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Unintended Consequences: What $15 Minimum Wage Means for Fast-Food Industry

In this brief excerpt from a recent edition of The Macro Show, Hedgeye Restaurants Sector Head Howard Penney discusses the unintended consequences of raising the minimum wage for fast food workers to $15 an hour. According to Penney, the industry can’t afford it, people will get fired and stores will close.

 

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BONUS! Is 'Mobile Order & Pay' the Holy Grail for Starbucks?

If you missed it...Check out Penney's review of the new Starbucks Mobile Order & Pay app and how it plays into his long-term view on the company. 

 

 


Retail Callouts (10/2) | Ups and Downs in Athlete Endorsements, NKE, AdiBok, UA, JWN, AMZN

Takeaway: James Harden's start with Adidas, and remembering 10/2 -- The ups and downs of Athlete Endorsements.

AdiBok, NKE - On the first day of his contract, Adidas delivered a truckload of shoes to James Harden.  Now he won't have to wear Jordans when going to the movies.

(http://footwearnews.com/2015/focus/athletic-outdoor/adidas-james-harden-sneakers-157894/)

 

After Nike was dealt several blows in the sports endorsement world by UA -- starting with Kevin Durant, then Misty Copeland, Jordan Spieth, Tom Brady and Steph Curry -- Nike finally wins one in the press at the expense of Adidas' endorsement of James Harden. Not only is Adi paying Harden a total of $200mm over the next 13 years, but it also had to self deprecate itself (we don't know what else to call a truckload delivery) after the basketball player was spotted wearing Jordans and Nike in public not once but twice since singing the deal. That begs the question for Adi as to whether the investment is really worth it. Nike and Jordan collectively have 97% share of the US basketball market. And, if Adidas can't get its players to buy into the brand (who it is paying handsomely) then how does it convince the consumer to give it a shot?

Retail Callouts (10/2) | Ups and Downs in Athlete Endorsements, NKE, AdiBok, UA, JWN, AMZN - 10 2 2015 chart1

Retail Callouts (10/2) | Ups and Downs in Athlete Endorsements, NKE, AdiBok, UA, JWN, AMZN - 10 2 2015 chart2

Harden leaving the theater in mid-September

Image source: TMZ

 

BUT...Let's Keep Nike's Ego In Check On This One

Anyone know what today is? It was October 2, 1996 that Lance Armstrong was diagnosed with Cancer. Nike subsequently commercialized his ensuing popularity into its 'yellow bracelet' business, which exceeded $100mm, and then into 'wear yellow' apparel and footwear line, which we think approached $400mm at its peak. Needless to say, that business is close to zero today.  Just a subtle reminder as to how quickly and dramatically things can change in the athlete endorsement world.

Retail Callouts (10/2) | Ups and Downs in Athlete Endorsements, NKE, AdiBok, UA, JWN, AMZN - 10 2 2015 chart3

 

NKE - Nike Forced to Hand Over Communications with Lance Armstrong. Court is assessing whether Armstrong must return more than $30 million paid to him by the U.S. Postal Service in sponsorship money.

(http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=8&id=57755)

 

AMZN - Amazon announces that Apple TV and Chromecast will not longer be sold via Amazon saying it wants to avoid customer confusion since these players don’t interact well with the Prime Video platform.  Roku, Xbox and PlayStation are unaffected.

(http://www.bloomberg.com/news/articles/2015-10-01/amazon-will-ban-sale-of-apple-google-video-streaming-devices)

 

JWN - Nordstrom has closed on the sale of its credit card portfolio to TD Bank.  The company is using the $2.2bn in proceeds to pay off debt, issue a special cash dividend of $4.85 per share, and increase share buyback by $1bn.

(http://investor.nordstrom.com/phoenix.zhtml?c=93295&p=irol-newsArticle&ID=2092509)

 

Neiman Marcus cuts 500 jobs bringing the headcount to 15,500.

(http://wwd.com/retail-news/department-stores/neimans-cuts-staff-cites-reinvestments-10249792/)


JCP - JC Penney taking action to reduce the risk of its pension plan, by offering a lump sum to some participants, and entering into agreement to pass portion of obligation over to Prudential.

(http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-newsCompanyArticle&ID=2092604)

 

KSS - Madden Girl launching at Kohl's on Oct 15th.

(http://phx.corporate-ir.net/phoenix.zhtml?c=60706&p=irol-newsArticle&ID=2092125)

 

DKS - SVP and CMO Lauren Hobart named Executive VP, CMO and general manager of Dick’s new women's store Chelsea Collective. She will retain marketing oversight for all Dick’s lines of business.

