Takeaway: Great CEO move by WMT. WWW’s McCarthy refocuses Merrell. JCP purposefully irreverent in dispute with Kmart. ANF fire in Paris. JNY SHLD LTD
EVENTS TO WATCH OVER THE NEXT 24 HOURS
CHS - Earnings Call: Tuesday 11/26 8:30 am
DSW - Earnings Call: Tuesday 11/26 8:30 am
TIF - Earnings Call: Tuesday 11/26 8:30 am
BWS - Earnings Call: Tuesday 11/26 9:00 am
WMT - Doug McMillon Elected New Chief Executive Officer of Wal-Mart Stores, Inc.
- "Wal-Mart Stores, Inc. today announced that its board of directors elected company veteran Doug McMillon, 47, to succeed Mike Duke, 63, as president and chief executive officer, effective February 1, 2014. McMillon was also elected to the company's board of directors, effective immediately."
- "Duke will continue serving as chairman of the executive committee of the board and, in the tradition of his predecessors, stay on as an advisor to McMillon for one year. The company plans to make an announcement on McMillon's successor as CEO of Walmart International by the end of the fiscal year."
Takeaway: McMillon's profile has been growing inside WMT, so this is not a complete shock. But we definitely are surprised by the timing. All that said, the idea of having a 47-year old CEO with heavy International experience is extremely appetizing to us. Let's face it, there's no more unit growth in the US, and WMT can't comp consistently better than 1%. The guy can't exactly do any damage to the US business, and Int'l will have a bigger profile. This is a win-win.
JCP - J.C. Penney Will Be Replaced by Allegion in S&P 500 After Drop
- "J.C. Penney Co...will be replaced in the Standard & Poor’s 500 Index by Allegion Plc., S&P said in a statement today."
- "The S&P 500 change will take place after the close of trading on Nov. 29…"
- "J.C. Penney will bump Aeropostale Inc. from the S&P MidCap 400 Index, and Aeropostale will displace Corinthian Colleges Inc. from the S&P SmallCap 600."
Takeaway: Not a surprise for two reasons…1) JCP can't be in the S&P with its current market cap for too much longer, and 2) The stock dropped like a stone headed into this announcement. Someone had the information.
JNY - Sycamore in talks to buy Jones Group for less than $16/shr-sources
- "Private equity firm Sycamore Partners LLC is in advanced talks to acquire apparel retailer Jones Group Inc and is working toward a deal in the next few weeks, according to sources familiar with the process."
- "Sycamore is discussing a price of less than $16 per share - or roughly $1.3 billion based on shares outstanding - and is in the process of lining up financing for the deal, two people said on Friday."
Takeaway: Looking back as far as 10-years, JNY has managed its M&A pricing through the press. Whenever it sold an asset, there was always a lot of noise around how many bidders there were, and what they were willing to pay. It seemed as if WWD was their banker, and not Morgan Stanley. This one is no exception. The press talked about 3 bidders at a price North of $16, and now we're down to 1 bidder at a price South of $16. We won't miss JNY after it goes private.
WWW - Merrell's Gene McCarthy Spells Out His Plans
- "The company has to return to something very simple: hiking and trail, outdoor and performance. So my message internally and externally will be this 'Out.Perform' message. It can be a tagline, but it needs to be more of a mantra. Everything we do needs to be tethered to the idea of outdoors and performance. We want to keep these legacy items, like the Jungle Moc or the Moab, but we want to keep them in their rightful place. I don’t want to lead with them."
- "I need to integrate apparel and footwear. And that, to me, [means] I don’t want to be a footwear, apparel and accessories brand. I just want to be a brand. Apparel needs to have a visual place with footwear [in our stores] because you need to create mindshare with apparel before you can get market share."
Takeaway: So nice to hear that McCarthy is not going to lead with a dinosaur like the Jungle Moc. We wish it would go away, but the reality is that it's a great comfort shoe for people that don't care how they look and are too lazy to tie their shoes.
JCP, SHLD - JC Penney Gets Sassy With Kmart Over 'Jingle Bells' Ad
Takeaway: This exchange speaks for itself. JCP remains irreverent in its marketing (which is a good thing).
WMT, AMZN - Wal-Mart Lowers Free Shipping Minimum to Compete with Amazon
- "Effective today, Walmart has lowered its free shipping minimum price on Walmart.com from $50 to $35 just in time for the holiday season. The new price makes Walmart's online shipping minimum exactly the same amount as Amazon's."
Takeaway: The key consideration is not a war between AMZN and WMT, but rather the precedent that WMT is setting for every other retailer than competes with either of the two goliaths.
LTD - L Brands, Inc. (Formerly Known As Limited Brands, Inc.) Announces New Stock Ticker Symbol
- " L Brands, Inc. announces today that in relation to the March 2013 announcement in which the company changed its name from Limited Brands, Inc. to L Brands, Inc., the company will change its NYSE stock ticker symbol from LTD to LB, effective Dec. 2, 2013."
