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HedgeyeRetail (1/22) | TIF - Don't Fear the Repo, NKE/Jordan

Takeaway: TIF Share Repurchase - 'Announcing' ≠ Lower Share Count.  Jordan's at ROST, Jumpman Ain't Dead.

TIF - Don't Fear the Reap-o

Share Repurchase -- 'Announcing' Lower Share Count



We're absolutely not concerned about being short TIF into the company re-upping its share repo authorization. For starters, 1) we're only talking $500mm, which is about 6% of the current market cap. This program is a drop in the bucket. 2) Next, just because a company announces a repo, it does not mean it will actually execute on it. 3) Lastly and most importantly, history does not lie. Over the past decade, TIF spent $1.1bn on share repo, and yet the share count only came down by 6.6mm, or 4.8%.  The implied repo price per share comes out to $170, and yet the stock only poked its head above $100 fewer than a dozen times, and never broke $110. But the average implied repo price was $170?


The fact is that some companies, like GPS (which we don't like) use repurchases as an offensive weapon -- cutting it share count in half over a decade. TIF is not one of those companies -- as it basically uses the repo program as a way to offset dilution from options and other non-cash compensation.


NKE, ROST - Jumpman Ain't Dead


People are finding every way imaginable to jump on the 'Jordan is Done' bandwagon, and this report is the latest. The picture shows two pairs of Jordans on the rack. We're hard pressed to find them at any other stores. The reality is that this happens all the time, even for high end product. The shoes are likely damaged, or more likely, the boxes are damaged. That's usually the factor that results in Marquee shoes ending up in off price channels. Keep in mind that 'sneakerheads' value the box almost as much as they value the shoe. All it takes is a palette of 100 pairs of shoes to get wet, or the corner of the boxes crushed, and they are deemed unsellable in full-price channels. If there's anything unusual about this it is that they did not end up in Nike outlets. Our sense is that the retailer who deflected these kicks to Ross Stores will be getting an angry phone call from someone in Beaverton. 

HedgeyeRetail (1/22)  |  TIF - Don't Fear the Repo, NKE/Jordan - 1 22 2016 chart1



WMT - NLRB Judge declares Wal-Mart violated federal law when it disciplined employees after 2013 strike -- must rehire 16 former employees with backpay



BID - Sotheby's Board of Directors eliminates the Company’s $0.10 dividend effective immediately, and allocate the capital instead to repurchase shares.



M - Macy’s new omnichannel strategy, “Pick to the Last Unit”, lets stores act as “warehouses” to utilize the full assortment of owned inventory



WSM, RH Baby & Child - Pottery Barn Kids is unveiling its first nursery collection



CAB - Cabela's trying to sell credit card business, responsible for 30% of revenue, prior to selling to company



Richemont acquires remaining 40% of luxury watch and jewelry maker Roger Dubuis



DG - Dollar General Names Michael M. Calbert as Non-Executive Chairman of the Board to Replace Rick Dreiling


Sell on Strength

Client Talking Points


As spreads begin to widen on a record amount of corporate credit, the rating agencies are beginning to sound the alarm, on a lag to real-time quotes and credit default swaps. When the CDS of an IG credit is trading >+1000, that’s a red flag. Both S&P and Moody’s have been vocal the last two days on the dour outlook for commodity producing companies and countries as one of our 3 big macro themes, the #creditcycle, gets rolling.


Yesterday the Nikkei rallied on a central bank rumor of more easing then sold off on a contradictory rumor, the SPX futures gapped higher on Draghi pointing to rising downside risks, oil rose on higher inventories and the U.S. equities finished higher alongside a 4th month of contraction in the Philly Fed Index and a rise in rolling jobless claims to their highest level since April of last year. This morning’s catalyst is Chinese officials vowing to “look after” stock investors. Manic price action in markets and reactionary policy responses out of central banks are not outcroppings of improving fundamentals. GrowthSlowing remains the call and we remain sellers of strength.  


