JT Taylor: Is Clinton Gaining Momentum... Behind The Rise Of Donald Trump

Takeaway: What to watch on the election 2016 campaign trail.

Below is a brief excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning.



JT Taylor: Is Clinton Gaining Momentum... Behind The Rise Of Donald Trump - hillary clinton


Hillary Clinton trounced Bernie Sanders in Saturday's primary, winning by nearly 48 points, and sweeping the African-American vote by a 5:1 margin. Her campaign made an all-out attempt to run up the score, deploying her family across the state days after Sanders packed up and left. 


Clinton bet that the added momentum will help her in states with a large African-American population -- and that the opportunity costs of not spending time last week in, say, Colorado or Minnesota will be minimal. She can't afford any risk of looking like she's taking any votes, especially African-Americans' for granted -- especially given that she needs to shore up perceptions of her authenticity and that their support is so vital for her candidacy.


Bottom line: Her decision to remain in SC throughout last week was both a defensive move and a show of strength. 



JT Taylor: Is Clinton Gaining Momentum... Behind The Rise Of Donald Trump - its alive


We wrote months ago that Trump's rise was due in large part to the establishment media and their refusal to hold his feet to the fire -- and we dubbed him the media's Trumpkenstein. Here's what we wrote:


"For most of this election season, Donald Trump has represented high ratings and big get interviews for media outlets. The Republican debates have been some of the highest-rated programs on cable networks as a result of Trump's participation. Instead of regular programming, CNN and other cable news stations provide free air time to Trump and cover his speeches [and ubiquitous dial-ins] live. Yes, he said crazy things, but it was 'good television' and ratings."


Ahem. So we find it incredibly ironic that that same establishment media is now implying that the Republican establishment is responsible for Trump's rise, and faulting them for not intervening to thwart his candidacy.


C'mon. Plenty of blame to go around on this one... 

A Brief Update On Our Foot Locker Call | $FL

Editor's Note: Below is a brief update and recap on our Foot Locker call. For additional analysis or other related research from our Retail team led by Brian McGough please ping


A Brief Update On Our Foot Locker Call | $FL - footlocker


Following Wednesday’s updated Best Short Idea presentation by Hedgeye Retail analyst Brian McGough, Foot Locker (FL) posted decent to good numbers.


However, most metrics look sequentially worse including FL’s margin of EPS upside relative to expectations. The flow through in profitability is less than half of where it trended 3 and 4 quarters ago. And from here, compares get increasingly tougher.


Since McGough added FL as a Best Ideas Short, the company is down -12% versus -4% for the S&P 500:

A Brief Update On Our Foot Locker Call | $FL - footlocker 22


Comp trends were disappointing in February, at a low-single digit rate month-to-date even though:


  1. There was a sequential uptick in Nike/Jordan launches this month versus last, and;
  2. Feb 2015 was disappointing – so it faced an easy comp. i.e. there’s an increasing bifurcation between Nike’s solid release schedule and FL results. 


That’s bad.


The steady sequential decline in e-commerce is unsettling to say the least. Given base levels of industry growth in the US in conjunction with our estimate of how Nike channel distribution will change, we think that Nike’s US Wholesale revenue base will shrink by $1 billion (retail equivalent) by 2020.


The only way FL wins in that context is to become a wholly-owned subsidiary of Nike. That obviously won’t happen. FL is likely to miss six out of eight quarters from here without a significant downward guide, not to mention the re-valuation that will come with it – we expect this to be a slow but steady bleed.


Bottom line: We think FL will struggle to generate $4 in EPS over the next 2-3 years, suggesting 25%+ downside risk from here.


Click here to watch a brief video summarizing FL's earnings:


To read more analysis on Foot Locker or other research from our Retail team ping

McCullough: Listen Closely to the Bond Market’s Message


In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why we “remain right and contrarian” on the bond market and why investors should be buying Utilities (XLU), Gold (GLD) and Long Bonds (TLT). If you like this excerpt, you’ll love The Macro Show.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

KATE | Where Could We Be Wrong?

Takeaway: Fundamentals look good, and KATE will finally have much-needed valuation support in ‘16. But yes, we still worry ‘bout what they’ll say.

Let’s be real – there’s no company (not even RH) that worries us more headed into an earnings event – even when we think we have the fundamental story 100% nailed. That’s no different this time – a) we think we have the fundamentals nailed – and they look very good, and b) we’re worried about what management will say when they open their mouth tomorrow, and how the market will react.  But under $20 – heck, even under $30 – we’re very comfortable taking the risk.


