Here’s the deal: Barclays has a mess on its hands that is not going to go away anytime soon no matter how many executives resign. In fact, the LIE-BOR situation has been exacerbated if anything and has spread to Germany where Deutsche Bank is now under investigation. What’s going on is that regulators and market participants are beginning to take a good hard look at banks and their tangible common equity relative to total assets.
Glass-Steagall is long gone. It shouldn’t have been destroyed in the first place. What is happening is a paradigm shift in which the public will demand that Barclays break up its traditional banking unit from its investment banking unit (Barclays Capital).
This trend will continue all over Europe and eventually, may reach the U.S. But think about this for a minute: Barclays currently has a market capitalization of about $20 billion. It has around $2.1 trillion in gross net exposure to derivatives. In other words, the bank is well undercapitalized. We think that should a spinoff occur, Barclays Capital alone would need $20 billion in addition capital, which will be difficult to raise.
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Materials: * PLEASE NOTE MATERIALS WILL BE SENT OUT TOMORROW MORNING PRIOR TO THE START OF THE CALL.
"Q3 MACRO THEMES AND PRESENTATION"
This Wednesday, July 11th at 11am EST, the Hedgeye Macro Team, led by CEO, Keith McCullough, and DOR, Daryl Jones, will be hosting our 3Q12 Macro Themes Call.
Topics will include:
- Growth Slowing's Slope - Our fundamental view is that growth will come in lower than expectations across a collection of major economies - including the U.S. We refute the notion of the U.S. decoupling and will present the main indicators that signal a higher probability of equities crashing from here.
- The Cliff - We analyze the assumptions embedded in consensus/CBO forecasts regarding the "fiscal cliff" and offer our view on how heightening uncertainty regarding this event should impact global financial markets. Further, we discuss the question: will slower domestic growth pull forward the debt ceiling debate and introduce uncertainty on a fiscal cliff resolution?
- Obama vs Romney - As elections approach we evaluate the policy impact on the broader economy based on the victor. Could the U.S. look more like Europe if Obama wins? And what asset classes stand to outperform based on the next president?
Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.
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Wingstop comps are pointing to an upside surprise for Buffalo Wild Wings’ 2Q12 same-restaurant sales.
Buffalo Wild Wings has been a name we have liked on the short side for some time. Our call to stay short into the most recent earnings report, on April 24th, was correct as comps came in below expectations and the stock traded lower on the news. We were wrong on 4Q11 earnings, however, and don't want to make the same mistake twice. Heading into 2Q12 earnings on 7/20, we would advise not to be short heading into the quarter. Keith has traded this name very well in the Hedgeye Virtual Portfolio, covering for a gain yesterday, but we will not be advising him to revisit on the short side until this earnings report is out of the way.
Wingstop, a concept similar to Buffalo Wild Wings with 600 units in 31 states, posted strong same-restaurant sales of +12.6% for the second quarter. This is important because of the strong correlation between the two year averages of these concepts’ same-restaurant sales. If the relationship holds or – merely – doesn’t reverse, BWLD could print comps as high as 12% for the second quarter when it reports on 7/20. This would obviously negate our short thesis on the stock, which is predicated on cost pressures lowering EPS expectations and/or guidance over the remainder of 2012. With short interest at 12.4% of the float and the heightened likelihood of a substantial upside surprise in same-restaurant sales, we think a squeeze between now and when earnings is released has become a distinct possibility.
Keith shorted M in the virtual portfolio on the heels of weak June results and a low volume rally setting lower highs. We remain negative on the intermediate term TREND and long term TAIL.
Macys’ localization & omni-channel initiatives could create margin upside and improved asset turns long term but anyone who owns M needs to understand that it is a zero growth retailer at peak margins. This is all about trusting management to leverage technology and take its existing industry-leading productivity levels even higher. We’re now entering 2H where the expectation for margin upside is predicated on pricing which is all but guaranteed. Department stores have been great plays in economic recoveries of years past. We’re two years in, and are not holding our breath for number three.
Over the past two years, Macy’s has increased its focus on the localization of the business and omni-channel shopping experience. The integration of mobile & online (~7% of sales growing ~40%/year) remains a priority with the e-commerce biz aiming to exceed $2bn in 2012. Macy’s is one of the few retailers that we think ‘gets it’ in this regard. As a result, M has consistently delivered 4%+ comps over the past 8 quarters; comparable growth not seen since 2007. Despite these initiatives driving the top line over the past 24 months, the recent tailwind from JCP/KSS share gains will become incrementally more difficult over the intermediate term which will cost margin dollars, working capital, or both.
Here are some additional factors that we expect will continue to weigh on performance:
- June comps came in +1.2% vs +2.5E (and guidance of slightly below the quarterly +3.5%). This following management reaffirming that Macy’s is gaining share directly from JCP’s inability to execute on its pricing strategy. With June accounting for ~40% of the quarter, July comps need to come in +6% to reach the quarterly guidance of +3.5% and +4.5% to reach the consensus estimate of +3.1%. Each requirement suggests an acceleration in the underlying 2 yr comp trend of 80bps and 150bps respectively. Given a 180bps sequential deterioration sequentially from May to June, this is no slam dunk.
- Sell side sentiment improved on the margin relative to June following the light top line results while short interest remains at a 10 year low creating an opportunity on the short side.
- F12 comp guidance of 3.7% (increased following Q1 from 3.5%) is assuming continued AUR expansion. 2H12 costs may be set at this point however pricing is not guaranteed. While JCP has been unable to properly communicate its pricing strategy, it has yet to roll out its shops in 2H which are arguably the larger piece of the transformation. Additionally, the off price space continues to accelerate its top line momentum as KSS remains unable to capitalize on the JCP attrition. Both the potential for traction at JCP as well as the off price value proposition and now the recently announced EDLP program at KSS will weigh on M’s pricing power in 2H.
- M is currently at peak gross margins with EBITDA margin targets predicated on further expansion. Revitalized competition (mentioned above) creates “strategy audibles”- Macy’s won’t be an exception here.
- Finally, with the M trade range at $32.69-$35.29, it’s bumping up against Keith’s TRADE Resistance and sitting at a point where the fundamentals and price mesh well within Hedgeye’s Risk Management framework
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