Stirring The Masses

“The men who have changed the world never succeeded by winning over the powerful, but by stirring the masses.”

-Napoleon Bonaparte


Like all of us, Napoleon obviously had his issues. Unlike most of us, he changed part of the world at a time when it needed changing.


In 1799, France was littered with a political elite (The “Directory”) that plundered its People with a Policy To Inflate. Most British historians of the Napoleonic era missed that part. That’s because they were writing from their own aristocratic perspective.


Ah, the historical perspective. If you want to stir the masses in America like JFK or Reagan did (or like Thatcher did in the UK), promote the truth about a #StrongCurrency. It ensures the purchasing power of the many, at the expense of the political few.


Back to the Global Macro Grind

Stirring The Masses - Draghi 09.04.2014


If only because the Eurocrats were Burning Euros yesterday, it was a great day for Americans who don’t get paid by the edifice of asset price inflation. On a US Dollar +1.1% day (EUR/USD was -1.5% at one point):


  1. The CRB Commodities Index (19 commodities) deflated -1.9%
  2. Oil (WTI) got tagged for a -3.7% loss on the day
  3. Coffee and Corn dropped -2.3% and -1.6% in price, respectively


I’m not sure what part of the world you grew up in, but I can tell you that crushing a long-term inflation expectations bubble in food and gas prices would go over quite well in my Canadian stomping grounds.


It wouldn’t go over particularly well in parts of Texas or Alberta, however:


  1. Oil & Gas Stocks (XOP) led losers at -2.9% on the day
  2. Energy Stocks at large (XLE) weren’t far behind at -1.4% (in a flat US equity market)
  3. Oh, and Russian stocks (RSX) dropped -2.3% too


Futhermore, I can’t for the life of me find the part in the Federal Reserve Act of 1913 that states that un-elected-US-linear-economists shall be tasked with upholding levered Energy Junk Bonds and/or “international earnings” from SP500 cohort companies…


In other words, never did so many do so well yesterday, at the expense of the few.


Sadly, this too shall probably pass as the Federal Reserve boxes itself in a corner at this stage of what we have been calling #LateCycle in the US economy – and that’s devalue the Dollar as both US consumption and labor cycles slow.


As a reminder, here are your immediate-term Macro Calendar Catalysts for a resumed Down Dollar correction:


  1. May 29th – ugly headline Q1 2015 GDP report will keep political pressure on the Fed to push out the dots
  2. June 5th – watch out for the cycle on the labor front; especially if we get the 2nd bad jobs report in the last 3
  3. June 17th – Fed Day in America (FOMC meeting); sleep in until 9AM and just buy everything


If the European, Japanese, and Chinese central planners don’t come out and devalue, daily, that is…


Looking for immediate-term risk management levels on that?


  1. US Dollar Index immediate-term TRADE overbought at 96.02 with no support to 92.82
  2. EUR/USD immediate-term TRADE oversold at $1.10 with no resistance to $1.14
  3. CRB Index immediate-term TRADE oversold at 224 with no resistance to 234
  4. Oil (WTI) immediate-term TRADE oversold at $56.14 with no resistance to $61.37
  5. Gold immediate-term TRADE oversold at $1200 with no resistance to $1239


That’s just the immediate-term though – and if you’re paid to not risk manage that duration (or take advantage of the opportunities it presents), no worries – you probably aren’t reading this anyway.  


From a long-term TAIL risk perspective, the onus is definitely on the Europeans (and Japanese) to prove that they aren’t who we think they are – some version of what Napoleon crushed over 200 years ago.


But, other than Warren, who in this business is really allowed to stir the masses with long-term leadership views and skip over everything that could happen until June 17th? I’m not. So, for now, I’ll take our asset allocation to Commodities to its YTD high of 10%.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are as follows:


UST 10yr Yield 1.97-2.32% (bearish)

SPX 2105-2140 (bullish)
RUT 1 (bullish)
DAX 118 (bullish)
VIX 11.91-14.98 (bullish)
USD 92.82-95.92 (neutral)
EUR/USD 1.10-1.14 (neutral)
YEN 118.91-120.99 (bearish)
Oil (WTI) 56.14-61.37 (bullish)

Natural Gas 2.79-3.11 (bullish)

Gold 1 (bullish)
Copper 2.78-2.91 (neutral)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stirring The Masses - Chart of the Day

May 20, 2015

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The Macro Show Replay | May 20, 2015


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DKS - Not Half Bad

Takeaway: Something that is ‘not half bad’ is hardly our benchmark for an investable idea. But it definitely gets interesting on sell-offs like today.

At face value, a company putting up 9% revenue growth and de-levering to 4% EBIT growth and 7% EPS growth is nothing to write home about. But in this tape, where we’re seeing retailers across the board show weakness on the top line, lower margins, higher inventories, and in many cases, earnings below last year, we think the DKS 1Q15 print was actually not half bad. Something that is ‘not half bad’ is hardly our benchmark for an investable idea. But for the most part, the print was in-line with what the company outlined at its analyst event just one month ago.


