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INSIGHT | Another Trump Victory (And Why California Could Decide GOP Nomination)

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.

DEBATE SABOTEUR:

 

INSIGHT | Another Trump Victory (And Why California Could Decide GOP Nomination) - trumplican

 

In an impeccably timed announcement ensuring any fallout was overshadowed by the SCOTUS press conference, Trump declared that he is going to speak at the AIPAC conference instead of appearing at the now-canceled Fox debate on Monday. This is another victory for Trump -- it denies his rivals and the media a chance to gang up on him and exploit his vulnerabilities -- while flexing new muscle as the frontrunner. At this point, the only thing that seems to have a chance of derailing Donald Trump is...Donald Trump. 

ALL ROADS LEAD TO... CALIFORNIA?  

 

INSIGHT | Another Trump Victory (And Why California Could Decide GOP Nomination) - cruz picture

 

After crunching the Republican delegate numbers, we think the race may very well come down to CA. If Trump wins the Golden State, we think he will likely exceed the magic number of delegates he needs for the nomination. There has been scant polling in CA to date, but what we've seen shows a narrow Trump lead, with Cruz breathing down his neck. CA often votes too late to be a determining factor in the nomination, and as a solid blue state rarely receives presidential election love -- however, this year it is in a position to be a determining factor in whether there will be a contested Republican convention.

reTRUMPlicans:

 

For months, the Democratic Senate Campaign Committee (DSCC) has been preparing for a Republican ticket with Trump or Ted Cruz on top. With Trump as the presumptive nominee, they're now putting their playbook in motion, tying vulnerable Republican Senators up for re-election to Trump's controversial policies and personality. Some strategists are predicting up to an eight percent drop across the polls for Republican Senators in the general election if Trump is on the ballot. Looking to capitalize on the 13 Senators who pledged to back the eventual nominee, the DSCC has dubbed them "reTRUMPlicans," faithful only to the "Party of Trump."


Q: Is This A Generational Buying Opportunity In Emerging Markets?

Takeaway: Emerging Market stocks are down -19% since we turned bearish. We still don't like them.

Q: Is This A Generational Buying Opportunity In Emerging Markets? - brazil

A: No.

 

With Emerging Markets (EEM) down -19% since we turned bearish in April 2013, Hedgeye Senior Macro Darius Dale presented a 105-page slide deck to institutional subscribers this week to update his thinking. (To read Dale's entire slide deck or additional Macro research ping sales@hedgeye.com.)

 

The takeaway?

 

"We see further downside at the primary asset class level, as well as elevated risk of material bankruptcy cycles in a number of key emerging market economies," Dales writes. 

 

Here are a couple key charts from the presentation (click images below to enlarge):

 

Our proprietary emerging market "Crisis Risk Index."

Q: Is This A Generational Buying Opportunity In Emerging Markets? - dale crisis index

 

... Our Crisis Risk Index versus Equity Market Performance.

Q: Is This A Generational Buying Opportunity In Emerging Markets? - dale bubbles

 

 


Initial Claims | Steady

Takeaway: This morning's initial jobless claims report showed no trend change from what we've been seeing YTD on the labor front.

Initial Claims | Steady - Hawkish cartoon 03.14.2016 normal

 

 

In short, this morning's claims number appears consistent with YTD trends. In other words, the US Labor market has remained resilient in spite of myriad other signs of slowing. As labor has historically been coincident/lagging we continue to expect to see weakness in the non-services side of the economy bleed through to the economy at large. To date, however, we continue to wait, as we view the setup as still asymmetrically negative.

 

On the energy side of the house, conditions remain challenging as the basket of 8 energy states we track show an ongoing decoupling from the broader US.

 

 

Initial Claims | Steady - Claims12

 

Initial Claims | Steady - Claims13

 

Initial Claims | Steady - Claims14

The Data

Prior to revision, initial jobless claims rose 6k to 265k from 259k WoW, as the prior week's number was revised down by -1k to 258k.

 

The headline (unrevised) number shows claims were higher by 7k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.75k WoW to 268k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -11.9% lower YoY, which is a sequential improvement versus the previous week's YoY change of -11.4%

 

Initial Claims | Steady - Claims2

 

Initial Claims | Steady - Claims3

 

Initial Claims | Steady - Claims4

 

Initial Claims | Steady - Claims5

 

Initial Claims | Steady - Claims6

 

Initial Claims | Steady - Claims7

 

Initial Claims | Steady - Claims8

 

Initial Claims | Steady - Claims9

 

Initial Claims | Steady - Claims10

 

Initial Claims | Steady - Claims11

 

Initial Claims | Steady - Claims19

Yield Spreads

The 2-10 spread rose 6 basis points WoW to 105 bps. 1Q16TD, the 2-10 spread is averaging 109 bps, which is lower by -27 bps relative to 4Q15.

