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McCullough: The 5 Best Ways to Be Positioned Right Now

Editor’s Note: Below is an email Hedgeye CEO Keith McCullough sent to Fox Business anchor Maria Bartiromo and her show’s producers last Friday morning before his appearance on “Opening Bell.” Incidentally, one of our biggest recent calls, long Housing (ITB), is up almost 5% versus the S&P 500 since we added it to Investing Ideas on March 4th. Images added.

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This morning it’s back to business with what I think is the best way to be positioned right now:

Long US Dollars (UUP)

McCullough: The 5 Best Ways to Be Positioned Right Now - Dollar cartoon 03.09.2015

Long long-term Treasuries (TLT)

McCullough: The 5 Best Ways to Be Positioned Right Now - 3  yield Godot 07.27.2014

Long US Housing (ITB)

McCullough: The 5 Best Ways to Be Positioned Right Now - House rocket

Long US Consumption and Healthcare stocks (XLY and XLV)

McCullough: The 5 Best Ways to Be Positioned Right Now - Dollar cartoon 03.11.2015

Short Commodities and their related stocks/bonds (OIL and XOP)

McCullough: The 5 Best Ways to Be Positioned Right Now - Oil cartoon 12.09.2014

 

Ultimately this is the long and short of being positioned for our top Global Macro Theme in Q1 of 2015, Global #Deflation (yes, there are plenty of ways to be uber LONG of the bearish theme – because it’s only bearish for those who are long inflation expectations).

 

Lots to talk about including another slow GDP print. Looking forward to being with you,

Keith

 

Keith R. McCullough
Chief Executive Officer


Retail Callouts (3/31): KSS, WMT, TGT, AMZN, Chain Store Sales

Takeaway: KSS health and fitness announcement. WMT Canada removes free shipping. Weekly chain store sales mild as comps get tougher.

COMPANY HIGHLIGHTS

 

To see our note Retail – Our 2015 Quarterly Playbook please CLICK HERE

 

KSS - Kohl’s Delivers New Active and Wellness Solutions to Families Nationwide

(http://phx.corporate-ir.net/phoenix.zhtml?c=60706&p=irol-newsArticle&ID=2030859)

 

Takeaway: KSS put out a fancy press release this morning outlining its new health and fitness initiatives. Most of which the company has been talking about for some time. But, let's keep the new launches in perspective. KSS, like most retailers, adds new brands to its arsenal every year, and it cycles out the unproductive ones. The brands associated with this year's fitness flavor -- Nike, Adidas, Asics -- are much more likely traffic drivers, but they are also brands KSS has carried for years. Yes, the floor allocations will probably march higher as KSS tries to catch up to the competition in its athletic/sportswear offering. But, we think it's important to remember that a) these national brands come in at a lower gross margin, and b) as e-comm becomes a bigger part of the puzzle the need to compete on price and or shipping $ becomes even more important.

 

WMT, TGT, AMZN - Wal-Mart Canada to drop unlimited free shipping as competition eases

(http://www.theglobeandmail.com/report-on-business/wal-mart-canada-set-to-drop-free-shipping-as-competition-eases/article23686662/)

 

Takeaway: 1) This is genius. WMT moved to free shipping in 2013 to compete with the TGT openings in Canada. Now as Target is set to close its final doors in Canada, WMT hikes rates back up because it can. It's what everyone fears (I guess 'everyone' here would refer to regulators) AMZN will do in the US.  2) This is an interesting case study for US retail where the gamesmanship online is just heating up. AMZN has forever set the pace for the industry when it comes to shipping hurdles, but TGT made a market share place by dropping it's free shipping from $50 to $25 earlier this year. We expect more retailers to use this an offensive weapon, forcing the rest of the industry into free shipping and returns all day every day. The interim move to Free Shipping should be felt by the retailers in 2H15.

 

 

WEEKLY RETAIL SALES (ICSC -- 80 General Merchandise Stores)

 

Takeaway: Today we're looking at about 3% growth -- on top of a very easy (sub 1%) week last year.  The important takeaway is that as March comes to a close, sales comps for the rest of the year get very difficult.  Heading into 2Q, growth normalizes – this should be the most ‘normal’ of all the quarters through the year. If you want to see what a company like KSS, M or RL is really capable of, this should be it (we can’t wait). It should also be a quarter where reported earnings growth decelerates by at least 500bp to the high single digits.

