wayfair largely caters to the middle market with a 'kayak-like' technology that might or might not ever be profitable. 

 

NKE - Nike and Apple to create wearable that has ‘more stealth’ and is ‘more integrated’

(http://www.thedrum.com/news/2014/10/23/nike-and-apple-create-wearable-has-more-stealth-and-more-integrated)

 

  • "Despite Nike having shut down its FuelBand fitness-tracking bracelet and the team that created it, wearables will still be 'a big part of the future', Nike chief executive Mark Parker has insisted."
  • "'Speaking in an interview with Bloomberg TV, Parker said that teaming with Apple for the creation of wearables allowed Nike to  'do things together that we couldn’t do independently'."
  • "He added that the plan for the company was 'to expand the whole digital frontier in terms of wearables, and go from what we say is tens of millions of users – right now there’s 25 million Nike+ users – to hundreds of millions.'"

 

Takeaway: Remember the press reports noting that we should expect to see a NextGen Nike Sportswatch in 1H14 at a price point just below $400 to compete with the Adidas ($399) offering? That was set to be a meaningful upgrade from the current Nike SportsWatch, which sells for $150. But 1H14 came and went without a peep from the Nike Timing team. Why? It was clear that something was up when Nike fired its FuelBand team in April.  Apple's Tim Cook sits on Nike's Board, and Nike knew full well about Apple's iWatch plans. We're also inclined to think that Tim Cook said something to the extent of "You're going to come out with a hi-tech sportswatch that's priced $50 above what Apple is launching? That's a big mistake".  It was probably a pretty simple decision for Nike's Mark Parker to back off that initiative, and piggyback onto the iWatch with a partnered fitness app that promotes Nike's core product in a more commercial way. 

 

VFC - Timberland’s Frisk leaves to be CEO of Canada’s Aldo Group

(http://www.theglobeandmail.com/report-on-business/timberlands-frisk-leaves-to-be-ceo-of-canadas-aldo-group/article21293545/)

 

  • "Patrik Frisk, who headed VF Corp.’s Timberland business, is leaving the company to become chief executive officer of the shoe retailer Aldo Group Inc."
  • "'After over 10 wonderful years at VF Corporation, I have decided to move on and take on a new challenge,' Frisk said Thursday in an e-mail. 'From November, I will be based in Montreal, Canada, leading the Aldo Group.'”

 

Takeaway: That's two C-Suiters hitting the road within the past 30 days. Shearer certainly earned some R&R after 28 years in the seat, but this Frisk announcement is a little bit puzzling. Just 6 months after being named Coalition President of Outdoor Americas and a month and half removed from the Timberland analyst day (where he outlined the $3.1bil plan) he jumps ship for Aldo? If there is any company that can absorb this type of turnover its VFC. We're not questioning the company's bench strength, but in light of the company's first two quarterly misses in a 12 month period since 2009 the timing raises an eyebrow.

 

OTHER NEWS

 

WMT - Wal-Mart names veteran exec as India COO

(http://www.chainstoreage.com/article/wal-mart-names-veteran-exec-india-coo)

 

  • "Wal-Mart Stores Inc. has named Murali Lanka as COO of its Indian operation effective Dec. 1. Lanka has held various positions with Wal-Mart and Sam’s Club since 1989 and served as head of operations of Wal-Mart India from 2008-2013, and most recently held the position of regional general manager for Wal-Mart in Texas."

 

AAPL, RAD, CVS - Apple Pay Faces Challenge as CVS, Rite Aid Reject System

(http://www.bloomberg.com/news/2014-10-26/apple-pay-face-challenge-as-cvs-rite-aid-reject-system.html)

 

  • "CVS and Rite Aid are among 220,000 U.S. merchants that already have technology in place to read the short-range wireless signals that enable customers of Apple Pay or similar services to make a purchase by waving their smartphones. The retailers weren’t among those specifically named as accepting Apple Pay when the iPhone maker revealed its system last month."
  • "The drug retailers, which are part of a consortium developing a competing payment system, stopped Apple Pay last week, said a person familiar with the situation who asked not to be named."

HILTON: GET THE REIT FOR (ALMOST) FREE

Takeaway: Sum of the Parts (OpCo + PropCo) = Higher Implied Share Price

CALL TO ACTION

Convergence of recent and future events makes a Hilton REIT spin-off event more likely. We have no edge on timing but this transformative event could increase shareholder value to $29-$34/share. Furthermore, a split would enhance both companies’ (OpCo and PropCo) growth prospects in addition to the obvious tax efficiency gains. 

 

 

Please see our note  http://docs.hedgeye.com/HE_HLT_REIT_10.27.14.pdf


#GrowthSlowing

Client Talking Points

VIX

The front-month volatility was down -26% last week, but +17% for the year-to-date – which is next into more U.S. #GrowthSlowing data like you had with New Home Sales on Friday? Immediate-term risk range of 14.34-27.86 now for the VIX; there’s a ton of asymmetry in that.

