Here is the replay of today's edition of RTA Live.
Here is the replay of today's edition of RTA Live.
Takeaway: Not the beat a $75 stock expected.
The headline beat does not mean much here, particularly given that the print is below where estimates were before it guided down in February. The key here is that the prevailing view over the past quarter has been that the KSS story is bullet proof. The company had just printed a 3.7% comp in 4Q, and people could not tell how much was easy comps, gas, or a structural change in the company’s model (new brands, beauty, rewards program). Management had an extremely active NDR schedule both on the road and at KSS HQ – where it seemed to perpetuate that the company was on the right path. Then the latest data from some of the more widely used services as well as commentary from its top competitor (JCP) all pointed toward comps of 4%+.
But here’s what we got…
We still think that EPS will steadily march below $3.00 – at a time when consensus numbers are going over $6.00. There’ll be ebbs and flows by quarter, but overall we think this one will serve as an appropriate reminder when people are tempted to get bulled up on KSS’ multiple anytime in the future.
The Euro is up +0.6% to $1.14 - two points here: A) the immediate-term risk range is now tightening and B) weak U.S. economic data is Dollar bearish, Euro bullish – is there a case for Euro 1.18-1.19 into the next Fed meeting? Yes – we’re starting to think that’s probable.
Oil would absolutely love EUR/USD $1.19 – we can get you to $71 WTI on that, so it’s a risk management scenario to consider ahead of a bearish U.S. GDP report on May 29th and the potential for another slowing U.S. jobs report on June 5th (FOMC = June 17th).
The best sector to be short on the fundamental news yesterday was Consumer Discretionary and earlier this week we signaled SELL on U.S. Retail (XRT) too – Euro up (Dollar Down) + Oil up + tough U.S. consumption comps + labor cycle rollover.
|FIXED INCOME||27%||INTL CURRENCIES||2%|
One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). The highly anticipated Non-Farm Payrolls report came and went Friday, and it was largely a non-event. The change in non-farm payrolls was +223K vs. consensus estimates of +228K for April. Considering last month’s report was a bomb (revised to 85K from 126K), April had an easy comp. Our thesis on interest rates remains lower-for-longer, but that view is being tested in the short-term.
iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. It was a relatively light data week for housing with weekly mortgage application data and the March employment report offering incremental updates on the current state of housing demand. On the market side, interest rate volatility remained a concern for the public homebuilders but one we believe remains shorter-term in nature absent another expedited, step function increase in interest rates. We think the rate related pressure will be largely transient unless we see a further back-up in mortgage rates on the order of +50-100bps from here – a potentiality we would not view as probable at this point. On the fundamental side, the drumbeat of improvement remains ongoing.
The U.S. dollar has gone on a big reversal since the Fed’s March 18th meeting. Since the meeting, the dollar has moved lower and rates higher. This short-term move in rates has caused confusion with respect to our lower for longer call. Put simply, we have been wrong on the direction of our four macro tickers in the newsletter. A continuation of this trend will force us to re-evaluate the longer term call.
The Macro Show, Live @ 8:30AM ET https://app.hedgeye.com/insights/44089-the-macro-show-live-with-keith-mccullough-today-8-30am-et… via @hedgeye
The trouble with not having a goal is that you can spend your life running up and down the field and never score.
Americans paid over $44 billion more in taxes during this year's filing than they did in 2014, according to the Congressional Budget Office. Meanwhile, income-tax refunds stayed relatively flat, at $202 billion.
This note was originally published at 8am on April 30, 2015 for Hedgeye subscribers.
“Confusion now hath made his masterpiece!”
Oh boy, are macro markets confused by the collision of central plans now!
Shakespeare fans will remember the aforementioned quote from Act II (Scene 3) of Macbeth. It’s a great metaphor to use in answering the question I get from most long-term risk managers: “How does this all end?”
While it would be reckless to predict precisely how it ends, I have a pretty good idea how the beginning of the end looks – confusing. Confusion in the timing of central planning breeds contempt. And that perpetuates volatility which, in due course, crushes confidence.
