WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up

Takeaway: WETF assets-under-management finished '15 on a slippery slope and January '16 hasn't started much better.


WisdomTree assets-under-management (AUM) finished last year in fluid fashion with -$3.0 billion flowing out of the asset manager in December alone. This was the worst month in the history of the firm and January 2016 hasn't started in any better fashion. In the first five business days of the New Year, WisdomTree has shed another $686 million, essentially on par with the -$3 billion monthly run rate exiting '15. We can't exactly chalk up year end loses to seasonality, as December 2014 put up a +$1.0 billion inflow for WETF. Monthly inflows are now a pittance of their highs of over $6.0 billion from March '15. Over 90% of the losses in both December and January occurred in the firm's international hedged equity products.


WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - chart 5 flow chart


WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - WETF monthly breakout detail


The Tale of Two Products


We are chalking the exodus in the international hedged products to separate catalysts as firstly the firm's Japanese hedged product has fallen victim to a substantial rally in the Yen which has taken demand for the hedged FX fund off of the boil. We warned of a slack in demand should the U.S. dollar not continue to strengthen which has proven accurate over the very near term.


WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - DXJ chart 6


The firm's European product can't be painted with the same brush however as the Euro has maintained its price range against the U.S. currency.


WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - HEDJ chart 7 


It looks however that European woes are the result of new demand for the copy cat iShares hedged product (which is 5 basis points cheaper). The following chart shows how the HEDJ moved from a 91% share of the market’s three major hedged Euro products (WisdomTree’s HEDJ, BlackRock’s HEZU, and Deutsche’s DBEZ) at the beginning of December to 86% share through yesterday. This has increased the HEZU iShares Currency Hedged MSCI Europe share from 8% to 14% over the same period on net positive inflows respectively.


WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - EUR4


Additionally, DXJ’s share of the market’s three major hedged Japan products (WisdomTree’s DXJ, BlackRock’s HEWJ, and Deutsche’s DBJP) ceded another point of market share over the past month. The Deutsche and BlackRock products both gained incrementally in December finishing at just over 9% and 4% share respectively.


WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - JPY4


PRICING NOW IN QUESTION and Forward outlook

It looks like pricing is becoming a factor with the emergence of investor interest in the iShares hedged European product (or it was just a catch up trade to share that the Japanese product had already ceded to competitors). While the delta's of price decreases per basis point are quite small, we don't think Street estimates incorporate a lot, if any, pricing compression for WisdomTree. At a 1 basis point decline for HEDJ pricing on an annual basis, we calculate a -0.6% top line revenue impact, but with AUM in decline the impact could be worse. We calculate for every $1 billion in AUM lost for the hedged European fund that annual WisdomTree revenues decline by -3.2%. The impact on pricing and AUM are not as severe for the Japanese DXJ product.


WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - price analysis


The ongoing fundamental issue from our vantage point is Street consensus is way too high (which is increasing by the month with the development of net outflows). We calculate that 2017 consensus estimates of $0.97 per share (the out year numbers this growth stock is valued on) to be based on over $80 billion in AUM. With assets-under-management at $47 billion currently, this is a stretch at best. Even our $0.79 estimate for '17 based on $70 billion in AUM looks ambitious at this point. WisdomTree continues to trade at a substantial premium to the asset management group at over 20.0x next 12 month estimates versus the group at just over 13.0x '16 numbers which make estimate cuts problematic. The stock remains on our Best Ideas list as a Short.


WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - PE chart 


WisdomTree (WETF) - More Questions Than Answers - We Remain Short 

WisdomTree (WETF) Black Book Presentation - Not So Smart Beta 


Please let us know of questions,



Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA





With the defense budget due out February 9th, we preview several key expectations with our new teammate, Lieutenant General Emerson “Emo” Gardner, USMC, (ret.).  Emo brings unparalleled insight to the defense spending process with 37 years of distinguished service as a Marine officer and as the former acting Director of Defense Secretary Gate’s Cost Assessment & Program Evaluation.  


We are very pleased to welcome the policy thought leaders from Potomac Research group to Hedgeye, and look forward to the differentiated perspective that Emo and his colleagues will bring. 



About Lieutenant General Emerson “Emo” Gardner, USMC, (ret.)

Lieutenant General Emerson N. Gardner, USMC, (ret.) is a recognized expert on the Department of Defense programming and budgeting process and assists defense and non-defense companies in strategy development as an independent consultant.


From 2007 to 2010 Gardner was the Principal Deputy Director and then acting Director of Cost Assessment and Program Evaluation within the Office of the Secretary of Defense.  In this billet he led independent evaluations of all major defense programs and managed the development of the Pentagon's $3 Trillion, six year Future Year Defense Plan for Secretary of Defense Robert Gates.  He had previously been the Deputy Commandant of the Marine Corps for Programs and Resources where he was directly responsible for the development and execution of all aspects of the Corps’ $33 Billion annual budget.