Retail Callouts (3/31): KSS, WMT, TGT, AMZN, Chain Store Sales - 3 31 chart2

 

 

OTHER NEWS

 

ICON - Iconix CFO Resignation

(http://www.sec.gov/Archives/edgar/data/857737/000119312515112037/d898611d8k.htm)

 

KER - Puma and FIGC Sign New Deal

(http://wwd.com/business-news/marketing-promotion/puma-figc-sign-new-deal-10104860/)

 

WMT - Wal-Mart Hits Back in Converse Case

(http://wwd.com/business-news/legal/wal-mart-hits-back-in-converse-case-10104330/)

 

GPS - Banana Republic Unveils New-Look Flagship

(http://wwd.com/retail-news/specialty-stores/banana-republic-unveils-new-look-flagship-10102865/)

 

 

 

 


[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015

Takeaway: Domestic equity mutual funds go into net redemption for 2015; Equity ETFs have a banner week.

This note was originally published March 26, 2015 at 08:38 in Financials

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Domestic equity mutual fund flows exhibited accelerating weakness with a -$1.8 billion outflow for the 5 day period ending March 18th.  This now wipes out the slight running year-to-date gain that had marked the first 10 weeks of '15 when including the latest data. In comparison, the first 11 weeks of 2014 totaled a +$15.0 billion inflow displaying the stark differences setting up for domestic equity fund managers this year, with now a -$933 million total for the first 11 weeks of 2015. We continue to flag that shares of T. Rowe Price will bear the brunt of these weak equity domestic fund trends, and the stock remains on our Best Ideas list as a Short/Avoid.  (See our latest TROW research.)

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - chart of the week

 

Another recent theme making itself especially apparent, is favoritism for passive products over active management.  While total equity and bond mutual funds took in +$1.9 billion and +$449 million respectively last week, passive equity ETFs had their biggest week of the year with +$21.9 billion in inflows, and passive bond ETFs took in a healthy +$2.8 billion.  As outlined in our sector exposure table at the bottom of this note, BlackRock (BLK) and Invesco (IVZ) house the most substantial ETF exposure on a revenue basis at 44% and 19% respectively. Repeating last year's behavior, both stocks year-to-date have out performed the S&P asset management index with BLK returning +3.8% and IVZ up +4.2%. The asset management group is down -0.2% thus far in 2015.

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 1

 

In the most recent 5 day period ending March 18th, total equity mutual funds put up net inflows of +$1.95 billion according to the Investment Company Institute, exceeding the year-to-date weekly average inflow of +$1.84 billion and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$3.7 billion and domestic stock fund withdrawals of -$1.8 billion.  International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 15 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up inflows of +$449 million, trailing their year-to-date weekly average inflow of +$2.8 billion and their 2014 average inflow of +$929 million. The inflow was composed of +$259 million of contributions to taxable funds and +$190 million of contributions to tax-free or municipal bond funds.  Munis have had a solid run with subscriptions in 51 of the last 52 weeks.

 

Equity ETFs took in +$21.9 billion, outpacing the year-to-date weekly average inflow of +$2.1 billion and the 2014 weekly average inflow of +$3.2 billion. Fixed income ETFs took in +$2.8 billion, trailing the year-to-date weekly average inflow of +$1.4 billion and the 2014 weekly average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly quarter-to-date average for 1Q 2015:

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 2

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 3

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 4

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 5

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly quarter-to-date average for 1Q 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 7

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 8

 

Sector and Asset Class Weekly ETF and Year-to-Date Results: Sector SPDR flows were mixed last week.  The consumer staples XLP ETF experienced the largest percentage outflow (-4%, -$331 million) while utilities, via the XLU, experienced the largest percentage inflow (+4%, +$238 million).

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 9

 

 

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$20.6 billion spread for the week (+$23.8 billion of total equity inflow net of the +$3.3 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.4 billion (more positive money flow to equities), with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$15.5 billion (negative numbers imply more positive money flow to bonds for the week).

  

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 10

 

Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] ICI Fund Flow Survey | Domestic Equity Flows Go Into Net Redemption for 2015 - ICI 11 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


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Keith's Macro Notebook 3/31: Euro | Oil | Housing

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


LEISURE LETTER (03/31/2015)

TICKERS: SJM, SGMS, PENN

COMPANY NEWS  

SJM - SJM CEO Ambrose So Shu Fai described the government’s latest estimated average monthly gaming gross receipts of 20 billion patacas for this year as “a bit conservative”.  However, he was quick to add he believed that the government was just being cautious.

