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Eye On China: Our Outlook for the Yuan

 

Could the Chinese government devalue the Yuan 15-20%? Hedgeye Senior Macro analyst Darius Dale responds to this subscriber question in this excerpt of The Macro Show.   


Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII

Takeaway: People aren’t bearish enough on where GPS’ P&L could go. | 15 SIGMAs this wk. ULTA, EXPR only pos setups. AEO is the big negative one to us.

GPS - Lousy November Comp

Our Take: "Just another lousy month for Gap, Inc." At least that's what we think the sentiment on the stock is saying. There's definite complacency in its persistent ability to underperform.

But make no mistake...this story can, and likely will, get a lot worse.  Sales productivity today (blended) is in excess of $400/foot. In past recessions it's dropped down closer to $360/foot. And on a go-forward basis, with increasing competition from Uniqlo, H&M, and not to mention little ol' Primark, we think that GPS is just structurally unable to compete -- especially at a 12%+ margin structure when we're late in the economic cycle.

We're fully aware that the stock is down 40% year to date, and it looks "cheap" (whatever that means) at 10x earnings. But take sales productivity down by 15%-20% and the fixed cost deleverage takes EPS negative. Not so "cheap" on those numbers.

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart1

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart2

 

15 Retail SIGMAs This Week

We’ll have our full book of 125+ SIGMAs out shortly. But this week’s data offered up far more bad than good. And we’re not talking about what the numbers reported as much as we are what the sales/inventory/GM triangulation suggests about 1H16. Bottom line, estimates remain too high. We’re at peak margins, and there are too few dollars chasing too much inventory.

Winners: The BIG winners, where the setup augers quite well for estimate revisions even above what we just saw, are ULTA, EXPR, and that’s pretty much it.

Losers: Here’s the inverse – inventory/sales/margin setup is changing negative on the margin. Biggest Losers are: AEO (adding to our short bench), DG, PVH, FIVE, LE, GIII

 

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart3

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart4

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart8

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart5

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart6

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart7

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart16

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart9

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart10

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart11

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart12

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart13

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart14

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart15

Retail Callouts (12/4) | GPS Comps, SIGMAs - ULTA, AEO, EXPR, DG, PVH, FIVE, LE, GIII - 12 4 2015 chart17

 

AMZN - After key Amazon representatives no-showed a meeting with Robbinsville, NJ officials Wednesday, the mayor vowed to take the online retail giant to court demanding the shutdown of its 1.2 million-square-foot warehouse if the traffic problems remain unresolved.

(http://www.ecommercebytes.com/cab/abn/y15/m12/i03/s03)

 

DG - Dollar General Names John W. Garratt as Chief Financial Officer

(http://investor.shareholder.com/dollar/releasedetail.cfm?ReleaseID=945346)

 

Rossignol in Talks to Buy French Bike Maker

(http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=8&id=58573)

 


Where We Stand On Macau Right Now

Editor's Note: Below is a brief excerpt from a research note sent to institutional subscribers earlier this week written by our Gaming Lodging & Leisure team. 

 

Where We Stand On Macau Right Now - macau yesterday

 

We remain generally negative on the Macau stocks but acknowledge that the December optics (-25% YoY GGR decline vs November’s 32% decline) could favorably impact sentiment.

 

However, there is still no indication that fundamentals are improving – November was worse than October from a seasonally adjusted GGR perspective. Low hold wasn’t responsible for the sequential degradation but VIP volumes were ugly and, importantly, Mass revenues were below expectations.

 

Going forward, we are concerned with 2016 where our -9% GGR forecast is below the Street. Same store revenue will look worse, down 19%. Non-gaming will look bad with room rates down in the mid-teens heading into a period of 20%+ room supply growth.

 

Relative to sentiment, LVS could be most at risk in 2016 given its sizeable valuation multiple and the fact that the new supply will target Sands sweet spot – non-gaming and the Mass segment.

 

 

To read the more detailed research note ping sales@hedgeye.com.


