TGT – Quick Take – It’s All About 2015

Takeaway: The real issue seems to be whether or not TGT will need to guide down for 2015 in another 1-2 quarters. We think more likely than not.

The accountability pants are fitting pretty snug for us on TGT today. We’ve been on the wrong side of a 15% spike over the past month, which is a lot for a low beta name like Target. Any time an event goes against us like this, we always step back and re-evaluate our positioning. But the way we look at it, the thesis here still holds. Consider the following…


This is one of the most expensive names in retail relative to its underlying growth. We’re looking at 20x ’15 earnings and 9x EBITDA. If you assume that Canada losses go away entirely, and that TGT gets a billion in cash for the leases, it is still trading at 16.5x EPS and 8x EBITDA. While valuation is hardly a catalyst, barring an acceleration in the US Consumer or a rebound in the Canadian business, we can’t see TGT pushing all-time highs and peak valuations when we’re in year 6 of a retail margin expansion cycle.


Let’s consider the dramatic change in expectations. Back in August when TGT was trading at $60, the company lowered full year guidance by $0.50 to about $3.20 for the year (midpoint). Since then, the stock has gone up by $10 (outperforming the market by 14%), the company is de-leveraging lackluster sales growth into a year/year earnings decline. Could TGT come in a nickel ahead of sandbagged guidance in 4Q? Sure. But it will still be earning $0.40 (11%) less than when the stock was $10 lower.  


People like the big guide-down the company offered up three months ago as it serves as a cushion heading into the holiday for TGT to be more aggressive in discounting, offering free shipping, and ultimately taking share – even if it’s earnings dilutive. In fact, this quarter, sales were up +2.7% and yet EBIT was -3.4%, despite an improvement yy from Canada.


We think next year is key. The Street is at $3.80. TGT hasn’t given any guidance there yet. If we assume Canada gets 25% better next year (i.e. it gets back about $0.20 in earnings that it cost this year), then it suggests that the Street is looking at 12% earnings growth in the core business. With no square footage growth, a prescedent for buying comp, virtually no reason to think that gross margins will improve, and Brian Cornell likely to invest more SG&A to accelerate share gain in the outer years, we simply can’t get close to the Street’s numbers.  It seems to us that Canada has returned to being the key variable in the earnings


TGT – Quick Take – It’s All About 2015 - 3q 14 earnings

TGT – Quick Take – It’s All About 2015 - tgt sigma

A Growing Sell List

Client Talking Points


Price/volume/volatility – that’s our quantitative signal, and we’re sticking to it. Total U.S. Equity Market Volume was -5% and -26% vs. its 1 month and year-to-date averages yesterday – that provided the immediate-term TRADE Overbought signal for the SPY as trending volatility continues to signal bullish (not bearish like it was all of 2013).


Bank of Japan Governor Haruhiko Kuroda “reiterated his upbeat assessment of the economy” overnight – seriously… with household spending -6% year-over-year and the economy in recession. Apparently fin media can parrot central planners from Russia to Japan lying to the world on economic matters. The Yen is burnt right through $116.94 support vs. USD to $117.57.


Down Yen, Up Dollar, Down Oil – and a big % of the high yield energy market continues to see spread risk widen inasmuch as oily (and levered) illiquid upstream MLP stocks do; Oil testing a breakdown of $74 this morning – that’s big time #deflation, down -31% since June.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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).


The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road


TREASURIES: old faithful Long Bond continues to perform as Global Growth Slows, 10yr 2.32% $TLT @KeithMcCullough


We learn more by looking for the answer to a question and not finding it than we do from learning the answer itself.

-Lloyd Alexander


The National Weather Service said Tuesday afternoon that some parts of Western New York could get nearly 6 feet of snow by Thursday from a lake effect snow storm.

CHART OF THE DAY: Sell the S&P 500 | $SPY

"It’s been a classic year of #divergences in Global Macro risk management (Long Bond TLT +18% vs Russell 2000 flat YTD)," wrote CEO Keith McCullough in today's Morning Newsletter. "So ending it any other way than putting myself on the front line, willing to be cut to pieces by SP500 (SPY) bulls, is right where I want to be."


CHART OF THE DAY: Sell the S&P 500 | $SPY - SPX Levels refreshed

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Cut To Pieces

“Believe on this day that I will have been cut to pieces, and you not much later than I…”



That’s a quote from the latest leadership, strategy, and #history book I have started to read. It’s one of the Greek classics that I’ve been wanting to study for a long time – Xenophon, The Anabasis of Cyrus.


It’s been a classic year of #divergences in Global Macro risk management (Long Bond TLT +18% vs Russell 2000 flat YTD). So ending it any other way than putting myself on the front line, willing to be cut to pieces by SP500 (SPY) bulls, is right where I want to be.


The SPY is the most widely shorted equity security in US history. In all of her manifestations you’ll find hedge fund victories and defeats. While I’ve been on the “short the Russell” road for most of this year, now I’m here, saying sell it. That is #timestamped.