ARTICLE HERE

 

Thomas Cook Group trading update

  • The UK business continues to trade ahead of last year, with significant bookings growth resulting from robust demand particularly for our Winter Sun holidays 
  • Trading in Continental Europe and Northern Europe, while still tough compared to last year's strong performance, has improved since we reported FQ1 results
  • Demand for holidays to our Concept Hotels is growing, with bookings up by 20% versus prior year
  • Summer 2015 trading is developing satisfactorily, with improving trends seen across most markets since our last update. The season is now 54% sold for the Group as a whole, 2% higher than this time last year.

<chart1>

Takeaway: For the summer season, stronger bookings are seen for this tour operator but pricing is still flattish which we expect is also the case for the cruise lines in Europe. 

 

SGMS - has signed a contract to provide OPAP S.A.("OPAP") with 5,000 video lottery terminals ("VLTs") pursuant to OPAP's10-year license to operate a network of 16,500 VLTs across the country.  Deployment is expected to begin in spring 2015 and conclude by the end of the year.

Takeaway:  30% share is roughly in-line with expectations. Greece has been a long-delayed project. Will it finally get off the ground this year?

 

HELLENIC LOTTERY (OPAP)/SGMS - scratch ticket revenues for the Hellenic Lottery grew 13% QoQ in Q4 2014 to 100m euros while other lottery revenues declined 5% QoQ in Q4 2014.  Total Hellenic lottery revenues grew 7% QoQ to 141m euros. OPAP says "The H2 revenues’ run rate is seen as a normalized trend to be expected in the foreseeable future as well."

Takeaway:  Hellenic Lottery seems to be growing modestly. SGMS (16.5% equity interest in Hellenic Lottery) recorded income of $2.3 million in FY 2014.  SGMS also recognized revenue of $6.3 million from the sale of instant games to Hellenic Lotteries during FY 2014. Operations under the Hellenic Lottery concession agreement commenced in May 2014.

 

PENN - has informed the partners of Endeka Entertainment LP (“Endeka”) of its intent to withdraw from the proposed Lawrence Downs Casino and Racing Resort project. An application by Endeka for the proposed $225 million integrated racing and gaming facility in Lawrence County, Pennsylvania has been pending before the Pennsylvania Gaming Control Board (PGCB) since May 2013.

 

“We are disappointed to be withdrawing from this project,” stated BJ Fair, Chief Development Officer for Penn National Gaming. “However, given the continued softness in the economy and the level of market saturation -- not just in Western Pennsylvania, but across the Commonwealth -- we are regrettably unable to justify this investment at the statutorily required spending levels,” said Fair.

Takeaway: Rifts between PENN and Endeka caused the withdrawal.  In addition, in the trailing 12 months, total casino revenues in Pennsylvania have been flat, which suggests a mature market. 

 

ERI -  will ask state regulators for permission to remove 140 slots as part of a $5 million improvement plan that ERI says will right-size its operations. The reduction will leave Presque Isle with 1,580 slots. ERI also wants to reduce its number of table games from 46 to 42.

Takeaway: Pressure from Cleveland openings.

INDUSTRY NEWS

Macau casino tax budget - The amending budget proposal, which will be voted upon at the Legislative Assembly on Wednesday, includes a 30 percent cut in revenues derived from gambling taxes. According to the proposal, the government expects to cash in MOP84 billion derived from the casino tax revenue. In the budget announced in November 2014, revenue was estimated to be around MOP115 billion. 

ARTICLE HERE

 

Hotel transactions to ebb - hotel investors at the Hunter Hotel Conference said volume levels will be lower than what was seen in 2014.  Sujan S. Patel, managing director at NorthStar Realty Finance Corporation, said his company’s focus will be on smaller-sized deals of $50 million or higher. “There’s a limited arena of big deals,” he said. “This is probably the year of smaller-scale transactions. Clearly, there are groups of people who have built large hotels and some groups might decide to sell them. From NorthStar's perspective, we are certainly not a seller this year. We will be acquiring.”

 

Select service is a particularly sought-after class of hotels. Tyler Morse, CEO of MCR Development, said consumers favor select service because of the lower cost of their stay.  “It’s a great value proposition,” he said. “There’s been a secular shift with consumers from full service to limited service.”

 

An attractive debt environment will continue to help spur deals during 2015. While it is a good time to buy assets, the panelists agreed it is an equally if not more favorable time to sell. 

