Why Clinton Lost Michigan... & Cruz's Big Gamble

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.



Why Clinton Lost Michigan... & Cruz's Big Gamble - trump face


Whatever rattled Donald Trump last weekend is already old news. His double-digit takedown of his rivals in MI coupled with his wins in MS and HI last night netted 71 delegates and significantly shifted momentum back his way. Now heading into the winner-take-all states, Ted Cruz is back on defense despite winning Idaho, Marco Rubio is limping (he picked up no delegates) and after playing big in MI, John Kasich may have lost momentum going into his neighboring OH.


Trump's focus now turns to tomorrow night's debate in Miami (another QVC-esque infomercial for Trump products anyone?) and holding his ground while his rivals frantically attack him.



Why Clinton Lost Michigan... & Cruz's Big Gamble - ted cruz photo


Ted Cruz continues to invest serious resources into FL, despite having no chance of winning the state. Cruz's strategy to intercept the anti-Trump vote from Marco Rubio has two prongs:

  1. Denying him a home-state victory and likely sinking his candidacy for good;
  2. Keeping Rubio pinned down while he presses ahead in other March 15th states.

It's a big gamble -- if Trump wins the state along with NC and IL, his delegate lead will be all but insurmountable. While Rubio and John Kasich are pinning their hopes on prevailing at an open convention, Cruz is reaching for an outright win in the delegate count -- even at the risk of ending the contest next week.



Why Clinton Lost Michigan... & Cruz's Big Gamble - bern


Throughout Hillary Clinton's campaign, she has raked in local endorsements from Democratic mayors, state leaders, and even governors across the nation. Her tactical focus on local issues like water, minimum wage fights, and her calculated attacks against Republican governors at local rallies have so far won her broad support.


Then what happened in Michigan last night? One word -- trade. In exit polling, MI Democrats overwhelmingly expressed that trade with other countries "takes away U.S. jobs" -- and it didn't help that Bernie Sanders outspent Clinton in the state and exposed her support for trade pacts during the Flint debate, in speeches, and negative ads for the past month. With Clinton's overwhelming win in MS, she still wins the day and more delegates.

A Look At The MLP Boom & Bust With Hedgeye Energy Analyst Kevin Kaiser

Editor's Note: Earlier today, Hedgeye Energy analyst Kevin Kaiser published a 55-page "Midstream MLP Chart Book" institutional research deck highlighting key metrics and developments. As a reminder, Kaiser has been the lone MLP bear since the beginning on companies including Kinder Morgan and Linn Energy. He was recently featured in Barron's (MLPs: Is the Worst Over?). 


The chart below compares the narratives floated about the MLP industry during the boom years (2000-2014) to the bust of 2015.


Click to enlarge 

A Look At The MLP Boom & Bust With Hedgeye Energy Analyst Kevin Kaiser - mlp kaiser chart

To access Kaiser's research email

Why We’re Keeping a Close Eye on Wynn


In this brief excerpt from The Macro Show this morning, Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan distills what’s going on with Wynn Resorts (WYNN) right now, why it matters to Macau, and what to expect going forward.


Subscribe to The Macro Show today for access to this and all other episodes. 


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Early Look

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How To Trade This Market Chop and Volatility

Takeaway: Fade oil-related rallies and stick with longer-term calls on #GrowthSlowing & #LowerForLonger (rates).

How To Trade This Market Chop and Volatility - Volatility cartoon 09.02.2015

How should investors trade these volatile markets?


Fade oil-related rallies.


That's the latest from our Macro team in a note sent to subscribers this morning. Here's more analysis:


"Chase the wabbit – U.S. equity futures whipping around on what Oil does and that isn’t going to do anything for the economy obviously (volatility = bad). The immediate-term risk range for WTI is 30.65-38.18 so the way we would deal with this is fade Oil related beta moves at the top end of that range."


How To Trade This Market Chop and Volatility - wti risk range


Outside our immediate-term trade advice, our longer-term calls on #GrowthSlowing and #LowerForLonger (rates) still hold.


But how do you play it?


"No matter what oil does, our favorite S&P Sector remains Utilities (XLU) which ramped another +1.0% yesterday to immediate-term TRADE overbought at +10.5% year-to-date as our favorite Sector to be short remains Financials (XLF) which led “ex-Energy” losers yesterday -1.6% to -8.1% year-to-date."


How To Trade This Market Chop and Volatility - xlu v xlf ytd


To be sure, it's been a rocky three weeks. Hedgeye CEO Keith McCullough wrote as much in a recent Early Look:


"Of all the bad weeks I’ve had since the US profit cycle peaked (when US and Japanese stocks peaked in July of 2015), last week ranked right at the top of them.


And, to be clear, since I was telling you to buy the Long Bond at 2.53% on the 10yr (in July), I’ve had some really bad weeks. But you’ve had to be able to endure those to have been right for the last 8 months."


What does the score look like since July?

