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The Tax Man Cometh

“The avoidance of taxes is the only intellectual pursuit that still carries any reward.”

-John Maynard Keynes

 

If any of you are like me, you hate paying taxes.  Admittedly, I’m just a lowly sell side Director of Research, so I don’t make nearly as much money as many of you Masters of the Universe. That said, paying taxes every year still feels punitive.

 

Sure, I get the patriotic component of paying your taxes (even though I’m technically Canadian), and certainly we all do have an obligation to help those who are less off in our society.  But the fact remains: our tax bill every year is astonishingly high.

 

In fact, in their most recent projections, the Congressional Budget Office projects that more than $2.6 trillion, or 80%, of the projected revenue for the federal government will come from the combination of individual income taxes and payroll taxes.  On the other hand, corporations will contribute a paltry $328 billion to the annual revenue of the Federal government.

 

The bigger question is how all of this hard earned money is being spent.  As a percentage of the projected 2015 Federal government outlays, the largest buckets are:

  • Medicare and Medicaid – 26%;
  • Social Security – 24%;
  • Discretionary defense – 16%; and
  • Interest – 6%

Incidentally, the deficit in 2015 is expected to be an additional -$468 billion and projected to grow to - $1.1 trillion by 2025.  So if you want a long term reason why interests will be somewhat capped in the United States, it’s simply that the U.S. government can’t afford to pay high rates on the $7.6 trillion in debt it is going to have to borrow over the next decade to fund the federal budget.

 

Of course there is an alternative. The government could just raise our taxes and not borrow so much . . .

 

Back to the Global Macro Grind...

 

Now, inasmuch as we all wish to pay lower taxes and had more discretionary income, not all alternatives are that compelling.  In fact, our system is pretty good.  If this were a communist system, the government could just take all of our money! Speaking of which, China reported GDP numbers last night for Q1.

 

The Tax Man Cometh - China cartoon 04.14.2014

 

In today's Chart of the Day, we highlight Chinese GDP growth going back five years by quarterly y-o-y growth.  As you can see, this is the slowest growth in that time period. The direction is very clearly that of a long term deceleration mode.

 

This point was reiterated in the post release press conference (yes, even Communists have pressers!) as a National Bureau of Statistics official made the following comments:

  • Important to keep property market steady;
  • Economy likely to remain under pressure in Q2 as destocking, clearing over capacity could take time; and
  • Prioritize stable growth, jobs and profitability.

Actually, it sounds like almost the perfect economy! Although there is no word on whether anyone asked at the press conference how rail traffic in China could be down 9% year-over-year in Q1 and GDP be up 7%. But far be it for us to focus too much on the details.

 

Over in Europe, there was also some not-so-shocking news... The ECB left rates, gasp, unchanged!  Draghi is set to have a presser of his own at 8:30am ET and while he may get tougher questions than the Chinese official did during their GDP press conference, we can be fairly certain his dovish tone is unlikely to change.  

 

If you don’t believe us on the likelihood of a continued dovish tone, then just look at the data. Germany’s March CPI came in at a final number of +0.3% and the EU came in at +0.1%.  Clearly, Draghi has a lot of data cover to continue incinerating the Euro and implement his QE program.

 

The more interesting pin action in Europe relates to the heightened and continued rhetoric over potential for a Greece default.   The Germans are leaking that they likely won’t approve an April transfer to Greece and the Greek Prime Minister is apparently headed to Washington where he will, among other things, meet with a sovereign debt / bankruptcy lawyer from Clearly Gottlieb.  This is starting to get interesting!  But don’t worry, a Greek default will be completely contained . . .

 

Finally, a recent survey from Bank of America highlighted the strongest case we’ve noticed in a while for the bond and equity bull markets to continue.  According to the survey, four in five managers think the bond market is overvalued, which is the highest proportion ever.  In addition, a quarter thought equities were overvalued, the highest since 2000.

 

It reminds of the quote from Sir John Templeton:

 

“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

 

Indeed.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.85-1.96%

SPX 2080-2110
VIX 12.66-16.01
YEN 118.81-120.98
Oil (WTI) 48.65-54.28

Gold 1182-1219

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Tax Man Cometh - 04.15.15 chart


April 15, 2015

April 15, 2015 - Slide1

 

BULLISH TRENDS

April 15, 2015 - Slide2

April 15, 2015 - Slide3

April 15, 2015 - Slide4

April 15, 2015 - Slide5

April 15, 2015 - Slide6

 

BEARISH TRENDS

April 15, 2015 - Slide7

April 15, 2015 - Slide8

April 15, 2015 - Slide9

April 15, 2015 - Slide10

April 15, 2015 - Slide11
April 15, 2015 - Slide12

April 15, 2015 - Slide13

 


DKS - Exceedingly Mediocre

Takeaway: This story defines ‘uninspiring’. But expectations are finally at a level where it won’t define ‘disappointing’.

