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The Week Ahead

The Economic Data calendar for the week of the 1st of June through the 5th of June is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

CLICK TO ENLARGE.

The Week Ahead  - z Week Ahead


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: PENN, GIS, GLD, SHAK, VNQ, EDV, ITB, TLT & HIBB

Below are Hedgeye analysts’ latest updates on our nine current high-conviction long and short investing ideas and CEO Keith McCullough’s updated levels for each. 

 

Please note we added Penn National Gaming (PENN) and General Mills (GIS) this week and removed Muni Bonds (MUB).

 

Also below is a brief, exclusive video from Sector Head Todd Jordan outlining the bullish thesis on PENN.

 

We feature two additional pieces of content at the bottom. 

Investing Ideas Newsletter      - chart

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

CARTOON OF THE WEEK

Investing Ideas Newsletter      - Lower for longer cartoon 05.28.2015

IDEAS UPDATES

penn

In the above video exclusive to Investing Ideas subscribers, Gaming, Lodging, and Leisure Sector Head Todd Jordan outlines his bullish thesis on Penn National Gaming

 

itb

Housing went 3 for 3 as the Trinity of Fundamental Data Points released in the latest week continued to reflect accelerating rates of improvement across both the New and Existing markets.

Investing Ideas Newsletter      - z ho9

To review:   

 

New Home Sales  

New Home Sales in April rose +6.8% month-over-month to +517K.  More notably, sales were up a remarkable 26% on a year-over-year basis as NHS re-converged back to the trend in New Home construction. Given the favorable comp dynamics (i.e. sales were very soft in the comparable period last year), it’s likely we see similar numbers from a rate-of-change perspective in the coming months.  For context, if sales were to hold flat at current levels, year-over-year growth would come in at +12%, +25% and +28%, respectively, over the May-July period.   

 

Pending Home Sales  

PHS rose +3.4% sequentially in April, accelerating to +14% year-over-year with the Index making a new 101-month high.  Pending Home Sales represent signed contract activity and are a historically strong lead indicator of Existing Home Sales  The relationship is commonsensical and mechanical;  whereas Pending Sales represent signed contracts, Existing Sales measure actual closing – which typically occur 4-8 weeks after contract receipt.  Given the recent tendency for EHS to re-converge to PHS (see chart below) following short-term dislocations, a second month of burgeoning divergence between the two series argues for upside to Existing Sales over May/June (next release on 6/22). 

 

Purchase Application  

The MBA’s weekly Mortgage Purchase Application Index re-captured the 200-level, rising +1.2% week-over-week and accelerating +250bps sequentially to +13.1% year-over-year.  2Q15 is currently tracking +14.1% QoQ and +13.2% YoY and remains on pace for the best quarter since 2Q13.   Further, the high-frequency purchase application data suggests the strength reported in New and Existing Sales for April extended into May.   

 

Investing Ideas Newsletter      - z EHS vs PHS 

TLT | VNQ | GLD | EDV 

Editor's Note: The update below was written by Senior Macro Analyst Darius Dale.


Counting Down to Recession?

 

Let’s play the riddle game.

 

Q: What happens when the preponderance of economic data is: A) slowing on both a sequential and trending basis, B) consistently and fervently missing expectations and C) just plain bad (like this morning’s 1Q GDP revision, for example)?

 

A: You double seasonally adjust it and make it better.

 

Q: What happens when the economy is: A) in the latter innings of an above-average length economic expansion (Z-Score = +0.4x vs. all cycles over the past century to be exact), B) slowing into extremely difficult base effects that should perpetuate the slowest annual rate of nominal GDP growth since 2009 and C) mired with a myriad of [horribly misunderstood] secular headwinds?

 

A: The Fed hikes rates on that.

 

LOL! (pardon the millennial in me)

 

Regarding the first question, the consistent and fervent missing of expectations for economic data is eerily reminiscent of the start of 2007 when it just continued and continued and continued until the cycle completely rolled over.

 

Investing Ideas Newsletter      - z economic SURPRISE DD

 

Regarding the second question, trends across a variety of indicators put us roughly ~12 months away from recession.

 

Investing Ideas Newsletter      - z recession watch

 

That may sound like good news to investors, but our predictive tracking algorithm has YoY real GDP growth slowing throughout the balance of 2015. In lay terms, we believe the U.S. economy is past peak in rate-of-change terms and sliding down the slope to an eventual cliff (i.e. recession). That’s our call and we’re sticking to it.

