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A Novel Idea For The Oversaturated ‘Two And Twenty’ Hedge Fund Community

 

In the Q&A portion of today's Macro Show, Hedgeye CEO Keith McCullough discusses hedge fund positioning in $SPY and proposes a new ‘two and twenty’ for underperforming consensus hedge funds.


March 19, 2015

Hedgeye CEO Keith McCullough breaks down the current Real-Time Alerts positions and answers viewer questions.

 


Keith's Macro Notebook 3/19: USD | Oil | UST 10YR

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


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Retail Callouts (3/19): TGT, KSS, WMT, WSM, RH, GES, JCP

Takeaway: TGT raising minimum wage, 20% of industry now at $9/hr, others (KSS, JCP, etc.) have to follow. The only chart that matters on WSM/RH.

EVENTS TO WATCH

Retail Callouts (3/19): TGT, KSS, WMT, WSM, RH, GES, JCP - 3 17 chart2

 

 

COMPANY HIGHLIGHTS

 

TGT- Target to lift minimum wage to $9 an hour, matching rivals

(http://www.reuters.com/article/2015/03/18/us-target-wages-idUSKBN0ME2Q020150318)

 

Takeaway: The average workforce in the retail trade during 2014 was 15.4mm workers according to the BLS. If we take that a step further and look at only those employees who work in stores who sell categories where TGT and WMT compete (the Food & Beverage, Health/Personal Care, Clothing, and General Merchandise sectors) we get to 8.5mm employees. That means that between the two retailers about 20% of the employees in that space will now be making a minimum of $9/hour (WMT employs 1.4mm people in the US, TGT just north of 300k). If retailers like KSS and JCP don't think that the changes enacted by two of the top three retailers in the US will have an effect, then they are flat out in denial.

Here is how we are doing the math on the cost per employee based on what WMT disclosed during its 4Q call. The total number of employees it affects equals 500,000 which translates to a $0.20 EPS hit. Gross that up and it comes to $934mm, just shy of the $1bil McMillon called out in the press release. Per employee cost of $1,869.

If we then extrapolate that to the respective US workforces we get to a $0.50 hit to TGT and a $0.62 hit to KSS. At $1000 per employee the math works out to $0.30 and $0.33 for TGT and KSS respectively. That's a big pill to swallow for a group of zero square footage growth retailers with few levers to pull in order to offset inflated workforce cost pressures.

 Retail Callouts (3/19): TGT, KSS, WMT, WSM, RH, GES, JCP - 3 19 chart5

 

 

WSM, RH - For our full note WSM/RH - The Only Chart That Matters CLICK HERE


Retail Callouts (3/19): TGT, KSS, WMT, WSM, RH, GES, JCP - WSM RH comp 2

Retail Callouts (3/19): TGT, KSS, WMT, WSM, RH, GES, JCP - 3 19 chart3

 

 

OTHER NEWS

 

GES - 4Q15 Earnings

Retail Callouts (3/19): TGT, KSS, WMT, WSM, RH, GES, JCP - 3 19 chart4

 

JCP - Kent B. Foster to Retire from JCPenney Board of Directors

(http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-newsCompanyArticle&ID=2026834)

 

TGT - Target's Data Breach Settlement Could Pay Victims $10,000 Each

(http://gizmodo.com/targets-data-breach-settlement-could-pay-victims-10-00-1692327242)

 

TGT - Target unveils one-year return policy for exclusive brands

(http://www.chainstoreage.com/article/target-unveils-one-year-return-policy-exclusive-brands)

 

JCP - J.C. Penney Promotes John Tighe and Siiri Dougherty

(http://wwd.com/retail-news/human-resources/j-c-penney-promotes-john-tighe-and-siiri-dougherty-10098959/)

 

J. Crew Sets Out for ‘Women’s Fix’

(http://wwd.com/retail-news/specialty-stores/j-crew-sets-out-for-womens-fix-10098849/)

 

KER - Roberto Vedovotto Joins Kering Executive Committee

(http://wwd.com/business-news/human-resources/roberto-vedovotto-kering-executive-committee-10098977/)


LEISURE LETTER (03/19/2015)

Tickers: IGT, H, RCL, CCL, NCLH

EVENTS

  • March 16-19: Cruise Shipping Miami Conference
  • March 26: Macau Legend 4Q CC

HEADLINE NEWS

CCL/MSC - Nine MSC Splendida passengers are reported killed in the terrorist attack at Tunis' Bardo Museum, while 12 were injured and six are still unaccounted for, MSC Cruises said. MSC said sources indicated the dead include three Japanese, two French, two Spaniards and two Colombians.

