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Shaking Up Idea List

Takeaway: Major changes to our Retail Idea List. Long: NKE, RH, KATE. Short: FL, KSS, HIBB, W, TIF, TGT, LULU

Shaking Up Idea List - 2 8 2016 chart1B

 

We made some major changes to our Retail Idea List today. Here goes…

Thematically, our longs have meaningful, yet underappreciated, growth drivers (NKE) and have been punished/annihilated by the market (KATE, RH). Our bench is mainly composed of quality companies that have had a meaningful earnings/price reset, and it is only a matter of time before we think the ideas work again (PVH, RL, ULTA, AMZN, WWW, PIR).

Our shorts are composed largely of zero-square footage-growth retailers that are either overly exposed to deflationary pressures and/or have meaningful margin risk and are significantly overearning relative to consensus. This includes FL, KSS, HIBB, GPS, TIF, TGT, M, JCP, JWN, LULU, COLM and W.

 

Changes in Order of Top Longs

NKE: We moved this to #1 (from #3) on our list. It won’t make you rich here, but the earnings upside is very much underappreciated.

RH: Not our top name for first time since back when the stock was at $32. Still a core name for us. Earnings defendability in a recession is misunderstood, as is leverage as square footage growth kicks in and new store productivity improves. Only uncertainty is that RH does not report EPS until late March, a long time to wait. We think we’ll see a press release by the end of Feb, which should ease concerns.

KATE: No change. Sentiment in ‘space’ finally improved, and KATE should earn more $ this quarter than it has cumulatively in seven years. Then people should start to look at $0.70-$1.00 in EPS power for the year. Then it’s finally got valuation support – especially with the stock at $17.

 

 

Removed from Long Bench

DKS: The more we consider how bad the changes at Nike will be for Foot Locker, we’re now of the mindset that DKS will be hurt on the margin as well. Plus, we’ve been disappointed by the lack of margin-recapture in golf/hunt business. Sports Authority should hurt, not help (as many wrongly think).

COH: We think it’s rangebound between $30-$40. The stock’s currently at $35. When upside/downside is 1/1 we throw in the towel.

DLTR: We weren’t fast enough on this one. It was like a balloon underwater in the low $60s in Oct, then over the course of a week it rightfully popped to $75. Still likely upside from here in earnings, but we don’t think we have a real edge today. Revisit.

KORS: The model has proven to be far more resilient than the market expected. But the upside from here gets a little tougher. We’d stick with KATE – as ‘the space’ is bifurcating.

BBBY: Will this company ever stop disappointing?

CROX: As hard as we try, we can’t go the final mile on this idea. Cheap? Yes. Cash flow? Yes. Core Idea for us? No.

TLRD: After one of the most spectacular blowups of last year after the closing of the MW/JOSB merger, this name is trading at just 7x EARNINGS. The problem is, we still can’t get comfortable that the earnings number is real. We’d rather own DLTR if we had to own a recent retail merger where execution is paramount.

 

Removed from Short Bench

WSM: Though we think the company has issues long-term, the stock is arguably cheap down here. Not shortable anymore.

AEO: Vetted it, and don’t have a great edge on EPS downside. Need to bet on brand heat easing, which isn’t our game.

COST: Stock looked expensive – so we vetted it. Comps missed, and stock still looks expensive. But it’s a great company – and there are plenty of junkier ones to bet against.

 

Added to Long Bench

RL: This was on our Long Idea list, and yes, last week was a disaster. This company has so many issues it’s almost impossible to count. That said, this stock looks very close to a bottom. It might take a while to get paid (12-18 months) as it likely embarks on yet another restructuring, but this is one to keep a close eye on – and we DEFINITELY would not short it here.

PVH: Stock bottoming from a valuation perspective and easy compares on the top line, margins, and capital intensity over a trend and tail duration. Sentiment improving on the margin, as we enter year 3 of Warnaco acquisition. We have to assume that the worst of Warnaco’s skeletons are cleaned from the closet (regardless of what management says). Once we get past that, then we’re in business.

WWW: It’s tough to find names with a 20-year chart like this, and when the stock drops by 55% in under a year, we need to start giving its solid management team, deleveraging trend, and global diversification a lot more credit at just 11x earnings.