 

Initial Claims | Steady - Claims15

 

Initial Claims | Steady - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Q: Where Did The Fed Easing Go?

Q: Where Did The Fed Easing Go? - vlad

 

A: Straight to Russia!

 

Russia?

 

Yes, Russia. Here's Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"Forget being long Oil’s chart for this last gusher towards $40 – the real juice in being long a Fed Easing (Dollar Down, Reflation Up) is going straight to the Putin vein and buying the Russian Trading System Index, +4.7% this am and +19% in the last month! This should all end well."

 

Central planners may not be able to save the world. But they can definitely put some rubles in Putin's pocket.

 

Q: Where Did The Fed Easing Go? - Putin 09.03.2014 large


WSM | Blind

Takeaway: This management team would be great...for a $500mm company. Too bad WSM is $5bn.

This quarter told us one thing...we're highly unlikely to ever own this name as a long term investment while this management team is at the helm. They simply don't have the chops, the vision, and perhaps even the authority to do what it takes to turn this company from Good to Great in what is going to be the most dynamic retail climate in a generation. 

The numbers were downright ugly on nearly every metric we care about. The headline number came within the guided range but that was purely a function of WSM cutting 5% of its workforce to offset the worst comp performance we’ve seen in this economic cycle. What’s even more troubling than the choppiness on the top line we’ve seen reported over the past 6 months is management’s inability to articulate the root causes of the slowdown across all banners or identify clear and definable investments that need to be made in order to reignite the top line.

 

What we got from WSM this quarter was a patchwork investment plan centered around infrastructure additions, SKU reduction, store portfolio rationalization/improvement, and employment cuts. That screams defense to us. It’d be a different story if the company were going to take the additional cash flow saved after streamlining the back-end and reinvested that back into the value equation to stop sales from sliding. That’s not the case. The punchline is that a company in any industry rarely can cut costs and manufacture growth at the same time. Making minor strategic changes after a negative event – and not knowing why – is a recipe for disaster in this business.

 

From here WSM can either a) cut costs and harvest cash flow as management assesses the problem, or b) confidently make serious investments to tackle offensively the changing way people shop. We’d be incrementally more interested in the name if it were the latter.

 

Key callouts from the quarter…

1) Investments – WSM’s investments are centered around 5 strategic initiatives: 1) product leadership – lowering SKU count, 2) revolutionizing inventory management – new DC, planning software, consolidating assortment, wages, 3) Marketing – focus on design and value proposition, 4) Real estate optimization – culling stores, resetting assortment, etc., and 5) Head count reduction – corporate reorganization. All defensive moves.

2) Re-positioning Pottery Barn – It’s pretty clear that management is moving Pottery Barn down the price equation with a renewed emphasis on entry level price points to better attract customers on the lower end of the value equation. As the company’s biggest brand at 42% of sales (All 3 concepts = 60%) – this strategic shift (or investment) doesn’t strike us as the brand building event we’d want to invest in. Because it a) materially weakens the brand pretty much forever, and b) lends itself to a more price conscious consumer, i.e. more promotional sensitivity.

3) Why weak? – People can criticize RH CEO Gary Friedman for his explanation of the RH revenue shortfall in the 4th quarter, but we’d argue that the definable issues (execution, oil/energy markets, and softness in the high end consumer) demonstrate a much better grasp of the headwinds facing the company than demonstrated by WSM management on today’s call. In the 60mins of management commentary and Q&A, we only learned that mall traffic was weak, gifting was soft, and furniture wasn’t so bad.

4) Near term sales guidance – The company is six weeks into the first quarter of the year and hasn’t missed a 1Q comp number in the past 5 years. In fact the company has set a precedent of low ball comp guidance in 1Q only to beat handily. Our sense is that the street will shake out on the lower end of the new guidance range despite the acceleration it implies sequentially. We think it’s important to consider RH’s promotional cadence during weeks two through six of 1Q which was zero. That could help explain some of the pickup we’ve seen QTD.

5) Long Term Revenue Goals – We know this is a long way off but CEO Alber threw out a 10 year target to double revenue growth. The quick math on that equates to a CAGR of 7.2%. Over the past 10 years we’ve seen half that at 3.5%. That’s a big time goal for a management team who doesn’t appear to have a handle on the next three quarters let alone the next ten years.