Back to the Global Macro Grind…
How confident are you in explaining how rates can ramp to the top-end of their respective ranges as the US Dollar goes straight down? In rate of change terms, German Bund Yields doubled in 48 hours! Irrespective of what the Fed said, did that have anything to do with the US move in rates? Big time.
Was the rates move linked to the currency and commodity move (Down Dollar = Up Oil, Energy Stocks)? I don’t think so. The FX (foreign currency) market move and Global Rates moves went in the opposite direction of what most correlation models would have predicted. #Fun? Not.
But isn’t this what we’ve all signed off on? Wasn’t central planning of markets supposed to be a “smoothing” exercise whereby all of us “smart” people could make linear-assumptions to drum up macro correlation models for all of our asset allocations and bonuses?
Let’s get real here. Macro markets just did.
Setting aside the non-linear-multi-standard-deviation-move in both German Bund Yields and the European Currency for a minute, let’s bring this discussion back to the USA and what the Federal Reserve said yesterday:
That last point isn’t a joke (neither are paraphrasing points 1 and 2). The Fed has effectively reduced the timing of its first rate hike to the most lagging of #LateCycle economic indicators. And now you literally have to guess what the next jobs number is going to be.
Since my research team cannot predict an un-predictable number (we’ve tried to build models to front-run BLS Labor report data and, trust me, I’d have a prediction if there was a repeatable #process to be accurate with one), guessing is the only option.
Confused yet? You should be. Much like the March 18th Fed decision on “to, or not to, be lower on rates for longer” the May 8th jobs report is a binary event:
A) Jobs report “beats” useless forecasts of lagging indicator = Dollar Up, Rates Up, Oil Down (hard)
B) Jobs report “misses” useless forecasts of lagging indicator = Dollar Down, Rates Down, Oil To Infinity And Beyond
“So”, as my hedge fund friends in Chicago would say, place your bets!
Oh, did I mention that this is only a 6-7 day trading bet? Dammit this is getting good! Not only do we have to now day-trade US monetary policy based on best-guesses, but we have to completely ignore this longer-term thing called the cycle, at the same time.
What happens if the June and/or July jobs reports are bad? What happens if the May report is bad? I can tell you one thing – the entirety of Old Wall Consensus isn’t predicting anything bad – every question I get on rates has to do with ‘what if it’s good?’
There is nothing good about confusion in macro market correlations when volatility accelerates. There is no risk management #process in guessing either. So I’m selling in May and getting the heck out of the way. For now, going to cash beats confusion.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.84-2.06%
Oil (WTI) 52.96-59.69
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
SHAK is on the Hedgeye Best Ideas list as a SHORT.
Last night SHAK posted impressive 1Q15 earnings $0.07 above-consensus 1Q15 EPS of $0.04 on same store sales of +11.7% vs consensus' +5.1%. In the release management raised full-year same-store sales guidance to "low-to-mid single digits" vs. prior "low-single-digits." Our bearish view is that the market is placing too much value on SHAK's differentiated burger concept.
The better than expected 1Q15 EPS was driven by:
Management Increased 2015 guidance following 1Q15 results:
Based on the guidance management provided, we believe they are either 1) being less than genuine or 2) don’t know the tone of the business going forward. The most visible place of uncertainty is in same-store sales guidance. In the model for the balance of 2015, we are assuming +6% price and +2% mix good for 8% same-store sales growth over the balance of the year. This would result in 2015 same-store sales in the high single digit range versus guidance of low-to-mid single digits. Baked into management’s assumptions is significant cannibalization from the reopening of the flagship store in NYC.
While the 1Q15 earnings release was very strong the valuation the market is awarding SHAK is mindboggling! If we model out $40 million in EBITDA in 2016 (which is nearly double the current street estimate of $22 million) and put 30x on it the stock is worth $32 or 52% down side. If we value the company closer to CMG the downside approaches 75% from current levels.
Editor's Note: The chart and brief blurb below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. It costs $1 a day to subscribe. Learn more and subscribe here.
On the road yesterday in Boston, Darius Dale and I were spending a lot of time on risk managing the short-term within our longer-term view. That can be summarized in a picture (slide 52 of our Q2 Macro Themes deck) as follows:
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