 

Friday’s negative revision takes our full-year estimate for real GDP growth down to +2% (from +2.3% prior). Both the Fed and Street are up at +2.5%, both of which continue to careen down from perpetual expectations of rainbows-and-puppy dogs (i.e. 3-plus percent growth) earlier this year.

 

Investing Ideas Newsletter      - z deja vu DD

 

All told, we reiterate our call to be long of long-duration in its many forms: TLT, EDV, VNQ and GLD (gold has historically performed well in down-dollar and down-interest rate environments and we think the June 17th FOMC statement has a high probability of being dovish and dollar-bearish).

gis

We added General Mills to our investing ideas list this week and are are very bullish on the strength of their brands and the long-term growth potential of the stock.

 

The 2015 fiscal year was a busy one for GIS as they underwent a major restructuring project in addition to the $820MM acquisition of Annie’s.

 

Investing Ideas Newsletter      - g 44

 

We see multiple ways this company can win:

 

  1. The current management transforms into an Activist management team - 15% chance
  2. Fundamentally – Gluten Free Cheerios is a home run – 20% chance
  3. Management sells the company – 15% chance
  4. An Activist shareholder takes a position  – 50% chance

 

Management needs to start focusing (temporarily) on their non-core assets that represent roughly 28% of the portfolio such as, Pillsbury, Gold Medal, Green Giant and Progresso.  Divesting these brands would free up resources and provide greater capital to acquire a strong high growth business.

 

GIS is a company known for great brands. Consumers are proving that once again. The company is growing share in key categories this year with grain snacks dollar share up 187 basis points (bps) versus last year, yogurt up 75 bps and Ready-To-Eat (RTE) cereal up 31 bps. GIS is often a leader in the categories in which they compete and they are continuing to show their strength.

 

Selling the company is an option, albeit an unlikely one given the current valuation. If the price were to slip a little, some big players in the market will take a harder look at it. This is also the case for an activist coming on board, for someone willing to put in the work there is still plenty of meat on the bone, but most would probably want to see a pullback in the stock before taking a major position.

 

Bottom line is this stock is built for growth and with it currently paying a generous 3.1% dividend (which has never been decreased or interrupted) it is a worthwhile bet that this ship will turn.

SHAK

Restaurants Sector Head Howard Penney may be Wall Street's biggest bear on shares of Shake Shack. His uber-bearish view remains that the market is placing entirely too much value on SHAK's differentiated burger concept. He remains confident that the stock is set for a mighty fall.

HIBB

Hibbett Sports remains one of our top shorts in the retail space. These are the 3 key points we are thinking about as it relates to the call…

 

1)      THIS COMPANY IS BROKEN

 

HIBB grew up with a niche strategy that gets to maybe 500 stores, during the biggest ASP (average selling price) boom cycle the athletic industry has ever seen. Unfortunately, it is at 1001 stores now and facing much more competition – for stores and customers – that it has ever known. It is the only retailer to have zero presence in a space that is rapidly moving online.

 

2)      NOT TERMINAL, BUT COSTLY TO FIX

 

Its 3% hurdle rate to leverage occupancy should drive margins lower given the absence of organic sales growth. If HIBB chooses to go online, it’s likely a 300bps hit to margins. And then it has the call option to book dot.com sales at a margin that is 500bps-1000bps dilutive. This all matters given that HIBB is sitting on an industry leading 12.5% margin. Over the duration of our model we have margins headed to 5%.

 

3)      A LONG, STEADY (AND NOT SLOW) BLEED

 

This is as close to a perma-short as we have seen in years. But, the consensus estimate is $4.52 four years out. We’re at $1.45. That 70% variance is the biggest we’ve ever modeled for a retailer. A low teens P/E on our number gives us a stock ultimately in the teens. Even at that level, we’re looking at a somewhat expensive mid-single digit free cash flow yield. HIBB is not an LBO candidate. All we worry about is navigating around the quarterly earnings gyrations. But the end game is clear.

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

yelp: the new major red flag

The fact this is even remotely an issue suggest this story is going to turn much sooner than we initially expected.

Investing Ideas Newsletter      - z red flag

FUND FLOWS: defensive team on the field

Investors moved defensively last week, making net withdrawals from all equity products and shoring up cash in money market funds.

Investing Ideas Newsletter      - z 56


Cartoon of the Day: #GDP Stink Bomb

Cartoon of the Day: #GDP Stink Bomb - GDP cartoon 05.29.2015

 

Like this cartoon? Don't miss another. Click here to get the daily cartoon emailed free every day.


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 80.28%
  • SHORT SIGNALS 78.51%

Counting Down to Recession?

Let’s play the riddle game.