We’ll go through our modeling assumptions, and more importantly, where we could be wrong tomorrow. But in the end, we think that timing finally looks good for KATE. Keep in mind the following…


  • Even though KATE has been executing extremely well on its plan, the fact is that earnings have been nearly entirely absent this entire economic cycle. How could a) the brand be relevant, or b) the company be great, if KATE can’t earn a single red cent in the greatest economic recovery in a generation? The stock has looked extremely expensive to the average investor who cared about nothing but current year earnings (which is pretty darn important, in fairness). This is why the stock got annihilated when the category (Kors) hit a wall. It simply had no valuation support.
  • That’s why we think that the quarter the company will report on Tuesday will be critical, in that the company should earn 15% more than it did in all of 2014. As the market starts to shift its attention to ’16 and ’17 it’ll see just under $1.00 in earnings power for next year – a level it hasn’t seen since 2007. People will be looking at a name trading at 20x an earnings rate that should grow 50%+ for 3-5 years. For the first time EVER, KATE will prove to have valuation support – and that support should prove to be considerable.
  • Watch what KATE does, not what it says. Ultimately, ‘what it does’ will create the value we know is about to be unlocked. Do we need better disclosure? Yes. Enough financial information to build a basic retail/multi-channel model (like RL, KORS, COH, and pretty much every other real company that sells product in this space)? Yes. Management to put its money where its mouth is and buy stock when real believers in the story are sweating it out on the down days? Yes. A CFO who is on the conference calls (like every other company in the S&P)? Yes, please. But these are factors that can all be fixed – quite easily, actually. The thing that KATE has down pat is execution on the Brand growth and profitability strategy. We’ll take that.

Ultimately, we think we’ve got $2.00-$2.50 EPS power in three years. The CAGR it takes to get there gets us to $40 on the low end (20x $2.00), and to $62 on the high end (25x $2.50). Either way, we’re talking around a 2-3-bagger from where the stock is today. This is one of the best risk rewards out there from where we sit.


KATE | Where Could We Be Wrong? - KATE Financials 2 29


Where Could We Be Wrong:


1) Category is dead: We never thought this was the case in the first place, but the market certainly did. Sentiment on the space has changed in a positive way evidenced by the performance of KORS and COH, up 41% and 18% YTD, respectively, vs. a flat XRT. KATE has underperformed its peers on the inflection because it has been radio silent for the better part of three months. According to COH, the NA premium handbags and accessories market was flat for the quarter ended in December. That’s off from HSD a year ago, and MSD intra-year. Yet, KATE has seen accelerating comps sequentially in every quarter this year. If we’re wrong – it’s that KATE, with about 4-5% market share of the global handbag market, doesn’t have the market share opportunity, which translates to growth inline with the category. That hasn’t been the case.


2) Growth drivers don’t grow: This is a mix of core and non-core.

    1. On the core side, the company is just 50% penetrated in the North American market. There is already a big batch of stores headed into the peak part of the maturation curve. That = a better margin profile and increased unit productivity. KATE only opened 15 doors in North America in 2015, but we expect the cadence to pick up in ’16 and beyond (management already said as much though it has not guided to door openings). The risk would be product saturation as the store profile is built out, but given KATE’s relatively low wholesale mix (30% vs. KORS 50%) we think there is plenty of opportunity.
    2. On the non-core side, the company has two handfuls of licenses in categories ranging from furniture, to watches, and Yoga wear that have/will launch in the latter part of 2015/16. Add on 4 new distribution agreements: Japan childrenswear, China JV, LatAm, and Europe (ex. UK and France). All of this is incremental to KATE, and comes with neither a large capital investment or balance sheet risk. If we’re wrong – it’s that new door growth comes at lower productivity as distribution fills out in NA, and customer acceptance in new regions/categories falls flat.

3) Margin drivers:  At $1.2bn in revenue KATE has a 9.1% operating margin, on a similar revenue base KORS was operating at a 19% EBIT margin and COH in the mid 30% range. For KATE to work from here we don’t need to assume a KORS or COH esque margin profile – just high teens. We get there through steady GM improvement as the company continues to promote quality of sale in both retail and wholesale. Taking accessory sourcing in house from Li & Fung. New doors coming into the peak part of the maturation curve. No Kate Spade Saturday/Jack Spade dilution. A partnered approach to unproven growth drivers (license/international), lowering upfront investment. If we’re wrong – it’s that KATE has a materially lower margin profile than the rest of its peer group. That’s true to some degree given its Retail (70%)/Wholesale(30%) mix, but we don’t think those are prohibitions on the climb to high-teens.


