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TIF | Staying Short

Takeaway: TIF miss blows up bull case that this is a great company at a defendable valuation. Hardly financial management befitting a 'Best-in-Breed'

TIF missed yet again, blowing up the bull case that this is a great company at a defendable valuation. The forecastability of this cash flow stream is the worst we've ever seen outside of the Great Recession. If you did not think we were headed for a recession yesterday, you've got to give it serious credence today. Unfortunately, in a recession TIF earnings could still go meaningfully lower (I.e. $3.00).

 

We acknowledge that TIF is a very good (once great) brand and company. But let's be honest...this company guided down more in the past year than it had it the preceding decade. That's hardly financial management befitting a Best-in-Breed company.

 

Barring a complete reset in Street numbers (down to the $3.50 range) we'll stay short.

 

If the stock holds in there (~$65), then it will still be worth shorting due to lack of valuation support.

 

Additional details...

 

Stating the obvious this was a really bad number out of TIF this morning, reporting -5% constant currency comps for the months of November and December vs. consensus at 2.7% for all of 4Q. All regions of the globe, except for Japan, reported negative comps over the Holiday selling period. Earnings expectations for the quarter now sit at the bottom end of the previously announced range.

 

The key questions we were asking as we headed into this sales release was why earnings NEED to grow next year.  TIF answered that in its preliminary guidance for 2016 calling for minimal growth in both sales and earnings. That translates to $3.90 vs. the Street at $4.30.

 

The reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks. The price has come off (down another 5% at the open), but so have earnings. It is trading near a peak multiple on our numbers (17x) on peakish margins (19%-20%) on an earnings number that is not likely to grow for 2-3 years absent financial engineering. 


RTA Live: January 19, 2016

 


Shellacked: A Recap of Last Week's Market Action

Takeaway: Once again, it pays to listen to Hedgeye.

Shellacked: A Recap of Last Week's Market Action  - stocks. bear in the woods 01.06.2016

 

In terms of both economic data and macro market read-throughs, last week was really ugly. The reality is that it was the worst start in history for U.S. stocks. Ever. 

 

Well, for equity investors at least, not Hedgeye subscribers.

 

Our subscribers were spared the August equity market drubbing and the most recent market rout as our contrarian Macro team has been way ahead of consensus warning about ongloing risks including #Deflation and #GrowthSlowing

 

In other words, we made the call.

 

Hedgeye CEO Keith McCullough dissected last week's data and the resulting financial market reverberations in a note sent to subscribers this morning:  

 

"Let’s not forget we had a trifecta of “misses” on Friday with Industrial Production and Producer Prices (PPI) in recessions at -1.8% and -1.0% year-over-year, respectively (and control group for Retail Sales only +1.5%). The U.S. 10YR Yield broke 2.0% intraday (and should have on that data) and GDP is a lot slower than consensus (our favorite Macro Long idea remains the Long Bond)."

 

Shellacked: A Recap of Last Week's Market Action  - 10yr yield

 

Meanwhile, equity markets ripped to the downside, in all but one sector, Utilities (XLU) (which just so happens to be the one sector that we like.) Here's additional analysis from McCullough: 

 

"U.S. Equity Sector Styles continue to reflect #Recessionary expectations accelerating, with Utilities (our favorite sector currently) +0.7% last week (+0.3% year-to-date) and Basic Materials -4.5% on the week (-11.9% year-to-date) and Financials -3.1% on the week (-10.1% year-to-date) underperforming what’s an already -8.0% year-to-date S&P 500."

 

Shellacked: A Recap of Last Week's Market Action  - sector performance

 

The fizzling in U.S. equities doesn't surprise us at all. Here's an inside peak at our proprietary asset allocation model which has been largely devoid of U.S. equities since last July.

 

Shellacked: A Recap of Last Week's Market Action  - asset allocation

 

Bottom line: We're going to ignore consensus and stick with our process. It's working.

 

Shellacked: A Recap of Last Week's Market Action  - z consensus


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TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL

Takeaway: Slowing growth and falling oil prices continued to erode investor confidence last week. Our heatmap is negative across all durations.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM11

 

Key Takeaway:
Slowing growth, both domestically and in China, cascading oil prices and rising concerns over default in the energy arena continue to sound the alarm for investors. Default swaps widened globally last week, especially in emerging markets and most notably in Russia where Sberbank swaps widened by +50 bps to 413 bps and Russian sovereign CDS widened by +50 bps to 385 bps as oil prices continued their slump. Additionally, the high yield YTM blew out by +53 bps last week to 8.97%.

