In this recent excerpt of The Macro Show, Hedgeye Managing Director and Demography analyst Neil Howe responds to a subscriber’s question about how the “glacial pace” of demographic trends and migration impacts investors’ portfolios. If you like this excerpt, you’ll love The Macro Show.
Takeaway: Mother Yellen’s more to blame than Mother Nature. Only saving grace in owning this is that everything else likely to go down more.
VFC is near the top of the list of names we really want to own. The portfolio (even though we don’t like portfolios of brands) has gotten so good over time, it diversified geographic exposure more than most people think with ~30% of sales coming from outside the US, and its channel distribution is just about as good as a wholesale portfolio can expect – and it is now by a factor of 3 it’s own largest customer. These factors add up to a degree of earnings defendability that you don’t find too often in retail. And of course, check out the 20-year chart. Some management teams are worth betting against – this one certainly is not.
With all that said, we saw an extremely sharp deceleration in organic growth – from 7.4% to 2.6%, at the same time Gross margins rolled 70bps vs last year and EBIT margins similarly turned down. Management came across as ‘beyond-beared-up’ on the global demand equation throughout the remainder of this winter season and at least for the next 6 months. Yes, weather played a part in the miss – we all know this part of the story without having to go through puffy coat inventory issues. But let’s be crystal clear, there was more than weather at play here. In fact, Janet Yellen likely had a bigger impact than mother nature.
Given VF's product diversity mass market/athletic and global reach, this company should be putting up more consistent and predictable earnings than just about anybody, anywhere. And yet, it didn’t, which might end up being one of the more negative data points we've seen through retail earnings season.
Yes, the stock is starting to look ‘cheap’ (whatever that means). But when a management team as good as this loses control over its business so quickly and to such a great extent, we absolutely positively cannot say that this guide down will be the last. If you have to maintain certain exposure to retail, then yes, it might be worth picking away at VFC on red – but only because everything else is likely to go down more.
Other Thoughts --
Macro Outlook - VFC sounded particularly bearish on the current Macro environment. Characterizing the Macro environment as 'worse than anyone expected'. Supporting that with numbers, this was the first time VFC reported negative revenue growth since 2009. But, unlike many street models would lead one to believe, it's not letting up now that we've entered 1H16.
Inventory - Inventory was up 9% and the sales/inventory spread weakened to -13% from -9% last Q. Despite management spin, the fact is that inventory is way too high at VFC and likely around the industry (DKS, TGT, WMT, etc.). Even if we were to adjust for the cold weather hit, we are still looking at a sales to inventory spread of -9%.
Outdoor Weak, Jeanswear Strength - If there was one positive in this print for VFC and its US wholesale partners it’s the jeanswear segment. Contrary to what we heard from HBI on the basics category at WMT and TGT, the jeanswear segment actually accelerated in 4Q. Not that the wholesalers can hang their hats on that one. Outdoor was the laggard at 1% C$ revenue growth, especially when considering the way it has carried the topline. But, North Face as a brand is anything but broken.
Takeaway: Is 2016 the next 2011, open interest says no.
The biggest risk for shareholders in the exchange sector is that volatility dries up and liquidity in the market recedes. This was the case in 2011 as volatility spiked when the U.S. lost is AAA sovereign credit rating from S&P and the 13.3 million average daily contract volume on CME Group (CME) cascaded down to just 11.4 million contracts per day for 2012. This analog is important because this is the risk for CME longs for 2016 and 2017. Open interest however signaled this trading slack in the '11/'12 slough off as by September of 2011, open interest tallies were comping negatively by late summer portending the forthcoming slack in trading for 2012. Fast forwarding 4 years, open interest tallies currently couldn't be more positive, with the 114 million contracts in the backlog threatening to set new monthly highs each rolling 30 day period. The combination of new electronic (digital) trading in options and new product introduction in rates (the back end of the Eurodollar curve and also new Treasury products), makes the stock one of the few solid long positions in U.S. Financials currently.
Weekly Activity Wrap Up
Volatility and volume eased in tandem this week, however average daily volumes (ADVs) are still tracking well above 1Q15 ADVs creating solid year-over-year growth. Cash equity volume for the week came in at 8.7 billion shares traded per day, bringing the 1Q16TD ADV to 9.3 billion, up +35% Y/Y. Futures activity at CME and ICE came in at 21.3 million contracts traded per day this week, bringing the 1Q16TD ADV to 24.5 million, up +22% Y/Y. Additionally, CME's open interest currently tallies 114.2 million contracts, 25% higher than the 91.3 million pending at the end of 2015, which will drag trading volume higher going forward. Options came in at 17.3 million contracts traded per day this week, bringing the 1Q16TD ADV to 18.5 million, up +19% Y/Y.