While European equities are bouncing today, nothing has changed with our fundamental outlook of #EuropeSlowing. We got our first touch of reality on the inflation outlook from the ECB in ECB governing council member Ewald Nowotny saying there are risks inflation could turn negative due to low oil prices in H1’16. Also as no surprise, Eurozone GDP and CPI forecasts for the next three years were largely all guided down by a group of external analysts (we expect similar results from the ECB’s staff projections at the March meeting). Finally, preliminary January PMIs for the Eurozone all fell month-over-month. Manufacturing (52.3 vs 53.2 prior), Services (53.6 vs 54.2 prior), and Composite (53.5 vs 54.3 prior). Got growth slowing?

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We added Utilities (XLU) on the long-side last Friday as the market continued to pummel everything we haven’t liked (high debt, high beta, and small-cap stocks leveraged to inflation expectations) – Utility stocks are low-beta, slow-growth bond proxies which is why they are by far the best relative performer year-to-date.


XLU is outperforming the S&P 500 by +7% and remains flat on the year. Friday’s large swath of data echoed what we have been saying for a while now on the deflationary risk of an industrial recession.


GIS led a $3 million funding round for kale chip maker Rhythm Superfoods. Although this is not a big deal and will most likely never make a strong impact to top or bottom line, it marks a changing in the tide for management thinking. They are making a distinct effort to delve deeper into the natural and organic category which will help them a lot in the long run.


Although the overall market has been atrocious year to date, down roughly -8%, GIS with its low beta, big cap, style factors has held in, down just -5%. We continue to like General Mills as a LONG, especially during the tumultuous times in the market.


With growth continuing to slow and volatility breaking out to the upside across asset classes, we expect the unwinding of a record amount of corporate credit leverage to continue. We’d put that deleveraging in the third or fourth inning currently. Credit spreads will continue to widen. That's why you're long TLT (and short JNK).   

Three for the Road


SPAIN: "surges" +3.2% on Draghi Cowbell, but is still in crash mode, -26.5% from 2015 high



Every failure brings with it the seed of an equivalent success.

Napoleon Hill


Apple received $1 billion from Google to keep its search bar on the iPhone, according to a transcript of court proceedings from Oracle Corp.’s copyright lawsuit against Google.

CHART OF THE DAY: Why Volatility Won't Settle Down Anytime Soon | $VIX

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.


"... In the Chart of the Day below we plot daily price moves >1% in the S&P500 by year.  The bubble size corresponds to the average VIX level for the period. 


2014 marked the peak in policy induced complacency (implicit in the transition from explicitly “lower for longer” to “data dependence” is elevated uncertainty & the removal of a structural policy anchor on volatility) and with the Fed now attempting divergent policy action into a slowdown, volatility won’t be re-interred anytime soon." 


CHART OF THE DAY: Why Volatility Won't Settle Down Anytime Soon | $VIX - EL SnP

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Storm and Stress

“Volatility is an outcome revealed in markets: volatility is not causality; it is result.”

-David Kotok, Cumberland Advisors


Yesterday, Japanese equities rallied following a comment by a central bank aide who said that current circumstances would allow more easing by the BOJ, then sold off when another aide said it was too soon for incremental easing. 


A few hours later, the EUR gapped lower and S&P500 futures reversed and gapped higher as Draghi said downside risks have opened up and hinted at incremental policy action come March.  


Oil then rallied hard on a rise in inventories and the SPX held its gains alongside a 4th month of contraction in the Philly Fed Index, a rise in rolling jobless claims to their highest level since April of last year and SPX earnings for 4Q16 tracking at -4.0% YoY.     


The 2016 equity casino is officially open.  


Storm and Stress - casino


Back to the Global Macro Grind ….


With oil higher, commodity and EM equities and currencies gaining overnight and Chinese officials vowing to “look after” stock investors, the central bank intervention trade is hoping to extend yesterday’s 1-day Viagra reflation rally another day.


A new movie, this is not.  Manic price action in markets and reactionary policy responses out of central banks are not outcroppings of improving fundamentals.


Keith likes to say:  Play the game that’s in front of you. 


In other words, investing in the market you want rather than the one you have is a nebula for negative alpha. 


Policy aimed at hitting a misestimated potential growth target (or some unrealistic growth rate that, on paper, allows sovereigns to meet forward liabilities) represents negative policy alpha.    