Cut To Pieces - Crazy bull cartoon 08.19.2014


Back to the Global Macro Grind


I’ll get to the fundamental research view in a minute (both growth and inflation slowing, at the same time), but first I will draw my price, volume, and volatility sword on this matter:


  1. PRICE – SP500 signaled immediate-term TRADE overbought yesterday with no support to 2002
  2. VOLUME – Total US Equity Market Volume was -5% and -26% vs its 1-month and YTD averages yesterday
  3. VOLATILITY – front-month VIX closed at 13.86, well above my bullish TREND line of 11.34 support


In other words, even if I was a raging bull on US growth equity fundamentals (like I was in 2009 and 2013), I’d still have signaled sell into yesterday’s no-volume-short-covering-capitulation-overbought highs.


Back to the fundamentals – here are the Top 3 things confirming our bearish view on US domestic GROWTH:


  1. US GDP growth 2.3% (we model it year-over-year, not sequentially) continues to slow from Q413’s peak
  2. US 10yr Bond Yield = 2.32%, continues to crash (-23% YTD) alongside growth expectations
  3. Russell 2000 = 1170, still -3.1% from its all-time #bubble high (July 7th) and signaling bearish TREND


And here are the Top 3 things confirming our bearish view of INFLATION expectations:


  1. Oil continues to crash this morning, -31% since June
  2. CRB Commodities Index (19 commodities) down another -0.6% to 266 is -5% YTD now and making lower-lows
  3. Both TIPS (5Y Breakeven Rate) and Fed 5Y-5Y Forward Breakeven Rates are breaking down to fresh YTD lows


Then there’s sentiment (which I could give you a hocus pocus “survey” on) or use the only one that back-tests as a legitimate contrarian indicator in my 15 years of notebooks (the II Bull/Bear Spread):


  1. Bull’s ramped to 56.4% (from 55.5%) this morning
  2. Bear’s remain at 14.9% (just off their all-time lows)
  3. Bulls minus Bears = Bull/Bear Spread of +4160 basis pts, to the bullish side!


To put that Bull/Bear Spread in context:


A)     That’s +103% from where it was when perma equity bulls were in the fetal position on October 13th

B)      That’s just inside of the all-time wide to the bullish side


#Agreed. All-time is a long time. And that’s precisely why I’m willing to be cut to pieces by anyone who wants to put their own money (not other people’s) on the naked long side of SPY, from here until I say stop.


I’d be happy to publish your bull case to all readers of the Early Look. Remember though, your cost basis is going to be yesterday’s SPX close of 2051. This is the arena of accountability. My timing may prove to be fatal, but there’s no place I’d rather be.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.28-2.35%
SPX 2002-2055

RUT 1151-1187

Yen 115.72-117.61

WTI Oil 73.34-76.62

Gold 1130-1205


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Cut To Pieces - SPX Levels refreshed


TODAY’S S&P 500 SET-UP – November 19, 2014

As we look at today's setup for the S&P 500, the range is 53 points or 2.43% downside to 2002 and 0.16% upside to 2055.                                 













  • YIELD CURVE: 1.82 from 1.81
  • VIX closed at 13.86 1 day percent change of -0.93%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Nov. 14 (prior -0.9%)
  • 8:30am: Housing Starts, Oct., est. 1.025m (prior 1.017m)
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC minutes released



    • 10am: Senate Banking Cmte hears from FHFA Director Mel Watt on balancing stability, growth, affordability in mortgage mkt
    • 10am: SEC open meeting on adopting Regulation SCI standards that would require exchanges to improve technology systems
    • 10am: Senate Homeland Security Cmte hears from CDC Director Tom Frieden on Ebola response
    • 10am: House Energy and Commerce Cmte hearing on development of medical products in wake of Ebola
    • 1pm: CFTC media briefing to unveil national consumer protection campaign
    • 5pm: Permanent Subcmte on Investigations releases information in advance of hearing on Wall St bank involvement with physical commodities               



  • Obama Said to Include Tech Visa Expansion in Immigration Plan
  • FOMC Minutes Guide: From Job Mkt Gains to ‘Considerable Time’
  • Ackman Said to See Need for Significant Cost Cuts at Zoetis
  • Paramount Raises $2.3b in Record IPO for U.S. REIT
  • KKR, CD&R Said Preparing PetSmart Bid of >$7.5b: Reuters
  • Wells Fargo, U.S. Said No Longer Hopeful About Mortgage Pact
  • Wells Fargo to Start Europe Infrastructure Fund: Reuters
  • Buffett Creates Company to Buy Homes in Spain: El Economista
  • FTC May Need Dollar General to Divest Over 4k Stores: NYP
  • New Takata Air-Bag Case Prompts U.S. Demand for Natl. Recall
  • Ford, GM Demand Seen Buoying Takata Amid Congress Probe
  • Apple Sticking With Arizona Jobs Plan After GT Advanced Falters
  • Amazon Warehouse Worker Forces Changes as Labor Board Settles
  • Darden Executives to Retire Amid Cost Savings and Job Cuts
  • Music Mogul Azoff Demands YouTube Drop Pharrell, Eagles Songs
  • Hilton Said to Seek A$400m From Sale of Sydney Hotel
  • Netflix to Expand in Australia, New Zealand From March 2015
  • Senate Rejection of Keystone XL Measure Sets Up 2015 Showdown
  • United, Orbitz Sue Travel Site Over ‘Hidden City’ Ticketing
  • CBS Says Dish May Black Out Network at Contract End Nov. 20
  • WhatsApp Encrypts User Messages, Following Google, Apple
  • Putin Said to Back War on Corruption as Sanctions Bite
  • India Quarantines Man Cured of Ebola as Semen Contains Virus



