The Economic Data calendar for the week of the 16th of November through the 20th of November is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.
Takeaway: Current Investing Ideas: TIF, JNK, W, WAB, ZBH, MCD, RH, LNKD, ZOES, GIS, EDV & TLT
Below are our analysts’ updates on our twelve current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this. Hedgeye CEO Keith McCullough’s updated levels for each ticker are below.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
To view our analyst's original report on Junk Bonds click here.
It was a nasty end to the week for the “growth is back” bulls. It was an equally nasty end to the week in equity markets. The S&P 500 was “going to all-time highs” Tuesday before retreating over 3% from Wednesday to Friday.
Macy’s CEO hinting at the ‘R’ word (“recession”) certainly didn’t instill any confidence or convince us that we should ignore talk of an impending earnings recession. To quote its CEO Terry Lundgren on the Q3 earnings conference call:
“We’re in one of those tough periods that retail experiences every 6 or 7 years.”
Company CEOs in pro-cyclical industries are not incentivized to call for recessions. Interestingly, the last time Terry was on an earnings call was Q4 of 2009. As our retail sector head, Brian McGough reminded us, “Macy’s represents about 10% of soft-line retail, or $28bn. In other words, it matters.”
Friday’s poor retail sales print echoed the softness outlined by Macy’s management.
As you can see in the chart below (artistic wizardry brought to you by Keith McCullough), retail sales peaked last November which means:
With continued data-driven confirmation that growth is slowing, the awful deflationary PPI numbers released Friday provides an easy segue into outlining why you want to short junk:
Deflation crushes the debtor. Especially the debtor with high interest expenses (JNK). Even worse are debtors who borrow at expensive rates and sell something leveraged to commodity inflation because it creates a powerful feedback loop:
This is why deflation is already crushing the high-yield energy debtor.
JNK was down -1.8% w/w with the CRB Commodities Index down -3.5% w/w. Picking up that gain on the short side in JNK beats getting clobbered for being long equities this last week.
To view our analyst's original note on Wabtec click here.
Editor's note: We added Wabtec to the short side of Investing Ideas back in September. Since then, our call has worked out well with shares falling 18.5%.
The latest carload volume data combined with fleet age demographics continues to point to a sustained period of weak rail car orders, a negative for Wabtec. With Class 1 Railroads curbing capex spending in the face of slowing freight volumes, the downcycle in freight rolling stock is just getting started with WAB still trading at over 19x peak earnings.
To view our original note on McDonald's click here.
Hedgeye CEO Keith McCullough added McDonald’s (MCD) to the long side of Real-Time Alerts earlier this week after covering some shorts. McCullough cited a number of catalysts for the stock put forth by Restaurants analyst Howard Penney including the launch of All Day Breakfast, MCD's history of returning value to shareholders and additional cost cutting measures.
On a related note, Penney attended MCD's investor meeting in New York City earlier this week. His takeaway from the meeting was that it was "very very bullish" for investors.
Expectations were high, but CEO Steve Easterbrook came to NYC with big changes which have ultimately exceeded those expectations. "The big smile on Steve Easterbrook's face when talking about the current quarter was very telling," Penney writes. "He could not hide the enthusiasm." MCD increased the dollar value returned to shareholders by $10 billion.
Penney and his team still see +30% upside from here.
To view our analyst's original report on LinkedIn click here.
Hedgeye Internet & Media analyst Hesham Shaaban updated his current thinking on LinkedIn in a recent note to institutional subscribers.
While the selling environment remains solid, we're still cautious about staying long LinkedIn into its 2016 guidance release. The good thing is that the release won't be until February. As a result, we will get at least 2-3 more updates to our proprietary LNKD tracker before then.
If our tracker continues to improve, then we may stay long into the release. If not, we're definitely going to get out of the way and will reasses the setup post print. More to be revealed.
To view our analyst's original report on Wayfair click here.
After going through Wayfair's (W) 3Q and listening to management on the conference call, one question keeps popping up…"Why am I short the stock of a company that is growing its core business over 90% and where 44% of its float is held short?”
But then we consider the following… Wayfair added $266mm in revenue – an astonishing number. But the company still lost money. True, the operating loss narrowed, but only by $13mm. That pegs the company’s incremental margin at only 5.1%. To be clear, companies like Restoration Hardware and Williams-Sonoma – who are consolidating a different end of the home furnishings market (the good end) have incremental flow-through rates of about 20-25%. Heck, even AMZN, which is not afraid to lose money for a very long period of time, has an incremental margin of 15%. Then why are we looking at 5% for W?
The bottom line is that this company is spending – and it’s spending big – around penetrating what management believes to be the company’s total addressable market. Unfortunately, we think they are overestimating it by a country mile, and are building an infrastructure for growth that will not materialize – at least not profitably.
To view our analyst's original report on Tiffany click here.
