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HedgeyeRetail (2/18) | WMT - More Bearish on the Company than the Stock

Takeaway: WMT had already lowered the bar to where it won't hit 2015 earnings until at least 2019. We're More Bearish on the Company than the Stock.

WMT - We're More Bearish on the Company than the Stock


These results in the US were ho hum from where we sit. The comp and revenue miss was written in the cards given the results we've seen posted across the board at M, KSS, COST, [insert other US levered retail name here]. Guidance for the year for 0.5% implies a sequential deceleration in the US biz coming off an investment year in employees, stores, and e-commerce which would imply a less than bullish picture on US consumption, or just flat-out conservatism. We think it's the former. Current investments are all about driving the top line despite the drag to margins, earnings, and returns. If that doesn't work then WMT is in even more trouble.


But, WMT, unlike most of the names in retail, has already lowered the bar to a point where it won't hit 2015 earnings levels until at least 2019. With that much bad news priced in even at the mid-60's it's hard to be more bearish on the stock when there are so many in the space with more earnings downside.


Other read-throughs…

1) E-commerce sales totaled $13.7bn for the year or about 2.9% of sales up from $12.2bn or 2.5% last year. Considering that the company invested about $900mm in that channel alone in FY16, that's not a great ROI. We get that WMT is investing to put the building blocks in place for the future, but when we read comments by the CFO that he '...would have liked to have seen higher e-commerce sales growth this quarter', we have to wonder if the $1.1bn the company plans to invest in FY17 is enough to catch WMT up to the rest of the industry. We're inclined to think its not and that has negative implications for the rest of the players who are trying to play catch up, i.e. Target.


2) Fx - WMT guided to a $12bn hit to the top line from Fx in FY17. That's down from the $17bn the company felt in the fiscal year just reported, but its certainly still a sizable headwind. As the bellweather for global retail we think that's extremely bearish for the rest of the space. Looking quickly at the revenue ramp expected for PVH, VFC, and TIF, consensus is expecting a nice sequential ramp in sales from 4Q into 2H16 due in large part to lapping a strong dollar. But, based on WMT's commentary today...that's not going away.


3) How is this not bad for TGT? We know the composition of investments (wages, e-comm, stores, etc.) and the earnings drag being felt as a result at WMT. Add on a tepid consumer environment and it doesn't add up well for TGT. The low hanging fruit has already been picked by Cornell in the form of Canada, lapping the data breach, sale of the pharmacy unit, and now the company will need to invest if it wants to realize its goal of 3% sales growth. That doesn't appear to be in the current street numbers.

HedgeyeRetail (2/18)  |  WMT - More Bearish on the Company than the Stock - 2 18 2016 chart1


FL - Many ‘Un’happy Returns

Foot Locker’s big capital spending plan announced last night is anything but good for the financial return profile, and the stock. The company’s capex number for the upcoming year is expected to clock in at $297mm. That’s the most FL has spent since 1999, and it represents a 26% increase from the already-elevated levels we saw in 2015.

For Link to the Full Note: CLICK HERE


JWN - Time vs. Price

This is a multi-duration call. Bearish over the near-term as macro headwinds put earnings at risk. But, levers are there once the consumer stabilizes/recovers. The reality is that this is the only department store that really needs to exist.

For Link to the Full Note: CLICK HERE


NKE - Nike has terminates commercial deal with Manny Pacquiao following controversial statements



M - Macy's to offer Shaun White men's line after he ended 8-year relationship with TGT



AdiBok - Adidas hired ex LULU CEO Christine Day as Strategic Advisor, showing it’s getting serious about women’s athletic business



AMZN - Amazon is quietly inviting drivers for new "on demand" service to deliver its standard packages -- service will improve speed and margins



OLLI - Ollie’s Bargain Outlet majority owner looking to reduce stake, Ollie's plans secondary stock offering for 11% of company



BBW - Build A Bear Workshop holder nominates 2 candidates to board



HBC - Saks Fifth Avenue making entry into Canadian market today



SHLD - Kmart sourcing 'extreme-value' deals by purchasing the inventory of liquidated companies



Hhgregg announces that CFO Robert Riesbeck will act as interim CEO


NEM | Pick a Price | Adding Short NEM as a Best Idea

Newmont reported disappointing results that were in line with our December Black Book.  We provide a summary of the results below and highlight three noteworthy items.  While it is buried in a greatly expanded 10-K, NEM continues to capitalize stockpile & ore on leach pad costs using a $1,300 gold price, even though it lowered its reserve price assumption to $1,200. A long-term copper price assumption of $3.00/lb. to capitalize stockpile & ore on leach pads and $2.75 for valuing reserves is even more optimistic in our view. We expect NEM to continue to struggle with production costs, and forecast higher than expected gold mine output growth.  For background, please ping us for our Gold & NEM Black Book and EQM model & datasets.    