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#RateHike Expectations, #Deflation’sDominoes, EUR/USD

Client Talking Points

#RateHike Expectations

Expectations play-out every day in markets. The consensus expectation was a short commodity long USD view moving into this week (Euro-QE and a Fed funds rate cut). If and when that doesn’t happen, the currency move looks about like yesterday, a -2.2% move in the USD. With this morning’s uneventful jobs report, those expectations remain. USD consensus longs don’t capitulate on their long positioning in a day.

#Deflation’sDominoes

It’s a long road to the bottom. Low cost producers with endless reserves don’t volunteer to fight deflation. We don’t expect a bullish catalyst out of OPEC today with a production cut. Any catalyst to the end of a deflation trade looks policy driven at this point. If this morning’s NFP number was a go for Janet, the market will continue to deflate the fed-inflated commodity bubble.     

EUR/USD

One day post Draghi Disappointment Day that sent the cross rocketing higher, it’s trading -0.50% to $1.0885. Over the more immediate term we’ll take our cues on the USD from U.S. data and Fed policy (meeting Dec. 15-16) and over the intermediate term we maintain a bearish bias as we think there’s an increased likelihood that the ECB has to act (as growth and inflation disappoint to the downside) by expanding the size of its QE program (to €75-95B/month), likely within the first quarter of 2016.

Asset Allocation

CASH 69% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 14% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
MCD

We added McDonald's to Investing Ideas on August 11th. Since then shares of McDonald's have risen over 16% compared to a 0.2% return for the S&P 500.

 

As Restaurants Sector Head Howard Penney wrote right around the time we added McDonald's (MCD), "We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. 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," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."

RH

We believe that RH is to Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market.

 

RH is the preeminent brand in the space. We think that RH is in second inning of a game that may ultimately prove to be a double header. We believe the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we see a stock in excess of $300.

TLT

The consumption side of the economy is arguably the most important, as its 69% of U.S. GDP. From a rate-of-change perspective, consumption growth decelerated in October, and consumer confidence is waning along-side it. That's why we would like to reiterate our Growth Slowing=Long TLT call.

 

To be clear, the consumption side of the economy had been a point of strength over the last several months. We’re not calling for a crash in household consumption, but the comps (comparison vs. prior reporting period) are important in rate-of-change analysis. The next four quarters of comps for Real PCE growth are the most difficult since Q3 2008 while the next four quarters of comps for CPI are the easiest since the four quarters ended in 4Q11. Simply put, both are headwinds for the consumer and we expect that the consumption component of the economic equation will continue to decelerate.

Three for the Road

TWEET OF THE DAY

The US Stock market has only been up 6 days in the last 21 - it was oversold yesterday, that is all

@KeithMcCullough

QUOTE OF THE DAY

“Whoever said, ‘it’s not whether you win or lose that counts,’ probably lost."

 -Martina Navratilova                   

STAT OF THE DAY

Wade Boggs had a career batting average of .328.


CHART OF THE DAY: The Harbinger Of Future Defaults | $JNK

 

CHART OF THE DAY: The Harbinger Of Future Defaults | $JNK - Image 1

 

Editor's Note: Below is a brief excerpt from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to subscribe.

 

"... In the Chart of the Day, we look at the true harbinger of future defaults, which is comparing shares of company losing money versus the default rate. Going back to 1985, these two metrics have moved basically in lockstep (until recently). This is no surprise since corporate profits are what companies use to make payments on their debt. So fewer profits, lead to a lower likelihood of re-payment.

 

The combination higher of rates in the short term, declining corporate profitability, and accelerating downgrades is not a great fundamental mix heading into 2016."


Speaking Loudly

“Who you are speaks so loudly, I can’t hear a word you’re saying.”

-Ralph Waldo Emerson

 

Seven years or so ago, during the throes of the global market crisis, I sat at my desk one morning at Kudlow & Company, a cup of coffee in hand and an Early Look a friend had forwarded me on the computer screen in front of me. It was the first market missive I had ever read from this guy “McCullough.” Who the hell is Keith McCullough? Where does he get off being so damn confident? I was blown away by its candor and authenticity during such a fearful time racked with so much uncertainty. This guy had the courage of his convictions.