 

 


MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION

Takeaway: More evidence of the US labor market slowing triggered a global selloff in credit, as CDS for banks and sovereigns worldwide spiked.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM11

 

Key Takeaway:

The drumbeat of recession grows louder seemingly with each new eco data point. Last Friday's NFP was but the latest link in a growing chain of a getting-harder-to-dismiss negative data mosaic. We've been flagging emergent weakness in the labor data since late last year (Here's our late December initial jobless claims note: Raise Shields!), and our overarching bearish tone is unchanged as we enter the second week of February.

While the datapoints worth flagging in our Risk Monitor have waxed and waned from week to week YTD, what hasn't is the heavy skew towards negative trend. Right now the ratio of positive to negative on a short-term basis is 6 to 1, while on an intermediate term basis that ratio is 6 to 3. The long term ratio is 5 to 1. 

 

Last week the big theme was sovereign and corporate default risk rising seemingly across the board globally, partly in reaction to the weakening U.S. labor market. European banks CDS widened significantly with DB rising 56 bps and Barclays rising 40 bps. In the US, GS and MS each rose 20 bps, while BofA and Citi were +14 and +18, respectively.

 

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


Current Ideas:


MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 13 improved / 6 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 3 of 13 improved / 6 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 5 out of 13 worsened / 7 of 13 unchanged

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM15

 

1. U.S. Financial CDS – Swaps widened across the board for domestic financial institutions. GS & MS both widened by +20 bps to 115 and 118 bps, respectively. Meanwhile, Citi and BofA were +18 and +14 to 120 and 109 bps. Insurers PRU and MET also had a rough go of it, widening by +31 and +23 bps.  

Widened the least/ tightened the most WoW: ALL, CB, AGO
Widened the most WoW: PRU, MET, GS
Widened the least/ tightened the most WoW: CB, ALL, MTG
Widened the most MoM: AIG, AXP, PRU

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM1

 

2. European Financial CDS – Swaps widened notably across European financials last week. The median spread widened by a significant +24 bps to 123. Deutsche Bank saw swaps widen by +56 bps to 201 bps, while Barclays widened by +40 bps to 121 bps.

 

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM2

 

3. Asian Financial CDS – Asian financial swaps widened last week as the perceived risk of default rose globally. The Bank of China saw the largest increase, widening by +24 bps to 180.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly widened over last week. Portuguese sovereign swaps widened the most, rising by +34 bps to 252.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM18

 

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM3

 

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Chinese sovereign swaps widened the most, rising by +14 bps to 138. 

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM16

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 11 bps last week, ending the week at 8.84% versus 8.73% the prior week.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 2.0 points last week, ending at 1798.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM6

8. TED Spread Monitor  – The TED spread rose 3 basis points last week, ending the week at 33 bps this week versus last week’s print of 30 bps.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM7

9. CRB Commodity Price Index – The CRB index fell -1.4%, ending the week at 162 versus 164 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 | THE GRAVITY OF THE EMPLOYMENT SITUATION - 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 14 bps.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 1 basis point last week, ending the week at 1.98% versus last week’s print of 1.99%. 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 | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM10

12. Chinese Steel – Steel prices in China were unchanged last week at 2,028 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 | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 111 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM13

14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread was unchanged at 39 bps.

MONDAY MORNING RISK MONITOR | THE GRAVITY OF THE EMPLOYMENT SITUATION - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


SECTOR SENTIMENT RUN

Our monthly sentiment run is a behavioral, market-based gauge of investor sentiment in the Basic Materials Sector. Any relative performance measure is tied to the benchmark S&P 500 Materials Sector INDEX (GICS). Further screening methodologies are included in the link to the tracker below.

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CLICK HERE to access the February Sentiment Tracker presentation.

 

Key Call-Outs:

 

Positive Sentiment

Negative Sentiment

 

  • Looking at short-interest, 6 of the top 12 least shorted names are in the Gold Mining space with large-cap Diversified Metals and Miners being the most heavily shorted (FCX, AA, TCK, AWC, FMG).
  • Combining consensus “buy” ratings and short-interest, Diversified Chemicals & Specialty Chemicals have the most positive relative sentiment when combining both metrics. Diversified Metals and Mining, Aluminum, & Commodity Chemicals have the most negative sentiment.
  • With the outperformance in precious metals YTD, relative outperformance, declines in volatility premiums, and a cutting in short positioning all suggest the market views Gold Miners much more favorably vs. the beginning of 2016. 5 of top 12 declines in volatility expectations are in Gold Mining names. The largest 2016 YTD spikes in implied vol. come in the chemicals space (9 of top 12), but we believe this is due to broader market volatility.
  • The largest sector divergences in growth metrics (TOP-LINE, OPERATING, BOTTOM LINE) exist in the mining space. We expect a downward revision in sell-side estimates in the space as many mining company expectations still need to be taken down while some are already discounted with declining operating leverage.  

