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Atlanta Fed GDPNow Model Jumps the Shark

Takeaway: How a “forecast” goes from +2.7% GDP only a month ago to +0.6% today boggles the mind.

Editor's Note: This is an abridged excerpt from today's Early LookClick here to subscribe.

 

Atlanta Fed GDPNow Model Jumps the Shark - z fonz

 

Wow. Is this Atlanta Fed “GDP Now” model getting ugly. How a GDP “forecast” goes from +2.7% GDP only a month ago to +0.6% today is beyond me, to be quite frank!

 

We’re sticking with what was the Street’s low Q1 US GDP forecast of 1% (our predictive tracking algorithm and mapping/measurement #process has been accurate, within 25-50 basis points, on GDP for the last 5 quarters – without the 200bps intra-quarter swings!).

 

And, more importantly, we’re reiterating that the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3.

 

Click to enlarge

 

...AND Here's Fonzie jumping the shark.


HBI | Short the Tighty Whities

Takeaway: Margins and EPS at peak. Company buying stock when mgmt selling.  Estimates 20% high next yr and 40% by yr3. HBI should be a high teen.

We added HBI to our short list yesterday.  We don’t like the Brands, don’t like Management, and don’t like the Company, but that alone is no reason to short a Stock. What is, however, is the fact that we think that earnings and margins are at peak. We’re 7% below consensus this year, -20% in ’17, -30% in ‘18, and -40% by year 3. Some argue that stock might seem cheapish today at a mid-teens multiple and 5% FCF Yield – though we really don’t follow that logic. Once the dust clears from the acquisitions, special charges, and cotton prices normalize from the 7-year low, we think we’ll be looking at lower multiples on lower earnings and cash flow. A low double-digit multiple on our numbers gets us to a high-teenager. We don’t like high teenagers. Perhaps management agrees, especially CEO Noll who has cut his stake in half over four months.

HBI  |  Short the Tighty Whities - 3 29 2016 Chart 1

 

Here are some factors to consider…

1) Why? Can someone, ANYONE, explain to me why HBI has operating margins of 15%? That’s demonstrably higher than the following companies – UA, RL, PVH, GES, CRI, ANF, KATE, and yes – even NKE. It’s also well above its key retailers (WMT, TGT, KSS, JCP, AMZN). Why should a company whose primary brand sells through mass channels and department stores have higher margins than the best brands in the business?  As hard as we try, we cannot figure it out aside from over-earning due to a 7-year trough in cotton prices and the temporary benefit of being a serial acquirer and restructurer of companies in an effort to grow away from its core.

HBI  |  Short the Tighty Whities - 3 29 2016 HBI EBIT

 

2) Let’s consider how the margin structure changed at HBI over the past 4-years. Cotton peaked in the market at about $2.00 in 2011, which ultimately flowed through and hit HBI’s margins in 2012.  That was when the stock was at a split-adjusted $5. Overly penalized, for sure. But we’d argue we are seeing the inverse today. Since the precipitous decline in cotton to the $0.57 level we see today (a 7-year low and near a 20-year low), HBI recouped seven (7) full points in Gross Margin. Over the same time period, how much did the company see flow through to EBIT margin? Seven. Ordinarily, we’d like to see a company invest more of the upside. They’ll say they ‘innovate to elevate’. But we’ll bet there’s a direct flow through in margin downside if either a) cotton prices head higher, or b) if Wal-Mart and Target decide that HBI is making too much money.
HBI  |  Short the Tighty Whities - 3 29 2016 Chart 3

 

3) Buying at the Top? HBI buying so much stock when margins are at all-time peaks (and management is selling) comes across to us as flat-out reckless. In fairness to HBI management, we see this behavior from most major consumer companies – they buy stock when they CAN and not when they SHOULD. This is not unlike Target, which is taking the incremental $1.2bn it gained from its pharmacy business and using it to buy back shares at $80. Our sense is that it will come back to haunt them if we’re right on earnings and this stock is in the high teens.

 

4) Acquisition Behavior Bothers Us. This company has acquired an average of a company a year for 5-years for a total of $1.5bn. It’s also taken $546mm in restructuring charges, or 25% of non-GAAP EBIT, since the Maidenform acquisition in October 2013.

