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A Brief Update On Earnings Season & Sector Performance

Takeaway: As Macy's (M) & Disney (DIS) missed earnings numbers and shares implode this morning, here's a critical update on earnings season.

A Brief Update On Earnings Season & Sector Performance - Earnings cartoon 11.03.2015

 

A grand total of 446 of 500 S&P 500 companies have reported earnings, aggregate sales and earnings growth is down -2.4% and -8.5% respectively.

 

A few callouts:

 

  • 6 of 10 sectors have reported negative sales and earnings growth;
  • Energy leads the laggards, with sales and earnings plummeting -31.6% and -108.7% respectively;
  • Financials & Materials earnings growth is down -14.3% and -15.1% respectively;

 

A Brief Update On Earnings Season & Sector Performance - earnings season 5 11

 

Meanwhile, looking at sector Performance:

 

  • Our Macro team's favorite long sector of 2016, Utilities (XLU), continues to outperform, 13.1%;
  • Our favorite short, Financials (XLF), is down -2.3% and is the second worst performing sector;
  • Other callouts: Healthcare (XLV) is having a rough 2016 and Energy (XLE), which had a rough start to the year, is the second best performing sector. 

 

A Brief Update On Earnings Season & Sector Performance - sector performance 5 11


Daily Market Data Dump: Wednesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Wednesday - equity markets 5 11

 

Daily Market Data Dump: Wednesday - sector performance 5 11

 

Daily Market Data Dump: Wednesday - volume 5 11

 

Daily Market Data Dump: Wednesday - rates and spreads 5 11


M/FOSL | One is a Fossil, the Other is FOSL

Takeaway: Though FOSL is just scary, the franchise lost far more EV then its prospects suggest. Macy’s, however, hasn’t lost enough.

Now THIS Is A Massive Bifurcation

Most people admittedly don't look at Macy's sales trends in this rather simplistic way. But sometimes simplifying things is all it takes to see the truth. Specifically, we're looking at Macy's sales comps compared to Retail Sales as reported by the government -- and the historical correlation is rather spot-on. Macy's is a bit more volatile, as it should be, but much tighter than we think most people would otherwise suspect.  That is, until now. Macy's -- the bellwhether name in the group -- started to trend down in 2Q of last year while the rest of retail picked up. Not major -- but enough to notice. But year-to-date in 2016 that comparison completely blew out. We'd love to hear Terry Lundgren address this one. Maybe they'll give the 'ol "we don't sell what people increasingly want to buy" answer. We give 'em credit for owning up. But it does nothing to persuade us from shorting the stock. 

M/FOSL | One is a Fossil, the Other is FOSL - 5 11 2016 chart1

 

IS THIS FOSSIL PETRIFIED?

It's been a while since we've wanted to get behind a story this badly. Fossil is THE dominant player in the designer watch business. It's historically had very high, and (what we thought) were sustainable margins, with industry-leading ROIC and ROE. Management has always been easy to back -- as it's almost invariably made the right calls. But the past two years have simply been a slow-motion horror show. Consider this…

 

In 2014 FOSL earned $7.10, with consensus expectations  for 2016 above $9.00. Well...those two years have come and (almost) gone, and now the company is guiding toward a number as low as $1.80. That's an 80% cut in earnings expectations -- and roughly an 80% drop in the stock. In other words, it hasn't gotten any cheaper along the way. We'll see how it trades today, as we're likely to give up a few multiple points.

 

Analytically, this is the kind of name we LOVE standing behind on a major whiff like this. But our main concern is that the company does not appear to know what it wants to be. We don't agree with the shift to wearables (a fitBit/iwatch competitor), as it's a 'me too' category with low barriers to entry, that's attracting new competitors that use it as a loss leader for other parts of the business.

 

And then to hear management say "Our biggest objective in all of this technology stuff is really to disrupt the watch business."… What? Did they really say that?  That's like saying [Our core business is designer watches, but we're entering this low margin category with the sole purpose of disrupting the very business that pays for us to turn the lights on every morning].

