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The Most Regressive Tax Of All? A Weak Dollar

Takeaway: Average working Americans get hammered by a weak U.S. Dollar, while Fed-fueled monetary policy enriches wealthy investors.

Ahead of today's important Fed announcement, permabulls are desperately hoping and praying that a dovish Janet Yellen will continue devaluing the U.S. Dollar to keep propping up stocks.

 

Below are two charts showing why a weak dollar is perpetuating a massive wealth gap

#1 

Click to enlarge

The Most Regressive Tax Of All? A Weak Dollar - dale weak dollar

 

#2

CLICK TO ENLARGE

The Most Regressive Tax Of All? A Weak Dollar - dale inequality

 

 

***You can follow Darius Dale on Twitter @HedgeyeDDale


COH | Objects in Motion Remain in Motion

Takeaway: COH might be batting only 0.0833, but momentum is building in an otherwise investable Retail tape.

Investment Conclusion: There’s a lot of bad things you can say about Coach’s quarter – its poor quality of earnings, lower than expected tax rate, 7th consecutive quarter of special charges, NA comps still not positive, and all indications that the brand is still in ‘Outlet Mall/Department Store purgatory’.  But for the first time in a while, you can add a few positive comments to the narrative as well. The biggest of which is that this is the first quarter in 12 where GAAP earnings actually grew for Coach (even on a full tax rate). That carried through to the balance sheet as well, with a 14 day improvement in the cash conversion cycle. Clearly not all is horrible at COH, which for years could do nothing right.  Look at the SIGMA below, which shows that COH has one of the best sales/inventory/margin trajectories in all of retail (that’s a pretty massive statement), which is very bullish heading into next quarter.  We put COH on our Long bench in March for many of these reasons. It’s 5 tickers removed from our top idea, and deservedly so.  But this is a management team that took control of the company when it was a complete disaster – yes, two-three years ago (when EPS growth turned squarely negative). These guys learned the hard way, and appear to be figuring it out.  If there’s one thing I learned about Retail in 20+ years, it’s that a 3-year stretch of value destruction does not end, only to start all over again. Quite the opposite -- in a sea of uninvestable names in retail, this is one where we think you can arguably take above consensus EPS growth to the bank.  It’s still sixth on our idea list – but with an upward bias.

COH | Objects in Motion Remain in Motion - 4 26 2016 COH sigma chart1

 

DETAILS OF THE QUARTER

 

Whack-A-Mole: This is the first quarter in 3 years that the Coach brand grew organically, with sales growth of 3% (4% C$) and earnings growth of 17%. Margins still haven’t found a floor, down another 70bps in the quarter, or maybe put a better way, down 14 percentage points in 3 years. North America comps were flat with the road-map in place towards positive comps in 4Q16. We give management a tremendous amount of credit for laying out the road map for the recovery and delivering on the promises. But, now that the mole has poked its head out of the sand – we’re at a critical inflection point in the COH story.

 

From here – the story is less centered on the quarterly cadence of comparable store sales, but sustained organic growth and a material inflection in the margin trends over the near term, and margin stabilization in the long term. Merch margins have been more or less stable throughout the entirety of the three year decline (down just 220bps on a $900mm revenue decline). The kicker must be SG&A leverage as the company returns to a more stable top-line outlook. But, gone are the days of double-digit/high-single digit comps as the company all but admitted it is no longer a market share taker, instead just not a market share ceder.

 

The SG&A leverage story makes us inherently uncomfortable, especially since its associated with an equally aggressive (in the case of COH) topline acceleration growth story in the low-to mid single digits. Sure there is some occupancy deleverage to recapture (about 300bps of the 13 percentage point decline from 2011-2015), but most of the charges COH recognized as part of its restructuring have been written off as one-time. Meaning there isn’t a lot of low hanging fruit to grab without a commensurate return to excellence on the top line. Management has talked about $150mm in annual run rate cost savings once we hit the conclusion on 2016. Though today’s new cost cutting/employee reorg plan speaks to that fact that COH has more wood to chop.

 

True House of Fashion Design: In fairness, this is a nit-picky observation, but we can’t totally get behind’s COH new ‘True House of Fashion Design’ mantra. The fact is that COH is a company with a new footwear asset (Stuart Weitzman), and an average handbag business highly weighted to the outlet channel. By itself, COH has never proven it can scale what at a time was a highly relevant product in one geographic region across the globe or categories. Management seems focused on acquiring new category exposure (a la Stuart Weitzman), that will produce the illusion of growth and diversify away from handbags. But, nearly anything COH could acquire, while accretive, will damage the profitability profile of the parent.