CHINA

Don’t look now, but into and out of the official #ChinaSlowing GDP report the Shanghai Comp is down for 5 consecutive days and the Hang Seng remains bearish TREND @Hedgeye – no matter what they do with European Equities this morning, global #GrowthSlowing remains clear.

OIL

After another -1.3% week for WTI, you get another small bounce of +0.2% this morning – that’s not going to do anything other than remind you that #Quad4 deflation is bad (it felt really bad on Oct 14th, so let’s learn from that).

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 28% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

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

For the first time in three years I'm not bearish into a $COH print.

@HedgeyeRetail

QUOTE OF THE DAY

A lot of people seeking new beginnings have never finished with the past.

-Byron Pulsifer

STAT OF THE DAY

OPEC’s largest producer, Saudi Arabia, receives 85% of its export earnings from the oil and gas sector.


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Don't Call It Bad!

“Don’t call it a beachhead…”

-Adolf Hitler

 

That’s what Hitler told his field marshals after the Allies took the beaches of Normandy in 1944. He called it the “last French soil held by the enemy… and that Cherbourg was to be held at all costs.” (The Guns At Last Light, pg 105)

 

Evidently, it was a beachhead.

 

Don't Call It Bad! - EL chart 2

 

Back to the Global Macro Grind

 

A reporter from Marketwatch pinged me this morning asking what I thought the “biggest lie is that investors are telling themselves?” After reading a few consensus Bloomberg headlines that “deflation is good” my answer was simple:

 

The biggest lie US stock market centric investors are telling themselves right now is that the bond market has it wrong, and US growth isn’t half of what they thought it would be 10 months ago.

 

But , whatever you do, don’t call it bad. The same consensus that said the upside surprise in #InflationAccelerating from JAN-JUN was “good for stocks” are now saying that the #Quad4 deflation of that inflation is “good” too.

 

Like two bad golfers who are staring down breaking bogey puts from 9 feet in the rain and wind, it’s all “good, good.”

 

Back to reality…

 

Is 1 up week in the last 5 for the SP500 good? How about 2 in the last 8 weeks for the Russell 2000? What about both bond yields (10yr -25% YTD) and Oil prices crashing -25% since June? Oh, and 3 of the 4 BRICs falling like the real ones (Brazil,  Russia, China) - all good?

 

You show me one of the many consensus economists, strategists, etc. whose 2014 call for - 3.25% on the 10yr; +10-15% on the Dow, SP500,  Russell; and +3-4% GDP growth – was based on worldwide #deflation, and I’ll send them a Hedgeye hat.

 

Confirmation bias in being bullish on growth all of the time is what it is, but it’s not getting people paid this year. Looking at last week’s #Quad4 deflations (that continued, despite the Russell 2000 bouncing +3.4% to down -3.9% YTD):

 

  1. WTI crude Oil -1.3% to -12.6% YTD
  2. Russian Stocks -3.4% to -28.1% YTD
  3. Brazilian Stocks -6.8% to +0.8% YTD

 

And with Dilma Rousseff winning Brazil’s presidency this weekend (stock market indicated down another -5-6% pre-open), it appears that the anti-dog-eat-dog-socialist contract #deflation in that part of the global demand construct isn’t good either. It’s bad.

 

In Hedgeye #process speak:

 

  1. Quad 1 (inflation slowing and growth accelerating) is good
  2. Quad 4 (both inflation and growth slowing, at the same time) is bad

 

That’s it. We’ve already constructed a framework to talk about these trivial matters so that the people I used to pay on the sell-side can be held to account. If both growth equity bulls and bears agree that inflation is deflating, the only debate left is on growth.

 

If you’re in the #Quad4 camp (and you have to buy stocks) there are only 3 S&P Sector allocations you’d be net long of right now:

 

  1. Healthcare (XLV)
  2. Consumer Staples (XLP)
  3. Utilities (XLU)

 

And I’d weight them in that order. Since Healthcare stocks (XLV) led last week’s rally (+6.6% on the week to +17.6% YTD vs. something like the Dow which was only +2.6% on the week to +1.4% YTD), that was only confirmation that we are in #Quad4.

 

If we were in Quad 1 (and growth was accelerating again), early cycle stocks like housing and consumer discretionary would be leading to the upside (and big things like Retail Sales and New Homes wouldn’t be missing). Consumer Discretionary (XLY) lagged last week and is still down -0.7% YTD.

 

I’m not saying we’ll never be in Quad 1. That’s where markets went in the 1st half of 2009 and there were very few macro strategists who shifted from bearish on #deflation to bullish on consumption back then. Most were forced to call #Quad4 bad, after missing it the whole way down. Timing matters.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.12-2.31%

SPX 1

RUT 1055-1127

DAX 8

VIX 14.34-27.86

WTI Oil 80.05-83.78

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

 

Don't Call It Bad! - Chart of the Day


Pardon The Bear

This note was originally published at 8am on October 13, 2014 for Hedgeye subscribers.