(http://www.chainstoreage.com/article/dicks-sporting-goods-taps-marketing-head-head-new-store-format)

 

WMT - Walmart opening yet another e-commerce fulfillment center, this one in Atlanta.

(http://www.chainstoreage.com/article/walmart-enhances-e-commerce-shipping-latest-fulfillment-center)

 

Gilt by Appointment seeing average order values more than twice as high as those placed via its e-commerce site.

(http://wwd.com/retail-news/direct-internet-catalogue/gilt-by-appointment-rolls-out-new-initiatives-10249567/)

 

ShoeBuy Appoints Bob Mullaney as COO and President 

(http://www.sportsonesource.com/news/fbu/fbu_article.asp?section=1&Prod=5&id=57758)

 

BEBE - bebe stores, inc. eliminates 50 positions in workforce reorganization.  Expecting $4.8mm in annual savings.

(http://investorrelations.bebe.com/press-release/other/bebe-stores-inc-announces-workforce-reorganization)

 

SVU - SUPERVALU CEO Sam Duncan Announces Plan to Retire February 2016. He served as CEO since February 2013, appointed as part of sale to Albertson's.

(http://www.supervaluinvestors.com/phoenix.zhtml?c=93272&p=irol-newsArticle&ID=2092492)

 

CHS - Chico's appoints Cynthia A. Fields, former Victoria Secret CEO to its Board of Directors

(http://chicosfas.com/investor-relations/press-releases/press-release-details/2015/Chicos-FAS-Inc-Appoints-Cynthia-A-Fields-to-its-Board-of-Directors/default.aspx)


Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant

Takeaway: September performance was very soft and the stock reflects that now trading at trough levels on a Price/AUM basis.

  • September performance released this morning was very soft and underperformed both the broader market and the early calculation of leading alternative benchmarks. OZM's core Multi-Strat product experienced a -3.66% decline in September, more in line with beta as the S&P 500 lost -2.64% and with the Barclay's Hedge Index currently running at a -0.80% decline. Importantly, OZM Multi-Strat lost its running year-to-date positive return now down -2.0% for 2015 versus the Barclay's Hedge Index running down -0.6% but better than the S&P 500's performance of down -6.5%. Och's other Multi-Strat products are faring better year-to-date with its Asian strategy up +2.8% and its European product up +3.8% for '15.
  • Backing out investment losses for the month, we calculate that OZM also had a -$821 million redemption in the period, which annualizes to a -21% organic growth rate. The year-to-date score however is not as bad with Och's running fund raising at -$1.2 billion, or a negative growth rate of just -4%. 
  • OZM stock has underperformed the broader market and the asset management sector since March of last year and the disclosure of a potential FCPA violation (see our note titled Watching the Same Movie Twice) which was also reduxed in a major media outlet last month. We see nothing new on this issue other than shares continue to overly discount this item in our view. With the current depreciation of the stock on its core dividend payout alone (without incentive earnings), OZM now yields 7.8% as the company dividends out over 85% of its earnings and we calculate core OZM earnings at $0.80 per share on an annual basis. Putting a traditional asset management multiple on this core earnings stream translates to a $10 per share fair value, however with 3 months to go in 2015, there is also the opportunity for the firm to earnings back its slight performance deficit and create a year-end incentive payout. OZM shares are near their all-time trough on a Price-to-AUM multiple with the firm's current market cap at just 9.6% of its asset-under-management. The stock bottomed at 9.3% on this metric in 2009 with the long term mean value at 15.8%.

 

September Results

 

This morning Och Ziff reported soft performance in September with negative returns in all of its main products. The firm gives four numbers in a shortly worded 8-K on a monthly basis, which includes the monthly performance for its OZ Master Multi-Strat Fund (~59% of total assets-under-management), its multi-strat fund in Asia (~3% of AUM), its multi-strat fund in Europe (~3% of AUM), and its total month ending assets-under-management. The OZM reported numbers this morning were:

  • OZ Master Fund performance in September of -3.66% (YTD: -2.0%)
  • OZ Asia Master Fund performance in September of -1.39% (YTD: +2.8%)
  • OZ Europe Master Fund performance in September of -2.11% (YTD: +3.8%)
  • Ending total assets-under-management of $44.1 billion (YTD: -4.1%) 

 

The most current tabulation of running OZM performance and AUM: 

 

Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant - table

 

