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McCullough: Companies "Moronic" About Stock Buybacks

 

In this brief excerpt from today's edition of The Macro Show, Hedgeye CEO Keith McCullough reveals how many companies mishandle stock buybacks and how that affects Joey Stockpicker.

 

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

 


Why #FIFA Allegations Could Hurt Nike and Help Under Armour | $NKE $UA

Editor's Note: This is an excerpt from recent research from our Retail team. For more information on our various product offerings please click here.

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In case you somehow missed it, seven FIFA officials were arrested in Switzerland earlier this week as part of a global bribery scheme centered around illegal cash payments and marketing/broadcasting rights.

Why #FIFA Allegations Could Hurt Nike and Help Under Armour | $NKE $UA - sosff

 

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.


MUB: Removing Muni Bonds from Investing Ideas

Takeaway: We are removing Muni Bonds from Investing Ideas.

Please be advised that we are removing Muni Bonds (MUB) from Investing Ideas today. Below is a brief note from CEO Keith McCullough explaining our decision.

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MUB: Removing Muni Bonds from Investing Ideas - r 55

 

After seeing this morning's GDP report then a horrific Chicago PMI print of 46.2 in a month where the "weather" turned, I'm getting increasingly concerned that we might be too right on this #LateCycle slowdown.

 

Munis do have credit risks don't forget. The City of Chicago's bonds, for example, were downgraded to junk earlier this month by Moody's.

 

Oh, and MUB is at the top-end of its immediate-term risk range, so I'd rather signal buy lower, when they're at the low-end of the range anyway.

KM


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YELP: Perdition or Salvation?

Takeaway: Binary setup. Next print is likely a disaster, but we can’t explicitly rule out M&A before then. Best play is options if possible.

KEY POINTS

  1. 2Q15 PRINT = DISASTER: We expect YELP to miss 2Q consensus revenue estimates for Local Adverting and cut 2015 revenue guidance.  YELP will need a massive acceleration in new account growth to hit estimates, particularly in 2H15 (see first link below).  That will be a major challenge since YELP is now struggling to grow/retain its salesforce, the size of which drives its entire model. The fact that this is even remotely an issue means the model is unraveling, and is likely why YELP has decided to put itself up for sale.
  2. BUT IS THERE A BUYER? We don't believe so. There are very few who can afford, and much fewer (if any) who would be willing to look past YELP’s attrition issues and/or risk trying to fix the model.  The latter would require introducing lower-tiered products, which would ultimately result in declining revenue since YELP would essentially be replacing its account base at a lower ARPU.  Still, we can’t categorically rule out an acquisition since M&A can be illogical, even if we can't identify a likely buyer.
  3. PERDITION OR SALVATION: Basically, will YELP be saved before its model implodes?  We don't believe so, but if YELP is to be acquired, we believe it needs to happen before or during the 2Q15 release since a second consecutive guidance miss/cut would be a major red flag for any would-be suitor.  We want short exposure to the 2Q15 release, but we wouldn’t be naked short into the print since it is essentially a binary event than can go 20%-30% in either direction.  Best play here would be options if possible (e.g. buy puts or protect short w/ out-of-money calls).

 

We are planning on hosting an update call next week to address incremental developments to our short thesis and discuss the M&A landscape.  In the interim, see the below notes for supporting detail, and let us know if you have any questions.

 

YELP: The New Major Red Flag (1Q15)

04/30/15 08:53 AM EDT

[click here]

 

YELP: Salesforce Productivity?

03/16/15 08:10 AM EDT

[click here]

 

YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]

 

YELP: Death of a Business Model

04/04/14 10:05 AM EDT

[click here]

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


UST 10YR Yield, Italy and Oil

Client Talking Points

UST 10YR

The UST 10YR Yield broke down through what the moving monkeys call support and has been doing what its been doing for the past 17 months which is making a series of lower highs. It has been a great week to be Long the Long Bond not only in the U.S. but in Germany, France and Italy as well. The immediate term risk range for the UST 10YR Yield is 1.98-2.20% (bearish).

ITALY

Italian PPI was down 2.3% year-over-year vs down 2.4% the prior month, CPI was up 0.2% vs 0.1% the prior month. This is just terrible if you are a producer, and this is the problem with GDP for a lot of countries that sell inflation expectations in their top-line (when inflation starts to fall GDP starts falling). 10YR bond yields are reflecting slower growth in Italy and Europe as a whole.

OIL

Immediate term risk range for WTI Oil is 57.01-61.35 (bullish). We like the series of events that was going to be a bad GDP report, a potential bad jobs report next week and then a Dovish Fed on June 17th. Our signal says short the USD (for a short term trade) be long Oil, long gold and long those things that are yield chasing. 

Asset Allocation

CASH 46% US EQUITIES 5%
INTL EQUITIES 10% COMMODITIES 13%
FIXED INCOME 24% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
VNQ

One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). Unless the Fed wants to show the world it has the power to go both ways on rates, we don’t think the Fed will ever be able to justify hiking interest rates. We expect an unarguable slowing of the current economic cycle by Q4 of this year. If you think domestic economic growth is slow now, just wait until the U.S. economy faces very difficult growth and inflation comps in the second half of 2015.

ITB

Housing got its mojo back in May, rebounding strongly over the last couple of weeks alongside the moderation in rates and ongoing strength in reported price/volume data. Below is a round-up of the data thus far in 2Q:

  • Housing Starts:  New 7-year high in the latest month
  • Purchase Applications (existing market):  2Q15 Tracking +14% QoQ and +13% YoY, on pace for best quarter in two years.
  • Pending Home Sales (existing market):  PHS are up an average of +11.8% year-over-year the last two months
  • New Home Sales (new market):  NHS are up an average of +22.5% year-over-year the last two months
  • HPI:  After a year of discrete deceleration in home price growth in 2014, 2nd derivative HPI has seen 3 consecutive months of acceleration through the latest March data.
TLT

The strength of the labor market continues to be a good indicator of our positioning in the current cycle:

  • Seasonally adjusted jobless claims came in at 274k last week vs. 270K est.

Despite the slight miss, the rolling 4-week SA figure dropped to 266.3k (lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266.3k) We all know what happened afterwards…..

Three for the Road

TWEET OF THE DAY

VIDEO (1min) The Biggest Threat to the Stock Market https://app.hedgeye.com/insights/44346-mccullough-this-is-the-biggest-threat-to-the-stock-market… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Don’t be fooled by the calendar. There are only as many days in the year as you make use of.

Charles Richards

STAT OF THE DAY

GDP print was -0.7% quarter-over-quarter with the year-over-year revised to +2.7% (from +3.0%). 

 

The Macro Show - CLICK HERE to watch today's replay.


CHART OF THE DAY: U.S. Debt

Editor's Note: The brief excerpt and chart below are from today's Morning Newsletter which was written by Hedgeye Director of Research Daryl Jones. Click here for more information on how you can subscribe.

 

Certainly, a lot of politicians and political candidates pay lip service to reducing the size of the government, while few actually follow through.  If there were ever a time for follow through it is 2016, a year in which the federal government’s spending will be over $4.0 trillion and government debt will accumulate to $23.5 trillion.  Undoubtedly one point that all of us can agree on is that governments are the most ineffective allocators of capital.

 

CHART OF THE DAY: U.S. Debt - z 05.29.15 chart


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