“But pardon, gentles all…”

-Shakespeare

 

That’s from William Shakespeare’s Prologue to Henry V. It’s also the opening volley from a #history brick my wife gave me for Father’s Day (sorry, just digging into it now!) called The Guns At Last LightThe War in Western Europe 1944-1945.

 

While I think she sometimes thinks I’m at war with my keyboard in the early mornings, she puts up with my market life – and for that I am forever grateful. From my family to my friends at the firm, getting it done is an all-out team effort.

 

But whose team is The Bear on? While I received some kind emails while in London last week, I’m not sure that being right this time is a good thing. The #Quad4 Deflation is nastier than a gnarling grizzly. And I fear the war between inflated asset #Bubbles and gravity has just begun.

Pardon The Bear - Bubble bear cartoon 09.26.2014

 

Back to the Global Macro Grind

 

The thing about fear is that you need to accept it before you conquer it. Last week’s +46% move in the front-month fear (VIX) index to +54.8% YTD should help pave part of that path towards acceptance. But don’t forget that there’s a long way between denial (1st stage of grief), anger, bargaining, depression, and acceptance.

 

Maybe using the Five Stages of Grief is a little over the top for a Monday morning. Maybe not (especially if you are a NY Jets fan). Being bearish at 1208 on the Russell (all-time #Bubble high = July 7th) or during the Ali-Bubble (BABA) IPO day (September 19th) at SPX > 2011 wasn’t easy for me. The denial stage for the bulls was equally isolating for our bearish macro view.

 

So pardon, gentles all – isolation is often where the alpha lives. And we certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest, TLT = +18.3% YTD vs Russell 2000 -9.5%).

 

In US Equity terms, here’s how the Def-#Quad4 Deflation looked last week:

 

  1. SP500 down -3.1% (down for the 3rd straight week) to +3.1% YTD
  2. Russell 2000 down -4.7% (down for the 6th straight week) to -9.5% YTD
  3. US Energy Stocks (XLE) down -5.2% to -5.6% YTD
  4. US Industrial Stocks (XLI) down -4.7% to -3.7% YTD
  5. US Consumer Staples (XLP) up +0.4% to +6.1% YTD

 

That’s right. In addition to the Long Bond (Treasuries), Munis, and Cash, we’ve noted in our most recent Macro Themes slide deck that Consumer Staples (XLP) is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

 

Typically, when Correlation Risk (commodities trading inversely to USD) is this high, Down Dollar pays the commodity bulls. But last week, that was only true for pockets of the commodity complex (Oil was -4.4%). In addition to Gold +2.4% last week:

 

  1. Coffee was up another +6.7% to +83.5 % YTD
  2. Palladium was +4.0% to +8.7% YTD
  3. Cocoa was +3.3% to +16.4% YTD

 

But I am thinking there are more hedge funds who are still carry trading oil futures with a levered long bias than there are 2 and 20 alpha dogs who are long Cocoa on the #Ebola trade.

 

In fact, if you look at how hedge funds are positioned from a speculative net futures and options perspective:

 

  1. Crude Oil still has a net LONG position of +299,755 futures and options contracts (vs. 6 month avg of +385,000)
  2. US 10yr Treasury still has a net SHORT position of -51,954 contracts (vs. 6 month avg of -15,000)
  3. SP500 (Index +E-mini) has a net LONG position of +48,616 contracts (vs. 6 month avg of -41,000)

 

We’re obviously on the other side of every one of these Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX), so it was a good week. But the bigger question is where do the US equity bulls (and Treasury bears) go from here?

 

Within the small cap US equity #Bubble, there are a whole bunch of #bubbles we highlighted on our Q4 Macro Themes call (ping sales@Hedgeye.com if you want the replay). And some of them play right into hedge fund consensus:

 

  1. Complacency #Bubble (slide 44)
  2. Levered Beta Chasing #Bubble (slide 45)
  3. Leveraged Speculation #Bubble (slide 46)

 

We can do a conference call with you to review all of these #bubbles, but the #Complacency one is really easy to show in terms of the number of days where the SP500 has had a > 1% move. After hitting an all-time YTD low, we just had 4 of those days, in a row!

 

Sure, markets scare people when they do that. I think I scared the hell out of some Institutional Investors in London with some of these slides too. Coming off the all-time lows in complacency, there’s never been this level of #VolatilityAsymmetry, ever.

 

While never-ever is a very long time – and I certainly don’t mean to be mean (or scare people) - I’d appreciate it if you took it easy on my inbox. My wife thinks of me as a cuddly Thunder Bay Bear, so be gentle with me.

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1884-1948

RUT 1037-1086

VIX 16.85-21.67

USD 85.07-86.67

WTI Oil 83.99-88.64

Gold 1210-1234

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pardon The Bear - Chart of the Day


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