SHLD, SCC - Eddie Lampert considers sale of Sears Canada
- "Lampert is interviewing multiple banks including Goldman Sachs about conducting a prospective process, according to sources close to the situation. Spokesmen for Sears and Goldman declined to comment."
Takeaway: This is a no-brainer. SHLD has nearly 4,000 stores, and can't turn a profit. They need to monetize anything that's not nailed down.
Moncler - Moncler Gets Green Light for IPO
- "Moncler SpA on Friday received the green light from the Italian Stock Exchange to proceed with its public listing."
- "The Italian luxury brand still needs to wait for approval from Consob, Italy’s equivalent of the Securities and Exchange Commission, which is expected next week, before it kicks off its two-week road show."
- "Sources indicate that the IPO is expected to take place in mid-December and that the company will float around 30 percent of its total shares. Industry sources said Moncler’s IPO could value the company at around 2 or 2.4 billion euros, or $2.68 to $3.22 billion at current exchange."
ANF - Fire Ravages Abercrombie Flagship in Paris
- "A fire has ravaged the Abercrombie & Fitch Co. flagship on Avenue des Champs-Elysées in Paris, and the store will require a full refit before it can reopen, according to a spokesman for the Paris fire brigade."
- "The blaze broke out in a clothing display section on the second floor of the four-story unit shortly before 7 a.m. on Sunday and destroyed 1,075 square feet of retail space, said Lieutenant colonel Frédéric Grosjean."
U.S., Bangladesh to Sign Accord
- "The U.S. and Bangladesh are set to sign a Trade and Investment Cooperation Forum Agreement on Monday that is said to provide an important mechanism for the two countries to discuss bilateral trade and investment issues, as well as be a forum to pursue cooperative activities."
- "In July, the U.S. and Bangladesh agreed to a Bangladesh Action Plan, along with a statement by the U.S. on 'Labor Rights and Factory Safety in Bangladesh.' The USTR said at the time that the implementation of the actions outlined in the plan could provide a basis for the President to consider reinstatement of the Generalized System of Preferences trade benefits for Bangladesh that were suspended in June, which went into effect in September. Apparel and textiles were not covered by GSP, which included imports such as tobacco, sports equipment, porcelain china and plastic products."
Takeaway: Risk continues to fall in many key measures of the Financials complex. Fundamental measures are also improving.
Risk Monitor / Key Takeaways:
For a while now we've been flagging the particularly conducive environment for Financials on both the risk and fundamental fronts. This week remains the same. The setup remains favorable from both a short and intermediate term trend standpoint. A few of the callouts include ongoing stability/further increases in the 2-10 spread, ongoing stability and even marginal tightening in Euribor-OIS and even in the Shifon Index. Rising rates are also again becoming a general tailwind. We provide a brief summary below of some of the notable callouts across the various risk measures we track.
* U.S. Financial CDS - Another good week for the US Financials with swaps tightening 4 bps, on average. Large caps were leaders, tightening by 4-8 bps across the board.
* European Financial CDS - Europe's banks resume their winning ways, dropping an average of 8 bps W/W. Italian, Spanish and UK banks led the charge lower.
* 2-10 Spread – Last week the 2-10 spread widened to 246 bps, 5 bps wider than a week ago.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 6 of 13 improved / 0 out of 13 worsened / 7 of 13 unchanged
• Intermediate-term(WoW): Positive / 9 of 13 improved / 1 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS - Another good week for the US Financials with swaps tightening 4 bps, on average. Large caps were leaders, tightening by 4-8 bps across the board.
Tightened the most WoW: JPM, BAC, GS
Widened the most WoW: MMC, TRV, CB
Tightened the most WoW: MBI, AGO, WFC
Widened the most/ tightened the least MoM: SLM, XL, XL
2. European Financial CDS - Europe's banks resume their winning ways, dropping an average of 8 bps W/W. Italian, Spanish and UK banks led the charge lower.
3. Asian Financial CDS - Asia was tighter almost across the board, save for one Indian bank (+2 bps).
4. Sovereign CDS – Sovereign swaps were mixed last week with the biggest up moves in the US (+5 bps) and Ireland (+4 bps) and the biggest down moves in Spain (-9 bps) and Portugal (-7 bps).
5. High Yield (YTM) Monitor – High Yield rates fell 4.6 bps last week, ending the week at 6.00% versus 6.05% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 point last week ending at 1829.
7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 16.3 bps this week versus last week’s print of 16.71 bps.
8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 275 versus 273 the prior week. As compared with the prior month, commodity prices have decreased -2.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 bps to 9 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 57 basis points last week, ending the week at 3.89% versus last week’s print of 4.45%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Markit MCDX Index Monitor – Last week spreads tightened -1 bps, ending the week at 84 bps versus 85 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.
12. Chinese Steel – Steel prices in China fell 0.3% last week, or 11 yuan/ton, to 3532 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread widened to 246 bps, 5 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.8% upside to TRADE resistance and 1.9% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Client Talking Points
The Yen is signaling oversold versus the US Dollar as the Nikkei signals immediate-term TRADE overbought. The Nikkei is up 1.5% to +52.6% year-to-date. #Boom. With CFTC futures/options net short position hitting new highs of -110,309 contracts, buy/cover Yen versus the US Dollar.