6) West Elm to $2bn – Language changed on the long term outlook for the brand from $1bn to $2bn on this quarter’s earnings call. That makes sense given that the brand is $200mm from the prior goal, but…a) e-comm traffic trends softened materially in 4Q which translated to the 2nd weakest comp from the brand in the past 6 years. That trend has continued into the first quarter. b) store growth is moving away from top MSA’s towards markets like Grand Rapids, MI and Rochester, NY and fill in locations. And, c) store growth is slowing to 11 net new stores from 18 this past year which isn’t an overly bullish statement on long term opportunity.

7) International – There was a lot of real estate dedicated to the international growth opportunity for the company. A concept we were not sold on in the first place. Fact is, the combination of WSM brands has ~5% share of the US market, with the opportunity to grab additional share in a highly fragmented home furnishings space. We’d argue the incremental investment would be better spent doubling down on the US business in order to position the brand for another leg of sustainable growth. Instead, the focus has been shifted from the core to taking its footprint from 9 countries to 35.

8) Teen underperformance – The biggest laggard in the portfolio in the 4th quarter was Pottery Barn Teen at -12.7% a 1000bps swing sequentially on a 2yr basis. No surprise to us given that RH launched its Teen collection with a 300 page source book in the 3rd quarter and really started shipping orders in earnest during 4Q. Managements solution to the slowdown – firing the brand head and doubling down exclusive product. That doesn’t sound like a winning strategy to us.


Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets?

Yesterday afternoon we hosted a conference call highlighting our latest thoughts on emerging markets. Watch the replay below.

 

The key topics of discussion were as follows:

 

I) Have emerging market financial assets bottomed? Despite a broad-based rebound in EM asset prices throughout the YTD, the belief that many EM asset markets remain at/near trough valuations has some merit. In this presentation we identify and vet potential catalysts for a sustained recovery and/or another material leg down for EM capital and currency markets.

 

Conclusion: We see further downside at the primary asset class level, as well as elevated risk of material bankruptcy cycles in a number of key emerging market economies.

 

II) Are the Chinese economy, its banking system and the yuan as vulnerable to collapse as investor consensus believes? Many investors seem to be of the view that China requires a material devaluation of the RMB to stave off banking crisis and/or outright economic collapse. Some investors actually believe each of those outcomes are inevitable. In this presentation, we offer our well-researched thoughts on the viability of these views.

 

Conclusion: While we remain explicitly and overtly bearish on the Chinese economy and RMB, we believe investor consensus is far too bearish on both. Most of the analysis we’ve seen inappropriately analyzes the Chinese financial sector from the perspective of Western economies; nor does it include the full range of potential outcomes – including a secular bull market in the Chinese currency and Chinese equities.

 

III) Which countries will outperform from here? The latest refresh of our proprietary EM Crisis Risk Index will offer valuable insights as to which countries investors should overweight and underweight from here.

 

Conclusion: On the long/overweight side we like Emerging Europe (i.e. Poland, Hungary and Czech Republic), South Korea and Thailand. In terms of short/underweight candidates, we think Latin America (specifically Brazil, Mexico and Colombia), Indonesia and South Africa are most at risk for #PhaseIII of our #EmergingOutflows theme – i.e. a wave of bankruptcy cycles.

 

CLICK HERE to download the associated slide deck in PDF format (105 slides).

 

Our top-10 charts from the presentation are as follows:

 

10: Country-level credit risks:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 2

 

9: Country-level acute bankruptcy cycle risk:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 3

 

8: Summary of country-level economic and financial market risks:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 4

 

7: One (of two) credible bull cases for the Chinese yuan:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 5

 

6: Why China won’t opt for a sharp devaluation:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 6

 

5: Is the U.S. Dollar Index (DXY) moving from “net-long consolidation” to “net-short”?:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 7

 

4: Why the DXY could go down by a third to a half from here over the next 5-10 years:  

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 8

 

3: Why the DXY should go up another 20-30% from here over the next 3-5 years:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 9

 

2: Contextualizing bankruptcy cycle and valuation risks across emerging market economies:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 10

 

1: Summarizing our outlook for China and the Chinese yuan in one handy image:

Call Replay & Eye Candy | Is This a Generational Buying Opportunity in Emerging Markets? - 11

 

Best of luck out there risk managing downturns across these [former] “drivers of global growth”. Funny how things change with last price…

 

DD

 

Darius Dale

Director


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