 

5) As hard as it might try, HBI can simply not grow online. If there was only one statistic we could see for a consumer brand to gauge the health of its business, it would be the direct to consumer (DTC) sales of its product. DTC sales at HBI, however, have shrunk as a percent of sales over the past 5 years from 9.5% to 6.8%. We’ve never seen a company do that before. Our sense is that WMT, TGT, the Department Stores, and Dollar Stores all would react severely if HBI tried to go direct.  And yes, we understand that WMT and AMZN sell Hanesbrands online, which counts as a wholesale sale on the P&L but shows up online. It does not matter. Margins are better for a direct sale full-stop. We refuse to accept the premise that underwear is not a category that lends itself to online sales. Tell that to Tommy John, Lululemon, and UnderArmour, who all have 30-40%+ online businesses and are charging $30-$40 per pair (not package), and they can hardly keep them in stock. It’s abundantly clear where the trend is going – and HBI can innovate all it wants, but it’s likely not going to be a player in this premium game.

 

6) When management buys a share of stock, we’ll step back and question our logic (though we’ve done that a few times already). We have seen an absolutely massive degree of selling from the management team over the past year – see Rich Noll’s selling activity below. Specifically, he has sold $85mm in stock over the past 14 months, most of that +/- $2 of where it is trading today.

HBI  |  Short the Tighty Whities - 3 29 2016 Chart 4


CHART OF THE DAY: Past Peak Income & Consumption Growth

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.

 

"... Sure, a growth bull might say “but, the consumer and housing are still strong parts of the US economy”… but a gentlemanly rate of change person like me would correct them by reminding them that rates of change continue to slow from their respective cycle peaks.

 

On economic cycle matters, saying things are “good” or “bad” means absolutely nothing to us; measuring and mapping whether things are getting better or worse is what matters most. We’re very reasonable and tolerant about all 2nd derivative debates."

 

CHART OF THE DAY: Past Peak Income & Consumption Growth - 03.29.16 chart


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Gentlemanly Bears

“It meant being reasonable, tolerant, honest, virtuous, and candid.”

-Gordon Wood

 

As I push into my early 40s, I’d like to think a Gentlemanly Bear can be thought of that way inasmuch as a Gentlemanly Bull can be. After all, sometimes (when GDP growth is slowing) gentlemen prefer being bullish on long-term bonds!

 

In the latest history book I’ve cracked open, Revolutionary Characters, Gordon Wood used the aforementioned characteristics to describe America’s Founding Fathers. How well do you think they describe your economic, profit, or credit cycle resources?

 

Or are we all partisan now? Rate of change isn’t partisan. It’s honest math. And I think being candid about it accelerating or decelerating is, as Wood wrote, “an important 18th century characteristic that connoted being unbiased and just as well frank.” (pg 15)

Gentlemanly Bears - GDP cartoon 10.29.2015

 

Back to the Global Macro Grind

 

Yesterday we received more intermediate-term TREND (not to be confused with monthly or sequential immediate-term TRADE head-fakes) confirmation that the US economy is indeed well past the peak of the cycle:

 

  1. Having peaked at +3.8% y/y in JAN 2015, Real Consumer Spending was revised down -30bps to +2.6% growth for JAN 2016
  2. Having peaked at +13.1% y/y in APR 2015, US Pending Home Sales slowed to 0.7% year-over-year (y/y) in FEB of 2016

 

Sure, a growth bull might say “but, the consumer and housing are still strong parts of the US economy”… but a gentlemanly rate of change person like me would correct them by reminding them that rates of change continue to slow from their respective cycle peaks.

 

On economic cycle matters, saying things are “good” or “bad” means absolutely nothing to us; measuring and mapping whether things are getting better or worse is what matters most. We’re very reasonable and tolerant about all 2nd derivative debates.

 

While Real Consumer Spending isn’t crashing into a #Recession (that was never our call), there are large components of the US economy already in a recession (no you can’t “back out” Energy, Industrials, Cyclicals, Financials, etc.). That’s why:

 

  1. US Long-term Treasury Yields have dropped from 2.27% at the start of 2016 to 1.87% this morning
  2. The Yield Spread (10yr minus 2yr Yield) is right around cycle lows at 100 basis points wide
  3. High Yield Spreads remain elevated and rising (above the recessionary signal of its historical mean)

 

Yes, the commercial and industrial (C&I) side of the economy matters inasmuch as the consumption and real estate cycle will if these rates of change in both consumer spending and housing demand continue to slow.

 

By the time it’s all slowed to cycle lows, you start buying again.

