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Retail Callouts (12/28): Nike E-comm, Retail Wages, AMZN

Takeaway: Nike e-comm push hurts traditional wholesale. An interesting look at WMT wage moves. Amazon holiday.

NKE - E-comm push hurts traditional wholesale

(http://www.wsj.com/articles/sportswear-stores-struggle-in-race-to-reach-consumers-1451258541)

 

This story discusses the impact of the athletic brand (particularly NKE) push into the direct segment. Because of the way that consumers shop today, it makes it very hard for the little guy to compete with not only the traditional wholesale competitors like DKS, FL, FINL, Sports Authority, Academy, HIBB, etc. but also the brands which have emphasized direct growth. For starters, it's almost impossible for an independent retailer to establish an online presence because of the economics associated with the small scale and limited allocations. It's like Hibbett Sporting Goods (which we think will lose 300-500bps of margin as it builds its e-comm business), but worse. Maybe the technical running shops still have a place in the market, as they can offer a level of service and expertise not available on the internet today. But, a) that type of store only caters to small portion of the population, and b) those sales can easily be moved to the internet once the knowledge is transferred and performance attributes are found.

This isn't an issue just affecting the bottom of the competitive marketplace. As NKE adds $10bil in e-comm revenue over the next 5 years it will send shockwaves around the rest of the traditional supply chain. Look no further than the most recent quarter from NKE when it was the first time EVER that wholesale accounted for less than 50% of incremental profit. This means that Nike itself is now a more important profit driver than all of its traditional customers combined.

-Alec Richards

 

Retail Callouts (12/28): Nike E-comm, Retail Wages, AMZN - 12 28 2015 chart1

 

WMT - Wages With Minimal Wiggle Room

http://www.wsj.com/articles/wages-with-minimal-wiggle-room-1451259371)

 

This is an interesting way to look at the minimum wage decisions at WMT written by the Andrew Pudzer, CEO of CKE Restaurants. Here is a quick summary of his math. The 20 retail companies that land in the Fortune 500 recognize an average of $6,300 in annual profit per employee. On an average retail work week of 31.5 hours the raise to $9 and $10.10 from the current $7.25 minimum wage would equate to an increase in annual wages per employee of $2,370 and $4,446, respectively. That would take annual profit per employee down by 38% for a hike to $9 and 71% for a hike to $10.10. Of course there are companies that already pay over the federal minimum wage, but it's all about the pay gap needed in order to attract the right type of talent which will cause wage inflation across the industry. The bottom line is, this isn't a positive development for retail especially when companies can't pass along the added cost pressures through to the consumer. Which will ultimately result in less employees as costs go up.

-Alec Richards

 

AMZN -  Amazon Celebrates a Record-Setting Holiday

(http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2125057)

 

AMZN put out a press release this am talking about Prime, hardware, and TV stats. Not a lot of concrete detail in the release on Prime other than a brief mention that more than 3mm Prime members were added in the 3rd week of December.  At first glance this number is impressive, however we suspect a large portion of the additions are late holiday shoppers leveraging a 1 month free trial to get the free two-day shipping. 

December to date ChannelAdvisor comp numbers, suggest a sequential slowdown in comps for the 4th quarter to the 20% range in line with current consensus estimates.

-Alec Richards

 

Retail Callouts (12/28): Nike E-comm, Retail Wages, AMZN - 12 28 2015 chart2

 

ICON - Iconix Brand Group Announces SEC has Issued a Formal Order of Investigation

(http://phx.corporate-ir.net/phoenix.zhtml?c=62075&p=irol-newsArticle&ID=2125085)

 

CONN - Conn’s CEO eyes 500 store opportunity, recently opened its 100th store in Las Vegas

(http://www.retailingtoday.com/article/conns-ceo-eyes-00-store-opportunity)

 

ETSY - Etsy Temporarily Suspends Google Shopping Ads

(http://www.ecommercebytes.com/cab/abn/y15/m12/i28/s02)

 

FIT - Fitbit topped Apple’s app chart on Christmas Day

This marks the first time it topped Apple’s rankings of free iOS apps, jumping 20 spots from Christmas Eve.

