Process: How We Do Asset Allocation


On RTA Live, Hedgeye CEO Keith McCullough responds to a user question on how to incorporate all of Hedgeye's retail products (with a specific emphasis on the Daily Asset Allocation).


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Do ETFs Share Blame for Wild Market Swings?

Palisade Capital Management CIO Dan Veru, Hedgeye CEO Keith McCullough and FBN’s Dagen McDowell debate the impact of ETF’s on the overall markets on Fox Business.

Cartoon of the Day: Cement Shoes (Kinda)

Cartoon of the Day: Cement Shoes (Kinda) - Oil cartoon 08.27.2015

Oil (finally) caught a bid today. A big bid. That said... it's still down a monster -55% since one year ago today.

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RTA Live: August 27, 2015

Hedgeye CEO Keith McCullough will answer your questions about Real-Time Alerts live today at 1:30PM ET. 




TIF | This Short’s Not Done Yet

Takeaway: The 2Q miss, scant 2H guide-down, and lack of color on '16 leaves expectations wound too tight in the face of increasing headwinds.


We didn’t like TIF into the print, and we definitely don’t like it on the way out. The company lowered back half guidance, which we expected to see, but we’re not sure if $0.10 is enough off of 2H14’s $2.27 base. We’re inclined to think ‘no’. But the bigger tell for us will be how much consensus numbers come down for next year. They currently sit at $4.77. If numbers come down as far as the $4.50 vicinity, then this is still probably a good short. The only thing that makes us walk away from our positioning is if we see estimates shake out near $4.25 — but that’s unlikely. While management clearly articulated its business, as always, the reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks. We’re staying short this one.



Our Previous Note from Tuesday 8/25


TIF | We Don't Like It


Takeaway: 2Q looks fine. The back half is a stretch. 2016 needs to come down.

We don’t like TIF into the print as we think 1) back half numbers look too high, and 2) this model is extremely poorly positioned for the consumer climate we’re forecasting. There are definitely redeeming qualities about the name – most notably the Brand (and that’s pretty much it).  But it is trading near a peak multiple (18.5x) on peak margins (21%), peak earnings ($4.24E), peak returns (18%), has the worst cash conversion cycle we’ve ever seen (490 days), while sentiment is sitting at all-time highs. It’s feast or famine – if one of those metrics breaks, then they all do.  


Common perception seems to be that “just because TIF blew up earlier this year, it can’t blow up again.” We simply disagree. The environment has changed significantly, and the company’s guidance for back half growth “in the double digits” is not going to happen. Could the company grow earnings in the 4-6% range? Yes. It can. But that implies at least a $0.15 guide down. Importantly, that could/should cause the consensus to revisit its $4.75 estimate for next year, which we don’t think is achievable. We think a base case is $4.50, with downside to $4.00 as the macro environment worsens.


Historically, TIF’s multiple change has been fairly explosive. As you can see, when earnings have been revised meaningfully up or down, we’ve seen TIF’s multiple relative to the S&P move by up to 40%. The point is that a $4.00 earnings number won’t get a high-teens multiple. It will get something in the low teens while the market waits for earnings to find a bottom. Using that logic, it is not unrealistic to model a $50 stock -- $30 lower. Are we making a call right now for such severe downside? No, we’re not. But that’s where the research initially appears to be headed.

TIF | This Short’s Not Done Yet - TIF PE NTM EPS


Mother Macro Could Make $4.00 (or less) A Reality?

Consider the following… Domestic economic growth is now well past-peak in rate-of-change terms for this economic expansion, with US GDP growth getting tougher in the 2nd half of 2015 vs. the 1st half. That means, if you held all other risks equal, the probability is higher that growth slows in Q3 and Q4 than Q2.  And the last two cycle tops didn’t have this mother of all demographic secular slowings – and note that this isn’t just the US -- the chart below represents better than 90% of Tiffany’s earnings.

