Contrary to what the economic Pollyannas might tell you about U.S. economic growth right now, it's not all rainbows and puppy dogs. Case in point: today's Q4 GDP report. In line with the Hedgeye macro team's forecast, 2014 full year GDP growth was +2.4%, not 5%.
Takeaway: We still see DKS LBO as a no go, NYPost agrees. GPS gets less "Creative". Jones NY Closing Stores. SIGMA Summary.
DKS - Dick’s Sporting Goods not for sale after all
Takeaway: The NY Post says DKS is not being sold. So naturally it must be true. We never thought that an LBO made any sense, and therefore maintained our short on DKS in the face of the rumors.
If we were Ed Stack (DKS CEO) we'd sell now if it were at all possible. The reality is that the margin structure of this business is in a secular decline. We get to a negative IRR at the current price, and we suspect that any private equity firm worth its salt is getting to similar values.
To be clear, our model assumes…
- DKS tops out at 900 stores by 2018, below management's 1,100 goal
- 2% comp store sales growth as e-commerce offsets negative store traffic.
- Gross Margins fall by 50bp annually as e-commerce dilutes profitability, and aggregate sales growth is not strong enough for DKS to leverage occupancy costs.
- EBIT margins fall from 8% today to 5% in 2018.
GPS - New Gap Brand President Restructures Marketing, Creative Director Role Eliminated
Takeaway: This is obviously part of a much bigger brand and marketing restructuring, but it can't be a great sign that 'Creative Director' role is being eliminated by a brand that needs to be increasingly creative to fend off faster, more relevant, and more profitable competition.
Jones New York to close stores, end wholesale business
Takeaway: We wonder if Sycamore was planning on this when they took JNY private? The deal to sell Stuart Weitzman to Coach came very soon after the buyout. Sycamore is acting fast to sell what they can, and shutter the perennial dogs.
KATE - Strong Q4, Remains a Best Idea Long
Takeaway: For our full note, KATE – Watch What They Do, Not What They Say, from yesterday morning CLICK HERE
WSM - Williams-Sonoma, Inc. Announces Election of Sabrina Simmons to Board of Directors
SKX - Pete Rose Enters a Hall, Just Not THE Hall, in Skechers' Super Bowl Commercial
J.CREW - J.CREW LOSES 2ND MAJOR EXEC IN 3 WEEKS
NKE - Feds, NFL Grab $19.5M in Sports Fakes
SHLD - Sears cuts 115 jobs in effort to reduce expenses
ROST - Ross Stores Announces Departure Of Doug Baker, President, dd's DISCOUNTS
SHOO - STEVE MADDEN ANNOUNCES ACQUISITION OF BLONDO
EBAY - Michael Kliger to Exit eBay Enterprises
FDO - Report: Family Dollar CEO to sell up to 2 million shares
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
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TICKERS: MPEL, GTECH, CCL
- Feb 2: Cod Manila Grand Opening
- Feb 3: GLPI 4Q CC
- Feb 3: WYNN 4Q CC
- ; pw: 57961245
- Feb 12: MPEL 4Q CC
- (1866) ; pw: MPEL
- Feb 17: MGM 4Q CC
- ; pw: 8870181
Macau – The minister for Social Affairs and Culture in Macau, Alexis Tam Chon Weng restated the government’s determination to ban smoking anywhere in casinos to protect the health of gaming employees and patrons. The Health Bureau (SSM) is aiming to introduce a full smoking ban in casinos. This would mean that that smoking would be prohibited not only on mass gaming floors, but also within VIP rooms. Current smoking lounges would also be forced to close if the bill is approved.
He added that SSM is hoping to finish revising the legislation and to submit it to the Legislative Assembly in the first half of 2015.
According to a govt survey, over 70% of Macau residents back a full smoking ban. The survey also indicates that about 80% of casino workers agree with a full smoking ban that includes VIP rooms; about 85% of surveyed tourists also said that they are not against a full smoking ban.
Mr. Tam revealed that the government met with the executives of casino operators to understand their views on the full smoking ban. Casino companies are hoping that the government will allow them to keep current smoking lounges, like those found in international airports which provide smokers with a separate smoking area. However, the Secretary stressed that the government stands firmly in its plan to implement a full smoking ban, meaning that smoking will be prohibited within the entire premises of casinos’ resorts, and that smoking lounges will therefore not be allowed.
Takeaway: We have warned for months of a possibility of a full-scale smoking ban. It looks like it will become a reality although implementation is not imminent.
MPEL - has announced that it will give all its employees, except managers, a bonus equivalent to one month’s pay. An internal notice also says the company will promote some 1,300 employees or transfer them to its new Studio City casino-resort. The notice says Studio City will employ 9,000 workers when it opens.
Takeaway: At least it's not a 14th month bonus. No doubt labor costs will be higher in 2015.
Donaco Int - Boutique casino operator Donaco International Ltd has agreed to acquire the Star Vegas Resort and Club casino property in Poipet, Cambodia, for a consideration of US$360 million. The deal would be closed by April. Donaco is currently a one-property operator, running the Aristo International casino hotel in Lao Cai, in northern Vietnam.
GTECH - signs $800M term loan; further reduces size of bridge loan for IGT acquisition. Bridge load size now at $4.9B from original $10.7B
CCL (Princess) - A limited-time payday deals offer covers discounts on four cruises popular with UK holidaymakers and has been made available to encourage consumers to book over the next few days after they get paid for the first time in 2015.
