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SPECIAL EDITION: McCullough Answers 4 Macro Questions From Elmo

 

During a special, surprise visit to The Macro Show this morning, Hedgeye CEO Keith McCullough fields some tough macro questions from “Elmo.” Top of mind for the Sesame Street character? Will the Fed hike interest rates and where should Elmo be putting his money right now.

 

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COH | Absolutely Uninvestable

Takeaway: COH could be a TRADE to the upside as negative leverage swings in its favor. People will look to $2.50+ EPS power. But real number is $1.50.

Coach might be a good TRADE at any given point it time based on its business trending at varying degrees of ‘terrible’. But for anyone that has a duration of anything more than a year, we think that the name is absolutely positively uninvestable. Can COH earn $2.00 this year? Perhaps. It’s definitely on a ‘really bad’ as opposed to ‘horrible’ earnings trajectory – with sales ex Weitzman down 9% and EBIT down 31% as opposed to sales -15% and EBIT -50% three months ago. So yes, $2.00 in EPS is possible as we see operational leverage swing the other way.  But that would be the last time annual earnings start with a 2-handle again – at least until someone takes the company private at a lower price than where it is today, incubates it, and finds the right market (and new investor base) for another IPO.

 

There are so many things we could point to that are problematic here, and most of them don’t represent any unique thought. A $32 stock knows about the following; a) Coach’s exodus of talent, b) that the brand simply does not resonate outside the US like other brands such as Kors, Kate Spade, and European higher-end luxury brands like Gucci and LV, c) that man-purses are not the answer, and d) what it means that the company had to resort to an acquisition in accessories (Stuart Weitzman footwear) – because unlike other brands it could not do it on its own.

 

[Two quickies on the SW deal: 1) buying a company like SW is a huge admission that the Core can no longer grow at the desired margin structure, and 2) one of the Cardinal rules of Retail is “Never Buy a Business from Jones Apparel Group”. JNY finalized its purchase of SW in 2012 for $430mm. Then as Sycamore Partners carved up JNY after the buyout, it sold SW to Coach for $574mm. JNY was the undisputed king of buying companies and stripping them of growth capital in order to improve margins. Coach is likely going to pony-up some deferred capex and SG&A on that one (upwards of $100mm).]  

 

Ultimately, the problem is what most people know at some level – the brand simply does not resonate anymore with the consumer it needs to drive $1-$2bn in sales at an industry leading margin. The reality is that there’s nothing in the company’s strategy that we think allows it to shed its fate as a Department Store/Outlet brand for a style-conscious, but aging consumer.  The slide below – which compares the KATE, KORS, and COH consumer -- says it all. Only 12% of KATE’s customers shop COH – that’s 9% for KORS. COH skews older (than the brand admits) and less affluent. KATE skews younger and wealthier. KORS is somewhere in between – but skews toward KATE. 

 

The key point is that last year Coach sold about 25mm handbags to 16mm people (our math) – them’s big numbers. The best marketer in the world can’t just snap her fingers and change-up the underlying consumer group for a Brand. If Coach wants to accelerate growth, it probably has to fire some older, less affluent customers first. If it wants to drive margin, it should stop talking about the top line.  Some brands/companies can have both. But that ship has long sailed for Coach. Unfortunately the company does not know it.

 

Bottom Line: The real earnings power for Coach – the one that allows it to sustain a low-single digit revenue growth rate over the long term, is about $1.50. That’s where we are 1 and 2-years out. But over the next two quarters, we think that the bounce in the sales/margin trajectory will make people believe in a much higher number. Unfortunately, COH management set expectations for a positive comp in 4Q – which is bold to say the least. We’ll look to get aggressive on the short side on the big green days.

 

COH  |  Absolutely Uninvestable - COH   Kate Slide 10 27

 

A Quick Point On The Category – We’re Still Buying KATE

Category growth – in the North American premium and women’s men’s market was estimated to be in the LSD range during the quarter in line with what the company reported during it’s 4th quarter call back in August and off the high-single digit pace in 1H15 and mid-single digit pace in 3Q15. That’s not alarming to us given that two of the biggest competitors in the space, COH and KORS with market share collectively in excess of 40%, (using the $13bil market COH has cited) have been comping negative in North America at a negative HSD to LDD clip. KATE on the other hand has ~5% share in that market place and a lot of runway for growth. If COH’s numbers are right and the category is still growing at a LSD in spite of that, the dollars have to be going somewhere and we think that’s KATE.


Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence

Takeaway: Case-Shiller confirms HPI Acceleration. Meanwhile, 3Q15 HVS data shows the beginning of the long awaited rebound in 18-34 YOA homeowership.

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.