ARTICLE HERE

 

 

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.


BABA: Solid Pushback → Same Conclusion

Takeaway: Group-buying has come up a few times as a counter to our thesis. Definitely plausible, but points to the same conclusion, if not worse.

KEY POINTS

  1. OUR THESIS: We believe China’s Elite is driving the bulk of BABA’s GMV.  Average spending on the platform is well in excess of what the average Chinese consumer could afford.  In turn, we expect GMV/Active Buyer to decline as a progressively weaker consumer joins the platform, leading to precipitous slowdown in GMV growth, which will pressure its entire model.
  2. GROUP-BUYING COUNTERARGUMENT: One very plausible explanation for BABA’s elevated Average GMV is that often one person is placing orders for multiple people.  However, this would need to occur at a very wide scale to counter our thesis.  If that was the case, then BABA has penetrated a much greater portion of the Chinese population than its reported metrics suggest.
  3. SAME CONCLUSION, IF NOT WORSE: If a new BABA user was already shopping on the platform via someone else's device, then their GMV will be pulled from one device into another, leading to declining average GMV.  What's worse, if the counter is true, that also means BABA's core GMV growth driver moving forward would be wallet share; a challenge since new product expansion may not yield much for BABA (see below for historical context).

 

OUR THESIS 

We believe China’s Elite is driving the bulk of BABA’s GMV.  Average spending on the platform is well in excess of what the average Chinese consumer could afford.  In turn, we expect GMV/Active Buyer to decline as a progressively weaker consumer joins the platform, leading to precipitous deceleration in GMV growth, which will pressure its entire model (see note below for more detail).  

 

BABA: New Best Idea (Short)

02/11/15 11:12 AM EST

[click here

  

On the first point, in the chart below, you can see the distribution of China’s internet users by income (red columns) and what BABA's average GMV would represent as percentage of their incomes (orange columns).  BABA's Average GMV is well in excess of what the average consumer could afford to spend, especially since BABA’s core product offering only caters to roughly 40% of the consumption needs of the average urban consumer (see note below for more detail).

 

BABA: What the Street is Missing

11/26/14 08:03 AM EST

[click here]

 

BABA: Solid Pushback → Same Conclusion - BABA   Avg GMV vs. Internet CY14

 

GROUP-BUYING COUNTERARGUMENT

One very plausible explanation for BABA’s elevated GMV/Active Buyer is that one person is placing orders for a group of people.  For example, one person in rural setting is placing orders for a small village, or one person is placing orders for neighbors in their apartment complex.  Naturally, this would have an inflationary impact on GMV/Active Buyer.  However, this would need to occur at a very wide scale of counter our thesis.  

 

We illustrate this point in the below chart, which is a scenario analysis of what BABA’s actual GMV per active shopper would be at varying level of actual consumer penetration.  Most of the calculated metrics are still in excess of what the average consumer could afford to spend. 

 

However there is a more important point here.  If China’s Elite isn’t driving the bulk of BABA’s GMV, then actual e-commerce penetration is considerably higher than BABA's reported metrics suggest.  

 

BABA: Solid Pushback → Same Conclusion - BABA   Avg GMV scen 2

  

SAME CONCLUSION, IF NOT WORSE

We're expecting new user growth in the form of a weaker consumer will lead to declining Average GMV.  The counterargument would suggest that same.  For example, if a new BABA user was already shopping on the platform via someone else's device, then their GMV will be pulled from one device into another.  

 

However, if the counterargument is true, that also means BABA's core GMV growth driver moving forward would be wallet share (retail moving online) since e-commerce penetration is already much higher than BABA's reported metrics suggest.  

 

As we've stated previously, BABA's wallet share opportunity is debatable, largely because BABA’s core product offering can only cater to roughly 40% of the consumption needs of the average urban consumer.  We realize that BABA will continue to expand into new product categories, but historically that hasn't mattered much.  BABA's core offerings have only grown as a percentage of total online consumption despite product expansion.  

 

That said, we're not suggesting that BABA won't be able to penetrate new product categories.  But just because BABA is offering new products, doesn’t mean that consumer uptake will be widespread.  

 

BABA: Solid Pushback → Same Conclusion - BABA   Urban Per Cap Consumption

BABA: Solid Pushback → Same Conclusion - BABA   E com product share 2 

 

 

Let us know if you have any questions, or would like to discuss in more detail.    

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 


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