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Real Conversations | Doug Cliggott: ‘An Uncomfortably High Probability of a Significant Correction’

During this wide-ranging, recent Real Conversations interview, prominent Wall Street equity strategist Doug Cliggott sits down to discuss his current market and economic concerns. Cliggott, who was formerly U.S. equity strategist at Credit Suisse and chief investment strategist at J.P. Morgan, shares his ursine investment outlook and cautions against complacency with Hedgeye’s Director of Research Daryl Jones.


PIR | LONG WALK ON A SHORT PIR

Takeaway: This is a great name to buy on an ugly print. Ugly qtr, but financial recovery finally within reach.

We’re not expecting a whole lot of positive news from PIR’s 2Q print (today after the close). EPS is a moving target, and guidance will be light. But when all is said and done we think that the results will show that the financial and operational inflection point for this beaten-down value stock is finally within reach. Are we concerned about a headline miss later today? Yes. We were well aware of these concerns when we added PIR to our Best Ideas list on August 31. Furthermore, we have yet to talk to anyone about this name that is not expecting an ugly quarter. Several analyst notes have already come out calling for a miss, and on top of that, short interest has raced up to 16% of the float – a four-year peak. We think they’ll ultimately be proved wrong.

 

PIR | LONG WALK ON A SHORT PIR - PIR shortinterest

 

A key consideration is that CFO Jeff Boyer will handle guidance for the first time after joining the company in late July. It’s not entirely clear how he will handle guidance…but we can’t imagine that he’ll want high targets his first year on the job. We’ve heard this concern from bears as well “new CFO will lower the bar”. Maybe we’d be concerned if the stock was up 20% over the past quarter, but we’re looking at quite the opposite – a 26% decline since the last earnings report in mid-June, and 12% over the past month.  So will guidance be lower? Probably. But it’s very important to note that Boyer is likely to lower because he wants to, not out of necessity. 

 

Why We Like It – PIR is a beaten-up, ugly value stock…there’s no two ways about it. But with the stock trading at just 0.5x sales – a level it hasn’t sustained in six years -- we think there are two primary questions to ask. 1) Are we going into a major recession? and 2) Is management going to do anything more destructive that would otherwise emulate a major recession? If you answer ‘No’ to both of those questions, then we think it’s a very good risk/reward to buy the stock with $3-$4 down and $20 upside.

 

PIR | LONG WALK ON A SHORT PIR - PIR financials

 

Our Answers:

1) We have some major questions marks as it relates to the economy, but we’re not calling for an all-out recession.

 

2) This is a company that is no stranger to execution issues, but we don’t think that management is about to do anything more that would cause a downturn in the business (especially w/ new CFO taking the seat in late July). Quite the opposite, in fact. Consider this…

  • Over the past three years, PIR gave up 5 points of margin as it played catch-up with its e-commerce business, which stood at only 1% of sales in 2013. Today it is pushing 17%. E-comm will continue to be a headwind as it grows to the mid-30s (about 130bps of dilution over 4 years), but the combination of merch margin recovery and store base rationalization should more than offset the dilution. We think that ~300bps of the margin recoverable.
  • Interestingly enough, in our survey in this report, PIR’s categories ranked as the ones where consumers are most apt to switch sales online. If there is any company that should have invested in e-comm, it is PIR.
  • We’ve had three straight years of elevated capex as the company built out e-comm capabilities. That rolls off this year, with asset consolidation (closing stores) and multi-year margin tailwinds takes RNOA from trough levels at 19% in FY16E to 31% by 2020. That’s a long tail, but even the slightest sign that we’ve found the bottom should make this stock rally.

 


EVENT (TODAY) – P & Web IV: What You Need to Know

Takeaway: Join us TODAY at 12pm and 2pm EDT for a two-part event on the implications of Web IV on P. Dialings instructions below

EVENT (TODAY) – P & Web IV: What You Need to Know - Pandora cartoon

 

 

We will be hosting a two-part event TODAY at 12pm and 2pm EDT to discuss both the bull and bear cases.

  1. P: Webcaster IV = Powder Keg (12pm EDT) – Our bearish thesis discussing the implications of the Web IV outcome on P’s business model.
  2. Speaker Series: David Oxenford, Counsel to Webcasting Companies (2pm EDT) – Fire-Side Chat on the relevant Web IV statutes and the Services' arguments.

