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HedgeyeRetail (1/28) | Brands Competing With Wholesale Partners

Takeaway: Brands putting the screws to Wholesale partners by upping E-commerce agenda

Specialty Retailer Christy Sports tired of competing with its vendors as they make DTC push 



This is a major trend developing in retail as brands make the DTC push. Essentially competing with its historical wholesale partners on price to push growth through a direct agenda. And, the brands have a lot of margin dollars to work with in the DTC channel by eliminating the wholesale markup.


Take Nike, for example, which generates about a 51% Gross Margin when it sells a $100 pair of shoes to Foot Locker. But it garners about a 68% margin when it sells on nike.com. That’s nice, but it’s not what we care about. We care about the Gross Margin dollars – not the rate. On that very pair of sneakers, Nike gets about $23 in Gross Profit from that ‘wholesale’ sale to Foot Locker. But it gets about $85 (by our math) when it sells direct. In other words, there is a magnifier effect, and the dot.com margin dollars go up by a factor of 3-4x.


All it takes is a few sales hiccups for retailers to the give the stiff arm to vendors who are selling the same product behind their backs. But, that doesn't work when one brand is 75%+ of sales volume.


For a full run down on how the DTC push affects the traditional wholesale model, especially Foot Locker, see our note: NKE/FL | Critical Context on NikeLocker.



WMT - Walmart is taking its battle with Amazon to the cloud -- its new OneOps cloud management and application lifecycle platform is being released



M - Macy’s will offer limited-edition merchandise, promotions and in-store events to benefit Go Red For Women next month -- customers who purchase $3 pin will receive 25% off most items storewide



TIF - Coty, Tiffany Ink Fragrance Licensing Deal



UA - Under Armour will sell $500 Cam Newton cleats if he is named Super Bowl MVP



FINL - Retailers bet big on retooling supply chains for E-commerce after Finish Line's warehouse system fails



AMZN - Free Shipping is no longer enough -- Amazon and other online retailers go for speed



UPDATE | Our Best Macro Ideas (And The Nasty Equity Reality)

Takeaway: With the Fed tightening into a slowdown, stock market declines haven’t been transitory.

UPDATE | Our Best Macro Ideas (And The Nasty Equity Reality) - liquidity trap cartoon 01.25.2016


For those of you keeping score, here's the year-to-date breakdown of S&P 500 sector performance:



Not pretty.


Making matters worse for long-only perma-bulls, volume has been lackluster (at best) on up days and rips on the down days.



This doesn't bode well for anyone who's doubled-down on Old Wall "wisdom" of buying the dip as equities went down, down, down.


Our subscribers? They're doing just fine.


People invested in the truth see our calls for what they are.



Here's a snippet from a note Keith sent to subscribers this morning. 


"... Our Top 3 Long Ideas in Macro right now remain: USD, Utilities (XLU), and The Long Bond – 10yr in the US about to break the 2.00% yield level again as German and Japanese 10s chase to lower-lows of 0.42% and 0.21%, respectively."


Incidentally, XLU is crushing it year-to-date (up +1.3%) compared to the S&P 500 (down -7.7%). Check out sector performance in the chart above ... the sole green line ... Yup --> Utilities.


Checking in on U.S. Treasuries. After today's Durable Goods bomb, the 10-year broke 2%. A nice call from McCullough earlier this morning.


Stick with accountable and transparent 2.0 sources. Stick with us. We're the only Wall Street firm to nail this #GrowthSlowing data. We're just getting started. 



Déjà vu, rerun, we’ve seen this movie before, replay, Rocky X. After re-reading our LVS Q3 analysis, I was struck by the similarity with last night’s release. Hedgeye was positioned long on the stock. What we thought would happen did indeed happen. The stock still looks like a long but, just like last quarter, only for a trade.


Believe me, I want to make the long recommendation, call the turn, be the maverick. In meetings with clients in New York, Boston, and London I laid out conditions I was looking for to go long for more than a trade: 1) multiple compression, 2) lower Street estimates more in line with Hedgeye, and 3) a belief that Mass has stabilized. For the first time in our 2 year-long short call 1) and 2) have occurred but it’s that fundamental point number 3 that brings us back to our keep a trade a trade recommendation.



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Market Declines Aren’t Transitory

Client Talking Points


They crushed the Shanghai Composite -2.9% to lower-lows overnight. There’s not much the Chinese can do at this point – they’ve already lied to the world about both their GDP figures and intentions to devalue the Yuan by 10-15%.


Consensus is so focused on “Oil and China,”  but is nowhere near focused enough on the #crash (> 20% decline from 2015 peak) in European Equities. Spain is a disaster and Italian Banks are leading the MIB Index -3% this morning (-14% in the last month alone).


Our Top 3 Long Ideas in Macro right now remain: USD, Utilities (XLU), and The Long Bond. The UST 10YR is about to break the 2.00% yield level again as German and Japanese 10s chase to lower-lows of 0.42% and 0.21%, respectively.


*Tune into The Macro Show with Energy analyst Kevin Kaiser live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Utilities (XLU) continue to be the bright spot in the equity markets for 2016. XLU is up 1% this year, having edged out all other S&P 500 subsectors by a wide margin. Last week, XLU was down marginally but was still second best among the subsectors, beating all but Healthcare (XLV). Essentially, it's paying off to own low-beta XLU in a crashing market.


General Mills (GIS) has turned on its advertising for no artificial colors and flavors in its cereal, as well as an increased effort for its gluten free campaign. Click here to view the 30 second spot TV commercial.


