Q: How does Mario Draghi like his eggs?
A: "Over easy."
Mario "Whatever It Takes" Draghi Full of Hot Air!
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So... ECB head honcho Mario Draghi (more than) hinted that additional monetary stimulus is on its way. Like his central-planning cousin Janet just across the pond, Mario loves that monetary cowbell. The ECB governing council apparently had a “rich discussion” about what accommodative monetary instruments might be used in the not-too-distant-future.
On The Macro Show this morning, Hedgeye CEO Keith McCullough explained the ramifications of what more monetary easing means. Here are some highlights:
“The euro crept up a little bit yesterday to 1.15 versus the dollar, with everyone questioning that Draghi may not bring the thunder. That changed today. If it breaks 1.11, there’s going to be a mad rush to 1.05. If it gets to 1.05 on the euro you’re going to get 100-something potentially on the U.S. Dollar index. That is going to wreak havoc. Then you get the deflation dominoes.”
“Will Draghi be able to keep Spain from crashing? We doubt it. Cowbell does not create economic growth if it’s via currency depreciation. What it actually does is devalue the purchasing values of the people. That means you need more to buy that loaf of bread."
“This is very deflationary. It is perverse, but it is what it is. Draghi devalues the euro, that takes the euro down, the dollar up, and oil and energy stocks down.”
“The Fed is absolutely scared of its own shadow. The minute the market went down, they got scared. But now, the economic data is going down and the market is up. What does the Fed do on that? Well, they see the market react to a stronger dollar, via Draghi, and say to themselves we don’t have to tighten Draghi did that for us.”
“The Japanese taught us this, when you’ve got nothing else going on, the best security is government bonds. This is what happens when people don’t have economic growth, or hope, or anything to invest in. The core feature of a Long Bond is growth slowing.”
In other words, recent global developments are further confirmation of our firm's non-consensus macro theme #LowerForLonger and our contrarian bet on the Long Bond.
Takeaway: Returns are declining, and will for at least 1-2 yrs. But those who can look out to $4.00 in EPS probably won’t – and shouldn’t -- care.
When a stock trades at 70x an underlying earnings stream that’s only growing 15%-20%, the cold, hard truth is that the ratio of ‘awesomeness-to-mediocrity’ needs to be off the charts in a given quarter to appease the market. For a day, at least. On today’s menu there was a bit too much mediocrity in the mix.
Is there anything we heard that makes us question the long term growth potential of UA? Absolutely not. We think that it ultimately has between $3.50-$4.00 in earnings ($10bn revs at 12% margin). Importantly we think that UA is making the investments required to complete its transition from being a Great US Brand, to a Great Global Company. We actually don’t think it cares nearly as much as other companies in hitting a quarter, and for that we commend Plank & Co. That’s why there are some investors who own this name and will absolutely not sell it. They see a company going from $3.9bn in sales to $10bn, and earnings from just over a buck this year to $4.00 in five years’ time.
But for some investors that don’t have Kevin Plank’s duration, the quarter matters. And unfortunately, when looked at holistically, this was not as stellar a print as one might think in listening to all 5 Analysts who asked questions on the call congratulate management for doing its job.
Revenue was on fire – coming in +29% yy. But Gross Profit was +27%, EBIT +21%, and EPS +17%. On top of that, the cash conversion cycle eroded by 15 days, the most in seven quarters. That’s due in part to higher footwear inventories, as the company scales up a fundamentally more complex business (lower margin and more capital intensive). Most companies in Consumer Discretionary would be thrilled with this growth algorithm – but not those that trade at 70x earnings.
The reality is that this is a generational growth story that is almost always in a state of flux. All great stories are. We’re seeing rapid growth in businesses like footwear, that we would argue are responsible for arguably half of the company’s enterprise value – but just 15% of revenue. This is the most positive trend in the quarter full-stop. We’re looking at 61% growth in footwear, which is the fastest rate of growth since 3Q11, when the business was less than $200mm. In other words, it’s growing faster as it’s getting bigger, which goes against common logic.
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The title of our short presentation on VRX back in July 2014 was "Something New Under The Sun?". It seems like a good title in retrospect.
its hard to see a way out from here...
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Hedgeye CEO Keith McCullough pulls no punches whatsoever on why hedge fund manager Bill Ackman is not (even close) Warren Buffett on The Macro Show this morning.
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ECB head Mario Draghi, in what has become an all too familiar song and dance, reiterated his extend & pretend mantra in today’s ECB presser, namely stating that country level structural reforms combined with accommodative ECB policy (low interest rates and continuous QE program) is the recipe to achieve Eurozone growth and an inflation rate near its target of 2.0%.
We’ll take the other side of the “hope” embedded in that positing! And it’s one we’ve long espoused and expressed as our 3Q15 Macro theme of #EuropeSlowing (published on July 7, 2015).
What was new in today’s presser? Very little: Draghi kept main interest rates on hold (as expected) but did clearly signal that the ECB is in fact in wait and “monitor” mode until its December 3rd meeting when the ECB’s staff releases a new growth and inflation outlook for the region. Expect forecast revisions to go one way – down!
The EUR/USD is down -1.4% since Draghi’s remarks this morning, indicating that investors are already baking in the cake an extension to the QE program come December.
We continue to suggest that you trade the risk range in the EUR/USD based on our quantitative multi-factor risk signals, and risk weight what our good friend Jim Rickards has penned the Currency Wars.
This morning the EUR/USD broke its immediate term TRADE/TREND level of $1.12, a bearish signal for further downside support if it can hold for at least 3 trading days.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.