Relative to other Alternative benchmarks including the Barclay's Hedge and the Barclay's Multi-Strat, OZM returns under performed:

 

Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant - comp 1

Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant - comp 2

 

However capitalizing the firm's core management fees of $0.80 per share at a traditional asset management multiple translates into $10 per share in value alone:

Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant - implied price

 

OZM stock is also close to trough levels on a Market Cap-to-AUM basis at 9.6%, well of off its mean of 15.8% and near the '09 bottom of 9.3%:

Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant - Price to AUM

 

 

Sell in May and Miss a Payday 

Magnum P&I

Robust March Performance - 2015 Off to a Hot Start

Don't Call it a Comeback...I've Been Here for Years

The VIX Vaporizer

Watching the Same Movie Twice - Reload on OZM shares

Hedgeye BlackBook Best Idea Long

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


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CHART OF THE DAY: Payrolls Running into the Law of Large Numbers?

Editor's Note: Below is a brief excerpt and chart from today's Early Look which was written by Hedgeye U.S. Macro Analyst Christian Drake. If you're interested in staying a step ahead of consensus, we encourage and invite you to subscribe.

 

  • RoC | Past Peak:   From a rate of change perspective NFP peaked in February at +2.343% YoY.  Re-breaching that growth rate to the upside is not going to happen.  It’s just math meeting realism.  The M/M change in NFP would have to be +602K for that to happen.  What does that mean?  Not much in the very immediate-term, at least based on historical precedent.  As the Chart of the Day below illustrates, payrolls run into the law of large numbers as an expansion matures with peak rate-of-change in NFP occurring ~2yrs ahead of the peak in the cycle.  Cycles take time to play out – let it breathe.  And, as noted above, typical business cycle oscillations in the post-war period are only loose analogs for the post-crisis expansion.  

CHART OF THE DAY: Payrolls Running into the Law of Large Numbers? - z chart 1 cd


Macro Like You Mean It

“Sleeping is no mean art: for its sake one must stay awake all day.”

-Friedrich Nietzsche

 

I’m going to make a bold prediction:  This will not be the best Early Look of the year.

 

Clever linguistic acrobatics are a rested man’s game and I haven’t slept since Tuesday as @HedgeyeFIG and I were busy prepping to bring the housing research thunder on our 4Q Themes call yesterday.  

 

(Incidentally, we’ve had a pretty $$$ run in housing calls over the last 7-qtrs -  if you’d like the detail on our attempt to maintain the analytical momo in 4Q, email )

 

Plus it’s Friday – Jobs Friday no less – and risk rarely rests.  And since I'm both head housing drummer and lead domestic econ vocalist for our Global Macro Boy Band, I’ll play the next gig.

 

… Ya gotta Macro Like You Mean It!

 

Macro Like You Mean It - z chart 2 cd

 

Back to The Grind …

 

As we highlight probably every month, we haven’t figured out a way to consistently model and convictedly forecast a point estimate on the monthly payroll figure – so we don’t.    

 

The current price/quant signals and our TREND view on domestic fundamentals generally drives our positioning into the number and we simply take what BLS gives us on jobs day and respond accordingly. 

 

But since the collective investor fascination this morning will be guessing on the over/under on everyone else’s guess on the rand() function that is the NFP print,  we’re tasked with observing and assimilating the machinations of a restless market on its most manic day of the month.   

 

Keith will be captaining the real-time macro strategy session on Fox Biz this morning before the @Hedgeye Macro Show if you’d like to tune in.

 

Since we don’t know what the payroll number will be, let’s focus on some stuff we do know: 

 

  • Trend = Less Good:  No matter how you parse either the NFP or ADP employment numbers, the trend has been slowing:  3M ave < 6M ave < 2015 ave < 2014 ave.  Was it inevitable that we slow off the 2H14 pace of +273K/mo.  Yes, but less good is less good.

 

  • The Late Late Show:  October will mark the 77th month of the current expansion (the mean & median over the last century are 59-months and 50-months, respectively).  Do expansions following financial crises and balance sheet recessions run longer in period and lower in amplitude (i.e. long and muddling).  Yes, while we’re late cycle, the duration of the expansion is not surprising.  Do conventional expansions and bull markets die of old age and without focused central bank tightening.  Not typically but this, of course, is not a typical cycle (financial crisis, unprecedented global central bank intervention, negative global demographic trends, global over-leverage, global liquidity trap conditions, etc.)