 

COH | Objects in Motion Remain in Motion - 4 26 2016 Algo chart2

 

COH | Objects in Motion Remain in Motion - 4 26 2016 earnings chart3


Do You Believe? What We're Watching On Fed Day

Do You Believe? What We're Watching On Fed Day - central bank cartoon 04.22.2016

 

For better or worse, it's Fed Day. Here's what we're watching in macro markets via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning.

 

Key takeaways on the Dollar, oil, etc

 

"It’s a good thing we’re not ex’ing out Dovish Dollar (Fed) expectations and its impact on “reflating” the SP500; but today is event day for Yellen and my main macro question is what happens if she can’t burn the USD to a lower-low (vs. the last yr of USD holding 93-94 on the US Dollar Index?) Stay tuned… should be riveting."

 

 

"Oil is up big again, +1.9% and pushing the Pain Trade to almost its max on FOMC event day – for WTI my TAIL risk level of resistance is just north of $46 – for something like Oil & Gas Stocks (XOP) it’s in the $36-37 range; if you were a bear on Energy (I don’t have this on, yet), on whatever Yellen says you’d probably buy/cover USD and sell Energy (for now)"

 

 

So where does the dovish Fed, down dollar trade go?

 

Straight to Vladimir Putin's pocket...

 

 

Meanwhile, Yellen's down dollar trade has crushed Japanese equities:

 

 

Now, in other countries (far, far away) where faith in central planners has undoubtedly waned, reality rules.

 

So Greece (and ECB-led Europe broadly)...

 

 

And China.

 

 

So we'd ask...

 

In Central Planners, do you believe?


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TWTR | Auto-Play = Legacy Siphon (1Q16)

Takeaway: The auto-play headwind was bigger than we imagined. The model is essentially moving toward CPM, but TWTR is basically back where it started

KEY POINTS

  1. 1Q16 = SCARY GUIDE: We thought TWTR would produce upside to 1Q guidance and resulting consensus 1H16 estimates.  However, it wound missing 1Q revenues across both segments, and offered pretty dreadful guidance, which calls for 2Q16 revenue growth at almost half the rate of 1Q16 (19% vs. 36%, respectively).  That may appear like a sandbagged guide, but it may actually be a reflection of growing uncertainty around the auto-play headwind that we didn’t give enough credence to before covering our short (point 2).
  2. AUTO-PLAY = LEGACY SIPHON: While we suspected auto-play could cannibalize legacy ad engagements, we didn’t believe it would occur at this magnitude in 1Q, or at what’s implied for 2Q.  While 1Q16 ad engagements spiked 208% y/y, CPE fell off almost 60% (56%), which suggests that the majority of ad engagements are now coming from auto-play given the CPE discount (est. +85% discounts vs. legacy).  Meanwhile, mgmt admitted its legacy promoted tweets are "under pressure", which is likely due to waning engagement rates from the influx of auto-play ads (i.e. ad fatigue)
  3. HAMSTER WHEEL Mgmt suggested that it is now steering its advertisers toward auto-play, but in reality we suspect that's where engagements are flowing given the lower engagement threshold.  TWTR is effectively moving toward CPM (vs. CPC), but is basically back where it started; it needs to introduce a disproportionately higher level of ad load to drive comparable revenue growth.  The difference this time is that instead of introducing rampant increases in legacy ad load to offset fading ad engagement rates, TWTR is just swapping in a heavily discounted auto-play ads with a much lower engagement threshold.  This could become a growing concern depending on the rate of legacy ad cannibalization; we have more work to do here.  For now, we remain on the sidelines.

Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet 

 

TWTR | Auto-Play = Legacy Siphon (1Q16) - TWTR   Ad eng vs. Price y y 1Q16 

TWTR | Auto-Play = Legacy Siphon (1Q16) - TWTR   Auction 4Q15


[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness

Takeaway: All equity categories experienced withdrawals last week while investors sought shelter in IG fixed income and municipal bonds.

Editor's Note: This is a complimentary research note originally published April 21, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

*  *  *  *

 

Emerging market equities put up their 5th consecutive week of outflow with a cumulative -$2.3 billion having come out of the category since the week ending March 16th. While EM received some fanfare as a "generational buying opportunity" in mid-February, equity prices and flows haven't broken their down trend and are in again in retreat. Importantly, the recent +20% rally in the MSCI index is not uncharacteristic as there have been eight 20%+ (short covering) rallies in the 4 year price action starting in 2011.

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - EEM Theme

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - 4 12 2016 4 38 51 PM 

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Investors pulled funds from all equity categories last week with both funds and ETFs experiencing redemptions totaling -$4.7 billion. Additionally, high yield and global fixed income lost -$419 million and -$820 million respectively while investors sought shelter in investment grade and municipal bonds; IG fixed income took in +$2.1 billion with municipal bonds collecting +$910 million. Finally, money market funds lost another -$8 billion to outflows, as tax season finished up during the week.