While the illusion of growth can be maintained for a period, sustained real growth can’t be printed and the accumulation of latent risk eventually manifests in prices. 


In the Chart of the Day below we plot daily price moves >1% in the S&P500 by year.  The bubble size corresponds to the average VIX level for the period. 


2014 marked the peak in policy induced complacency (implicit in the transition from explicitly “lower for longer” to “data dependence” is elevated uncertainty & the removal of a structural policy anchor on volatility) and with the Fed now attempting divergent policy action into a slowdown, volatility won’t be re-interred anytime soon. 


In fact, if all you did was draw a line connecting the bubbles in the chart below and adjust gross/net exposure and asset allocations counter-cyclically as we predictably traversed the sine curve, you would have crushed it.   


So, what’s driving the crescendo in investor angst?  Is it China …. Is it oil? … elevated geopolitical risk? 


In a sentiment update note from the road on Wednesday my colleague, Darius Dale, highlighted the above as consistently offered narratives attempting to explain the swoon in financial markets. 


Attempting to assign definitive causes to events is a natural cognitive trapping.  In viewing markets as a complex system, it’s less that those explanations are not true (in isolation) but that they are all true.     


As Kotak notes “the yin and yang of data flows and interdependency influence the Sturm und Drang (Storm & Stress) of human behavior” … a cauldron of reflexivity where data, prices, expectations and behavior mix to both birth and propagate volatility. 


The yin and yang of expedited price moves in commodities comes with duration sensitivity (i.e. the implications are different based on the time horizon taken).


Lower oil represents a diffuse benefit to domestic consumers. However, the flow through to reported growth is hostage to the prevailing trend towards higher savings and the benefit to non-energy consumption can show up on a variable lag (not to mention that aggregate income growth – which represents the capacity to consume – is and will continue to decelerate from here) . 


On the flip side, the nearer-term concerns are both acute and highly visible as domestic producer profitability gets crushed directly, related sectors feel the follow-on effects, credit markets and spreads get stressed, and commodity export economies come under increasing pressure (with impacts ranging from higher current account deficits to revolutionary social unrest). 


Further, to the extent commodity deflation is a function of a strong dollar, the cost of trade for import heavy countries rises, driving current account deficits higher and potentially stocking local inflation.   


The impact to growth in developing markets can be equally severe given the proclivity for capital flows to reverse alongside policy tightening in developed markets. 


When portfolio capital starts to exit, asset prices deflate and credit gets tighter, investment and consumption both decline.  The currency depreciates, driving local inflation higher at the same time that aggregate demand accelerates to the downside. If demand is local and the debt is denominated in foreign currency, the debt burden on business is amplified.  Declining demand in the face of a crashing currency and elevated inflation can leave policy makers handcuffed. 


With $9 Trillion+ in non-bank dollar denominated debt outstanding outside of the U.S., the prospect for a resurgent wave of defaults is certainly real and rising. 


Domestically, the earnings/profit/industrial recession won’t be ebbing in the next few months and expectations around a reversal in domestic monetary policy may be rightly placed - but let the data breath a bit. 


Central Bank rhetoric follows the data flow and market prices on a lag and actually policy action lags the rhetoric. 


When volatility rises we compress the measurement parameters in our TRADE, TREND models to more dynamically manage the risk of the probable range – it’s our way of objectively measuring and managing the stress of a roughening storm. 


We’ll assuredly get more price volatility and relief bounces but we remain sellers of strength, for now.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.96-2.10%


VIX 22.24-29.83
USD 98.57-99.56


To poach the sign-off from our own Howard Penney …


Function in Disaster, Finish in Style.


Christian B. Drake 

U.S. Macro Analyst 


Storm and Stress - EL SnP

The Macro Show Replay | January 22, 2016


Cartoon of the Day: Laughing Bears

Cartoon of the Day: Laughing Bears - bears in car cartoon 01.21.2016


"BREAKING: Dip Buyers Face Exhaustion," Hedgeye CEO Keith McCullough wrote earlier today. "If you've been buying them the whole way down, you're out of business at this point."

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