Germany is straight up +0.9% to register fresh new highs this morning. It's also signaling immediate-term TRADE overbought within its bullish TREND. See our Q413 #EuroBulls Global Macro Theme. Ping firstname.lastname@example.org if you need access.
Gold is down 1% to immediate-term TRADE oversold. We will be making the buy/cover call on that this morning with Gold down -27% year-to-date and gold bulls capitulating alongside John Paulson with net long position crashing another -20% last week (futures/options).
|FIXED INCOME||6%||INTL CURRENCIES||24%|
Top Long Ideas
Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged. If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
TWEET OF THE DAY
Ignorant people are more likely to doubt the truth of facts that contradict their beliefs. @UberFacts
QUOTE OF THE DAY
"Anytime you play a contest that you keep score in, there should be a winner and a loser" - Mike Ditka on tie games
STAT OF THE DAY
U.S. Stocks hit all-time highs last week with the S&P 500 up +26.5% and the Russell 2000 +32.4% year-to-date. Meanwhile, US Equity Volatility (VIX) made a higher-low, closing +0.6% on the week at 12.26 (down -32% YTD).
“Anyone who isn’t confused doesn’t really understand the situation.”
-Edward R. Murrow
That was the closing quote from David Einhorn’s most recent quarterly letter. I can’t think of one that better summarizes where we are right now in understanding markets. So I’ll leave it at that.
Back to the Global Macro Grind…
While he’s been quite adept at not violating Rule #1 of investing (don’t lose money), that doesn’t mean Einhorn shies away from writing about where he could make more money. One of those areas is high short interest stocks.
From a Hedgeye Style Factoring perspective, last week was the 1st week of 2013 where SHORT INTEREST (as a style factor) diverged versus its TREND. We look at these style factors by quartile in the SP500:
- HIGH SHORT INTEREST (as a style factor) was -0.5% last week
- LOW SHORTS INTEREST (as a style factor) was +0.8% last week
In other words, if you’re short company that hedge fund consensus (high short interest) doesn’t like, the stock actually had a good chance of going down last week. Look at Tesla (TSLA). That’s new.
What wasn’t new vs. intermediate-term macro TRENDs last week?
- US stocks closing at another all-time high (SP500 = 1804, +26.5% YTD)
- #RatesRising on the 10 yr US Treasury Yield (+4 bps w/w to 2.74% = +99 bps YTD)
- Rate Sensitive “asset classes” (like Gold and REITS) going down on that
In fact, “rate sensitive” was really sensitive last week:
- MSCI REITS (real estate) Index lost another -2.2% going to FLAT 0.0% return for 2013 YTD
- Gold was down another -3.4% on the wk to -26.3% for 2013 YTD
And, to be clear, all those pundits who told you that #RatesRising (tapering) was going to spell the #EOW (end of the world) were dead wrong this year. Wrong is as wrong does.
Would you be wrong to buy anything “rate sensitive” on sale today? Buying any of Bernanke’s Yield Chasing Bubbles is not for the faint of heart. While he won’t acknowledge the mother of all global commodity inflations (2011-2012), history’s score will.
For the YTD here are your Top 5 Deflating of Bernanke’s Inflations moves:
- Silver -34.6%
- Coffee -33.0%
- Corn -29.6%
- Gold -26.3%
- Coal -20.3%
I know. I know. At the all-time high in world food prices (2012), there was NO INFLATION. More Jelly Donuts, please.
At the all-time high in commodity inflation expectations (2011), check out our Chart of The Day: the net length of the CFTC (Commodities Futures Trading Commission) non-commercial net long positioning in Gold spanning Bernanke’s tenure as Fed overlord:
- John Paulson launches his Gold fund 2010
- EXPECTATIONS PEAK = August 2nd, 2011 = +289,000 net long Gold contracts
- SPOT GOLD PRICE PEAK ($1900.20) = September 5th, 2011
Last week’s net long position in Gold fell below < 75,000 net long contracts for only the 2nd time since 2008. Down -15% week-over-week to +71,840 net long contracts, that’s down -75% from the expectations peak (not to be confused with the price inflation peak).
Expectations, as Shakespeare wrote, are the root of all heartache. And my guess is that those shorting Gold -1% this morning will have some heartache of their own when we get back from Thanksgiving. So get all wild and crazy today, and buy yourself some. It’s “cheap-(er)”!
What is not confusing about Gold is that it trades on expectations. When the market expected interest rates to rise into their YTD peak (January-July 2013), it went down; when the market expected rates to fall (July-September 2013 into no-taper), Gold went up.
Oh, and if you are confused as to whether or not our central planning overlords will allow #RatesRising (and Gold falling) from today’s time/price, join the club. Because, eventually, the Fed may very well lose control of that expectation too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.69-2.83%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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