CEO's Aren't As Important As Cycles Are

In this excerpt from today's edition of The Macro Show, Hedgeye Inudstrials Sector Head Jay Van Sciver explains that not even the savviest CEO is immune to the cyclicality that exists in the capital equipment space.


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Retail Callouts (6/26): RH, NKE, FINL, RL, VNCE, Retail Wage Hikes

Takeaway: Big Inside Buy at RH | FINL Comps, can't leverage occupancy | Ralph still 81.3% of vote + a cool $24mm comp | IKEA enters wage boost game.


For full research note: CLICK HERE

If you (like us) were wondering why Nike was so expensive, well now you know. Is this company for real? We expected a big earnings beat, and we got it (GAAP $0.98, $0.92 adj vs our $0.90 and the Street’s $0.83). But by just about any stretch, we should have seen some stress in Nike’s US Futures numbers with this print. No dice.  Growth is healthy throughout the portfolio, margins are strong, and guidance is up for the quarter and full year. Revenue was +5%, GP +6%, EBIT +15% and earnings +26%. Not bad. The simple fact that we’re not seeing any holes (when we otherwise should) either a) speaks to the company’s increasing dominance with the consumer globally, b) points to the excess profits Nike is seeing as it’s e-commerce engine kicks into high gear, or c) suggests that CFO Don Blair jettisoned his usual conservatism in issuing guidance as Nike starts its new Fiscal Year (and Blair hands off these expectations for his successor to deliver upon – starting on Aug 1). We think it’s all of the above. Outlined in our note.


RH - $2mm Insider Buy

Takeaway: Lead Independent Director, Thomas Mottola, made a $2mm open market purchase on Wednesday. This is the first meaningful insider buy we've seen at the company since CEO Gary Friedman bought a $2mm slug back in September of 2014. That's when the stock was 25% lower than it is today. RH doesn't require its Board members to maintain a minimum ownership position, so this buy is all about Mottola's confidence in managements ability to execute on its long term plan.


RL - Ralph Voting % at 81.3%


RL Proxy Takeaways...

-Board now set at 11 directors vs 12 prior, 8 class B and 3 class A, as the board chooses not to replace Steven Murphy who resigned in May to become a company consultant.

-Ralph retains 100% of voting over the 8 class B directors -- no change there. That amounts to 81.3% of total voting power.

-Ralph's compensation came in at $24mm down from $24.5mm LY -- still among the highest paid CEOs in America. Given where the stock is, we'd expect this to come down materially in 2015.


IKEA to Ratchet Up Its Hourly Pay in U.S.


Takeaway: This IKEA decision is interesting for a couple of reasons.

1) For starters it's a non-public company that doesn't have to answer to the public markets, so it has a bit more wiggle room to be aggressive on wages.

2) The $11.62 minimum wage floor is 64% higher than the current federally mandated minimum wage and almost 20% higher than the $10 floor implemented by WMT, MCD, TJX, and TGT. The delta can be attributed to IKEA's need to attract and retain the right type of talent. We think that gets lost in the wage discussion. It's all about maintaining the spread for each retailer between itself and WMT, which means the reach of the wage hikes is far more widespread than many may otherwise assume.


FINL - Good Quarter. Interesting/Perplexing Insight into Occupancy

The headline EPS number looked good relative to expectations especially with short interest just off 2yr peaks at 11%. Reported comps for the month of May were up 12.6%. That syncs with commentary we heard out of HIBB and FL who indicated at the time of the 1Q release on 5/22 that May comps to date were up LDD QTD. Commentary from management indicated that June comps 85% of the way through the month were up MSD. On HIBB specifically there are considerable headwinds as we enter July with the shift in Tax Free Holidays in HIBB's core market from 2Q last year to 3Q last year. One notable factor is that management noted that FINL will not leverage occupancy costs -- even on a mid-single-digit comp. We've seen luxury retailers (KORS) with relatively high occupancy leverage hurdles, but never a retailer with an average basket below $100. That's either a sandbag, or its very disconcerting.

