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McCullough: This Is The Biggest Threat to the Stock Market

 

In this brief excerpt from today's edition of The Macro Show, Hedgeye CEO Keith McCullough answers a subscriber’s question about current risks to the U.S. equity market.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 


Retail Callouts (5/28): NKE, UA, ANF, KATE, DG, AMZN

Takeaway: NKE - FIFA Allegations could accrue to UA. ANF has another muddy print, we're still on the sidelines.

NKE/UA - FIFA Allegations Could Disproportionately Accrue To UnderArmour

(http://www.wsj.com/articles/nike-cooperating-with-authorities-on-fifa-allegations-1432752855)

 

If you haven't heard, seven FIFA officials were arrested in Switzerland yesterday as part of a global bribery scheme centered around illegal cash payments and marketing/broadcasting rights. Nike appears to be caught in the fray, identified in the indictment as 'Sportswear Company A'. For starters the relationship with the Traffic Group (NKE paid the company $30mm from 1996-99) looks questionable. The owner and founder plead guilty to racketeering and money laundering charges late last year and forfeited about $150mm. The way the scheme worked, Traffic would acquire marketing rights for large soccer events and then auction them off the broadcasting and marketing rights to the highest bidder (or best connected bidder). The fact that the relationship with Traffic kicked off just days after Nike signed a deal with the Brazilian Soccer Federation adds a little fuel to the speculation fire.

 

We actually view this to be not entirely dissimilar to the zoning/real estate bribery scandal Wal-Mart battled in Mexico and the fraud Reebok 'allegedly' committed in India. We'd never in a million years say that this is 'part of doing business' overseas for any multinational. But it absolutely underscores the risk management procedures that are necessary once companies move beyond US borders.

 

As it relates to any financial impact, we're not too worried about Nike's exposure. We're more concerned about changes in regulation around FIFA and other leagues that deal with product and broadcasting licenses. In Nike's case, regulation is bad. It has a clear financial edge over any other sportswear company anywhere in the world, which is a major asset in a deregulated licensing environment.  But if the field of play is more standardized, then we'd argue that it could accrue disproportionately to smaller brands like UnderArmour.

 

 

ANF: Another Muddy Print -- We're Still On The Sidelines

A few highlights: a) Comp improvement vs prior two quarters, despite lower promotional activity. b) Comp trends have improved in May. c) US AUR stabilizing, International AUR is down intentionally to driving better conversion. d) International DTC saw healthy growth, US DTC negative yoy (that's still a big red flag for us). e) AUC improving -- down MSD in Q1. f) Guidance: sequential comparable sales improvement into the second quarter and the second half of the fiscal year, in-line with prior guidance. Gross margin rate to be flat to slightly up, same as prior guidance. Op expenses down 40mm, guided roughly flat before.

 

As it relates to the stock, we have a hard time getting an edge on this one. We get the story around management, cost cuts, store rationalization, a more activist board, etc… But where we come up short is that when all is said and done, we'd still be left owning the Abercrombie brands, which are simply not relevant to what used to be the core teen consumer anymore.

Retail Callouts (5/28): NKE, UA, ANF, KATE, DG, AMZN - 5 28 chart1

 

OTHER NEWS

 

KATE - Kate Spade New York looks to personalize online fit with True Fit

(http://www.chainstoreage.com/article/kate-spade-new-york-looks-personalize-online-fit-true-fit)

 

DG - Dollar General Board Names Todd J. Vasos as CEO

(http://investor.shareholder.com/dollar/releasedetail.cfm?ReleaseID=915291)

 

AMZN - Amazon plans to hire at least 6,000 new workers

(http://www.retailingtoday.com/article/amazon-plans-hire-least-6000-new-workers)

 

HBC - Hudson’s Bay Intensifies Quest for Germany’s Kaufhof Chain

(http://wwd.com/retail-news/department-stores/hudsons-bay-kaufhof-store-chain-germany-10136066/)

 

RL - Ralph Lauren Joins the New York Fashion Week: Men’s Schedule

(http://wwd.com/menswear-news/designer-luxury/ralph-lauren-new-york-fashion-week-mens-schedule-10136387/)

 

COLM - Columbia Sportswear Announces Four Key Leadership Promotions

(http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=1&id=56158)


Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. It was published at 7:04am ET. 

Click here to learn more and subscribe.