These steps taken on cereal, coupled with improved merchandise planning across their portfolio in the second half should bode well for the company’s future performance. Additionally, General Mills fits neatly into the style factors that we like from a macro point of view, large cap, low beta and liquidity.


Rating agency S&P disclosed on Thursday three concerning stats as it relates to the wellness of credit oustanding:

  • More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009
  • The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009
  • The year-end total for 2015 was "exceptionally" higher than a yearly average of 613


Then on Friday, S&P followed with additional action:

  • Disclosure that oil-exporting countries face fresh downgrades as crude prices fall further and that it could repeat last year's move when it made a big group of cuts all at once
  • S&P currently has Azerbaijan, Bahrain, Kazakhstan, Oman, Russia, and Saudi Arabia on negative outlook in its Europe, Middle East and Africa region, as well as Brazil and Venezuela in Latin America

Moody’s echoed the shaky state of credit markets by announcing it was putting the ratings of 120 oil and gas companies on watch Friday.


Strap on your seatbelts as we expect that credit spreads will continue to widen. If the Fed pivots on its “4 rate hikes” in 2016 as the data continues to slow, Treasury bond yields get pushed lower and high-yield spreads widen into a late cycle deleveraging. This should continue to generate alpha in a Short JNK, Long TLT trade.

Three for the Road


McCullough: My Thoughts On Today's Fed Statement https://app.hedgeye.com/insights/48793-mccullough-my-thoughts-on-today-s-fed-statement… via @hedgeye



Life is short. Smile while you still have teeth.

Mallory Hopkin                           


Today in 1878, The Yale Daily News became the 1st daily college newspaper in the U.S.

CHART OF THE DAY: There Goes The Fed's Credibility


CHART OF THE DAY: There Goes The Fed's Credibility - 01.28.16 Chart


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.


"... That is why the #Deflation & #GrowthSlowing bears won (again) yesterday. To summarize:


  1. The Fed continues to be a pro-cyclical version of a Labor Economist (Overweight #LateCycle employment data)
  2. The Fed continues to call something that’s been pervasive (#Deflation) “transitory”
  3. And, as a result, the Fed continues to be behind the curve, lagging both real-time economic data and market moves" 


Reputational Bubbles

“Reputation is a bubble which man bursts when he tries to blow it for himself.”

-Someone Observing The Old Wall


So a short, aging, Wall St. guy from the CT burbs (with 4 kids) walks into a room with 2 strapping younger dudes…


That is my professional life. And no, I’m not the young buck who walks in looking like Cam Newton (Darius). I’m the fatter version of a former me who is on Day 7 of a roady, covering 4 cities (New York, Boston, San Francisco, and Los Angeles) trying to keep up with these guys.


The meetings go great. We have this crazy contrarian thing called the time-series of economic data that augments this other thing called our macro opinion. We are The Bears. Raging. We get that. We also get that our reputation will hinge on whether or not we overstay our welcome.


Reputational Bubbles - bears in car cartoon 01.21.2016


Back to the Global Macro Grind


Do you think, for more than 3 seconds, that I don’t want to call the bottom? Seriously. I have spent almost 17 years trying to understand, respect, and measure tops and bottoms.


Lesson #1: Both tops and bottoms are processes, not points.


As the legendary Paul Tudor Jones taught us, it’s the last part of the macro move that makes the most fools out of us. In fractal math, we’d call that the last 1/3 of the move. It’s where the “value” guy buys too early, and the bear covers too soon. (both BUY orders)


Lesson #2: Be there for the last 1/3 of the move (SELL bounces).


So, no matter where your “market” opinion has been over the last 18 months, here we are. There are no excuses. There is no finger pointing. Our reputations will be won or lost by the decisions we make next. This is not a charitable exercise. This is Wall Street.


Lesson #3: Stop opining. Give me the wood.


And since I’ve done that for 7 straight marketing days, I will do that (again) on the 8th day. I’ll put my reputation on the line and keep pressing our best call – the probability of a US #Recession is rising (not falling). Consensus isn’t yet Bearish Enough.


As a result, the Reputational Bubble that is popping is that of an un-elected and un-accountable bureaucracy called The Federal Reserve. Until Bernanke’s legacy of linear forecasters embrace the non-linearity of it all, one of the most obvious risks remains their forecast.


That is why the #Deflation & #GrowthSlowing bears won (again) yesterday. To summarize:


  1. The Fed continues to be a pro-cyclical version of a Labor Economist (Overweight #LateCycle employment data)
  2. The Fed continues to call something that’s been pervasive (#Deflation) “transitory”
  3. And, as a result, the Fed continues to be behind the curve, lagging both real-time economic data and market moves


No, the Fed wasn’t “dovish enough” in their statement. Newsflash: they are still hawkish and in “rate hike” mode. And it’s going to take at least another 3-6 months for them to catch up to our economic view. That’s the bull case!


Our Top 3 Macro Theme Ideas on the long side remain:


  1. Long US Dollars (UUP)
  2. Long The Long Bond (TLT)
  3. Long Utilities (XLU)


Our Top 3 Macro Theme Ideas on the short side remain:


  1. Russell 2000 and SP500
  2. Junk Bonds (JNK)
  3. Financials (XLF)


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.96-2.06%

USD 98.64-99.63
Oil (WTI) 28.01-32.98


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Reputational Bubbles - 01.28.16 Chart

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