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

CHART OF THE DAY: How To Win The 2016 Alpha Bowl, Our Favorite Sector

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.

 

"... You don’t just have to be in Cash and Long-term Treasuries to win the 2016 Alpha Bowl. You could have easily ran a net neutral exposure long/short US equity hedge fund and set yourself up with the following portfolio:

 

  1. Put a billion into Long Utilities (XLU) which were up another +2.5% last week to +7.6% YTD
  2. Put a billion on the short side of the Financials (XLF) which got sacked for another -3.5% loss last week (-12.1% YTD)" 

 

CHART OF THE DAY: How To Win The 2016 Alpha Bowl, Our Favorite Sector - 02.08.16 Chart


Same Old Thing

“Something is going to have to change.”

-Cam Newton

 

That’s what the young leader of the Carolina Panthers had to say after last night’s Super Bowl loss to the Denver Broncos. I thought Newton was both truthful and accountable. When things don’t go your way, change is the only path forward.

 

Fortunately, we don’t have to apologize this morning. We were on the right side of the #LateCycle US Employment report going into the weekend. And we’re on the strong side of a worldwide selloff in both stocks and long-term bond yields this morning.

 

As Cam said in the post-game press conference: “That’s it man – I sound like a broken record, but it’s the same old thing.” Global #Deflation of asset prices combined with US #GrowthSlowing into recessionary expectations needs to be risk managed.

 

Same Old Thing - Deflation cartoon 12.29.2014 large

 

Back to the Global Macro Grind

 

There comes a point in an economic cycle when the latest cycle factors (employment and consumption) start to slow. That’s when bad becomes bad. And there’s no amount of “Fed Easing” that can arrest that economic gravity. Newsflash: Fed is still tightening.

 

Friday’s Non-Farm Payroll (NFP) print of 151,000 may have been “decent” on the surface, but words like “good” and “decent” don’t register in our #process as relevant. Did the number get better or worse? That’s the only question that matters.

 

After peaking at +2.34% year-over-year growth in FEB of 2015, US NFP slowed (in rate of change terms) to 1.9% year-over-year in JAN 2016 and is primed to slow to its slowest rate of the cycle when it bumps up against that peak-cycle FEB comp next month.

*“Comp” = comparative period (vs. last year or whatever time-series you choose to analyze)

 

Since both the US Profit Cycle and GDP comps peaked in Q2 of 2015, you should get used to me writing about the same old thing for the next 5-6 months. That’s why we’re staying with the best big-liquid-long for that prevailing macro environment – The Long Bond.

 

Here’s how that boring old Long Bond (TLT) did in the face of a lot of other things not working last week:

 

  1. US 10yr Treasury Yield down another 8 basis points on the week (down 43 basis points YTD) to 1.84%
  2. US Dollar -2.7% on the week (one of its worst weeks in a year) to $96.95 on the US Dollar Index
  3. EUR/USD +3.1% week-over-week to +2.8% YTD
  4. Yen (vs. USD) +3.6% week-over-week to +2.9% YTD
  5. Commodities (CRB) Index down another -2.9% on the week to -8.1% YTD
  6. Oil (WTI) continued to crash, down another -7.8% on the week to -18.8% YTD
  7. Gold continued to rally +5.1% week-over-week to a league leading +10.6% YTD
  8. SP500 dropped another -3.1% week-over-week to a dismal -8.0% YTD
  9. Russell 2000 continued to crash, down another -4.8% on the week to -13.2% YTD
  10. Nasdaq underperformed both the SP500 and Russell, -5.4% on the week to -12.9% YTD

 

That last bit (Nasdaq) got de-fanged on Friday. When I said there will come a time in the US stock market when bad is bad, that was pretty much what I meant by that. Every “General” of the #LateCycle bull market gets shot.

 

Looking at that Breaking Bad reality from a US Equity Style Factor perspective:

 

  1. Top 25% Sales Growers led losers last week, closing down -4.8% to -12.1% YTD
  2. Top 25% EPS Growers dropped -4.0% week-over-week to -11.0% YTD
  3. High Beta Stocks lost another -3.7% last week, crashing to -14.7% YTD

*Mean Performance of Top Quintile vs. Bottom Quintile of SP500 Companies

 

In other words, if your competition was levered long High Beta and Growth (and averaging down throughout January, getting longer) last week, you made them look like the Denver Defense did to Carolina last night.