Keith's Daily Trading Ranges [Unlocked] - z dtr

BULLISH TRENDS

Keith's Daily Trading Ranges [Unlocked] - Slide2

Keith's Daily Trading Ranges [Unlocked] - Slide3

Keith's Daily Trading Ranges [Unlocked] - Slide4

Keith's Daily Trading Ranges [Unlocked] - Slide5

Keith's Daily Trading Ranges [Unlocked] - Slide6

Keith's Daily Trading Ranges [Unlocked] - Slide7

Keith's Daily Trading Ranges [Unlocked] - Slide8

 

BEARISH TRENDS

 

Keith's Daily Trading Ranges [Unlocked] - Slide9

Keith's Daily Trading Ranges [Unlocked] - Slide10

Keith's Daily Trading Ranges [Unlocked] - Slide11


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

LEISURE LETTER (05/28/2015)

TICKERS: 27.HK, CCL, LVS

EVENTS

  • May 28: MGM Annual General Meeting: Proxy "Fight"
  • June 4: CCL special press announcement in NYC

COMPANY NEWS  

LVS - received notice of an unsolicited mini-tender offer by TRC Capital Corporation ("TRC Capital") to purchase up to 2,500,000 shares of LVS's common stock at a price of $47.63 per share in cash, without interest.  

Takeaway: Thanks for the offer but i'll just sell into the pool of 5 million shares of LVS traded daily at the higher market price.

 

Stations Casino - is looking to sell shares to the public four years after leaving bankruptcy, people with knowledge of the matter said. The company, which owns or manages 21 casinos, has asked investment banks for proposals for an IPO that would take place this year. Station Casinos could be valued at more than $3.5 billion, including $2.15 billion in debt, one of the people said.

ARTICLE HERE

Takeaway: We'd love to see it this well run company back in the public domain. Look for the Hedgeye pre-IPO report.

 

Galaxy - deputy chairman Francis Lui Yiu-tung expects the company's non-gaming revenue in Macau to see a double-digit growth as the industry faces its toughest times in a decade. "It's hard to predict how big a proportion the non-gaming sector will account for as it just started in the past two years. We'll find out in three years," Lui said. 

 

So far, the group has invested HK$43 billion in the two phases of Galaxy Macau and Broadway Macau, nearly half of the planned HK$100 billion investment for the SAR. Lui said the group has enough cash and no debt. It will factor in changing market situations in Phases 3 and 4. Phase 2 has 7,000 employees, Lui added.

ARTICLE HERE

Takeaway: Please see our note out this morning on the successful Phase 2 opening. 

 

CCL -Jim Heaney, a financial executive with more than 25 years in the cruise and hospitality industries, including 17 years with Disney Cruise Line, will take the CFO role at Carnival Cruise Line. Most recently Heaney spent three years as CFO for SeaWorld Entertainment. Earlier he was CFO and SVP finance and travel operations at Disney Cruise Line. Prior to that, Heaney held various financial posts at Royal Caribbean Cruises; Pueblo International, which operated a large Florida-based grocery store chain; and Gould, Inc., a manufacturer of super mini-computers used primarily for military application.

INDUSTRY NEWS 

April McCarran airport traffic rose 4.4% YoY

Takeaway: 20th straight month of growth for McCarran traffic

 

Westin Sydney sold -Singapore's Far East Organization has teamed up with its Hong Kong-listed sister company Sino Land for a A$445.33 million (S$467.72 million) acquisition of The Westin Sydney and its adjoining Heritage Retail podium. The property is being sold by GIC Real Estate. The five-star hotel features 416 luxurious rooms. The Westin Sydney continues to be managed by Starwood Hotels & Resorts under the existing management agreement.

ARTICLE HERE 

MACRO

Hedgeye Macro Team remains negative on 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.


Early Surprises

This note was originally published at 8am on May 14, 2015 for Hedgeye subscribers.

“One of the key benefits of experiments is they allow you to get surprises early.”

-Scott Cook

 

I thought that was an excellent quote from the co-founder of Intuit from a solid chapter in Learn Or Die titled “It’s Time To Bury Caesar” (i.e. the “kind of boss who gives thumbs up or down on all decisions” pg 170).

 

Thumbs down? If that’s how you run your investment team or firm, I’m thinking that’s probably not going to end well. It would be the equivalent of a coach getting in your face after every mistake. It doesn’t build confidence. The insecure mind is weak.

 

Be creative… take chances…  fail fast… learn, pivot, evolve. Yeah, I like that. And so do the people you lead. Provided that experimenting is on a progressive path, you should wake up every morning looking forward to that element of surprise.

 

Early Surprises - 11

 

Back to the Global Macro Grind

 

Oh, you don’t like getting scored on right away? You don’t like losing money? Too bad. That’s the game. If the New York Rangers buckled after going down 1-0 last night (or 3-1 in the series for that matter), they’d be golfing today.

 

I don’t know about you, but I need a real-time signaling mechanism in order to risk manage the many early surprises Mr. Macro Market provides us an opportunity to learn from.

 

Some of the big ones (counter-TREND moves) as of late are as follows:

 

  1. Dollar Down, Euro Up
  2. Dollar Down, Oil up
  3. Euro Up, German Stocks Down

 

What is the market telling us?