Retail Callouts (6/26): RH, NKE, FINL, RL, VNCE, Retail Wage Hikes - 6 26 chart1


VNCE - Vince CFO is Resigns


Every time we step-up our work on VNCE as a potential long, something emerges that gives us pause. CFO resignation for a volatile high-priced apparel brand that is a) potentially still over-earning and b) really doesn't know what it wants to be -- is just flat out scary. There's something to do with this stock, we just don't know if its long or short. Either way, it's worth doing the work -- particularly given the eventuality of being bought by another company.





LULU - Lululemon recalls 185,000 tops in Canada for dangerous drawstrings



AMZN - What’s a Treasure Truck? Ask Amazon



More exec changes at 99 Cents Only


LEISURE LETTER (06/26/2015)



PENN - Plainridge Casino opening reported a great a turn out. 

  • “It’s been a fabulous success,” said Lance George, the facility’s general manager. He said he expected to exceed his goal of 10,000 people in the first 12 hours of operation.
  • Within three hours of the opening, the casino had hit its fire department-imposed capacity of 3,750 people. 
  • Patrons said they waited about 15 minutes to get in. Some cashiers had to close temporarily because they had run out of money.


Takeaway: Great comments. We continue to expect Plainridge to beat expectations of $300-350 slot win/day. We're at $400 and we suspect Plainridge will top even our forecast.


Louis XIII - Plans to charge as much as HKD1 million (US$129,000) per night for its most luxurious accommodation. According to a report, “Louis XIII plans to use only ‘one single junket’ (the Neptune Group), and believes this could reduce the cannibalisation between junkets,” 


Takeaway: Can't believe wealthy mainland Chinese will want to be seen within this extravagance during the corruption crackdown.


Galaxy - Vice Chairman, Francis Lui Yiu-tung, thinks the government should reconsider its intention to ban smoking in casinos, in view of the slump in gaming.  He indicated that the present practice – allowing smoking in casinos only in smoking rooms – serves the paramount purpose of protecting the health of staff. Lui added, “Over a longer period of time, VIP gaming will change to a different model. But to let it drop 50%, everybody will have the responsibility to look at it and see what we can do to smooth out the curve such that everyone will have a little bit more time to adapt to the new norm.” 



Takeaway: Expected comments from a gaming operator regarding the full smoking ban.


CCL - Eight tourists killed in Alaska plane crash. 

  • Promech Air, an airline based in Ketchikan, operated the shore excursion sold through Holland America Line, the cruise ship company said in a statement. 
  • The eight passengers were guests on the Westerdam, which is on a seven-day cruise that departed Seattle on Saturday. 



Macau Junkets - Prominent Macau casino junket operator Cheung Chi-tai has been accused of laundering HK$1.8 billion through bank accounts in Hong Kong after he "surrendered'' to police in the city earlier this week.


Takeaway: More bad press for junkets.


Las Vegas - McCarran Passenger Traffic Increases in May

  • May 2015 saw 3,992,150 passengers arriving and departing, a 5.7% increase YoY.
  • YTD there have been 18,113,323 passengers arriving and departing, a 3.3% increase YoY. 
  • Domestic travel to Las Vegas increased 5.4% YoY
  • International travel to Las Vegas increased 7.5% YoY 


Takeaway: That's 21 straight monthly gains for McCarran traffic.  Should be good for May slot play.


New Jersey - Tax bill passes in state Senate. The most important of the five bills approved by the state Senate would let Atlantic City's eight casinos make payments in lieu of taxes for 15 years.

  • The bill would allow the gambling halls to know exactly how much they owe instead of facing huge potential increases each year.
  • The payment-in-lieu-of-taxes bill would let the casinos collectively pay $150 million for the first two years and $120 million annually for 13 years, assuming gambling revenue stays within certain ranges ($2.2 billion to $2.6 billion) in the city.
  • The Tropicana, which Icahn owns, and the Trump Taj Mahal, which he is soon to acquire, would pay nearly $19 million less in the first year of the plan. 
  • Caesars and Harrah's would see a nearly $20 million reduction. Bally's, which also is owned by Caesars Entertainment, would see a $2.6 million increase in payments. 
  • The Borgata would see a $2.7 million reduction.


Takeaway: The House is next.