Tiffany's (TIF) hit 52-week lows on Friday. Major department stores (JCP, M, KSS, JWN) reported earnings this week and results have been less than stellar.
The biggest sales slowdown and margin hit came at the high end of the space – Nordstrom and Macy’s. Who is TIF’s core consumer domestically? Look no farther than these two comps.
Sprinkle on weaker than expected tourism traffic and you have a pretty bleak picture for TIF numbers when reported next week. Keep in mind that TIF’s flagship store in NYC accounts for 10% of total sales and is highly levered to international tourist traffic.
This callout from JWN management during the company’s conference call paints a bearish picture for TIF consumer demand. When asked about what is going on in the department store landscape Nordstrom management responded very explicitly saying:
"It appears that there has been a slowdown in overall demand from the customer who is purchasing what we sell."
To view our analyst's original report on Restoration Hardware click here.
Restoration Hardware (RH) shares got caught up in the tumultuous selloff of other high-end retailers. But we're still bullish on RH. Here's why.
RH Tampa has just opened. That makes 4 new Full Line Design Galleries in 90 days. And all will be open before the start of holiday shopping season and just in time to house the new product lines RH Modern and Teen. Add up the four stores and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage.
When all is said and done, we still think this company has $11 in earnings power 4-years out, which is nearly double the consensus.
We remain convinced that the debate should not be ‘if or when’ the stock hits $115, but rather is it going to $200 or $300? We’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x?
We’d argue the higher end.
To view our analyst's original report on Zimmer Biomet click here. Here is an update from Healthcare analyst Tom Tobin:
Citi launched coverage on the Orthopedics space this week with a very similar take on the industry as ours. Their rating on Zimmer Biomet Holdings and SYK are both Sells, a rare occurance from a bulge bracket firm. Incidentally, I know the analyst from my prior life on the buyside and always found him credible and well versed in his stocks.
As I understand it, the Sell rating is based on assumptions and research conclusions very similar to our own. It turns out Citi and Hedgeye believe the headwinds to growth facing surgical volumes in 2016 are likely to be material as we come up against the ACA tailwinds of 2014 and 2015, or the #ACATaper.
We received a lot of pushback on our research, mainly based on assumption economics, so it will hopefully help us find a more receptive institutional audience for our non-consensus research conclusions.
CMS reported this week that, compared to the same time last year, Public Exchange enrollment was up 17% year over year for the first week of open enrollment period. This is a decent beginning as a percentage change, but small in magnitude as enrollees grew from 462K to 543K, or only +80K individuals year over year.
Over the coming weeks we will be updating the enrollment chart below as well as continuing to speak to surgeons about their case volume, pricing, and policy impacts on their hospitals.
There has not been much notable news on General Mills (GIS) as of late. GIS continues to be one of our top ideas in the Consumer Staples sector. Sector head Howard Penney loves the name for its characteristics during the current macro driven market. Big-cap, low-beta, and their line of sight at growing the top line in a meaningful way, are contributors to our LONG thesis.
We attribute a lot of last week's weakness in shares of Zoës Kitchen (ZOES) to style factors. Due to the macro-driven market, high beta, low-cap names such as ZOES have fallen out of favor. We still love the management team and the concept of the restaurant.
If you are a "buy and hold" type of investor this is a name you want to be in for the long run, especially at these values. This company has a long runway of growth which we believe is only just in the beginning stages.
We'll have a clearer picture of the company's outlook next Thursday when ZOES reports earnings.
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Takeaway: Although comps are tough this quarter, rising volume is making for improving Y/Y growth rates.
Weekly Activity Wrap Up
Options and futures volumes continued to come in above their 4Q15TD averages this week in a bid to leg out positive Y/Y comps by the end of the quarter. Options volume averaged 16.7 million contracts per day, raising the 4Q15TD ADV to 16.5 million. Y/Y change remains negative at -4%, but that marks an improvement from last week's -5% comp. Futures volume averaged 19.3 million contracts per day this week, raising the 4Q15TD ADV to 18.1 million, still a -6% Y/Y contraction but an improvement from last week's -7% comparison. Cash equities came in at 7.1 billion shares per day, bringing the 4Q15TD ADV to 7.1 billion, good enough for +2% Y/Y growth. In October of last year, the potential Greek exit from the European Union drove outsized activity, making for difficult comps this quarter in '15. However, with recently rising volumes, Y/Y growth rates are grinding into more positive territory.
Additionally, with a Fed rate hike on the table again near term, the following chart shows that historical Fed adjustments have been positive for CME volumes (mainly in Eurodollar futures and options). In the last rate hiking campaign, which lasted from June 2004 through June 2006, CME Eurodollar ADV experienced a clearly positive upward trend with baseline activity accelerating throughout the program. If the Fed raises rates (even marginally), we expect a similar positive impact on CME fixed income activity.