 

Are we taking that out of context? We really hope so, because that's how it sounded.

 

But in the end, as long management gets its head screwed on straight, which we have a funny feeling its shareholders will make happen, the question comes down to what this watch franchise is worth. It was worth over $10bn 2 years ago. Did over $8bn in enterprise value justifiably vanish forever?  If you're going to make the argument that no future generations will ever wear a watch with an hour and a minute hand, then yes, it is gone forever. But we don't buy that extremely weak argument for a minute.

 

Are we anxious about this? Yes. We hate retail turnarounds. They're painful. But our gut on this is that it's not as broken as the stock price suggests.

 

FOSL is officially on our Vetting Bench -- Long Side.

M/FOSL | One is a Fossil, the Other is FOSL - 5 11 2016 chart2

 

RH - RH appointing Eri Chaya, Karen Boone, and Demonty Price as Co-Presidents

(http://ir.restorationhardware.com/phoenix.zhtml?c=79100&p=irol-newsArticle&ID=2167223)

 

SPLS, ODP - Staples and Office Depot merger agreement terminated -- SPLS initiates cost-cutting plan, will close at least 50 N.A. doors and explore strategic alternatives for Euro operations

(http://www.businesswire.com/news/home/20160510007030/en/)

 

UA - Stephen Curry became the NBA's first unanimous Most Valuable Player on Tuesday, Under Armour unveiled a new MVP shoe.

(http://footwearnews.com/2016/focus/athletic-outdoor/stephen-curry-unanimous-nba-mvp-under-armour-curry-mvp-back-2-back-pack-220160/)

M/FOSL | One is a Fossil, the Other is FOSL - 5 11 2016 chart3

 

WMT - Wal-Mart will sue Visa for right to require PIN # for more secure debit transactions --company pinching pennies as it invests to fend off growing online competition

(http://www.wsj.com/articles/wal-mart-sues-visa-over-chip-enabled-debit-card-transactions-1462906677)

 

SQBG - Sequential brands acquiring GAIAM Yoga brands for $146mm

(http://footwearnews.com/2016/business/mergers-acquisitions/sequential-buys-acquires-yoga-brand-gaiam-220328/)

  

AMZN - Amazon announces Video Direct, a self-service video streaming platform to be included in Prime package -- also introduced AVD Stars program, which will give content creators a share of $1mm/month bonus pool

(http://www.businesswire.com/news/home/20160510005558/en/)


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A #LateCycle Reality Check Hits Disney, Macy's, China, Italy, etc...

Takeaway: Recent stumbles in Disney shares, Italy's bank-heavy FTSE MIB index, and China's Hang Seng index are prime examples of #GrowthSlowing.

A #LateCycle Reality Check Hits Disney, Macy's, China, Italy, etc... - late cycle cartoon 10.08.2015

 

It's getting tougher each day for deniers of #LateCycle reality.

 

"I wonder if Disney missing for the 1st time in 5yrs has anything to do with #TheCycle (it continues to slow)," Hedgeye CEO Keith McCullough wrote in a note to subscribers this morning.

 

Even chart chasers can digest the massive rally in Disney (DIS) shares followed by the abrupt flatlining. Note: DIS is down more than -10% from it's August 2015 peak.

 

 

By the way...

 

It's going to be a rough #LateCycle reality check for Macy's (M) investors this morning. The retailer printed lackluster earnings eerily reminiscent of the last cycle's rollover. (It has also already nosedived from its July 2015 peak – it's down almost -50% since then.)

 

 

It's happening around the world...

 

Check out European economic data:

 

 

And Italy's banking-heavy FTSE MIB leads the losers today. 

 

Thanks NIRP!

 

 

(For more, read the FT's piece about the German regulator who called NIRP a "seeping poison." Or Spain's 50-year Long Bond issuance as growth continues to slow.)