NEM | Pick a Price | Adding Short NEM as a Best Idea - Capitalized expenses vs. price


NEM | Pick a Price | Adding Short NEM as a Best Idea - What is a capitalized expense


1. Wrong Way, Higher Costs & Cash Burn Threaten Bull Thesis:  We see NEM’s gold production cost reductions as unsustainable and partly non-economic.  In the fourth quarter release, AISC moved up to $999/oz, amazingly just $1 below the sub-$1000 guidance.  That compares with $927/oz in 4Q 2014 and an average of $898/oz for all of 2015.  For longs, this is a meaningful piece of disconfirming evidence on NEM’s ability to adapt to a lower gold price environment. Only about $26/oz of the year-over-year increase was from higher ‘sustaining capital’, a dubious concept at best. The bulk of the year-on-year cost increase in the AISC framework was from Costs Applicable to Sales (a bit under $50/oz), which is harder for management to explain away.  While only a single quarter, it is worth noting that free cash flow was -$185 million in 4Q 2015; the bull story of NEM being a “most improved”, “adapting to low price environment”, and “cash generating” miner seems at risk.


NEM | Pick a Price | Adding Short NEM as a Best Idea - NEM AISC Adj. vs. Reported


2. Pick-A-Gold Price Assumption, Capitalizing Expenses:  The most surprising aspect of the 10-K for us was the continued use of a long-term $1,300 gold price assumption for stockpiles & ore on leach pads.  NEM dropped its 2015 long-term gold price assumption for Reserves to $1,200/oz from $1,300 last year.  How does it make sense to use two different gold prices for similar assets?  It doesn’t, as we see it.  An above market gold price does allow for capitalizing of costs related to stockpiles that would be expensed at lower gold price assumptions.  We believe that NEM is capitalizing an expense by using inconsistent long-term gold price assumptions, presenting an unsustainable cost profile at current gold prices. 


NEM | Pick a Price | Adding Short NEM as a Best Idea - Note 1


NEM | Pick a Price | Adding Short NEM as a Best Idea - note 2


NEM | Pick a Price | Adding Short NEM as a Best Idea - Ore on Leach Pads vs. Write downs


3. 2016 Costs Expectations Likely To Increase:  While 2016 guidance did not change except for a small drop in capital expenditures, higher fourth quarter costs may shift expectations to higher in the AISC range.  As it stands, the midpoint of guidance puts AISC costs up about 3.5% from 2015, which would seem the wrong direction.  The cost guidance is also likely back-end loaded, with the Merian mine launch and cost improvements at Carlin offering year-on-year improvement.  We would be quite interested to hear what 2016 AISC would look like with a $1,200 gold price assumption, and hope the question gets asked on the earnings call this morning.

Key Data and Notes on Earnings Report (Q4 2015 vs. Q4 2014)

  • Missed top-line, EBITDA, bottom line and FCF estimates
  • Reported Copper AISC and CAS each declined 37% (seems absurd). Gold AISC and CAS both increased +8% Y/Y
  • For the full year, stockpiles and ore on leach pads increased +$230MM to $896MM as of 12/31
  • Big jump in reclamation and remediation expense ($192MM in Q4 15’ vs. $93MM in Q4 14’)
  • Impairments long-lived assets sizable: $50MM vs. $8MM Q4 14’
  • For the full-year, impairments of investments, impairments of long-lived assets, and deferred income taxes added up to a $488MM in non-cash reconciliations for FCF bump over 2014 ($744MM vs. $328MM in 2015)
  • Large jump in production from Batu Hijau in Indonesia in Q4 (especially in copper). Considering their copper price assumptions for carrying value of inventories (NRV), need to watch this closely. Copper sold in Q4 was 40K tonnes and copper produced at Batu Hijau alone was 51K tonnes. Spot copper prices are 31% below NEM’s long-term copper price assumption.


Q4 2015 vs. Q4 2014 in $MM (All reported numbers vs. BBG consensus estimates):

  • Sales ($MM): $1,816 vs. $1,817 est. ($2,017 2014)
  • Gold Costs Applicable to Sales (CAS): $680/Oz. (+8% Y/Y)
  • Gold Reported AISC: $999/Oz. (+8% Y/Y)
  • EBITDA (Adj.): $466 vs. $546 est. ($)
  • Free Cash Flow: -$188 vs. -$54 est. ($)
  • Net Income (Adj.): $20 vs. $61.9 est. ($86MM 2014)






  • Attributable Gold Sales (thousand Oz.): 1,237 oz. vs. 1,243 oz. Q4 14’
  • Attributable Gold Production: 1,247 oz. vs. 1,261 oz. Q4 14’
  • Consolidated Production: 1,406 oz. vs. 1,389 oz. Q4 14’         
  • AISC: $999 (+8% Y/Y)
  • CAS: $680 (+% Y/Y)