Additional Modeling Considerations  on the Print  


Sales Guidance – For the 4th quarter the current guidance implies a growth rate in the range of 4-22%. This, of course, is ridiculous. The company simply did not change annual guidance after the 3Q beat. And no, we don’t think it accurately reflects the company’s internal forecast accuracy. It just shows where guidance stands in the hierarchy for KATE. We’re slightly below the street on the revenue side at $437mm, 10% growth vs. the street at 11%, due to accounting on discontinued ops.

A few things to keep in mind…

1) KATE started to pull back on its Flash Sale promotions in 4Q14, eliminating a 75% off Flash Sale that occurred in mid-December 2013. We saw three flash sales in 2015 vs. just 2 in 2014 (but similar day count) which means the headwinds that have cost KATE ~$10mm in revenue over the past 3 quarters are now in the rearview.

2) There are 4 particular headwinds that would cost the company $30-$40mm in sales in 4Q. 1) Fx, 2) the licensing of the watch business to Fossil, 3) quality of sale efforts in the wholesale channel, and 4) new store openings pushed into FY16. Those headwinds are in consensus numbers. As we roll forward into 2016,  those headwinds turn into tailwinds and should provide additional upside.


Gross Margins – YTD, we’ve seen 75bps of gross margin leverage, but the 60.4% guide for the year assumes that gross margins are flat for the year implying that 4Q is down 150bps (which excludes the $8mm charge taken in 4Q14 from Jack/Saturday). That’s up against a -190bps GM (adjusted) number in the 4th quarter of last year which was caused by FX pressure in Japan, and outlet pull forwards; the exact same reasons cited this year.  Additional FX pressure can explain away maybe a fraction of the confusion over guidance, but we have a hard time getting to the company's numbers. The punchline here is that there’s no way KATE is going to simply ‘hit’ (and not beat) its fourth quarter GM guidance.


Same for SG&A/EBITDA Margin Guidance – The top end of the sales and EBITDA guidance assumes a 15.7% EBITDA margin rate for the year. That implies that the company will get just 50 bps of leverage in 4Q as it comps against $29mm in charges from Jack/Saturday. If we net out all of the charges associated with those two brands last FY, we get to an EBITDA margin rate of 15.9%. To date this year – the company has printed 300bps of margin leverage excluding all Jack/Saturday charges and 390bps of leverage reported. We would have to see a material weakening in the business to get to the implied profitability rate in 4Q. 

They Can't Stop the Bleeding

Takeaway: Global equity markets continue to crash alongside faith in central bankers' omnipotence.

They Can't Stop the Bleeding - Global economy cartoon 12.16.2014


Whether we're talking about the Fed, ECB, BOJ or PBOC, central planners the world over can't stop the bleeding in global equity markets. 


Case in point... more deflation in the Eurozone this morning. The key question for ECB head honcho Mario Draghi ahead of the March 10th meeting is can Draghi snap his fingers and magically change Europe's deflationary reality?




Here's some related analysis from Hedgeye CEO Keith McCullough from a note sent to subscribers this morning:


"European stocks had their slow-volume bounce last week (EuroStoxx600 +1.6% to -9.4% YTD), but resume their crash this morning with the DAX -1.6% (down 13% YTD and -24% from 2015 top) post a #Deflation print of -0.2% y/y for Eurozone CPI (versus 0.3% in January); Swiss 10yr falls to -0.45% as #NIRP (negative interest rate policy) continues to perpetuate #Deflation."


Take a look at Germany...



Here's Spain and Italy...



In other central planning news, the (up) Yen and (down) Japanese stocks story continues to defy the intent of the BOJ's negative interest rate policy.


It's just one more example of the crumbling credibility of central bankers. To be sure, when macro markets wake up to this reality, things are going to get downright nasty. McCullough has dubbed this evolving phenomenon the #BigBangTheory


Here's his take on the latest macro market developments out of Japan:


"The Yen is ramping (again) vs. USD this morning and that is not a good thing when it comes to the #BigBangTheory as it keeps Japanese stocks (Nikkei -1% overnight and -23.1% since last yr’s high) in crash mode w/ no “G20 help” this weekend."



Meanwhile, over in China... the PBOC cut the banking system's reserve requirement ratio again by 0.5 percentage points as the economy continues to slow. China's stock market is down 48% since June. Here's what growth slowing looks like in China Shanghai Composite Casino:



While permabulls pray for more cowbell, we're bullish on growth slowing proxies like Long Bonds (TLT) and Utilities (XLU). 


Our message: Fade Central-Planning storytelling...

RTA Live: February 29, 2016