 

  1. The US economy is experiencing a #LateCycle slowdown
  2. The most lagging of cyclical indicators (Labor) is slowing, in rate of change terms
  3. The Fed has no policy shift for that other than to push out the “dots” on rates #LowerForLonger

 

Now you might say, “but rates have gone straight up in the last few weeks.” Yep. And I’d say back that:

 

A)     US rates have de-coupled from the US Dollar move and moved in sync with European Bond Yields

B)      US Dollar has traded in sync with the rate of change in high-frequency economic data

 

Yesterday’s key US economic data (Retail Sales missing at 830AM) immediately crushed the US Dollar (10yr fell to 2.20% on the “news” too, then traded back up as German Yields rose).

 

What up with US Retail Sales #slowing, bro? Was it the nice April weather? Nope, it was the cycle:

 

  1. After bouncing in March, Retail Sales were dead flat at 0.0% sequentially in April
  2. After slowing from cyclical highs of +4-5% (since November), year-over-year Retail Sales are now 0.9%

 

Not cool. If you are one of the consensus bulls on US Consumer (XLY) and Retail (XRT) stocks, that is … Yes, on bounces I’d short both of those Sector Style Factors in the US stock market. I’m adding both to the bear side of our Macro ETF Playbook today.

 

Got SELL ideas with #timing on top? While the Euro and Oil will continue to signal immediate-term TRADE overbought within their longer-term TAIL risk setups, I wouldn’t be selling those short, other than for short-term trades.

 

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:

 

  1. US Dollar Index can trade as low as 90.11, before it resumes its longer-term breakout
  2. Euro (vs. USD) can trade as high as $1.19-1.20, before it blows up again on Draghi devaluation
  3. Oil (WTI) can trade as high as $71.38/barrel, before it resumes its longer-term #deflation

 

The calendar catalyst for that are:

 

  1. May 29th = downward revision to US GDP
  2. June 5th = US jobs report
  3. June 17th = FOMC meeting

 

For now, this is what I believe the market is signaling as a probable continuation of what’s become a big ole macro Pain Trade.

 

And while I was surprised early by some of these v-bottom bounces in things like Euros and Oil related securities, one of the key benefits to being crazy enough to get up and write to you every day is that I get to change my mind. Timing matters.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.95-2.32%

SPX 2080-2117
RUT 1214-1243
USD 93.25-95.43
EUR/USD 1.10-1.14
Oil (WTI) 55.47-61.71

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Early Surprises - z 05.14.15 chart


PHASE 2 OPENS THE NEXT PHASE OF MACAU

Takeaway: Don’t put too much stock in the new casino openings but given the sentiment, Phase 2 could surprise to the upside for HK.0027 and Macau

CALL TO ACTION

Macau stocks appear ripe for a rip to the upside, potentially aided by short covering.  The opening of Galaxy Phase 2 yesterday could provide that catalyst.  Our contacts (competitors included) praised the new product and the well executed opening and noted big crowds and importantly, mostly unaffected traffic at existing Cotai casinos.  We remain focused on the underappreciated degradation in the base mass business but the near-term trade could be higher given the horrid investor sentiment overall and capacity concerns specifically. 

GALAXY PHASE 2

Yesterday’s opening of the 2nd phase of Galaxy Macau appears to have been a success.  We typically don’t place too much emphasis on the initial performance of new casino openings and we won’t have a good gauge on the success of Phase 2 or its impact on Macau for several months.  However, with the smooth opening, product quality and strong traffic, the new property could allay some near-term investor fears that the upcoming supply growth will be entirely cannibalistic.  More importantly, the other Cotai properties generated consistent traffic flow for a Wednesday, providing at least a glimmer of hope that Phase 2 can grow the Macau market.

 

Here are some of our takeaways following conversations with Macau contacts:

  • Phase 2 contains 230 tables 
  • VIP rooms could be the nicest in town
  • Ritz Carlton rooms are the nicest in town
  • Peninsula properties may have been a little slower but no discernable drop off in traffic flow at any of the Cotai properties
  • Around 100k people flowed through the property with good gaming activity
  • The former Grand Waldo next door reopened as Broadway and it too experienced a strong opening – 38 tables in total
  • Its uber premium mass gaming area, which is not open yet, could be incremental for Galaxy Macau

CONCLUSION

A successful opening of Phase 2 looks in the cards and could spark all of the Macau stocks, including HK.0027.  However, keep a trade a trade.  The ongoing potential and market impact of Phase 2 won’t be known for several months.  Moreover, even a consistent performance of the new property may not be able to deter the deterioration in the high margin base mass segment, which is not well understood nor projected by the Street, in our opinion.  


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