Macau – Statistics and Census Service (DSEC) indicated that visitors on package tours totaled 1,190,000 in December 2014, up 35.8% YoY. Package tour visitors from Mainland China surged by 51.5% YoY to 991,000, with 328,000 coming from Guangdong Province, up by 17.4%.
Takeaway: No slowdown in the low-end, family, non-gaming oriented tourists coming to Macau
Singapore fines - The Casino Regulatory Authority (CRA) has taken action against Marina Bay Sands and Resorts World Sentosa for admitting patrons who are not supposed to be in the casinos. MBS was fined a total of S$65,000 for six such instances between July 1 to Dec 1, 2013. The heavier fine of S$45,000 was imposed on MBS because it failed to keep out two persons under exclusion orders from its casino. The remaining S$20,000 penalty is for it allowing four patrons from overstaying their 24-hour entry levies.
Maryland - The Maryland Lottery and Gaming Control Commission unanimously voted Thursday to allow Casino Baltimore and Maryland Live! Casino at Arundel Mills Mall to each reduces their count of slot machines by 300, bringing the number of slots at the Baltimore facility down to 2,200, and the pool of machines at Maryland Live! to 3,922. The reductions will be completed by April 1.
Takeaway: Slot play per property may be topping out at Maryland due to a swarm of new competition lately.
Cuba - Cuba Cruise offers ways for US citizens to cruise to Cuba
Takeaway: Still many restrictions for US cruisers to travel to Cuba but at least cruise lines are thinking about it now.
Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.
Takeaway: European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.
Takeaway: Today we show empirically why valuation should remain a limited-to-negligible part of your intermediate-term macro risk management process.
THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- Consumer Staples Select Sector SPDR Fund (XLP)
- SPDR Gold Shares (GLD)
- iShares U.S. Home Construction ETF (ITB)
- PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
- iShares 20+ Year Treasury Bond ETF (TLT)
- LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV), Healthcare Select Sector SPDR Fund (XLV)
Short Ideas/Underweight Recommendations
- SPDR Barclays High Yield Bond ETF (JNK)
- iShares MSCI Emerging Markets ETF (EEM)
- CurrencyShares Japanese Yen Trust (FXY)
- Industrial Select Sector SPDR Fund (XLI)
- SPDR S&P Regional Banking ETF (KRE)
- SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)
QUANT SIGNALS & RESEARCH CONTEXT
Allocating to Gold on the Pullback: Today we are adding the SPDR Gold Shares (GLD) ETF to the long side of thematic investment conclusions. It’s debut in the top-5 implies that we anticipate better absolute and relative returns than the macro exposure it replaced: Healthcare (XLV). In line with our now-bullish bias on Gold, we are removing iShares TIPS Bond ETF (TIP) from the short side of our thematic investment conclusions altogether.
Our bullish bias on Gold can best be summarized by Keith’s Real-Time Alerts signal at 10:27AM on Tuesday: http://app.hedgeye.com/m/rPM/a0)65Q/buy-signal-gld-124-00.
Going back to the exposure that it replaced, please note that we still anticipate positive absolute and relative returns for the Healthcare sector within the domestic equity market as investors are eventually forced to chase performance. Be it Healthcare, Consumer Staples, Utilities or REITs, the fact that some 85-90% of active managers underperformed their benchmarks last year implies that not enough investors are appropriately allocated to these #Quad4 outperformers.
In our conversations with investors, we often get valuation-based pushback on our bullish bias on the aforementioned sectors. As you probably know by now, valuation plays a very limited-to-negligible role in our tactical asset allocation process. What we are trying to do is isolate those asset classes, regions, countries, sectors and style factors that can do one or both of the following:
- Help you preserve capital over the intermediate term
- Help you generate positive absolute and relative returns over the intermediate term
What we noticed both empirically and through trial and error (see: Keith’s 10yrs on the buy-side), valuation typically does not play much of a role on in managing intermediate-term macro risks anyway.
While we agree that [perceived] market dislocations generally correct themselves over time and that allocating to “cheap” assets tends to provide for the best prospective returns in the strategic asset allocation process, we can’t say we agree with the premise that valuation-based investments are inherently more attractive on shorter durations (e.g. within a year or less).
But don’t just take our word for it. Listen to the market:
The following four charts show the TTM, trailing 6M, trialing 3M and YTD performance for each of the S&P 500 GICS Level 1 Sectors and Level 4 Sub-Industry indices on the respective y-axes. On the x-axes, we show the ex-ante P/NTM E ratio for each index (i.e. the P/NTM E ratio at 12 months ago, 6 months ago, 3 months ago and at the start of the year). We show this on a percentile basis to improve visual clarity. What you’ll quickly note is the positive sloping relationship between ex-ante valuation and performance in each chart.
Cheap gets cheaper and expensive gets more expensive over the intermediate term as, one-by-one, investors who said along the way, “I missed the move” or “I can’t buy/selll ‘em up/down here” are forced to capitulate at higher/lower prices.
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.
The Hedgeye Macro Playbook (1/29)
#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.
The Hedgeye Macro Playbook (1/26)
Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014. 2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.
Best of luck out there,
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 – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.
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