Our heatmap below is more negative than positive across all durations.

 

Current Ideas:

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 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 / 4 out of 12 worsened / 7 of 12 unchanged

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM15

 

1. U.S. Financial CDS – Swaps widened for 12 out of 27 domestic financial institutions with the median spread expanding by another 6 bps week over week. At the bottom of our U.S. CDS table below, we have added indices on investment grade and high yield CDS, which widened last week by 11 bps to 110 and by 33 bps to 555, respectively.

Tightened the most WoW: CB, ACE, MMC
Widened the most WoW: AIG, AXP, MET
Widened the least/ tightened the most WoW: CB, MMC, ACE
Widened the most MoM: AXP, ALL, MET

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM1

 

2. European Financial CDS – Swaps mostly widened among European banks last week. CDS on Portugal's Banco Espirito Santo were an exception, tightening by -490 bps to 1,229 on deliberations at ISDA'S Credit Determinations Committee. Last week, the committee failed to reach a super-majority decision on whether the transfer of Novo Banco senior bonds into Banco Espirito Santo constituted a governmental intervention. Additionally, it has set January 22 as its decision deadline on whether a portion of Novo Banco CDS would be transferred to Banco Espirito Santo.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM2

 

3. Asian Financial CDS – Swaps among Asian financials mostly widened last week. Chinese bank CDS widened between +8 and +12 bps as investors continued to worry about the country's decelerating economy. In India, although IDB Bank of India CDS tightened by -12 bps to 228, ICICI Bank and State Bank of India widened by 4 bps to 184 and by 10 bps to 171, respectively.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week as growth concerns mounted. Portuguese sovereign swaps widened the most, rising by +12 bps to 194.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM18

 

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM3

 

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps were hit especially hard by concerns over slowing growth in China and low oil prices. Russian sovereign swaps widened by +50 bps to 385 bps. Meanwhile, Brazilian sovereign CDS are once again knocking on the door of 500 (496 bps), +9 bps on the week.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM16

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 53 bps last week, ending the week at 8.97% versus 8.45% the prior week.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 6.0 points last week, ending at 1802.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM6

8. TED Spread Monitor  – The TED spread fell 3 basis points last week, ending the week at 39 bps this week versus last week’s print of 42 bps.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM7

9. CRB Commodity Price Index – The CRB index fell -5.6%, ending the week at 160 versus 169 the prior week. As compared with the prior month, commodity prices have decreased -7.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - 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 12 bps.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged, ending the week at 1.96%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM10

12. Chinese Steel – Steel prices in China fell 1.6% last week, or 33 yuan/ton, to 2009 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM12

13. 2-10 Spread – Last week the 2-10 spread was unchanged at 118 bps. We track the 2-10 spread as an indicator of bank margin pressure.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 5.6% upside to TRADE resistance and 1.8% downside to TRADE support.

TUESDAY MORNING RISK MONITOR | SLOWING GROWTH & FALLING OIL - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


CHART OF THE DAY: Got #Deflation And #GrowthSlowing? What Rallied (And Tanked) Last Week

CHART OF THE DAY: Got #Deflation And #GrowthSlowing? What Rallied (And Tanked) Last Week - 01.19.16 chart image

 

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... Last week’s macro market moves simplified that both #Deflation and #GrowthSlowing are bearish TRENDs where you can be LONG:

 

  1. USD: US Dollar Index up another +0.4% on the week to $98.95
  2. Long-term Bonds: US 10yr Treasury Yield down another 8 basis points on the week to 2.03%
  3. Utilities (XLU) up +0.7% on the week to +0.3% YTD

 

While the Utes Long Bond Cash Is King position worked, not all “yield chasing” or “growth in a slow-growth environment” did:

 

  1. MLP’s got smoked for another -10.7% weekly loss and are already -18.6% YTD on the Alerian MLP ETF
  2. Financials (XLF) underperformed the SP500 (again) losing another -3.1% on the week to -10.1% YTD
  3. High Beta (as a US Equity Style Factor) got crushed for another -6.3% weekly loss to -15.3% YTD" 

Simplifying The Complex

“Simplifying as much as possible is crucial to success.”