Gardner completed 37 years of distinguished service as a Marine officer in 2010.  As an aviator with 4300 hours of flight experience, his career highlights included tours as a Presidential Helicopter Command Pilot in HMX-1, operational deployments to the Middle East, Europe and Japan, and command in combat in Kuwait and expeditionary operations in Africa.  As a flag officer, he was Assistant Deputy Commandant for Marine Aviation, managed the US Central Command's joint operations center during operations in Afghanistan after 9/11, and was the Director for Operations at US Pacific Command, which is responsible for US military activities in 42 countries.


Gardner is a cum laude graduate of Duke University and was an Olmsted Scholar for two years in Göttingen, Germany.  He is a graduate of the Norwegian Defense College and the National Security Seminar at the Maxwell School of International Relations at Syracuse University.


Cartoon of the Day: A Bearish Bounce?

Cartoon of the Day: A Bearish Bounce? - bounce cartoon 01.12.2016


Trouble abounds in global financial markets. Meanwhile...


"Odds are high that if they can keep the Dow green, Old Wall media won't even mention the Russell crashing today," Hedgeye CEO Keith McCullough wrote this afternoon before the market closed.


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MDRX: Adding Allscripts Healthcare Solutions to Investing Ideas (Short Side)

Takeaway: We are adding Allscripts (MDRX) to Investing Ideas as a short.

Please note that we are adding Allscripts (MDRX) to Investing Ideas on the short side today. Hedgeye Healthcare Analyst Tom Tobin will send subscribers a full research report separately explaining our bearish thesis on the stock.


According to Tobin:


"While Allscripts reputation has markedly improved since the dark days of 2012-2013, the reality is that the damage is already done. Many Hospital Executives refuse to include Allscripts in RFPs and estimates of mind share vs. market share do not bode well for bookings growth.  Based on industry ratings and anecdotes, the probability of Allscripts unseating the current acute care EMR vendor at any large IDN is low.  We will continue to collect anecdotes from industry participants, including current Allscripts customers."


"Way too many investors are currently 'overweight' Healthcare," adds Hedgeye CEO Keith McCullough.


MDRX: Adding Allscripts Healthcare Solutions to Investing Ideas (Short Side) - z all



Nice! Old Wall Now Says 'Sell Everything'

Takeaway: Better late than never, we suppose.

Nice! Old Wall Now Says 'Sell Everything' - Bull SCREAM 01.06.2015


So get this, Wall Street is finally coming around to our bearish outlook for U.S. stocks.


Old Wall equity strategists are now concerned about weak manufacturing data, commodity-price deflation, and Fed rate hikes further perpetuating an economic slowdown.  


Sound familiar? 


“Our view is that the risk-reward for equities has worsened materially. In contrast to the past seven years, when we advocated using the dips as buying opportunities, we believe the regime has transitioned to one of selling any rally,” Mislav Matejka, an equity strategist at J.P. Morgan, said in a report.


Meanwhile, UBS issued a "significant change" at the turn of the year, and cut equities from overweight to neutral. Goldman Sachs trimmed its S&P earnings forecast after noting that 2015 could be "the worst year for S&P 500 earnings since 2008."


A more incendiary warning shot came from RBS credit chief Andrew Roberts. In a note to clients, Roberts warned that it would be a "cataclysmic year" and led by a deflationary crisis. As a result, Roberts said: 


“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small... Equities and credit have become very dangerous, and we have hardly even begun to retrace the 'Goldlocks love-in' of the last two years." 


RBS also accused the Fed of "playing with fire" by raising interest rates into a perfect storm of grim economic data. The report added, "There has already been severe monetary tightening in the US from the rising dollar," adding to the economic pain. 


After calling the U.S. equity market top in July, Hedgeye has been telling subscribers for a while now that the "U.S. stock market is going to crash." And if our recession call (for Q2 or Q3 of 2016) plays out things could look a lot worse from here.


So where should investors park their money?


RBS now agrees with us. Credit chief Roberts told clients to buy, of all things, U.S. Treasuries anathema to the many hedge funds who have shorted U.S. bonds as a "reflation trade." That will unwind as the economy slows.


Hedgeye CEO Keith McCullough likes to say that he is "the most bullish guy on Wall Street on Long bonds," expressed through TLT.


Click below to watch mccullough lay out our long bond call.


We're happy to hear that Old Wall is coming around, albeit seven months after we warned about an equity-market downturn. Better late than never. 

HedgeyeRetail (1/12) | KATE Yoga Partnership, HIBB, LULU

Takeaway: KATE rolls out Yoga - Solid setup into 2016. HIBB rides the Tide. LULU beats lowered expectations, still think it's a short.

