McCullough: Trade the Market Using Math, Not Magic

Hedgeye CEO Keith McCullough talks about making moves in this volatile environment. After buying U.S. equities following the FOMC decision yesterday, it might be time to sell some (according to our math, not our crystal ball).

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.

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.


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





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



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





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



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



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



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



J. Crew Sets Out for ‘Women’s Fix’



KER - Roberto Vedovotto Joins Kering Executive Committee


LEISURE LETTER (03/19/2015)

Tickers: IGT, H, RCL, CCL, NCLH


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


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.


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


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.


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.


    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.


    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.

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