TIF | This Short’s Not Done Yet - z ben 08.24.15 chart large


Modeling Considerations

2Q:  Overall, 2Q looks ok to us. Street estimates imply a slowdown in the 2 year constant currency comp by ~200bps.  That seems fair. LVMH and Kering both noted rebounds in jewelry sales in their second quarters.  Additionally, TIF's comp has directionally followed the organic growth of LVMH watch and jewelry sales for the past 4 quarters.  A potential positive is the Tiffany T collection which could/should boost penetration of the higher margin gold/silver fashion product. TIF’s US e-commerce business implies healthy demand in 2Q – though the trends look problematic into 3Q. It’s only 6% of TIF’s business, but is a good barometer for overall demand. Furthermore, TIF’s SIGMA chart looks very bad. Inventories are out of whack with the P&L in a way that is unlikely to be a 1-quarter fix without a meaningful margin event.

TIF | This Short’s Not Done Yet - tif sigma


Back Half

Here’s where we think the problem lies. Comp estimates are reasonable against easy compares, but Q3 margin comp is toughest of the year (even worse on 2 year rate).  SG&A growth was just 1% in Q4 last year, yet the street looking for SG&A leverage in this Q4 despite the company putting more capital into its new watch collection and "Will You" engagement campaign.  FX pressure is likely to ease in Q4, but what helps revenue and GM will hurt SG&A. The Street has 11% EPS growth in Q3 and Q4. We see it more as flat Q3 and HSD Q4.

TIF | This Short’s Not Done Yet - TIF CCC


TIF | This Short’s Not Done Yet - TIF Rank


TIF | This Short’s Not Done Yet - TIF reach


TIF | This Short’s Not Done Yet - TIF Sent

PHS & Purchase Apps | Mehhh ...

Takeaway: Summer doldrums have set in with July PHS +0.5% M/M, but decelerating Y/Y for the third consecutive month. Aug MBA #s show more of the same.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


PHS & Purchase Apps | Mehhh ... - Compendium 082715


Today's Focus: July Pending Home Sales & MBA Mortgage Applications

Pending Home Sales rose +0.5% sequentially in July following last month’s notable -1.7% retreat off the post-crisis highs recorded in May.  On a year-over-year basis growth decelerated -100 bps sequentially to +7.4% YoY, marking a 3rd consecutive month of 2nd derivative slowing. 


The takeaways are pretty straightforward:

  • From Great to Good: In rate-of-change terms, growth in activity is slowing and that trend should continue as comps steepen considerably through the balance of the year  (see charts 2/3 below).  
  • EHS Downside: PHS is a strong leading indicator for EHS and the prevailing tendency has been for EHS to re-couple in favor of PHS following short-term dislocations.  PHS softness in June and today’s uninspiring print for July suggest downside risk to reported EHS over the next month or two (see 1st chart below).   
  • Purchase App Corroboration:  The recent trend in Purchase Applications has been similarly lackluster.  Inclusive of the +1.7% gain in the latest week, Purchase Demand is tracking -2.4% MoM in August and -1.6% QoQ for 3Q.     
  • New vs Existing:  New and Existing Sales face similar (i.e. tougher) comp dynamics over 2H15 but, given where each is in their respective cycle, the MT/LT opportunity for new construction activity remains more compelling.  The mean reversion opportunity to average levels of activity in the new home market is ~20% while it's modestly negative in the existing market.  Upside to 6.0MM or greater in EHS is reachable (from 5.59MM last) but would require full market normalization and full resurgence in 1st-time buyer share to average historical levels. 
  • Rates:  Rates remain the lead swing factor for the complex and while rampant rate volatility has characterized most of the YTD, the expedited rate retreat over the last month has supported the relative case for domestic housing leverage.  At 3.83% on the 30Y FRM, affordability remains +4.5% better than the 2014 average and sits as a modest tailwind for HPI.



PHS & Purchase Apps | Mehhh ... - PHS vs EHS


PHS & Purchase Apps | Mehhh ... - PHS YoY TTM


PHS & Purchase Apps | Mehhh ... - PHS Comps


PHS & Purchase Apps | Mehhh ... - PHS Regional YoY


PHS & Purchase Apps | Mehhh ... - PHS LT


PHS & Purchase Apps | Mehhh ... - Purchase Apps Monthly YTD


PHS & Purchase Apps | Mehhh ... - Purchase Index   YoY Qtrly


PHS & Purchase Apps | Mehhh ... - Purchase Apps 2013v14v15


PHS & Purchase Apps | Mehhh ... - 30Y FRM 




About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.



The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.


About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake

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