 

Meanwhile, Costa Fascinosa sailed at 1:55 a.m. with 13 passengers still unaccounted for, Costa said.  Costa has canceled all its upcoming stops in Tunisian ports following the attack at the Bardo museum in Tunis.

ARTICLE HERE

Takeaway:  Tunisia incident will disrupt itineraries as well as pressure pricing/bookings in north Africa. 

COMPANY NEWS  

Bloomberry - For FY 2014, Solaire reported GGR of PHP 30.39 billion, net gaming revenue of PHP 22.85 billion and EBITDA of PHP 10.08 billion.

Takeaway:  Using 4Q 2014 EBITDA as the run rate, EBITDA is trending US$276m yearly. Not bad considering the investment cost of US$1 billion. EBITDA margins also reached 44% in 2014. While it may take a year or so for CoD Manila to ramp up including the junkets, the low tax rate is encouraging for margins and junket appeal.

 

IGT -  won a deal for nearly 50% of the $3.5 billion Baha Mar resort’s slot floor or 500 slots. IGT will also deploy its sbX Floor Manager system at the Bahamas casino, which is set to open later this month.  The 100,000-square foot gaming floor will include IGT products such as Wheel of Fortune and the new S3000 spinning wheel cabinet.
ARTICLE HERE

 

China LotSynergy - had record high VLT revenues, with steady sales in the Guangdong Welfare Lottery and significant growth in Chongqing based on additional VLT rollouts. Revenues of 37.75 billion (rem) resulted in a 9.9% market share, a new high. All of its nearly 38,000 VLTs in service were replaced with third-generation units. China LotSynergy remains committed to bringing VLT to new heights in China as the market still has plenty of growth potential. 

 

RCL/CCL/NCLH: Cruise shipping Miami Day 2 tidbits and other news 

  • MSC will make the Chinese market even more competitive when it introduces one of its new ships there, which could happen as soon as 2017. 
  • MSC entered into a joint venture with China’s largest port operator, Shanghai International Port Group.  The Shanghai entity was the first joint venture travel agency to enter Shanghai’s pilot free trade zone last year. MSC said, “We’re very pleased and proud to have been granted a license (via the free trade zone) to sell outbound travel packages. Only four non-Chinese companies in China have been granted such a license, which creates opportunities to develop and diversify our business in China. We aim to customize our cruise product for clients with requests that cannot be met through the standard trade or tourism market. In the future, we might also use it for other projects, such as themed activities, inbound cruises, charters and more. ”
  • AIDA: With the European market nearing record capacity levels once again, the debut of the second AIDA prima-class new build from Mitsubishi in 2016 could see a further footprint for AIDA in Asia. Could they base this new ship in China?
  • Canada/New England traffic, especially to Atlantic Canada, is down slightly from 2014 to 2015, continuing a bigger drop from 2013 to 2014.

    Hyatt - is interested in the J.W. Marriott Grosvenor House Hotel in London up for sale for £500 million. A spokeswoman for Hyatt said the company "is currently focused on careful expansion in European gateway cities and hopes to open a Park Hyatt in London in the future." 

    Takeaway: M&A has been hot in London.

    INDUSTRY NEWS

    South Korea - posted its ninth consecutive YoY sales growth. But the rate of growth in gambling-related sales has continued to be sluggish at 1% – a trend that started in 2013 – the government confirmed. Total industry sales in 2014 were KRW19.87 trillion (US$17.64 billion), from KRW19.67 trillion  the year before, the government said according to the country’s Yonhap news agency.

     

    During 2014 revenue generated by Kangwon Land (pictured), the only local casino open to South Korean nationals, jumped 10% YoY to KRW1.4 trillion. Revenue at foreigners-only casinos increased 0.3% to KRW1.36 trillion, Yonhap additionally reported.

     

    In 2014, South Korea’s sales of tickets for licensed lotteries and sales for licensed sports betting exceeded KRW3.28 trillion won in each case, up 1.4% and 6.5% respectively from the year before.

    Takeaway: More evidence that it doesn't make sense to invest in S Korea unless locals are allowed.

    MACRO

    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.


    A Man Larger Than The Sun

    This note was originally published at 8am on March 05, 2015 for Hedgeye subscribers.

    “At rest, however, in the middle of everything is the sun.”

    -Nicolaus Copernicus

     

    On this day of in 1616, the Catholic Church banned Copernicus’ book. The establishment’s main issue with the man’s independent research (which correctly implied that the sun was at the center of the universe) was that it didn’t sync with their ideologies and politics.