[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI19

 

In the most recent 5-day period ending April 13th, total equity mutual funds put up net outflows of -$4.6 billion, trailing the year-to-date weekly average outflow of -$1.4 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$2.8 billion, outpacing the year-to-date weekly average inflow of +$1.6 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net redemptions of -$75 million, outpacing the year-to-date weekly average outflow of -$957 million but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$493 million, trailing the year-to-date weekly average inflow of +$1.9 billion and the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI2

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI3

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI4

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI5

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI12

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI13

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI15

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI7

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: While ETF flows were fairly mild last week, the long duration treasury TLT saw the largest percentage flow; investors pulled -2% or -$211 million from the fund.

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI17

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$8.0 billion spread for the week (-$4.7 billion of total equity outflow net of the +$3.3 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$746 million (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] Fund Flow Survey | Eh-Merging Markets...Back To Weakness - ICI11 


All Good Though, Right?

Client Talking Points

USD

It’s a good thing we’re not ex’ing out Dovish Dollar (Fed) expectations and its impact on “reflating” the S&P 500. But today is event day for Yellen and our main macro question is what happens if she can’t burn the USD to a lower-low (vs. the last year of USD holding 93-94 on the U.S. Dollar Index?) Stay tuned… should be riveting.

OIL

Oil is up big again, +1.9% and pushing the Pain Trade to almost its max on FOMC event day. For WTI our TAIL risk level of resistance is just north of $46 – for something like Oil & Gas Stocks (XOP) it’s in the $36-37 range; if you were a bear on Energy (we don’t have this on, yet), on whatever Yellen says you’d probably buy/cover USD and sell Energy (for now).

QQQ

Turns out that going bearish on the Nasdaq for the 1st time in this cycle (on March 31st, 2016) wasn’t such a bad idea after all… Ex-AAPL-GOOGL-NFLX-MSFT, all good though, right? This is precisely what happened during the Spring of the last 2 U.S. economic/profit cycle tops (in 2000 and 2008); SPX bulls should pray for a mecca of Yellen dovishness and $60 Oil.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 60% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 31% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) released earnings Friday reporting strong numbers across every important metric. Consider, for example, Q1 EPS $1.23 versus FactSet's consensus estimate of $1.16. Same-store sales in the U.S. were +5.4% vs consensus +4.4%. Revenue in the U.S. was $2.02B vs consensus $1.98B. Company-operating margin was 15.4% vs consensus 14.9% and year-ago 14.3%. We are sticking with our $150 target and believe that $7.00 in EPS for 2017 is not out of the question.

CME

CME Group (CME) which reports on April 28th still has the opportunity for an earnings beat with the +13% year-over-year volume increase coinciding with a +2% increase in pricing power. We have a 1Q16 estimate at $1.18, +3% ahead of consensus. CME stock has positively reacted on earnings the past 5 announcements, rising between +1.5-3.7%.

TLT

The market is currently pricing in a rate hike but not until … late 2017. So if you’re looking for reasons to buy the market at all-time highs, don't expect a boost from incremental Fed policy. To be clear, the dovish Fed commentary of late is a direct result of U.S. growth slowing. Friday’s manufacturing PMI continued its downward trend (it peaked in rate of change terms in August 2014). Clearly, the market gets decelerating growth, which is why Utilities (XLU) are leading equity sector divergences YTD (+9.3%) and the U.S. Treasury 10-year yield down 0.35% over that same period. (That translates into TLT +6.5% and ZROZ +10.2% year-to-date.)

 

With that being said, the alpha on our long utilities and Long Bonds (TLT & ZROZ) vs. short Junk Bonds (JNK) position has gone against us in the last two months. Notably, we have no direct exposure to commodities or commodity-related sectors, but being short of JNK amidst a huge rally in commodities has not been a good position. Much of the beaten down resource-leveraged credit has rallied.

 

Three for the Road

TWEET OF THE DAY

VIDEO: Can Fed Stop Recessionary Selloff? https://app.hedgeye.com/insights/50528-can-fed-stop-recessionary-selloff

@KeithMcCullough

QUOTE OF THE DAY

The reality is: sometimes you lose. And you’re never too good to lose. You’re never too big to lose. You’re never too smart to lose. It happens.

Beyonce Knowles Carter

STAT OF THE DAY

Donald Trump has been personally sued in federal court 72 times since 2000. Since 2000, Bloomberg found that Trump and his companies have either sued or been sued at least 1,300 times.


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%
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