5 CHARTS: A Global #GrowthSlowing Checkup

Takeaway: Investors who avoided #GrowthSlowing equity markets nailed it in the past year.

5 CHARTS: A Global #GrowthSlowing Checkup - World Market No 12.16.14 large


Still don't believe U.S. growth is slowing? Nasdaq investors do...



Meanwhile in Japan, growth has been neutered for decades. Despite the best efforts of BOJ central planners, macro markets continue to crash.


Check out the ramp in the Yen...


The Nikkei is still in crash mode, even though the BOJ instituted its negative interest rate policy in January



Speaking of negative interest rates...  


Italy's bank-heavy FTSE MIB index remains in crash mode.


And finally, peeling back the onion on the recent reflation trade, take a look at a longer-term chart of much-watched Dr. Copper.


Does that look bullish for global growth?


RTA Live: May 2, 2016


YELP | Thoughts into the Print (1Q16)

Takeaway: We may sound like a broken record, but mgmt keeps making the same mistake (guidance). Expecting another 2H blowup, but mild near-term risk


  1. FLUFFING LOCAL? As a reminder, YELP is serving Google AdSense ads adjacent to its search results (Google pays YELP to display ads on its site).  We're not sure if the economics will be material, but it's something we can't just ignore given YELP's ~75M desktop UVs (4Q15).  Since YELP shuttered its Brand Advertising segment, those revenue will likely be reported in its Local Advertising segment.  Even if AdSense is immaterial to total revenues, it could be the difference b/w a beat/miss on 1Q results and/or 2Q guidance for no other reason than the sell-side isn't looking for it.  That said, there could be near-term, but temporary risk to staying short the 1Q release.  The key is to focus on YELP's ARPA, which will essentially tell us if AdSense is material.  
  2. 2016 ≈ 2015: We've kept the short on since it appears mgmt has repeated its mistake from 2015 by guiding to street expectations for 2016.  We suspect the inline guide was a panic move in response to LNKD's earnings release, which drove YELP down almost 20% in the following +12 hrs of trading before YELP's mid-day earnings release.  Post 4Q15 results, YELP now needs accelerating new account growth on historically low attrition rates to hit consensus Local Ad revenue estimates.  That also implies accelerating salesforce productivity since its guided revenue growth is exceeding its 2016 saleforce growth target (20%-30%).  In short, this is pretty much the same setup as this time last year; we're expecting another 2H blow-up on 3Q guidance (2Q print), if not 2Q guidance depending on how its other segments perform in 1Q.
  3. BUT IT'S SO CHEAP: It is, but we heard the same thing at various points along its slide from a forward 15x P/S multiple.  Granted, YELP might be in an asymmetric setup to the upside, but this is likely only a risk to the upcoming release; after that we're just getting closer to what we expect to be another full-year guidance cut.  The other implication is that YELP will be acquired.  We don't believe YELP's price is expanding the market of potential suitors simply because there are only a handful of companies that would be willing (large enough) to absorb YELP's model into its financials without taking a material hit.  As a reminder, the only way to fix that model is to improve ROI (i.e. lower price), which would result in down y/y revenues given YELP's attrition issues.    


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


Hesham Shaaban, CFA
Managing Director



YELP | Thoughts into the Print (1Q16) - YELP   New Acct vs. Sales rep 4Q15

YELP | Thoughts into the Print (1Q16) - YELP   2016 Scenario Analysis

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Takeaway: Decelerating U.S. growth is again weighing on bullish sentiment.



Key Takeaway:

Although data last week showed European GDP growing faster than expected, investors were more focused on the ongoing deceleration in U.S. economic growth, which came in at a low 0.5% annualized rate for 1Q15. Bank CDS widened globally, the TED spread widened by 2 bps to 43, the CDOR-OIS spread widened by 1 bps to 44, and the price of Chinese steel fell -2.3% last week. Our heatmap below is negative on the short term, positive on the intermediate, and mixed on long-term measures.

Current Ideas:



Financial Risk Monitor Summary

• Short-term(WoW): Negative / 3 of 13 improved / 7 out of 13 worsened / 3 of 13 unchanged
• Intermediate-term(WoW): Positive / 7 of 13 improved / 4 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged



1. U.S. Financial CDS – Swaps mostly widened for domestic financial institutions. Slower than expected U.S. economic growth affected moneycenter bank CDS the most; swaps in that group widened by an average 8 bps.