China Lottery - Misappropriation of funds reported. 

  • The government’s National Audit Office claims that it has uncovered widespread misappropriation of the funds from its state lottery program. 
  • At least some of the RMB 64 billion in funds that China’s Academy of Social Sciences claimed earlier this week was unaccounted for (see previous report) has been found; RMB 16.9 billion (about US$2.72 billion) was misused or misappropriated.


Takeaway: Bad news for an industry that is being highly scrutinized by the govt.



 Hedgeye Macro Team remains negative on Europe 

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot has happened in 2015.

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The Macro Show Replay | June 26, 2015


Japan, China and Volatility

Client Talking Points


Japan posted the best Household Spending print of the year at +4.8% year-over-year in May (vs what had been negative year-over-year numbers at -1.3% most recently in April) and now we get another shot at buying more Nikkei post a 2-day correction from our overbought signal (Japanese Stocks remain our top International Equity asset allocation). 


Kaboom! Or were those “margin calls”? Down -7.4% in one day for the Shanghai Composite Casino will leave a mark on the chart chasers, who are now down -14.6% in the last month on the same index performance chase. Maybe China shouldn’t have reported a better PMI earlier this week – what they need is horrible economic data to drive that stock market higher?!


Every time the VIX has tested the 11-12 zone, sentiment gets too bullish (II Bull/Bear Spread popped +25% week-over-week to the #bullish side after the recent SPX rally) and U.S. stocks are right back where they’ve been (SP500 +2.1% on the year with Industrials sucking wind -2.9% year-to-date – Energy (XLE) led losers yesterday -1% to -4.2% year-to-date).


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Macro Analyst Ben Ryan and Industrials Sector Head Jay Van-Sciver.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Shares of Penn National Gaming are up approximately 9% since it was added to Investing Ideas on May 26. Our Gaming, Lodging & Leisure team reiterates their high conviction on the stock and notes that Ohio and Kansas have both been super-strong revenue generators in the month of May. This positive development has has led our analysts to raise their estimates even higher (and we're already the highest on the street...).


It was a busy week across the housing space with a host of fundamental releases, builder earnings and notable regulatory updates.   Net-net-net....the past week offered another positive update on the state of the residential real estate market with housing turned in a second week of strong, positive absolute and relative performance. The NAHB HMI (Builder Confidence Index) for June surged across all categories and in all regions, posting its best reading in almost 10 years. Total Starts declined -11% MoM to +1.036 MM units with SF and MF starts declining -5.4% and -20.2% month-over-month, respectively.  Permits, meanwhile, rose to an 8-year high advancing +11.8% sequentially and +25% year-over-year.   The strength in permits augurs forward strength in Starts and suggest residential construction spending will be (increasingly) supportive of GDP growth over the next couple quarters.


Bottom line right now remains that Lower-For-Longer is firmly intact as long as US #GrowthSlowing is. As Keith pointed out on Friday, Consensus Macro is still stubbornly sticking to the tired idea that rates have to go higher - they just have to... because, they haven't? All told, it was a great week sticking with the process on the long side of bonds. Here we feature an in-depth discussion from Senior Macro Analyst Darius Dale which does a thorough job outlining where our macro team currently stands with respect to the Fed, interest rates, markets and economy. The prescient discussion occured just hours before release of the FOMC statement.

Three for the Road


(VIDEO) Me on Industrials: Just Terrible… via @hedgeye



Success is on the far side of failure.

Thomas Watson Sr.


The households’ savings rate backed off of 28-month highs, declining -3 basis points month-over-month to 5.1%.

CHART OF THE DAY: U.S. Monetary Policy Model

Editor's Note: Below is a chart and excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe.


CHART OF THE DAY: U.S. Monetary Policy Model - 06.26.15 chart2


In reality, what we have learned in the last 5-10 years (after almost 600 “rate cuts” globally) is that:


  • A)  When real-growth misses the perpetually optimistic government “forecast”,
  • B)  Central planners ease (cut rates) and devalue their currencies… then that “policy action”
  • C)  Reflates asset prices (cost of living in local currency terms) and slows real-purchasing power (spending)


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.