 

KEY TOPICS WILL INCLUDE

 

P: Webcaster IV = Powder Keg (12pm EDT)

  • Challenging Business Model: Limited operational leverage despite operating under lower Pureplay rates
  • Pandora vs. SoundExchange: A review of the Web IV proceeding, the key tenets of each of their arguments, and why P is losing the key debate
  • Powder Keg: We’ll detail a range of potential outcomes, and the limited wiggle room P has without having to restructure its business model
  • Fool's Gold: Why the Copyright Register's decision is not a preliminary victory for P; all it means is that P is just treading water.

 

Speaker Series: David Oxenford, Counsel to Webcasting Companies regarding CRB proceedings (2pm EDT)

  • Introductory Discussion: Explanation of the relevant statutes regarding the Web IV proceeding (including where may be wrong)
  • Services vs. SoundExchange: Discussion regarding the Services’ primary arguments in the Web IV proceeding
  • Anonymous Q&A: 30-minute session to field your questions

 

Dialing instructions for both calls are below.  Let us know if you have any questions beforehand.   

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

Participating Dialing Instructions

  • Toll Free:
  • Toll:
  • Confirmation Number: 13620143
  • Materials: CLICK HERE

 


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CHART OF THE DAY: Wait! $90,000,000,000,000 Yen Ain't Working? Cue the Arrows Abe!

Editor's Note: The chart and brief excerpt below are from today's Early Look which was written by Hedgeye CEO Keith McCullough. Click here if you would like to join our contrarian team and begin getting a step or two ahead of consensus.

 

CHART OF THE DAY: Wait! $90,000,000,000,000 Yen Ain't Working? Cue the Arrows Abe! - z ben 09.24.15 chart

 

...“So,” since 90 TRILLION Yen in money printing + the 3 arrows of “Abenomics” isn’t working, what did the Japanese announce overnight? “Three More Arrows”!

 

I seriously couldn’t make that up if I tried. And if a spend more than another sentence on what the 3 “new” policies are, today’s note is going to turn into a joke (1. “Stronger Economy” 2. “Welfare” and 3. “nominal GDP target of 600T Yen”).

 

Best of luck with that, dudes.

 


Gaining Insight?

“The goal is to transform data into information, and information into insight.”

-Carly Fiorina

 

That would (should) be the goal of any coach, captain, or executive. Sadly, it’s not the goal of central planners. They are mostly dogmatic-academic types whose goal is to obfuscate the data into their thesis, and their thesis into more central plans.

 

Dr. Gary Klein did a great job outlining the risks of ideologues and flawed beliefs in Seeing What Others Don’t. Here’s how he distinguished “successes from failures” in idea generation and decision making (pg 120):

 

  NO INSIGHT                       <--              -->     GAINED INSIGHT

  1. Gripped by flawed beliefs                    Escaped the fixation of flawed beliefs
  2. Lack of experience                                Experience
  3. Passive Stances                                     Active Stances

 

If your premise is that a bureaucrat (with no market experience) can part the heavens and smooth economic gravity, you’re gripped by some serious human hubris. If every impotent market policy move is met with more policy moves, there is no insight in that.

Gaining Insight? - campfire cartoon 10.31.2014

 

Back to the Global Macro Grind

 

“So”, since 90 TRILLION Yen in money printing + the 3 arrows of “Abenomics” isn’t working, what did the Japanese announce overnight? “Three More Arrows”!

 

I seriously couldn’t make that up if I tried. And if a spend more than another sentence on what the 3 “new” policies are, today’s note is going to turn into a joke (1. “Stronger Economy” 2. “Welfare” and 3. “nominal GDP target of 600T Yen”).

 

Best of luck with that, dudes.

 

In other central-market-planning news this morning the Norwegians have proclaimed their mystery of faith to the world that they can solve for all that is #Deflating in Norway with “rate cuts.” They’re cutting by 25bps to 0.75% and say they “can do more!”

 

I bet they can!

 

Europe, meanwhile, is right confused this morning:

 

  1. Draghi says he doesn’t need to deliver more #cowbell, because #EuropeSlowing isn’t yet clear to him
  2. Weidmann (head of the Bundesbank) says he’s “skeptical” about QE’s impact on the real economy altogether

 

The problem with the pending Draghi vs. Weidmann debate is that they aren’t debating #GrowthSlowing, yet. As the European data continues to slow, and the German stock market continues to crash (-22% since April), you can bet your Madoff that will change.