-Jocko Willink

 

I hope everyone had a nice long weekend. Two weeks into this 2016 bear market battle, I’m sure everyone needed a break. I spent my weekend coaching at a hockey tournament down in Bethlehem, Pennsylvania. The kids (and parents) had a blast keeping life simple.

 

“Simple: the principle isn’t limited to the battlefield. In the business world, and in life, there are inherent complexities. It is critical to keep plans and communication simple. Following this rule is crucial to the success of any team.” (Extreme Ownership, pg 140)

 

At Hedgeye, our team takes our core principles of Transparency, Accountability, & Trust very seriously. While they are simple principles – executing on them across our entire business requires a commitment to put the team ahead of individuals. Simple is not easy.

 

Back to the Global Macro Grind

 

Nope. Simple is not easy. In fact, simplifying the complex nature of a Global Macroeconomic System is very hard to do. That’s why, as a base layer, we use Chaos Theory. That way we can embrace both the non-linear nature of the system and all of its uncertainties.

 

Simplifying The Complex - Slow growth cartoon 09.11.2015 copy large

 

After we’ve done all of our research, we try to “boil it down” into three Global Macro Themes. While our quarterly themes may vary in terms of their “creative” hashtags, they’ve simplified two of the most basic things an investor should have prepared for in the last 6 months:

 

  1. GROWTH slowing
  2. INFLATION deflating

 

If you missed it, that happens. Don’t keep missing it. “Should have, could have, would have” are the kinds of excuses we don’t let players on our team get away with. However many mistakes we make, it’s always about learning, evolving, and moving forward.

 

When things go wrong, and they inevitably do go wrong, complexity compounds issues that can spiral out of control into total disaster. Plans and orders must be communicated in a manner that is simple, clear, and concise.” (Extreme Ownership, pg 140)

 

When things go right for the right reasons, your team builds confidence that you’ve helped them simplify the complex.

 

Look at what drove the SP500 down another -2.2% on Friday to -8.0% YTD and -11.7% from its July 2015 #Bubble high:

 

  1. US Industrial Production “growth” for DEC slowed another -0.4% month-over-month to -1.8% year-over-year
  2. US Producer Prices (PPI) for DEC slowed another -0.2% month-over-month to -1.0% year-over-year
  3. US Retail Sales growth (“control group” used to calculate GDP) slowed -0.3% month-over-month to +2.4% year-over-year

 

And while a consensus growth bull might call Retail Sales “not bad”, we continue to remind you that absolutes don’t matter in macro – rate of change does. Put simply: good or bad doesn’t matter; it’s all about things getting better or worse.

 

To be clear, there is a large (consensus) community of investors who thought things couldn’t get any “worse” than they looked in SEP of 2015. They saw the impressive counter-TREND bounce in everything “reflation” as a signal that all the bad was “priced in.” Not so much.

 

Last week’s macro market moves simplified that both #Deflation and #GrowthSlowing are bearish TRENDs where you can be LONG:

 

  1. USD: US Dollar Index up another +0.4% on the week to $98.95
  2. Long-term Bonds: US 10yr Treasury Yield down another 8 basis points on the week to 2.03%
  3. Utilities (XLU) up +0.7% on the week to +0.3% YTD

 

While the Utes Long Bond Cash Is King position worked, not all “yield chasing” or “growth in a slow-growth environment” did:

 

  1. MLP’s got smoked for another -10.7% weekly loss and are already -18.6% YTD on the Alerian MLP ETF
  2. Financials (XLF) underperformed the SP500 (again) losing another -3.1% on the week to -10.1% YTD
  3. High Beta (as a US Equity Style Factor) got crushed for another -6.3% weekly loss to -15.3% YTD

 

Put more simply: High Beta Small Cap Leverage = not good.

 

So is Mr. Macro Market pricing in a recession or a depression at this point? In asset price inflation terms, I think that’s a more reasonable question than trying to debate whether or not US and Global GDP growth is going to be +3-4%.

 

I can assure you that where I was in Pennsylvania this weekend, the cyclical/industrial #Recession is very much on. Check in with a farmer in Des Moines, Iowa or a real-estate agent in Houston, Texas and they’ll simplify the same. It’s not that complicated.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.00-2.13%

SPX 1
RUT

DAX 9

VIX 18.89-29.88
Oil (WTI) 28.51-32.38

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Simplifying The Complex - 01.19.16 chart image


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