  • Attributable Copper Sales (thousand tonnes): 40 vs. 34 in Q4 14’   
  • Attributable Copper Production: 39 vs. 29 in Q4 2014
  • Consolidated Production:   
  • AISC: $1.51 (-37% Y/Y)
  • CAS: $1.18 (-37% Y/Y)






  • Attributable Gold Production: 4,825-5,295
  • Consolidated Gold Production: 5,
  • AISC: $900-960
  • CAS: $650-700



  • Attributable Copper Production: 120-160
  • Consolidated Copper Production: 210-250
  • AISC: $1.50-1.70
  • CAS: $1.20-1.40


Please feel free to reach out with any comments or questions. For access to our December blackbook or previous work in the sector, ping us directly at  

From Washington To Wall Street: What To Watch With JT Taylor


In this HedgeyeTV video, Potomac Research Group Chief Political Strategist JT Taylor speaks with Hedgeye Director of Research Daryl Jones about who’s hot and who’s not in the race for the White House, the anti-establishment surge implications of Donald Trump and Bernie Sanders, and the brewing brouhaha over Justice Scalia’s empty seat on the Supreme Court. 

CHART OF THE DAY | Hedge Funds: A Recession In Contrarian Thinking

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.


"... If it wasn’t positioned too bullish in January 2016, we wouldn’t have A) seen the worst JAN ever and/or B) seen the crowd sell last week’s lows. And if they didn’t sell last week’s oversold lows (new weekly closing lows), we wouldn’t have had that kind of a bounce!


This is the point.


  1. The oversupply of fund managers who are selling low and chasing high (chasing momentum) is unprecedented
  2. Hedge Fund return correlation to US Equity Beta is at an all-time high (see Chart of The Day)
  3. And the amount of leverage hedge funds are using vs. daily market liquidity is also unprecedented"


CHART OF THE DAY | Hedge Funds: A Recession In Contrarian Thinking - 02.18.16 Chart

Will Markets Crash (again)?

“Wall Street exists to sell securities to people.”

-Jim Chanos


In a solid interview Lasse Heje Pedersen had with Jim Chanos in Efficiently Inefficient, Chanos went on to add that since people on the Old Wall are in the business of selling you securities, “most of the stuff you are going to hear all the time is bullish.” (pg 130)


Unless this is your first day on the job (if it is, it’s a great day to start short selling US Equities btw), I think you get that being bearish, skeptical, and cynical about Wall Street’s consensus (some of the time) can save (and make) you and your family a lot of money.


As Bernard Baruch taught Congress in 1917, “a market without bears would be like a nation without a free press… There would be no one to criticize and restrain the false optimism that always leads to disaster.” (Efficiently Inefficient, pg 123)


Will Markets Crash (again)? - Bear crossing cartoon 09.29.2015


Back to the Global Macro Grind


To be crystal clear on my view, I think the tail end of this 3-day short squeeze in everything “reflation” (commodities, stocks, junk bonds, etc.) is going to lead to another market disaster.


Not to be confused with the macro market disaster you should have already avoided in the past 6-18 months, I think this next leg down from classic slow-volume-lower-highs (total US equity volume -11% vs. 1mth avg in last 3 days) in Global Equities could be epic.


Yes, on the US Equities part, I get that more “people are bearish” than when we first started making this call (#Deflation call was 18 months ago; US Equities SELL call was July 2015). But ignorance never led to the end of a bear market – it perpetuates the epic part of a crash.


No matter how “bearish” you think “sentiment” is right now, I can assure you that consensus isn’t positioned bearish. If it wasn’t way too bullish in July, we wouldn’t have had the first -14% and -26% draw-downs (from July) in the SP500 and Russell.


If it wasn’t positioned too bullish in January 2016, we wouldn’t have A) seen the worst JAN ever and/or B) seen the crowd sell last week’s lows. And if they didn’t sell last week’s oversold lows (new weekly closing lows), we wouldn’t have had that kind of a bounce!


This is the point.


  1. The oversupply of fund managers who are selling low and chasing high (chasing momentum) is unprecedented
  2. Hedge Fund return correlation to US Equity Beta is at an all-time high (see Chart of The Day)
  3. And the amount of leverage hedge funds are using vs. daily market liquidity is also unprecedented


At both the lower-lows and lower-highs, that’s why I’d characterize my inbox as follows:


  1. Emotional
  2. Manic
  3. Frustrated


You see, I’m just a guy with a keyboard. I’m that new guy on a Wall St that isn’t trying to sell people securities. I’m the guy with 0% conflicts of interest (no prop desk front-running people, no positions, no banking/brokerage, etc.) who has been more right than wrong lately.