 

In the meantime, what is a Global Macro risk manager of this central-planning experiment gone bad to do?

 

  1. Stay away from cyclical stocks and “reflation” (locally and globally)
  2. Stay with long-term government bonds
  3. Keep building up that new contrarian Gold position

 

Yep. Until Draghi starts freaking out Weidmann with more “data/information” (like Sweden and Finland reporting new lows in Producer Price (PPI) #Deflation of -2.2% and -1.1%, respectively, this morning), Euro Up = Dollar Down = Gold Up. I like that.

 

As you know, I’m all about showing you the love these days. But don’t confuse my love for life, liberty, and free-market capitalism with a love for any trade-able security. My goal is to like/dislike macro positions as they undergo Phase Transitions. That is all.

 

What could get me to move off of the 0% net asset allocation to Equities in both the US and International markets? That’s simple. The combination of my macro market signals and research information. Until growth stops slowing at an accelerating rate, I’m all set.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are now:

 

UST 10yr Yield 2.08-2.20% (bearish)

SPX 1 (bearish)
DAX 9 (bearish)
VIX 19.90-26.62 (bullish)
USD 94.41-96.69 (neutral)
EUR/USD 1.10-1.14 (neutral)

Gold 1120-1148 (bullish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gaining Insight? - z ben 09.24.15 chart


Euro, Gold and the Dax

Client Talking Points

EURO

The Euro bounced right off our $1.10 TRADE support and seeing follow through to $1.12 vs. USD this morning as Bundesbank chief Jens Weidmann outlines his skepticism towards QE post the ECB President Mario Draghi fade – lots of macro moves on this.

GOLD

Long Gold is one of the plays after Up Euro = Down Dollar (Up Gold) and looks good post our Real-Time Alert to buy it again yesterday post the Draghi speech. To get a bigger breakout in Gold (toward $1190) we’d need the Fed to fade on the DEC hike (which we think they will).

DAX

The DAX does not like the Draghi fading – straight back down yesterday into crash mode (currently no bounce this morning -22.2% since April); reminder that we have the lowest European (and German) GDP estimates on the Street for both Q3/Q4 and 2016 #EuropeSlowing.

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 68% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 8%
FIXED INCOME 24% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald’s remains one of our Restaurant teams Best Ideas on the LONG side.  We continue to believe that 3Q15 will be the inflection point for the company’s turnaround and that we are going to be looking at a much different company 1-3 years from now.

 

Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.

PENN

Penn National Gaming continues to be our favorite Regional Gaming stock.

 

Regional numbers for August have come in soft, but we predicted the August weakness. September revenues should rebound and serve as a catalyst for the stock going into Q3 earnings. On the research side we have not altered our views of PENN’s long term growth story. We continue to see more upside from current price levels. 

TLT

Slower (and Lower) For Longer remains our non-consensus call. It's nice to see that the Fed is finally starting to see what the #GrowthSlowing late-cycle data does.

 

  1. GROWTH: is #LateCycle and will be slower (again) in Q3 than it was in Q2
  2. INFLATION: misreported, yes – in the area code of the Fed’s 2% “target”, no

 

Our estimate for Y/Y% GDP for Q3 is a range of 0.1% to 1.5%. Even the Q/Q SAAR # that consensus hangs on will be comping against a 3.7% Q/Q SAAR GDP print (second revision). Good luck positioning for a rate hike. Prepare for the fade…. AGAIN.

Three for the Road

TWEET OF THE DAY

VIDEO (2mins) Is This Raging Keynesian Bureaucrat the ‘Wesley Mouch’ of Today’s Atlas Shrugged? https://app.hedgeye.com/insights/46494-is-this-raging-keynesian-bureaucrat-the-wesley-mouch-of-today-s-atla

@KeithMcCullough

QUOTE OF THE DAY

Cultivate optimism by committing yourself to a cause, a plan or a value system. You'll feel that you are growing in a meaningful direction which will help you rise above day-to-day setbacks.

Dr. Robert Conroy

STAT OF THE DAY

According to the [unofficial] Caixin-Markit Manufacturing PMI series, Chinese growth slowed to a 78-month low in September, with the Output sub-index dropping to a lowly 45.7 from 46.4 in August.


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