U.S. Cash Equity Detail
U.S. cash equity trading came in at 7.1 billion shares traded per day this week. That brings the fourth quarter average to 7.1 billion shares traded per day, a +2% Y/Y expansion but -2% Q/Q contraction. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of fourth-quarter volume, a +2% year-over-year increase, while NASDAQ is taking an 18% share, a -9% year-over-year decline.
U.S. Options Detail
U.S. options activity came in at a 16.7 million ADV this week, bringing the 4Q15TD average to 16.5 million, a -4% Y/Y and -9% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -7% of its share year-over-year settling at just 19% of options trading currently. Additionally, CBOE's market share sits at 26%, -16% lower than 4Q14. NASDAQ, on the other hand, has increased its market share by +15% compared to 3Q15, bringing itself only -1% lower than the 24% share it held a year ago. Additionally, BATS' 8% share of 4Q15TD volume is +29% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +8% Y/Y growth.
U.S. Futures Detail
CME Group had its best week all quarter with 14.2 million contracts traded per day, bringing the 4Q15TD average to 13.2 million, a -11% Y/Y and -8% Q/Q contraction. CME open interest, the most important beacon of forward activity, currently tallies 106.6 million CME contracts pending, good for +14% growth over the 93.7 million pending at the end of 4Q14, an expansion from the prior week's +12%.
ICE saw volume of 5.2 million contracts traded per day this week, bringing 4Q15TD ADV to 4.9 million, +12% Y/Y and +15% Q/Q growth. ICE open interest this week tallied 68.2 million contracts, a +15% expansion versus the 59.4 million contracts open at the end of 4Q14, consistent with last week's +15%.
Monthly Historical View
Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.
Sector Revenue Exposure
The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:
Please let us know of any questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Takeaway: Today's disappointing data confirms a number of our non-consensus calls and risk of first Fed Hike (into a slowdown) since the early 80s.
STILL DON'T BELIEVE GROWTH IS SLOWING? WE DON'T KNOW WHAT TO SAY.
While the latest round of lackluster economic data continues to confound Old Wall expectations, we're not surprised. Our Macro team continues to reiterate its #GrowthSlowing and #SuperLateCycle calls even while many on Wall Street cherry-pick last month's "Where's Waldo" jobs report number as the latest "evidence" to remain ebullient.
Oh well. The data continues to be on our side.
Look no further than today's retail sales and producer price numbers. Hedgeye CEO Keith McCullough had this to say:
"Both US Retail Sales and PPI slowed (again) this month. If you missed the Macy’s and Nordstrom blowups this week, just wait until US Retailers comp the toughest comp in 5 yrs (in November). Oh, and the Fed is going to hike into this slowdown. That should be fantastic for the [producer prices] which is crashing to new lows like Copper did this week. USD #Deflation Risk = On."
Today's PPI reading confirmed our concerns about #Deflation (one of our calls for over a year now). Here's a five year look at PPI including the latest number. To be sure, the slope of the line is unambiguously negative:
We nailed retail sales too. This past July, Hedgeye Macro analyst Darius Dale warned subscribers about #ConsumerSlowing...
Again, here are the latest numbers and the increasingly tough comps for retail sales in November.
And this beauty...
Need more proof? Anecdotal evidence of the consumer spending crash is sprinkled all over equity markets.
"We believe that the retail industry is going through a tough period that we seem to experience something like this every five to seven years or so, and this one feels familiar in that regard."
... And a look at Macy's stock chart:
“It appears that there has been a slowdown in the overall demand for the customer that is purchasing what we sell.”
... And the resulting stock plunge:
Not to alarm you further... but even after Kohl's (KSS) posted seemingly positive earnings, its shares are getting shellacked too on #ConsumerSlowing woes. (Note: our Retail analyst Brian McGough reiterated his short call yesterday.)
Bottom Line: None of this is reassuring. Economic Pollyannas be advised.
Takeaway: Expectations suggest sequential pickup in sales w/o margin pressure. That's extremely aggressive given the circumstances.
Here's a look at key financial metrics for the four department stores that reported earnings this week. There are some really interesting takeaways. We all know sales are weak and inventories are high. By our math those two metrics are about 500bp out of whack. Our sense is that if retail CEOs could pick any two-week period of the entire year where the industry does not have excess inventories, they'd universally pick the two leading up to Thanksgiving/Black Friday. Unfortunately, the ball is not in their court.
Expectations for 4Q, as outlined below, still look too high. For the most part, expectations are for better-trending comps, without a meaningful hit to margins. There's very little chance that this comes to fruition. Base case is that we see a slowdown in sales OR in margins (negative earnings event). Worst case is erosion in comps AND margins.
The point is that there's a better chance than not that we see another round of downward earnings revisions. Either way it's reason for the group to test lower multiples.
This chart is not pretty -- showing that inventories are growing faster than sales by about 5% for the group headed into holiday. We need to see a huge surge in underlying demand to have margins positive for the group. Our sense is that the department stores end up in Quadrant3 -- right where they started.
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