 

Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence - Compendium 102715

 

Today’s Focus: August Case-Shiller HPI & 3Q15 HVS 

 

HVS: Housing Vacancy Survey, 3Q15

 

We received the Census Bureau's HVS survey data for 3Q15 this morning.  

 

The HVS survey is timely and widely cited, but it’s volatile and doesn’t always comport cleanly with the more comprehensive annual Census/CPS housing surveys or a common sense reading of reality. 

 

We take the data with a grain of salt and, while we view the magnitude of change as a distorted reflection of the underlying reality, we view directional changes in the data as a largely accurate depiction of the underlying trend.  

 

Household Formation:  The yearly net change in Households in 3Q15 was 1.45MM, down modestly sequentially but marking a 4th straight quarter of breakout following a half-decade hibernation in household formation following the great recession. 

 

The gains were again concentrated on the rental side with 92% of the increase stemming from an increase in renter households.  Notably, however, 3Q15 marked the first time in 6-quarters in which Owner Occupied Households saw positive gains on both a QoQ and YoY basis. The quarterly HH formation trends along with the cumulative HH formation changes by type are shown in the charts below.   

 

Homeownership:  The National Homeownership Rate bounced off the 48-year low recorded in 2Q, rising to 63.7% in 3Q from 63.4% prior. The seasonally adjusted Homeownership Rate was flat sequentially at 63.5%.  

 

The one callout is probably the notable increase in the Homeownership Rate among 18-34 year-olds which increased to 35.8% in 3Q from 34.8% prior.

 

Given that the employment recovery for that age cohort - which lagged the broader employment inflection - is now maturing towards the 3-year mark and has been growing at a premium to the broader average over the TTM, it's not particularly surprising to see upward pressure on ownership rates.  Ongoing improvement in employment/income trends should continue to support rising headship rates with emergent rental demand slowly tricking through to the SF purchase market.  

 

Again, we don't put significant stock in the precision of the HVS estimates but the data has begun to move directionally.  

 

 

Case-Shiller HPI:  August Godot Arrives (kinda)

The Case-Shiller 20-City HPI for August released this morning – which represents average price data over the June-August period – showed home prices rose +0.11% MoM while accelerating +20bps sequentially to +5.1% year-over-year.  On an NSA basis, 18 of 20 cities reported sequential increases (down from 20 last month) while, on an SA basis, 11-cities reported increases (up from 10 prior).  Notably, the Case-Shiller National HPI  (which covers all U.S. Census divisions) accelerated for the 6th consecutive month, accelerating +10bps sequentially to +4.68% YoY.   

 

Improving second derivative price trends have augured outperformance in the housing complex historically as rising prices are margin supportive and help perpetuate the Giffen Good dynamic that characterizes housing demand. 

 

The National Case-Shiller HPI has been in accord with the improving price trend observed in the CoreLogic and FHFA series since late 1Q.  The 2nd month of improvement in the 20-City Index in the latest August data provides more solid evidence that the most lagging of the HPI series is (finally) beginning to comport with the broader trend in prices.     

 

Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence - HH Formation by Type Cumulative

 

Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence - Homeownership Rate 18 34YOA

 

Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence - Homeownership Rate National

 

Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence - HVS HH formation

 

Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence - CS 20 City vs National HPI TTM

 

Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence - CS MoM SA

 

Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence - CS YoY vs MoM Scatter

 

Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence - HPI 3 Series

 

Case-Shiller HPI | Acceleration Confirmation & Millennial Bunker Emergence - CS vs ITB 

 

 

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

 

Joshua Steiner, CFA

 

Christian B. Drake


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FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII)

Takeaway: We are flagging JPMorgan (JPM - Score: 95) (short) and Federated Investors (FII - Score: 14) (long) on sentiment and short interest.

This morning we are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.

 

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  

 

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

 

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

 

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - SI1

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - SI2

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - SI3 2

 

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

 

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

 

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   

 

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 

 

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


RTA Live: October 27, 2015

 

 
 


Note to the Bullish Cabal: Small Caps Are In Correction Territory | $IWM

Note to the Bullish Cabal: Small Caps Are In Correction Territory | $IWM - Small cap canaries 09.23.2014

 

In a note to subscribers this morning, Hedgeye CEO Keith McCullough offers a brief update on the Russell 2000.  

 

"The Russell 2000 failed at both TRADE (1175) and TREND (1199) resistance and remains in draw-down mode -10.5% from its year-to-date (and bubble) peak - one of the best pure play ways to play a #LateCycle slowdown in the USA is via Russell's domestic revenues." 

 

Note to the Bullish Cabal: Small Caps Are In Correction Territory | $IWM - 10 27 2015 russell


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.49%
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