(http://qz.com/581789/fitbit-topped-apples-app-chart-on-christmas-day/)

 

British Stores Notch Record Sales on Boxing Day

(http://wwd.com/retail-news/retail-features/boxing-day-sales-2015-london-uk-10302776/)

 


INSTANT INSIGHT | The Market Returns To Reality

Editor's Note: This is an abridged excerpt from research sent to subscribers earlier this morning by CEO Keith McCullough. Click here for more information on how you can subscribe to our industry leading non-consensus research.

 

INSTANT INSIGHT | The Market Returns To Reality - reality

Last week’s equity/commodity rally came on:

 

A) The lowest volume of the year and...

B) In everything that’s crashed.

 

Here's another way of looking at last week's no-volume squeeze. The smaller cap Russell 2000 outperformed the large cap Dow at +3.0% week-over-week vs. 2.5%. But heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.

 

As pointed out in today's Chart of the Day Energy (XLE) and MLP stocks (AMLP) led the counter-trend bounce, up 4.7% and 14.4% respectively. But nothing short of a post-Christmas miracle could jettison them back to break-even territory for the year. XLE and AMLP are still down -22.2% and -31.8% year-to-date.

 

What did Mr. Market have to say about the rally early this morning? Hedgeye CEO Keith McCullough reviewed what's in store for Oil and the Russell 2000 in a note to subscribers this morning:

 

"WTI was up +5.7% week-over-week, but is straight back down -1.7% this morning after tapping the top-end of our immediate-term $34.97-38.33 risk range. MLPs were up +14.4% last week, but still down -32% year-to-date."

 

INSTANT INSIGHT | The Market Returns To Reality - oil reality

 

"Small cap, debt leverage, and big beta were the best Style Factors in the U.S. stock market last week (and have been the worst all year), so plenty of selling opportunities in small caps this morning with the RUT down -4.1% year-to-date and downside to 1109."

INSTANT INSIGHT | The Market Returns To Reality - russell RUT cartoon

 

Welcome back.


MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF

Takeaway: The high yield carnage continues while commodities catch a momentary reprieve.

 

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM11

 

Key Takeaway:

The sole takeaway from last week was the ongoing deterioration in the high yield markets. YTM widened another +37 bps on the week, pushing yields to 9.09%. That brings the M/M change to +115 bps.

 

Our heatmap below is decidely negative across all durations.


Current Ideas:


MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM15

 

 

1. U.S. Financial CDS – Swaps were generally tighter among US Financials on the week with the median spread falling from 56 bps to 54.

Tightened the most WoW: COF, MMC, ACE
Widened the most/ tightened the least WoW: ALL, SLM, SLM
Tightened the most WoW: ACE, AIG, MMC
Widened the most/ tightened the least MoM: COF, SLM, SLM

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM1

 

2. European Financial CDS – Swaps were little changed among European banks last week.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM2

 

3. Asian Financial CDS – Swaps mostly widened among Asian banks last week with the Export-Import Bank of China and the State Bank of India leading the way, the former widening by 7 bps to 127, the latter by 7 bps to 166.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM17

 

4. Sovereign CDS – Sovereign swaps were flat to wider over last week. Spanish sovereign swaps showed the most movement, widening by 5 bps to 91.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM18

 

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM3

 

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Indonesian swaps tightened the most, by -5 bps to 235.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM16

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 37 bps last week, ending the week at 9.09% versus 8.72% the prior week.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 4 points last week, ending at 1800.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM6

8. TED Spread Monitor  – The TED spread fell 1 basis point last week, ending the week at 40 bps this week versus last week’s print of 41 bps.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM7