    • E-House China (EJ) 6:25am, $0.17
    • JM Smucker (SJM) 7am, $1.53
    • Lowe’s (LOW) 6am, $0.58 - Preview
    • Mallinckrodt (MNK) 7am, $1.41 - Preview
    • Metro (MRU CN) 7am, C$1.27
    • Stage Stores (SSI) 6am, ($0.21)
    • Staples (SPLS) 6am, $0.36 - Preview
    • Target (TGT) 8am, $0.47 - Preview



    • Copa (CPA) 4:43pm, $2.00
    • Hillenbrand (HI) 4:24pm, $0.61
    • Keurig Green Mountain (GMCR) 4pm, $0.77
    • L Brands (LB) 4:30pm, $0.40
    • Real Goods Solar (RGSE) 4:04pm, ($0.13)
    • (CRM) 4:05pm, $0.13
    • Semtech (SMTC) 4:30pm, $0.44
    • Williams-Sonoma (WSM) 4:10pm, $0.63



  • Brent Oil Rises Most in Three Days on Car Bomb in Kurdish City
  • Iron Ore’s Rout Seen Relentless by SocGen as Miners’ Stocks Drop
  • Brace for Thanksgiving Traffic as Car-to-Plane Gap Grows: Energy
  • Gold Trades Below 2-Week High as Dollar Gains Before Fed Minutes
  • Nickel Advances as Indonesia Adheres to Ban on Exports of Ore
  • Cocoa Seen Extending Drop on Signs of Ebbing Chocolate Demand
  • Copper Prices Seen Rising as Mining Costs Increase: Codelco CEO
  • Europe-U.S. Oil-Product Cargo Flow Rises 67% in Broker Survey
  • Arabica Coffee Futures Rise for Second Day; Cocoa Also Gains
  • ICAP in Talks to Combine Shipbroking Unit With Howe Robinson
  • EUROPE OIL PRODUCTS: Gasoline Crack at 7-Week High; Gasoil Gains
  • Six Feet of Snow Buries Upstate New York a Month Before Winter
  • Senate Rejection of Keystone XL Measure Sets Up 2015 Showdown
  • Corn Drops to One-Week Low as U.S. Farmers Harvest Record Crop


























The Hedgeye Macro Team




















Takeaway: in today's edition of the Macro Playbook, we highlight the broad-based improvement across the domestic housing complex.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. SPDR S&P Regional Banking ETF (KRE)
  2. iShares Russell 2000 ETF (IWM)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)




  • Housing’s Bottoming Process Continues: In the Wednesday, November 5th 2014 edition of the Hedgeye Macro Playbook, we swapped out housing (ITB) for domestic E&Ps (XOP) on the short side of our core investment recommendations, citing 2nd derivative improvement in the broad compendium of housing data. Since then, the ITB ETF has rallied an additional +5.3%, which compares to a 0.0% return for the XOP ETF. We consider 529bps of alpha a good risk management decision. Moreover, it is indicative of our process in the sense that we’re not wed to any investment thesis; in fact, we find that helping our customers get OUT of positions is as critical as the process by which we help them get IN. Rewinding the tapes, recall that we had been bearish on the rate of change in house price appreciation and homebuilder stocks for the entirety of the year; the ITB was DOWN -3.7% YTD when we backed away from it on the short side. This compares to UP +9.6% YTD for the SPY on 11/5 and represents a material degree of alpha on the short side amid a raging bull market and consensus bullishness on housing. All told, with so much GREEN (i.e. 2nd derivative improvement) percolating throughout our Hedgeye Housing Compendium table, we are not surprised to see the ITB maintain its status among the top-20 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings across the entire global macro complex (~200 ETFs in aggregate). Risk managing the reversal from a #Quad4 early-cycle slowdown to a likely [bullish] #Quad1 economic setup in 1Q15 remains our key focus. We are now short the SPY in Real-Time Alerts, so we are of the view that there'll be at least one more correction in between now and then.






***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Early Look: November Rain (11/18)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Top Ten Reasons to Stay Short the Euro (11/5)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: S&P500 Levels, Refreshed (11/18)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.