This DKS Analyst day was a slight net positive as it relates to our view on the stock. To be clear, we headed into this meeting with a short bias as we thought growth and profitability expectations were too high – which concerned us at an 18x multiple and a 17% run year-to-date (39% since Oct). We still think that there are cyclical challenges as DKS grows into more competitive geographic markets as its model matures, and the only growth in the financial model comes from a margin-dilutive channel where DKS structurally has a permanently weaker competitive edge (online). 

 

That said, consider the following:  1) the company finally took down its store growth targets to a realistic level (our math had always said that over 800 stores without a big hit to profitability was a pipe dream), 2) it issued long-term comp guidance of a mere 2-3% -- when e-commerce growth alone accounts for 2-3% (i.e. it’s guiding for store comps to be flat to down), and 3) it guided to 110bp in margin improvement over 3-years. Though e-commerce is margin dilutive, our math suggests that the net effect of the weakness in golf and hunting alone hurt margins last year by about 100bp, which is obfuscated in the company’s disclosure.

 

We can beat the company up all day about how its current view of 2017 is so much weaker today than at its last meeting in 2013 (’17 revenue now $8.8bn vs prior $10bn, and margins 9.2% vs 10.5%) but that’s water under the bridge at this point. Does valuation make sense here? No. But it doesn’t make sense for most other maturing big box retailers, either. What we can say is that this is the first time in a while where we actually have a decent degree of confidence that DKS won’t miss.

 

Don’t mistake this as us getting behind the story. But we’re not leaning on it anymore, either.

 

 


Early Look

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ZOES: Adding Zoe's Kitchen to Investing Ideas

Takeaway: We are adding ZOES to Investing Ideas.

We are adding Zoe's Kitchen to Investing Ideas today. Please see note below from Hedgeye CEO Keith McCullough. Our Restaurants Sector Head Howard Penney will provide an additional update this weekend.

 

ZOES: Adding Zoe's Kitchen to Investing Ideas - 111

 

Howard Penney recently added ZOES to his Best Ideas list on the Institutional Research side.

 

After coming down hard on NDLS, CHUY, PBPB, DFRG and SHAK over the past year, it’s probably apparent that we have a strong bias against “high growth” restaurant companies that have recently come public. 

 

Rest assured this bias has not detracted from our research process.  In fact, this prior work in the small cap restaurant field has allowed us to identify a company that we believe is distinctly different from the rest. 

 

We like ZOES on the long side for many reasons, including its:

  • Management philosophy and execution
  • Unit opening geographic profile
  • Early-stage average unit volumes and returns

And it's signaling immediate-term TRADE oversold today within our bullish TREND and TAIL research views.

 

KM


REPLAY | Germany: Still Bullish

Earlier today Hedgeye’s European analyst Matthew Hedrick led a discussion on why we are still bullish on the German equity market.

 

Watch the for a video replay below.

 

Key take-ways from the call include:

  • QE is only just beginning; the euro will continue to weaken; Germany will disproportionately benefit due to exports; and asset classes like equities will inflate due to money creation
  • The German economy sits in the sweet spot to benefit from a weaker euro as its exports account for a monster 47% of German GDP
  • Since the ECB announced QE on 1/22/15 the correlation between the DAX and EUR/USD is -0.84, a strong negative correlation that we expect to persist as the ECB keeps its foot on the QE pedal for longer than its intended target (late 2016)
  • Recommending long the DAX (HEWG or EWG) and short EUR/USD (FXE)

REPLAY | Germany: Still Bullish - 1. GER

REPLAY | Germany: Still Bullish - 2. GER

REPLAY | Germany: Still Bullish - 3. GER


Cartoon of the Day: Beijing Bubble?

Cartoon of the Day: Beijing Bubble? - China cartoon 04.14.2014

"According to a Bloomberg report," Hedgeye's Daryl Jones wrote in today's Morning Newsletter, "margin debt in China, when adjusting for the relative size of the markets, is double that of the NYSE. With the Shanghai Composite trading at 20x earnings and GDP slowing, that is a tad disconcerting."

 


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