 

Q: What happens when the preponderance of economic data is: A) slowing on both a sequential and trending basis, B) consistently and fervently missing expectations and C) just plain bad (like this morning’s 1Q GDP revision, for example)?

 

A: You double seasonally adjust it and make it better.

 

Q: What happens when the economy is: A) in the latter innings of an above-average length economic expansion (Z-Score = +0.4x vs. all cycles over the past century to be exact), B) slowing into extremely difficult base effects that should perpetuate the slowest annual rate of nominal GDP growth since 2009 and C) mired with a myriad of [horribly misunderstood] secular headwinds?

 

A: The Fed hikes rates on that.

 

LOL! (pardon the millennial in me)

 

Regarding the first question, the consistent and fervent missing of expectations for economic data is eerily reminiscent of the start of 2007 when it just continued and continued and continued until the cycle completely rolled over.

 

Counting Down to Recession? - Econ Summary Table

 

Counting Down to Recession? - Econ Surprise Index

 

Counting Down to Recession? - GDP Summary Table

 

Regarding the second question, trends across a variety of indicators put us roughly ~12 months away from recession.

 

Counting Down to Recession? - Recession Watch Jobless Claims

 

Counting Down to Recession? - Recession Watch Consumer Confidence

 

Counting Down to Recession? - Recession Watch LEI Ratio

 

Counting Down to Recession? - Recession Watch PMIs

 

Counting Down to Recession? - Recession Watch TTM EPS

 

That may sound like good news to investors, but our predictive tracking algorithm has YoY real GDP growth slowing throughout the balance of 2015. In lay terms, we believe the U.S. economy is past peak in rate-of-change terms and sliding down the slope to an eventual cliff (i.e. recession). That’s our call and we’re sticking to it.

 

Counting Down to Recession? - UNITED STATES

 

As detailed in the previous chart, today’s negative revision takes our full-year estimate for real GDP growth down to +2% (from +2.3% prior). Both the Fed and Street are up at +2.5%, both of which continue to careen down from perpetual expectations of rainbows-and-puppy dogs (i.e. 3-plus percent growth) earlier this year.

 

Counting Down to Recession? - Consensus GDP Estimates

 

All told, we reiterate our call to be long of long-duration in its many forms: TLT, EDV, VNQ and GLD (gold has historically performed well in down-dollar and down-interest rate environments and we think the June 17th FOMC statement has a high probability of being dovish and dollar-bearish).

 

We also think the current entropy of U.S. demographic trends (i.e. they’re getting worse at their fastest rate ever, like now) is likely to continue supporting our lower-for-longer thesis on interest rates.

 

Counting Down to Recession? -  DemographicYields GDP Surveys

 

Counting Down to Recession? -  DemographicYields Inflation Surveys

 

Counting Down to Recession? -  DemographicYields 65

 

Counting Down to Recession? -  DemographicYields Core Consumption Cohort

 

Counting Down to Recession? -  DemographicYields Life Cycle Economics

 

Going back to the data, the government might be able to double, triple or quadruple seasonally adjust the national accounts, but they can’t smooth corporate earnings.

 

Counting Down to Recession? - S P 500 Revenue and EPS Growth

 

The proverbial “they” better keep the buyback machine revved up! On that note, the $141B announced buybacks in April was the largest month on record per Birinyi Associates.

 

Moreover, buybacks are on pace to reach $1.2T in 2015, which would break the record of $863B from – you guessed it – 2007 (i.e. the last time Keith made the #LateCycle Slowdown call, which caused organic earnings growth to slow, which effectively forced companies to forgo investing in their businesses in order to keep the “game” alive with financial engineering).

 

As an aside, it’s worth noting that core capital goods orders and factory orders are declining on a YoY basis at -0.6% and -5.3%, respectively.

 

Jumping back to buybacks, the three weeks ended  7/24, 7/31 and 8/7 are the three busiest weeks for S&P 500 constituent earnings releases. In advance of those weeks, we would expect market liquidity to dry up on reduced buyback execution (blackout periods). It’s worth noting that whisper numbers put buyback execution at upwards of ~30% of total institutional volume at major sell-side desks.

 

Removing such a massive bid from the marketplace amid a decided slowing of growth and the Fed out to lunch in terms of teetering on making a major policy mistake by hiking interest rates, could make this summer feel as “interesting” as the summer 2011 was…

 

Counting Down to Recession? - MONETARY POLICY MODEL

 

Counting Down to Recession? - 2011 Analog

 

Happy month-end Friday and best of luck out there!

 

Darius Dale

Associate


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.

*  *  *  *  *  *  *

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.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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