Tightened the most WoW: PRU, MET, LNC
Widened the most WoW: GS, HIG, MS
Tightened the most WoW: BAC, C, MS
Widened the most MoM: HIG, AIG, AXP



2. European Financial CDS – Financial swaps mostly widened in Europe last week. Greek and Portuguese bank swaps stood out, with the Greek banks widening between 107 and 444 bps and Banco Espirito Santo widening by 241 bps to 1396.



3. Asian Financial CDS – Financial swaps in Asia mostly widened last week. The median CDS widened by 8 bps to 145.



4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese swaps tightened the most, by -8 bps to 254, as the ratings agency DBRS confirmed the country's BBB rating with stable outlook.




5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week, although Brazil stood out on the opposite end of the spectrum, tightening by -19 bps to 340.



6. High Yield (YTM) Monitor – High Yield rates fell 12 bps last week, ending the week at 7.39% versus 7.51% the prior week.


7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 8.0 points last week, ending at 1893.


8. TED Spread Monitor  – The TED spread rose 2 basis points last week, ending the week at 43 bps this week versus last week’s print of 40 bps.


9. CRB Commodity Price Index – The CRB index rose 1.7%, ending the week at 185 versus 181 the prior week. As compared with the prior month, commodity prices have increased 9.9%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.


10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 9 bps.


11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 1 basis point last week, ending the week at 2.05% versus last week’s print of 2.04%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.


12. Chinese Steel – Steel prices in China fell 2.3% last week, or 72 yuan/ton, to 3075 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.


13. Chinese Non-Performing Loans Chinese non-performing loans amount to 1,274 billion Yuan as of Dec 31, 2015, which is up +51.2% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.


14. 2-10 Spread – Last week the 2-10 spread tightened to 105 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.


15. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread widened by 1 bps to 44 bps.


Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT

HBI | This Doesn’t End Well

Takeaway: We’re adding HBI to our ‘Best Ideas’ Short list. When a company behaves this badly, no one wins.

We’re adding HBI to our Best Ideas Short list. We initially put this short on in late March (see note below), but the company’s actions since then have given us greater confidence in the call. Here’s our basic thinking (we’ll have a Black Book out on the name shortly with a deep dive).

  1. This is not a bad business…but it’s not a good one. On the plus side, it’s highly consolidated on the brand side – with Hanes and Fruit of the Loom accounting for 24% share. On the flip side, distribution is even more consolidated with Wal-Mart, Target, Kohl’s, Penny, and (yes) Amazon accounting for ~70%.  That might seem like a push, but we’d also argue that consumer trends are pushing towards the high end (Tommy John, Lululemon, UnderArmour, Nike). All in, the core is probably a 1% long term grower. Nothing to write home about. And unlike a CPG company, it is extremely volatile. A volatile 1%? Not where we want to be.
  2. Margins are at peak. HBI’s own manufacturing plants account for roughly 65%. While the company guards these numbers closely, our sense is that utilization is likely running close to 90%. That’s actually to management’s credit, as they’ve got this engine running like a 911 Turbo. But where’s it going to go from here?
    Most retail analysts don’t cover companies that actually own manufacturing assets. They all have offshore/outsourced models that lock in price, limit volatility, and make it such that the company has to worry only about design, sales and marketing. The point is that margins for these ‘other’ brands might move by 1-2 points in a year. But for a company like HBI that owns its own assets, we could see 4-5 point swings with no problem as demand shifts and factory utilization drops. 
    In the end, we ask the question…why should HBI have higher margins (15%) than VF Corp, PVH, Ralph Lauren, and even Nike? We should note that it’s about on par with Gildan, which interestingly is the only other major company that buys cotton directly in such quantities for use in company-owned plants.   
  3. The New ‘Jones’? No, we’re not talking about Hedgeye’s illustrious Daryl Jones, we’re talking about Jones Apparel Group – one of the worst companies in retail. Ever. And that says a lot. As its core rolled, Jones took capex down from 2-3% of sales to about 0.7%. That’s bad. It took shareholders’ capital and bought assets/brands – over 25 of them. Then it took special charges almost every quarter obfuscating the real earnings power of the company. It was a great trading stock until it ultimately went private at 30% of peak trading levels.  We’re not certain this is where HBI is headed, but the parallels are uncanny.
  4. Management is investing away from the core. Maybe this is an exceptional idea. Maybe they’re doing what VFC did a decade ago when grew away from its stodgy old slow growing denim business, and sold off its underwear assets. But VFC bought things like Vans, Timberland, Lucy and Eagle Creek. HBI is diversifying into…you guessed it – underwear (and moderate priced sports apparel). Just in other parts of the world. We have no reason to think this category will grow any more outside the US than inside its borders.
  5. These deals are getting more expensive. HBI bought DB Apparel for 7.5x in 2014, Knights Apparel for 8x in 2015, and now both Champion Europe and Pacific Brands cost 10x EBITDA. Basically, HBI is trading at a 20% lower multiple (tho still expensive) than it was, but it’s deal multiples are 20% higher. Why?
  6. Why didn’t HBI buy Pacific Brands a year ago at half the price? That’s kind of a rhetorical question. I have no idea what the answer is. But it’s a public company…it’s not like it ‘wasn’t for sale’, and it’s also not like ‘HBI wasn’t a buyer’.  Just strange to pay nearly $400mm more for the same asset. That could have otherwise paid down 18% of debt, or bought back 3% of the float.
  7. 2 and 20 is Back! Did we mention that HBI announced two acquisitions in 20 days? One in Europe, and the Other in Australia? I’m sorry, but even if you’re the biggest bull on this name, you’ve gotta be scratching your head over this. Yes, I know, the stock was up on both deals, because people know that the company now has a cookie jar to dip into for a year or two. But we’ll bet against two international deals/20 days any day of the week when we’re at the tail end of an economic cycle.