 

Let me say that differently. If you’ve been positioned properly for the last 3-6 months (instead of last 3-6 weeks), once the entire cycle has slowed to its slowest rate of change, you’ll actually start selling what you already own:

 

  1. Long-term Treasuries (TLT) = +7.8% YTD
  2. Utilities (XLU) = +12.6% YTD
  3. Gold (GLD) = +15.1% YTD

 

And then you’ll probably start buying the classic #LateCycle things (lower) that you shouldn’t have owned from last year’s cycle peak (note: all 3 of these US Equity Style Factors have underperformed Energy YTD – so you definitely don’t want to “back out” Energy):

 

  1. Consumer Discretionary (XLY) = -0.3% YTD
  2. Financials (XLF) = -6.1% YTD
  3. Healthcare (XLV) = -6.7% YTD

 

I know. I know. The YTD performance isn’t “as bad” as this Gentlemanly Bear sounds. But, as you know, staring at a month-end markup performance snapshot can be very risky. Remember “stocks” ramped +6% from the FEB low to MAR 2008 high too…

 

Again, not that things being “bad” matter as much as things getting better or worse do. But wow is this Atlanta Fed “GDP Now” model getting ugly. How a GDP “forecast” goes from +2.7% GDP only a month ago to +0.6% today is beyond me, to be quite frank!

 

We’re sticking with what was the Street’s low Q1 US GDP forecast of 1% (our predictive tracking algorithm and mapping/measurement #process has been accurate, within 25-50 basis points, on GDP for the last 5 quarters – without the 200bps intra-quarter swings!).

 

And, more importantly, we’re reiterating that the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-1.97%

SPX 1
RUT 1060-1107

NASDAQ 4
EUR/USD 1.10-1.13

Gold 1 (bullish)

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gentlemanly Bears - 03.29.16 chart


Yen, Oil and Europe

Client Talking Points

YEN

The Yen is down -0.2% vs. USD this this morning at 113.72 and that registers an immediate-term TRADE oversold signal inasmuch as the Nikkei signaled immediate-term overbought late last week (buy Yen, short Japanese stocks remains our current view there as the #BeliefSystem in central-market-planning breaks down).

OIL

Dollar Up, Oil Down this morning – plenty of “reflation” trades are barely hanging on into month-end and now WTI is signaling its first series of short-term lower-highs (exhaustion signal) between 42-43. We imagine Janet Yellen will determine the next USD/Commodities trade with her commentary this week.

EUROPE

After an ugly last week, equities are trying to bounce but unimpressively so post the Easter break – Italian Stocks (MIB) were -2.4% last week and +0.6% early this morning, but -14.6% year-to-date and still in crash mode -24% vs. this time last year when many thought European growth was going to be just fine (its consistently slowing now).

 

*Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 21% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
CME

CME Group (CME) put up a decent fourth quarter earnings print with a slight revenue and earnings beat. Not that we put much weight on what happened last quarter but trends into the new operating period are looking even better. The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts.

 

Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.

GIS

We continue to like General Mills (GIS) as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without its noise surrounding the numbers; Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising just to name a few, muddied the waters. But digging through the noise, this is a business that is truly turning a corner. When they set sail on fiscal year 2016 back in June of 2015, we knew this was not going to be an easy ship to turn towards success. Now, with many key product platforms turning (through strong product innovation and renovation) in the right direction and operational improvements implemented through cost savings initiatives, GIS is on the cusp of success. We will be measuring this success by realization of sustained top line growth in the low single digit range.

TLT

In our model the second quarter is the toughest compare on both GDP and U.S. corporate profits so we want to be very careful going into that and be positioned defensively. Stay long Long-Term Treasuries (TLT).

 

While small/mid cap U.S. Equities reverted to their bear market mean last week (Russell 2000 down -2.0% on the week and -16.7% since US Corporate Profits peaked in Q2 of 2015), so did a few other US Equity Market Style Factors that had had a big 1-month bounce:

  1. High Beta stocks were -2.0% on the week
  2. High Leverage (Debt/EBITDA) stocks were -1.9% on the week
  3. High Short Interest stocks were -1.7% on the week

Three for the Road

TWEET OF THE DAY

*NEW VIDEO*

McCullough: Short Rich People? https://app.hedgeye.com/insights/49961-mccullough-short-rich-people… via @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

It meant being reasonable, tolerant, honest, virtuous, and candid.

Gordon Wood

STAT OF THE DAY

Over 10,000 bars have shut down in the past decade—with closures reaching a peak of six per day in 2014.



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