Taking a step back, we’d been perennial bears on DKS, but after digesting the content from the investor day we turned much more constructive on the DKS story. It’s not one of our top ideas (at this price), but this is perhaps the first time in many years that DKS set the bar for long-term growth and margin expansion at a level that is beatable. There was absolutely nothing that came from the print today that changes this view.


Clearly, people were not happy with the fact that the comp came in below the top end of the guided range (a whopping +1%), as well as the company’s posturing that it will be tough to recapture the margin lost when the golf/hunt categories collapsed last year.  We’re less concerned than DKS is leading the investment community to be on the Gross Margin issue.


Specifically, Golf and Hunt combined accounted for about 30% of total sales, which were collectively down last year by 10-15%. The company suggested that this cost about 40-50bp in margin, but we disagree. The incremental margin on this lost business won’t be a simple 10-15%, but rather something closer to 30-40%. That suggests to us that the margin hit was anywhere between 140-180bps. That’s definitely something to keep in mind in the context of a 3-year 110bp margin improvement target. DKS could potentially get there in half that time.


As for the model, we have the company at $4.73 in 2017, which compares to the consensus at $4.28. If we had to pick either $4.50 or $5.00, we’d take the Over.  With the stock at 15x next year’s EPS and 7.1x EBITDA, we actually think that this name is bordering on cheap given the likely earnings upside.  


To get bigger here, we need more confidence in the top line trajectory – not necessarily that the company will beat, but that it won’t miss in 2Q when compares get very tough. It’s probably not a rush to get into the name – so we’ll dig deeper where we need to. But it definitely gets interesting on sell-offs like today.


DKS - Not Half Bad - DKS Fin Table B


Here Are Some Puts/Takes for This Quarter

1)      Dick’s Inventory Looks very clean. The sales to inventory spread for the consolidated company was the best number we’ve seen since 1Q12. And management noted that Dick’s sales growth was ahead of inventory growth during the quarter. That’s a bullish gross margin set-up coming out of a quarter where merch margins cost the company 56 bps of gross margin. Now the company is lapping the elevated promotions in the golf department (which account for a large part of the 112bps of merch margin dilution in 2Q14) with a clean balance sheet.

2)      Hunting done? Field and Stream will account for about 20% of the unit growth over the next 3 years. We’ve heard a lot during the Analyst Day and on the call about the long term opportunity for this and side-by-side Dick’s/F&S concepts, but to us it sounds like Field and Stream is the dumping ground for lower margin, slow turning categories that no longer fits in the core Dick’s concept. We’re trying to keep an open mind as it relates to Field and Stream until we hear more quantified stats, but the initial management commentary on store placement, cannibalization, etc. aren’t exactly bullish. Add to that the fact that management is having internal conversations about what to do with Hunt/Fishing in markets where DKS has no plans to open a Field and Stream and it seems like a category not worth driving capital into. This is all accounted for in our model. But we wish management had better control over where this business is headed.

3)      Golf better on the margin. When a CEO stands up in front of Wall-Street and says that a business, which at one point accounted for 20% of consolidated sales, doesn’t have much left to contribute to the portfolio, you’d expect a hugely negative response. But the fact is, we’re talking about Golf at DKS – which most people have written off. On the margin, sales trends QTD are relatively flat and margins are up 100bps 17 days into 2Q. It’s not time to declare victory, but if DKS can continue to push AUR higher in the face of the huge promotional calendar in 2014 it will be a positive margin event. As noted, our math suggests that the combination of Hunting and Golf ate away about 1.5pts of margin during 2014. We have no reason to think that DKS doesn’t recapture 100% of that within 12 months, unless the company has understated the e-commerce investment needed to bring the three urls in house.

4)      World Cup? The company will face the World Cup comp in 2Q where sales essentially doubled on a per store basis from the event in 2010. That will be a big headwind to lap if the company can’t manage to keep golf flat for the quarter.

5)      E-comm carrying the load. Since the company started reporting a blended ‘omni-channel’ comp in 1Q13, the company has comped positive in its stores just twice. This marks the 7th quarter of negative store comps in the past 9 and 3rd consecutive at the same time sq. ft. continues to grow in the HSD. Over the long term we have a very hard time seeing how online margins are higher online vs. in-store. Yes the GSIC agreement shaves a few hundred bps off of current DTC margins, but when you consider the shipping cost and minimal fixed cost rationalization potential on a consolidated basis as DTC continues to cannibalize in store sales, e-comm = margin dilutive. Our sense is that this will be muddied by the margin DKS will recapture from golf. On a net basis, it should be fine although some of the components are ugly.

6)      Occupancy pressure. DKS needs 10% revenue growth to leverage store occupancy, which is a very tough hurdle. Managements 2017 sales targets suggest an 8.5-9.5% CAGR, or a 2-3% comp. We feel good about our assumption for margin upside from golf/hunt. But the comp trajectory is a different story. We’re ok with 2-3%, but it is admittedly a dangerous place to be with DKS.  This is probably the biggest risk to our above-consensus estimate. If we see a continuation of what we saw in 1Q (1%), then our numbers are likely too high. 

McCullough: 'There's No Inflation, But It Costs $127,000 to Go to Harvard for Two Years'

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