 

As rattled investors were racing around like chickens with their heads cut off, this guy had the audacity to write that the “Old Wall” was coming down. He told readers if they were interested in doing things a new way, a different way, to send him their résumés. Millions of Americans were losing their jobs, and this guy was hiring?

 

Ernest Hemingway had a great line about developing a ‘built-in bullshit detector.’ Over the years, I’ve met my fair share of people, especially on Wall Street, who were full of it. But this guy passed the smell test. So I sent him my résumé. After a number of professional twists and turns, I ended up getting my place on the team years later.

 

Fast forward to last night… Well over 100 people are gathered inside a former U.S. Post Office turned top-notch restaurant in Westport, Connecticut for our firm’s holiday party. In the event you’re a Hedgeye newbie, our analysts had a phenomenal year across the board. Two of our people (Healthcare Sector Head Tom Tobin and his protégé Hesham Shaaban who now spearheads our Internet & Media research) were awarded the coveted “Hedgeye Hockey Puck” award. They made some ridiculously good contrarian calls in a number of battleground stocks. Our cartoonist Bob Rich was also awarded a puck for delivering the best market-themed cartoons you’ll find anywhere.

 

Fast forward to this morning… me, Dan Holland, is writing the introduction to the Early Look. Huh?

 

In closing, (speaking of interesting twists and turns), the irony of celebrating inside a former U.S. Post Office wasn’t lost on me last night. If you went back in time and told someone waiting in line to buy stamps inside that same building 20 years ago, that a financial research firm would be celebrating a banner year in it two decades letter, well, I doubt they’d believe you.

 

I’ll hand the pen back to our Director of Research Daryl Jones now, but as we are fond of saying around here, “Risk happens slowly at first. Then all at once.” Things happen. Change is inevitable.

 

Speaking Loudly - Rate hike Grinch 12.03.2015

 

Back to the Global Macro Grind

 

Speaking of risk, a mounting issue looming over the fixed income markets is defaults. According to the Financial Times this morning, more than $1 trillion in corporate debt has been downgraded since the start of the year. In addition, S&P has more than 300 companies on review for downgrades. This should be no surprise since the number of global companies defaulting this year has eclipsed 102, the highest level since 2009.

 

In the Chart of the Day, we look at the true harbinger of future defaults, which is comparing shares of company losing money versus the default rate. Going back to 1985, these two metrics have moved basically in lockstep (until recently). This is no surprise since corporate profits are what companies use to make payments on their debt. So fewer profits, lead to a lower likelihood of re-payment.

 

The combination higher of rates in the short term, declining corporate profitability, and accelerating downgrades is not a great fundamental mix heading into 2016. While this tightening of credit is marginal, the game of global macro continues to be played in the changes on the margin. Collectively, this combination reinforces are cautious long-term view on the junk bond market. It is called junk for a reason and, frankly, who wants to own junk at the end of a cycle.

 

In the shorter term, an asset class we think may be due for a bounce is oil.   This morning the news is that oil tanker rates are at near a 7-year high. The primary driver of this spike in tanker rates is not demand, per se, but lack of storage.The lack of storage obviously speaks to the oversupply that has driven, in combination with the strong dollar, the sustained decline in oil prices this year. 

 

But like most things, what is in the headlines is not always the most appropriate way to place your fundamentals. In particular with oil, in the short term the market is heavily tilted to the short side. As our Commodity Analyst Ben Ryan wrote yesterday:

  1. Going into today, commodities have been crushed, yet protection is most expensive NOW (OVX back over 50). The market is heavily short commodities.
  2. Volatility expectations for this year’s OPEC meeting (starting today) are grossly higher than last year – protection is near its most expensive point since summer of 2014.  As a rule, tighter stops on lower volatility expectations causes more volatility.   
  3. The Commitment of Trader’s Report from the CFTC suggests the market was heavily short commodities and long dollars into this week. That doesn't get unwound in one day. A catalyst to take commodities lower from here is hard to find with renewed rate hike expectations. 

 

Suffice it to say, it’s not going to take much a positive catalyst to create one mother of a short squeeze in the energy sector.

 

Keep your head up and sticks on the ice,

 

Daryl G. Jones

Director of Research

 

Speaking Loudly - Image 1


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