 

  • RoC | Past Peak:   From a rate of change perspective NFP peaked in February at +2.343% YoY.  Re-breaching that growth rate to the upside is not going to happen.  It’s just math meeting realism.  The M/M change in NFP would have to be +602K for that to happen.  What does that mean?  Not much in the very immediate-term, at least based on historical precedent.  As the Chart of the Day below illustrates, payrolls run into the law of large numbers as an expansion matures with peak rate-of-change in NFP occurring ~2yrs ahead of the peak in the cycle.  Cycles take time to play out – let it breathe.  And, as noted above, typical business cycle oscillations in the post-war period are only loose analogs for the post-crisis expansion.  

 

  • ISM Mfg:  The employment sub-component in the ISM manufacturing survey for September came in at 50.5 – flirting the contraction line for the 2nd time in 6-months.   Again, is the ongoing softness in the manufacturing sector surprising with slowing global growth, strong dollar (↓ export demand) and cratering energy sector capex? Not really, but that doesn’t mean it doesn’t matter.  And (next bullet) …  

 

  • Good vs. Services: Because consumption of and investment in durable goods is more cyclical than nondurable/services consumption and carries a higher elasticity to macro conditions, the employment trend in the goods producing sector tends to front-run negative inflections in the broader labor market.  Employment growth in the goods sector has been in discrete deceleration – slowing from +3.0% at the start of the year to just 1.36% as of August.  Watch this trend  – U.S. centric strategists can live in an “de-coupler’s” echo chamber, globally interconnected Macroeconomies cannot – at least not sustainably.

 

  • What to Watch:  The product of total employment, ave hours/wk and earnings/hr gives you aggregate income for the month and aggregate income determines the capacity for consumption (and, generally, the trend in actual household consumption).  So long as income trends hold in a consumption economy, it will be hard for the domestic (real) economy to truly come off the rails – despite a worsening trade balance and flagging investment. 

 

  • Tea-Leafing the Internals:  Most of the market angst centers on the read-through to policy.  Here’s a rough playbook and the likely implications for a selection of data combinations:
  1. Big NFP gain, (still) no wage growth = slack still pervasive, Fed probably communicates a bullish interpretation of the data
  2. Lower Print, Accelerating wage growth = slack diminishing – Good in terms of approach toward full employment, but the Fed can’t hike (sustainably) into middling and declining payroll gains.
  3. Lower, (still) no wage growth = stall speed, Doves bunker down a bit, Dots pack their bags for a push out. 
  4. More of Same (200K +/- & Middling Wage growth) = More of same on policy side.  Global macro conditions remain a fulcrum for domestic policy. 

 

  • GDPNow … or Later:  The Atlanta Fed GDPNow model – which has had the hot hand in recent quarters - currently sits at 0.9% for 3Q.  Recall, the model gets increasingly accurate as quarter-end approaches and more data is incorporated. The skinny on the quarter is basically this: Consumption will remain pretty good while Net Exports, Investment and Inventories will continue to drag – and comps only get tougher.

 

  • Rationalization Indicators:  This is largely qualitative but my inbox has seen a notable influx of esoteric indicators of late.  The increased trotting out of squirrely, netherworld “indicators” via sell-side distribution channels typically signals that data-mining and the “twisting facts to fit theories” exercise has escalated.   

 

To summarize and conclude:

 

Next Verse, Same As the First:  Inclusive of whatever the BLS delivers this morning:   Slower-and-Lower-for-Longer remains the call.   

 

You buy that theme opportunistically and with a Trend view – you don’t buy it at every time and price.  

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.19%

SPX 1
RUT 1067-1125 

VIX 19.94-29.12
Oil (WTI) 43.64-47.21 

Gold 1104-1155

 

Happy Friday.  To Sundays, siesta’s and cerebral exfoliation,

 

Christian B. Drake  

U.S. Macro Analyst

 

Macro Like You Mean It - z chart 1 cd


The Most Important Chart on Jobs Report Day?

This morning, I'd like you to focus on the chart below - context is critical.

 

The Most Important Chart on Jobs Report Day? - z jobs km chart

 

As many of you already know, my team and I here at Hedgeye got bullish on employment growth (and US growth) when this chart bottomed in 2012 - it's bearish now.

 

On a related note, please bear in mind that our firm's call (for 20 months) has been that the biggest risk to the market is the Fed's forecasts. Their forecasts (on both growth and inflation) in 2015 have been flat out wrong.

 

The data is slowing. Period.

 

Now, back to your centrally-planned morning.


Early Look

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