So, people vent to me. People talk to me. People trust me. I get a ton of feedback.


When I say “I”, it’s really the wrong thing to say. As you know, there is no I in Hedgeye. The collective feedback I receive has a huge multiplier since we’re not only the fastest growing Independent Research provider on the 2.0 Wall, but we also have one of the biggest research teams.


In rate of change terms, a day doesn’t go by where I don’t see #GrowthAccelerating direct messages about what people think (read: sometimes hope) is going on vs. what is actually going on. To summarize all of it:


  1. Most people missed calling the causal factors behind what I’ll call Phase 1 of asset #bubbles popping
  2. Many are constantly over-weighting what they need (the upside risk) instead of what is (the downside risk)
  3. The ever-changing “bullish” thesis drift away from our core bear case is as far from reality as it’s been


That’s why I think markets are entering what I’ll call Phase 2 of our Bear Case – the crash. Since many things are already crashing, it’s really not that hard of a word to use. You can forward this to your friends who are still debating our “recession” call, and just fast forward to #crash.


As we’ve documented, you don’t have to have a recession to have a US stock market crash. You simply have to have profits slowing to negative (year-over-year) for 2 consecutive quarters and/or credit spreads sustaining a breakout above their historical mean.


Markets also crash when the “fundamentals” (growth and profits slowing) are being perpetuated by this thing called market volatility. That’s why the “biggest 3-day bounce since November of 2008” should remind you of a very important lesson: what happened after that.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):


UST 10yr Yield 1.61-1.84% (bearish)

SPX 1811-1938 (bearish)
RUT (bearish)

NASDAQ 4165-4564 (bearish)

Nikkei 147 (bearish)

DAX 8 (bearish)

VIX 20.99-28.97 (bullish)
USD 95.35-97.87 (bullish)
EUR/USD 1.09-1.14 (neutral)
YEN 111.65-116.68 (bullish)
Oil (WTI) 26.13-32.65 (bearish)

Nat Gas 1.89-2.09 (bearish)

Gold 1151-1252 (bullish)
Copper 1.98-2.10 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Will Markets Crash (again)? - 02.18.16 Chart

Growth & Profits Still Slowing

Client Talking Points


This is what, the 4th or 5th or 6th time (July, Oct, Feb = were the biggest “bottom is in” commodity led rallies) we’ve had to quintuple down on #Deflation being non-transitory. Australia and Russia (Equities) +2.3% this morning vs. Copper down -1%. Who has the intermediate-term call from here right? Copper.


After “covering” (Real-Time Alerts signaling product) SPY last week, the signal said to re-short the Russell (IWM) into the close yesterday. Fully loaded with the 3-day squeeze, don’t forget that the Russell 2000 is still in crash mode (-21.9% since July) and being long illiquidity (junk and small caps) is killing returns – short lower-highs; cover lower.


One of the major fade signals for the “reflation” trade (or was it “PMIs bottoming”?) has been using the top-end of our risk range – that’s currently $32.65 for WTI and don’t forget that the most important component of my signal is volatility. With OVX’s implying 63-80 volatility in the immediate-term, we would sell the Energy “bounce” here.


*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE


Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Utilities worked against us for a -2% loss on the week, but remain an outperforming sector YTD. New scares in the form of increased risk from the financial sector emerged last week. Deutsche Bank made headlines over liquidity concerns that tied into CEO Keith McCullough's favorite S&P Sector short, the Financials. Financials are the most over-owned group relative to its rate risk – XLF is now -14% vs. Utilities (XLU) +5.3% YTD.


Walmart is still having an effect on General Mills, but it isn’t any more or less severe than previously guided by management. They will begin to lap some of the effects caused by the retailer at the beginning of their 4Q16 (starting in March). Five years ago they dealt with a similar clean store policy implemented by Walmart. Coming out of that they seemed to have gotten more than their fair share of upside, specifically in cereal and fruit snacks, now they are seeing a little more than their fair share on the downside.


Investors continue to be confronted with our signal of #GrowthSlowing in the U.S. and globally. Even the White House came out to reduce 2016 U.S. inflation assumption to 1.5% from prior expectations of 1.9%!  We’ve called for yield compression alongside our signal of growth slowing and our expectation that global investors will continue to pile into US Treasuries as a “safe haven” liquid play. Last week, the US 10 year fell 13bps to 1.736%.Continue with our go-to macro market calls of long TLT and short JNK, and things don’t have to be so doom and gloom.

Three for the Road


Strong net buys from $WWAV insiders filed yesterday. #LONG



Life isn’t about getting and having, it’s about giving and being.

Kevin Kruse


42% of wine consumed in the U.S. last year that was consumed by millennials, according to an industry group. 

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.