9. CRB Commodity Price Index – The CRB index rose 2.5%, ending the week at 176 versus 172 the prior week. As compared with the prior month, commodity prices have decreased -3.9%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 11 bps.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 12 basis points last week, ending the week at 1.93% versus last week’s print of 1.82%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM10

12. Chinese Steel – Steel prices in China rose 1.6% last week, or 31 yuan/ton, to 1958 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 124 bps, -1 bp tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM13



Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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The Macro Show Replay | December 28, 2015

 


December 28, 2015

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.30 2.15 2.25
SPX
S&P 500
1,998 2,084 2,060
RUT
Russell 2000
1,109 1,163 1,152
COMPQ
NASDAQ Composite
4,901 5,095 5,048
NIKK
Nikkei 225 Index
18,503 19,206 18,789
DAX
German DAX Composite
10,153 10,827 10,727
VIX
Volatility Index
14.11 24.21 15.74
DXY
U.S. Dollar Index
97.29 99.35 98.02
EURUSD
Euro
1.07 1.10 1.09
USDJPY
Japanese Yen
120.02 121.69 120.28
WTIC
Light Crude Oil Spot Price
34.97 38.33 38.12
NATGAS
Natural Gas Spot Price
1.69 2.11 2.09
GOLD
Gold Spot Price
1,049 1,081 1,075
COPPER
Copper Spot Price
2.02 2.14 2.12
AAPL
Apple Inc.
104 110 108
AMZN
Amazon.com Inc.
650 679 662
GOOGL
Alphabet Inc.
750 777 765
DIS
Walt Disney Company, Inc.
102 108 105
NFLX
Netflix Inc.
113 120 117
KMI
Kinder Morgan Inc.
13.83 16.91 16.08

 

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

 


Oil, Russell 2000 and VIX

Client Talking Points

OIL

Oil was leading the no volume “reflation”/squeeze last week, WTI was up +5.7% week-over-week, but is straight back down -1.7% this morning after tapping the top-end of our immediate-term $34.97-38.33 risk range. MLPs were up +14.4% last week, but still down -32% year-to-date.

RUSSELL 2000

Small cap, debt leverage, and big beta were the best Style Factors in the U.S. stock market last week (and have been the worst all year), so plenty of selling opportunities in small caps this morning with the RUT down -4.1% year-to-date and downside to 1109.

VIX

Since the AUG breakout in equity volatility (prefaced by a credit signal that’s real), raising cash and lowering your portfolios exposure to illiquidity and leverage has been very smart at front month VIX 14-15; here’s another gift.

 

*Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 64% US EQUITIES 2%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
FII

Federated Investors (FII) profitability got a boost as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.

 

In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.

 

In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.

RH

We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer 2 weeks. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.

 

But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.

TLT

In case you were looking for Style Factors that crushed it last week – the Top 3 gainers were the Top 3 #Deflations of 2015!

  1. High Beta Stocks were +3.5% last week to -12.0% YTD
  2. High Debt (to EV) Stocks were +2.9% last week to -10.9% YTD
  3. Small Cap Stocks were +3.2% last week to -12.4% YTD

*Mean performance of Top Quartile vs. Bottom Quartile (SP500 Companies)

 

In other words, the no-volume squeeze had the smaller cap Russell 2000 outperform the large cap Dow at +3.0% week-over-week vs. 2.5%. Heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.

 

In a slower-for-longer secular growth world, you should pay more for the organic growth that you can find. But, more importantly, you should realize that “cheap” has the illusion of “cheap” because the U.S. economic cycle is slowing alongside the secular. 

Three for the Road

TWEET OF THE DAY

What To Watch: The Fed, Oil And U.S. Dollar https://app.hedgeye.com/insights/48256-instant-insight-what-to-watch-the-fed-oil-and-u-s-dollar… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Take time: much may be gained by patience.

Latin Proverb

STAT OF THE DAY

The CRB Commodities Index was up +2.3% on the week to down -23.4% year-to-date.


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