     

    Today will go down as one more day in central planning history where an unelected man of the mainstream will boil the oceans and part the heavens, raising stock markets to heights the world has never seen before.

     

    That man, who sees himself residing in the middle of everything, is Mario Draghi…

    A Man Larger Than The Sun - Draghi balloon cartoon 01.23.2015

     

    Back to the Global Macro Grind

     

    You go, Mr. Central Planning man. You go. You are the power and the light – you are the only one who can keep the Italian stock market up while its economy is in recession. Only you, the great Draghi, can see 0% improvement in Greek unemployment as Italian stocks move to +16.5% YTD.

     

    While this is turning into a joke, the actual data fits what I just wrote:

     

    1. Italy’s GDP for Q4 of 2014 was -0.5% y/y (revised lower vs. the prior -0.3%)
    2. Greek Unemployment rose to 26.0% in DEC from 25.9% in NOV

     

    Oh, right - the latest central planning of European stock markets didn’t really ramp until JAN, so I’m sure Greek government work is booming now and these structural debt, deflation, and unemployment problems all went away as a result…

     

    And then there was moarrr #Deflation

     

    Remember that, perversely, moarrr cowbell from Draghi = moarrr #StrongDollar driven #Deflation:

     

    1. Cowbell = Centrally Planned Currency Devaluation
    2. EUR/USD is getting smoked to -8% YTD and multi-yr lows of $1.10 ahead of Draghi’s latest (830AM EST)
    3. US Dollar Index is rocketing to $96.21 on that, +6% YTD and +21% from its 2014 lows!
    4. Commodities (CRB) Index (19 Commodities which largely trade in Dollars) continues to crash -28% y/y
    5. Oh, and WTI Oil, which you could have chased at $105 at this time last year, has crashed > 50% since

     

    So we definitely need to have Bloomberg and CNBC cheer on more of this. Access to these Sun-smoothers drives ad revs. #clicks

     

    Put another way, until either the Europeans and/or Japanese fail outright (i.e. when their people figure out this does jack for the economy, but keeps getting the bureaucrats and Eurocrats (and their all-access media) paid), this #StrongDollar + Down Rates #Deflation will continue.

     

    Not to be confused with #StrongDollar + #RatesRising (our call on the US in 2013), the Down Rates (both locally and globally) part is critical to contextualize, in global growth expectations terms.

     

    It’s obviously one thing to obfuscate Policies To Inflate with real-economic growth – but it’s entirely another to have neither inflation, nor growth. Japan (for the last decade), and Europe currently, that is …

     

    At least in the USA we get to get paid owning all of the asset allocations and sector style exposures to this 17th century gong show of the vanities. We signaled doing more of the pure play on US domestic consumption #accelerating yesterday in Real-Time Alerts (buy Housing, ITB, on red!).

     

    To review what we like during Global #Deflation:

     

    1. US Dollars (that’s our entire FX allocation, and it’s beating both US stocks and bonds YTD by a factor of 3)
    2. Long-duration-low-volatility Bonds
    3. US Housing (ITB), Consumer Discretionary (XLY), and Healthcare Stocks (XLV)

     

    And what we really don’t like:

     

    1. Burning Euros and Yens
    2. Commodities
    3. Stocks and bonds that have the most #Deflation risk (energy and the financials)

     

    Our Global Macro view is not that complicated. It is how you play Global #Deflation and #GrowthSlowing, while the US economy gets it’s “easy compare” Q1 sequential growth bounce (see Theme #2 @Hedgeye called #Quad414 for details).

     

    And while it has been fun to be bullish on the Weimar Nikkei (in Burning Yen terms), which is handily beating US stocks and bonds YTD at +7.5%, that’s really just a rolling of the bones that can go bust whenever this epic human experiment in trying to bend gravity and the sun does.

     

    Our immediate-term Global Macro Risk Ranges are now (intermediate-term TREND view in brackets):

     

    UST 10yr Yield 1.89-2.17% (bearish)
    SPX 2083-2117 (bullish)
    Nikkei 18409-18998 (bullish)
    USD 95.01-96.28 (bullish)
    EUR/USD 1.10-1.12 (bearish)
    YEN 118.67-120.66 (bearish)
    Oil (WTI) 48.22-52.16 (bearish)

     

    Best of luck out there today,

    KM

     

    Keith R. McCullough
    Chief Executive Officer

     

    A Man Larger Than The Sun - 03.05.15 chart


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