The Bottom Line

We think it’s absurd for a stock like HBI to trade at an EBITDA multiple in the teens. An EARNINGS multiple? Sure. But not EBITDA. We understand, however, that this is the type of name where there will need to be a major event to make people completely revalue the company – the way it did so on the upside as it repaired its balance sheet over the past two years. But until then, will we see the multiple push to 14x, 15x? We have a hard time with that one – unless we’re grossly underestimating a) how much juice it can squeeze out of the lemon in Australia, or b) the sustainability of its positioning in the US market. If we’re right, we’re looking at 7-8x EBITDA, and we’d argue that’s even generous. That’s a stock in the mid-teens, or 50% downside.



Here is our previous note on HBI from 3/29.


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 | This Doesn’t End Well - 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 | This Doesn’t End Well - 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 | This Doesn’t End Well - 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 | This Doesn’t End Well - 3 29 2016 Chart 4

INSTANT INSIGHT | Reflation Reversal & How To Play It

INSTANT INSIGHT | Reflation Reversal & How To Play It - Dollar cartoon 04.27.2016 


The mother of all reflation trades has inflated equities and commodities off the February lows. Since February 11th, the CRB index of commodities is up 18.8%  while, over that same period, the S&P 500 is up 11.5%.


Not so fast.


Before buying into the latest permabull narrative that U.S. #GrowthSlowing fears have abated so buy equities now, consider this. Once again, macro markets have already begun letting out some of the rally's hot air. Note: The S&P 500 was down for 4 of the last 6 weeks, meanwhile, net positioning is the most bullish it’s been all year (CFTC data).


INSTANT INSIGHT | Reflation Reversal & How To Play It - 05.02.16 Chart


So what are we watching? 


Top of the list is the U.S. dollar. Here is analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:


"Down Dollar (again) -2.2% last wk (-5.7% YTD) after both the PMI (50.4) and Consumer Confidence #s slowed (again) on Friday; markets are obviously questioning whether Dovish Fed can replace actual growth with some version of stagflation, but USD is signaling immediate-term oversold inasmuch as Gold is signaling overbought."



How do you play the oversold U.S. Dollar? Well, indirectly at the moment, McCullough says.


"Instead of buy USD (not brave enough, yet!), I sent out SELL signals in both Oil (+5.2% last week) and Copper on Friday; both are signaling overbought inasmuch as USD is signaling oversold; Copper $2.31 is an important macro level for the stagflation vs. #Deflation debate; so far longer-term #Deflation is still winning."



Here's the sell Oil signal in Real-Time Alerts:



U.S. #GrowthSlowing has been our call for a while now. We're sticking with it.


For more, watch the video below in which Hedgeye Senior Macro analyst Darius Dale explains why the U.S. Economy is entering "the most difficult part of the cycle."

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