How To Trade This Market Chop and Volatility - tlt v s p ytd


Reality check ... bear markets bounce. Economic gravity prevails.

Howe: The Biggest Change In Immigration Since The Great Recession

In this excerpt from a recent institutional presentation, Hedgeye Demography Sector Head Neil Howe explains why the fertility rate is the biggest leading indicator of immigration trends.

DKS | What Has Dick’s Become?

Takeaway: DKS went from greatness, to mediocrity, to uninvestable. Not a clear path back to awesomeness with this capital structure.

This DKS earnings event was perplexing. On one hand, the company gave every reason for just about any type of investor to never look at owning it again – at least until we emerge from the next economic recession. On the other hand – the stock actually traded up on the print. Yes, up. And we’re not talking a good ‘ol fashioned squeeze on a crowded short that is down and out. This is a name that was already up 28% for the year-to-date heading into the print and had only 7% of its float held short (below 10-yr avg of 9.7%). Now we’re left with a company that has underinvested in any effort to capitalize on the changing way that consumers are incrementally buying product in this corner of retail. Management’s answer? Aggressively buy Sports Authority stores as a key competitor goes bankrupt. NOT a good idea. Based on what we see today, we’d be on the short side of this name.


Here Are Some of Our Concerns


1) The earnings algorithm was horrible. DKS de-leveraged 4% sales growth into a 17% and 13% decline in EBIT and earnings, respectively.

DKS | What Has Dick’s Become? - 3 8 2016 DKS algo chart


2) Comp missed, and came in at -2.5%, but keep in mind that this INCLUDES e-commerce. On a store-only basis, DKS comped -4.4%, which was the worst performance since 4Q08 – when we were in a significantly more perilous environment.

DKS | What Has Dick’s Become? - 3 8 2016 DKS Comp trend


3) New Store Productivity weakened at a greater rate than we can calculate – ever.

DKS | What Has Dick’s Become? - 3 8 2016 DKS NSP


4) DKS SIGMA looks really really bad. Simply put, whenever a company puts up such a bad gross margin reading (-200bp), you want to at least see that its sales/inventory spread improved on the margin. That was not the case with DKS, and the market looked right through it.

DKS | What Has Dick’s Become? - 3 8 2016 DKS SIGMA 


5) Store Funk [was Mike Tyson in a ‘funk’ at the end of his career, or did he just get old and tired]

The performance of Dick's B&M stores remains poor.  Stores comped down 4.4%, the 6th negative comp in a row, slowing 180 bps on a 2 year basis.  For the first time since 2009 we saw a sequential decline in number of stores at -3, the biggest drop ever.   New store productivity is trending down as well, yet the company still has plans to open 45 stores this year, and then another 60 stores next year to hit its 2017 target.  If the stores are comping negative, new doors coming in at lower productivity, returns are declining rapidly on the incremental store investments.  We think at this point the store targets are a pipe dream.


6) What Gives with e-commerce? If there was only one statistic we can look at to gauge the health of a brand, it would be e-comm growth. That’s unfortunate for DKS, as e-comm slowed sequentially for three consecutive quarters, and is growing today at a mere 13%. That level of growth for a company with such an immature e-comm business is simply unacceptable. Interestingly, Dick's online business grew below the rate of online retail as a whole, which grew 14.7% in 4Q15.  In fairness, DKS should see an acceleration when it takes full control of its e-comm business in 2017. But unfortunately, hundreds of competitors will have advanced by then.

 DKS | What Has Dick’s Become? - 3 8 2016 DKS ecom growth


7) Sports Authority. DKS is aggressively going after TSA stores as its long-time competitor goes under.  As backdrop, Sports Authority does about $3.5bn in sales in its ~465 stores. If we academically assume that the stores being closed operate at a 20% productivity discount, we get to $820mm in sales.  DKS management indicated 90 to 100 (68%) of the 140 closing stores overlap with their stores, which looks like a fair number given our overlap analysis below shows 75% overlap (less than 15mi apart)  for Dick's stores with all of Sports Authority.  Therefore the total opportunity for DKS is ~$550mm or 7.5% in growth if they can take ALL of the revenue from closed Sports Authority stores.  Claiming a more plausible 20% of sales – which will come at a significant capital cost - would mean a 1.5% growth tailwind.

DKS | What Has Dick’s Become? - 3 8 2016 DKS Sports auth overlap


Let’s be clear about something…in the past when DKS has acquired competitors and then subsequently rebranded them, it’s been at a point when the industry was in its adolescence. Today it is extremely mature – at least in the form that Wall Street knows it. It’s no longer about acquiring Sporting Goods stores, but rather about building a defendable brand that will own the consumer in all channels of distribution. That does not appear to be what DKS has in mind, which is unfortunate, as that would be a story worth getting behind.


DKS | What Has Dick’s Become? - 3 8 2016 DKS map1

DKS | What Has Dick’s Become? - 3 8 2016 DKS map2

DKS | What Has Dick’s Become? - 3 8 2016 DKS map3


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