KATE - Yoga Partnership Out. Like the Setup For 2016


KATE rolls out new yoga line in partnership with Beyond Yoga. Just one of two handfuls of licensing deals that will be incremental to 2016. That's just one of the drivers of an accelerating top line we expect to see in 2016. Not only do the reported headwinds roll off in the new year (Jack/Saturday closures, SE Asia JV, quality of sale initiatives, etc.), but KATE has a lot of incremental drivers on the top line. Licensing, international growth through distributors/JV, and a flat promotional posture after working to improve quality of sale through all of 2015.


We think timing here is absolutely critical, and that timing finally favors the long side. Keep in mind that this company has been a serial restructurer, having traded under three different tickers in five years, and the only constant during that time period has been a lot of red at the bottom of the P&L. Even though KATE has been executing extremely well on its plan, the fact is that the stock has looked extremely expensive to the average investor who cared about nothing but current year earnings. This is why the stock got annihilated when the category (Kors) hit a wall. It simply had no valuation support. That’s why we think that the quarter we’re currently in (4Q), will be critical, in that the company should earn 30% more than it did in all of 2014. In fact, we’re a few short months away from people focusing on $1.00 in earnings power for next year – a level it hasn’t seen since 2007. People will be looking at a name trading at 17x an earnings rate that should grow 50%+ for 3-5 years.

HedgeyeRetail (1/12)  |  KATE Yoga Partnership, HIBB, LULU - 1 12 2016 chart1


HIBB - Roll Tide


This is the only retailer we can think of that actually has a material comp benefit when its local team wins big. Bama winning it's 4th National Championship in 7 years last night could at most add 1.5% in comp for the company's 4th quarter. We saw the same benefit in 4Q10 and 4Q12, and the store weight on Alabama hasn't changed materially since then, with Bama representing 9.1% of the store base at the end of FY15 vs. 10.3% at the end of FY10. But, there are two things to keep in mind…

1) HIBB is up against a 5.4% comp from Holiday of last year, its best comp number in over 3 years.

2) Want to buy your Bama gear on, well consumers are in luck, except that Bama's website isn't serviced by Hibbett but Fanatics (see image below). Logically it would make sense that the lack of an e-commerce presence wouldn't hurt HIBB materially for merchandise that consumers want now, but it will be interesting to see how consumers vote with their wallets. Either by driving 5miles to a HIBB store, or ordering from

HedgeyeRetail (1/12)  |  KATE Yoga Partnership, HIBB, LULU - 1 12 2016 chart2

HedgeyeRetail (1/12)  |  KATE Yoga Partnership, HIBB, LULU - 1 12 2016 chart3


LULU - Beat Expectations. Low Earnings Quality


The old guide down and beat lowered expectations before the company gets on stage and in front of Investors at ICR. The mid-point of the guide on the top line is just $2mm higher than where consensus stood before the company lowered the bar for 4Q in its 3Q earnings release just one month ago and the mid-point on the earnings guide is $0.07 lighter on a lower share count, which means lower margins. Since then, the stock has appreciated 15% taking the multiples from 23x P/E and 12.5x EBITDA to 28x P/E and 15.5x EBITDA on lowered 2016 numbers.  Maybe investors are looking at the Street's implied 19% earnings growth for FY16 (after 2 years of down earnings) in the context of the broader retail landscape where its tough to find a double digit grower in 2016. But, we'd argue that the expected growth is more than priced in at this point.


In the out years, numbers have come in by 10% since the company reported 3Q15 earnings. Still high by $0.50. Ultimately, we think LULU will miss again, and then again - until the ‘new’ CEO is likely to be out of a job. Spin it any way you want, but he's just not right for that job in that culture. Until then, LULU is marching towards $2.50 in EPS with the Street at $3.00. We still think it’s a short.


UA - UA signs the mother of all deals. Yale at 10 years/$16mm (vs. Notre Dame at 10 years/$90mm). Maybe we are a bit biased.

HedgeyeRetail (1/12)  |  KATE Yoga Partnership, HIBB, LULU - 1 12 2016 chart4


NKE, DIS - Mark G. Parker Elected to The Walt Disney Company Board of Directors



WWW - Wolverine Worldwide Names Pat O'Malley as President of Saucony Brand



BKS - Barnes & Noble names Mary Amicucci as its new head merchant



Joyce Leslie, a 47 store women's clothing chain located in the northeast, filed for Chapter 11 and is a likely candidate for liquidation



NKE - Nike Unveils Cleat For FIFA Women’s Player of the Year Carli Lloyd following U.S. 2015 World Cup win



AMZN - Amazon reportedly scaling down its Echo device to size of a 'beer can'



Christmas sales in the UK "disappointing", growing just 1% in December



APP - Dov Charney Seeks to Block American Apparel Bid to Extend Exclusivity Period



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