 

 

Rouding out the morning's #GrowthSlowing flops is China's Hang Seng:

 

 

Meanwhile, there's always a bull market somewhere...

 


#TheCycle

Client Talking Points

YEN

On the other side of making a call to short SPY and Japanese Equities yesterday, we signaled buy Japanese Yen again. This is purely a flow idea on the central-market-planning #BeliefSystem breaking down; we have Yen going back to at least 105-106.

GOLD

Gold signaled overbought on the NFP #Slowing print last week, corrected to @Hedgeye $1,255 TRADE support, and bounced; no resistance to $1306. With the UST 10YR at 1.75% and falling, all-time lows in long-term yields remains our long Gold catalyst.

ITALY

Italy did the 1-day bounce thing then straight back down this morning, leading losers in Europe -1.9% taking the MIB Index crash to -27% since Global Equities peaked in July 2015. The MIB is an important proxy for NIRP crushing the banks.

 

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

Asset Allocation

CASH 60% US EQUITIES 2%
INTL EQUITIES 0% COMMODITIES 8%
FIXED INCOME 26% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
XLU

As our Growth, Inflation, Policy model is oscillating between tracking in quad 3 and 4 for the second quarter, we’re sticking to core positions that perform well when growth is slowing and the yield curve is flattening:

  • QUAD3: Growth Slowing, Inflation Accelerating
  • QUAD4: Growth Slowing, Inflation Decelerating

 

The model signals that growth is slowing either way, and we expect a continuation of bond market discounting late cycle, growth-slowing. An allocation to Long Bonds (TLT, ZROZ) and Utilities (XLU) keeps investors out of the way of guessing which way assets levered to inflation will move next. The yield spread 10s-2s moved this week like it is headed toward taking out YTD lows. To be clear, this is NOT an indication that growth is back.

MCD

McDonald's (MCD) reported 1Q16 earnings on April 22nd that beat consensus estimates. The quarter serves as continued proof that the comeback story is in full swing.

 

The big question is where MCD is headed in terms of their national value platform. They had the McPick 2 for $2, then 2 for $5, now they have shifted to the monopoly promotion. McDonalds regaining a consistent value message is key to their success, and they know this. Additionally, we have another two quarters of tailwind from All Day Breakfast before we begin to lap it.

 

McDonalds’ recovery has been nothing short of extraordinary and has been a great source of alpha for all of its holders. We continue to like the name on the LONG side given the strong fundamental turnaround and the style factors that we love, big cap, low beta and liquidity.

TLT

#GrowthSlowing remains our call here in Q2. How do we know growth is slowing (ex. being validated by Treasury bond market and XLU outperformance)?

 

We look at every relevant data series on a rate-of-change basis to analyze a sine curve. Taking a look at our analysis of Y/Y Non-Farm Payroll growth, a clear cyclical picture develops. Mainstream media and other sell-side sources who talk about guessing the sequential NFP number are pursuing a fool’s errand (a confidence interval that is very wide) in terms of positioning into a number. We call this “open the envelope risk."

 

Rather, constructing a sine curve of the rate of change in NFP growth gives us a clear visual that employment growth peaked (in Feb. 2015), and it’s not recapturing that growth rate in this cycle. So whatever the sequential number is M/M, we know where this series is headed. And, when considered with every other relevant data series, we have a clear empirical view on where the U.S. economy is positioned in the economic cycle.

Three for the Road

TWEET OF THE DAY

**NEW VIDEO

REPLAY | About Everything: Does Cable Have a Future? https://app.hedgeye.com/insights/50829-about-everything-does-cable-have-a-future via @HoweGeneration

@Hedgeye

QUOTE OF THE DAY

It ain't over 'til it's over.

Yogi Berra

STAT OF THE DAY

The year-to-date count of retail bankruptcy in the U.S. is ahead of the full-year Chapter 11 tally for each of the past six years.