 

I realize that playing defense isn’t going to make you a “billionaire”, but it can win you a Championship. For those of us who believe that the name on the front of our jersey matters more than the one on the back, we’re cool with that.

 

You don’t just have to be in Cash and Long-term Treasuries to win the 2016 Alpha Bowl. You could have easily ran a net neutral exposure long/short US equity hedge fund and set yourself up with the following portfolio:

 

  1. Put a billion into Long Utilities (XLU) which were up another +2.5% last week to +7.6% YTD
  2. Put a billion on the short side of the Financials (XLF) which got sacked for another -3.5% loss last week (-12.1% YTD)

 

Why don’t any of these big time players in the league have this position on? Is it too boring? Or is consensus simply whining that “consensus is bearish” while they’re still positioned way too bullish?

 

The other consensus out there is classic #LateCycle and that’s that US consumption is still “good.” True. But the rate of change process point being missed here is that that factor has gone from great to good. And that’s bad.

 

Consumer Discretionary (XLY) stocks led US Equity Sector Style losers last week, closing down -5.3% on the week to -10.2% YTD. Yep. Same old thing as the consumer peaking and rolling over at the end of 2007, but with more leverage on the market side of that trade.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.80-1.94%

SPX 1
RUT

NASDAQ 4

VIX 20.31-27.98
USD 96.07-98.26
EUR/USD 1.07-1.12
Oil (WTI) 28.83-34.36

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Same Old Thing - 02.08.16 Chart


Euro, DAX and the UST 10YR

Client Talking Points

EURO

While there was a USD bounce on the jobs report having enough of what a #LateCycle Labor Economist (Yellen) might want to see to keep raising rates. The EUR/USD is +0.2% to start the week after one of its best weeks in a year at +3.1% week-over-week.

DAX

The DAX doesn’t like the Up Euro trade inasmuch as Japanese stocks didn’t like an Up Yen (+3.6% last week vs USD). The DAX is down another -1.9% this morning and remains in crash mode, down -26.5% from last year’s peak.

UST 10YR

One of the few places to stay long and liquid remains the Long Bond. The UST 10YR Yield was down -8 basis points last week and is down another 2 basis points this morning to 1.82% - this is flattening the Yield Spread to a new cycle low of 110 basis points (10yr minus 2yr) and that’s one of the main reasons why the Financials (XLF) remain our favorite S&P Sector short.

Asset Allocation

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 25% INTL CURRENCIES 13%

Top Long Ideas

Company Ticker Sector Duration
XLU

The bond market understands #GrowthSlowing. So do Utilities (XLU), which is why XLU is leading S&P sub-sector performance in 2016. XLU is up +7.6% versus down -8.0% for the S&P 500. Stick with it on the long side.  

GIS

GIS remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal in turbulent times; high market cap, low beta and liquidity. While GIS is down year-to-date, it's held up very well against the broader stock market. GIS is down -4% versus down -8% for the S&P 500 in 2016.

 

GIS has been picking up steam, as the company is working to improve merchandising and advertising on core business. One of the initiatives is making a distinct effort to delve deeper into the natural and organic category. That will certainly help them a lot in the long run. More to come.

TLT

Down go growth expectations and down goes the yield curve. That's the latest from Macro markets last week and it plays right into our long Long-Term Treasuries (TLT) and short Junk Bonds (JNK) Investing Ideas.

 

The UST 10YR Yield declined another -9 basis points last week which helped boost TLT +1.1% on the week. In a healthy environment, bonds as an asset class go up in tandem, but JNK lost -0.9% on the week despite a falling yield curve. That’s because we’re NOT in an “all is good” environment. Credit spreads widen in turbulent times. This widening is the alpha-generating opportunity in long TLT, short JNK.

Three for the Road

TWEET OF THE DAY

Under 60 Seconds: LinkedIn’s Earnings Report $LNKD  https://app.hedgeye.com/insights/48998-under-60-seconds-linkedin-s-earnings-report … via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Be a voice, not an echo.

Albert Einstein                                    

STAT OF THE DAY

The world’s largest producer of platinum, Anglo American Platinum Ltd. said profit fell 86% as it wrote down mines and operations by 14 billion rand ($876 million).


Early Look

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