U.S. Cash Equity Detail
U.S. cash equities trading came in at 8.7 billion shares per day this week, bringing the 1Q16TD average to 9.3 billion shares per day. That marks +35% Y/Y and +32% Q/Q growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of first-quarter volume, which is consistent with the prior quarter and year-ago quarter, while NASDAQ is taking a 19% share, +49 bps higher Q/Q but -99 bps lower than one year ago.
U.S. Options Detail
U.S. options activity came in at a 17.3 million ADV this week, bringing the 1Q16TD average to 18.5 million, a +19% Y/Y and +16% Q/Q expansion. In the market share battle amongst venues, NYSE/ICE has been trending downward at a moderate pace, but at an 18% share it is +69 bps higher than the year-ago quarter. Meanwhile, NASDAQ's recent declines bring it -396 bps lower than 1Q15. CBOE's market share is down -141 bps Y/Y but has improved recently; its 27% share of 1Q16TD volume is up +137 bps from 4Q15. BATS and ISE/Deutsche have been taking share from the competing exchanges, with BATS up to a 10% share from 9% a year ago and ISE/Deutsche taking 16%, up from 13% a year ago.
U.S. Futures Detail
16.7 million futures contracts traded through CME Group this week, bringing the 1Q16TD average to 18.6 million, a +24% Y/Y and +41% Q/Q expansion. Additionally, CME open interest, the most important beacon of forward activity, currently sits at 114.2 million CME contracts pending, good for +25% growth over the 91.3 million pending at the end of 4Q15, although that is slightly lower than last week's +27%.
Contracts traded through ICE came in at 4.6 million per day this week, bringing the 1Q16TD ADV to 5.9 million, +18% Y/Y and +24% Q/Q growth. ICE open interest this week tallied 69.5 million contracts, a +9% expansion versus the 63.7 million contracts open at the end of 4Q15, a contraction from +10% last week.
Monthly Historical View
Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.
Please let us know of any questions,
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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Takeaway: There are other options available than staying aboard the sinking equity ship.
Below are three big, non-consensus calls we've been recommending to our subscribers with brief analysis from Hedgeye CEO Keith McCullough's macro notebook sent to subscribers earlier this morning. They are based on our Macro team's #GrowthSlowing, #Deflation & #LowerForLonger calls.
LONG THE LONG BOND (TLT)
"10yr – UST ticks back down to 1.73% this morning and the call for all-time lows on the long-end of the curve remains firmly intact; best way to be long #GrowthSlowing in US Equity Sector Style terms = Utilities (XLU); best short = Financials (XLF)"
Even with this week's market bounce, plunging 10yr Treasury yields is exactly why our bullish Long Bond (TLT) call is outperforming equities this year.
Long Utilities (XLU)
short Financials (XLF)
Talk about alpha.
Get off the sinking equity ship while you can.
Takeaway: Our Financials team analyzes the disconcerting trend in jobless claims and what the Fed could do about it.
Editor's Note: This is an excerpt from a research note sent to subscribers on Thursday. For more information on our institutional research please email firstname.lastname@example.org.
This week we want to take a step back from the high frequency claims data and take stock of where we are in the cycle, and consider what policy tools the Fed has at its disposal.
Where are we in the cycle?
As the chart below shows, we're now in month 23 of initial jobless claims running at a sub-330k level. The last 3 cycles have seen the expansion last 24, 45 and 31 months at a sub-330k level, with an average of 33 months. Coupled with the slew of weak economic data coming from the industrial/manufacturing/energy side of the economy, we think it's a better than bad bet that economic contraction isn't far away.
What can the Fed do about it?
We think the cycle being late warrants asking the question: What can the Fed do?
The table below shows that the Fed's average response to the past seven recessions has been a -750 bps rate cut. However, it is facing a significant shortfall in its accommodative ability with the Fed Funds rate currently sitting at around 0.36%. In other words, it's one and done to get back to zero, and then it's QE or NIRP. As we show at the end of this note, the yield spread is already at a post-crisis low (108 bps), which is ratcheting up the pain for banks. 2016 was supposed to be the year when this pressure finally turned tailwind, but instead it's increasingly looking like the opposite is the most probable course for 2016 and beyond.
Editor's Note: We've made some new enhancements to Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to view a brief video of McCullough explaining how to use it most effectively.
Subscribers now receive risk ranges for 20 tickers each day - the last five are determined by what's flashing on Keith's radar screen and what tickers subscribers are asking about. Click here to subscribe.
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