Morning Bullets 5/11/16

Clinton - Is it June 7th Yet? Cruz's Cornhusker Comeback? Digging Out of Debt 

 

IS IT JUNE 7 YET?:  With Bernie Sanders' victory in WVA last night, Hillary Clinton is looking to run the clock out this month - without attracting further damage to her general election chances.  We've said before that the May primary calendar favors Sanders, but with the Republican field cleared and Donald Trump the presumptive nominee Clinton is unexpectedly (and unpreparedly?) finding herself under attack by him as well as Sanders - precisely at the time when she needs to unite the Democrats. Sanders is poised to win in OR next Tuesday and Clinton is now refocusing her attention on KY (also next Tues) where the coal comments that cost her WVA - which she won in a landslide in 2008 -  are now cutting into her support there.

 

CRUZ'S CORNHUSKER COMEBACK? : Well that was close for a moment. Despite Washington's dissatisfaction with Trump as the presumptive nominee and Republican leadership torn on whether to publicly back him, the WV and NE primaries offered voters a chance to rebuke Trump as the standard-bearer - and they took a pass. Worse yet for Cruz, who offered up ahead of results that if he won he may return to the race, he's now a) lost and then b) lost again preemptively. Ouch.

 

CLINTON TALKS TYCOONS : The Clinton campaign floated a new attack on Trump, painting the billionaire as a heartless tycoon. No doubt this attack is an attempt to convince the "Never Hillary" Democrats, who feel Trump may provide the shakeup they so desperately want from Bernie, that Trump is less Bernie-like than Hillary. The jury is still out on whether this new approach will actually work to bring Bernie Democrats back into the fold (or backfire a-la-Goldman-speeches).

 

KING OF DEBT : Trump continued to blast past criticisms that his tax plan would raise the national debt by $45 trillion over 20 years and provide $3.2 trillion in tax breaks to millionaires, emphasizing that everyone would get tax breaks. He suggested he would increase taxes on the wealthy, but then said they would "pay less than they pay now" and then "On my plan they're going down. But by the time it's negotiated, they'll go up," which definitely cleared things up.  Ahem.  He also reiterated his title as "King of Debt," with comments suggesting a Trump Administration might not fully honor Treasury Department bonds. Never one to create confusion, Trump clarified to, "I understand debt better than probably anybody. I know how to deal with debt very well. I love debt -- but you know, debt is tricky and it's dangerous, and you have to be careful and you have to know what you're doing." We're sure global markets are breathing a sigh of relief for the clarification.

 

I'll TAKE 16 TONY'S AND A BAILOUT : Lin-Manuel Miranda may be able to convert a bunch of fuddy-duddies into theatre goers, but not even his talents can cajole Congress to rescue Puerto Rico from its free fall (if you have not seen his original song on the subject, it's worth a watch).  Legislation that would create an oversight board to help manage PR manage its debts remains delayed, though we expect introduction as early as today. You'll recall previous efforts were blocked by the House who've grown tired of taxpayer-funded bailouts. Version 2.0 is being drafted with those concerns in mind, and the sell job is in full throttle mode. As if Republicans' electoral problems were not enough, with nearly five million Puerto Ricans living in the U.S., inaction would seem to be as mortal as a shot from Aaron Burr's pistol... 

 

ALBERTA NOT AL-NAIMI:  The big news for oil markets is the ongoing Canadian fires that have temporarily shut down production in Alberta's oil sands and not the departure of Saudi oil minister Al-Naimi.  Halfway across the globe in Riyadh, King Salman reshuffled his cabinet resulting in the departure of long-time oil minister Ali Al-Naimi. He was replaced by former Aramco CEO Khalid Al-Falih who is highly respected and well-known in the global energy community. As our senior energy analyst Joe McMonigle wrote on Sunday, a change in oil ministers will not mean a change in oil policy. We expect the Saudi's to continue their market share policy at least through 2016 and do not foresee any big change at the upcoming June 2 OPEC meeting.

 

 


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