A sign of the times.
Takeaway: Trump Hitting Hard, Clinton Hits the Casinos, Cali Knows How To Party
Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email firstname.lastname@example.org.
Time to play hard ball. We knew it was coming, we just didn’t know when. Donald Trump doesn’t care about the issue or the context - he’s going ugly, early. Although the presidential primaries are cooling, they’re still not over as neither candidate is their party’s official nominee yet and they’re already crossing the line – to the extent that one even existed this cycle.
Trump seems to keep the surprises coming and one of his allies summed it up perfectly: “What Trump is going to do only Trump knows. Trump is not scripted, he’s not programmed and he’s not handled, but he can read, and he does know the Clintons.”
A storm is brewing.
“How does anybody lose money running a casino?”
Well, people do lose money at casinos, but that’s not what she was referring to as Hillary Clinton follows suit by going after Trump’s past and this time, we’re talking business. Clinton poked fun at the presumptive Republican nominee for his four businesses’ bankruptcies, including his famously failed Atlantic City casinos. Additionally, Clinton shined a light on Trump Mortgages, their role in the housing recession, and Trump’s nerve in rooting for the economy to fail.
Californians are registering to vote faster than ever before. More than twice as many voters have registered this year than in the same four-month period in 2012. The growing voter groups identify themselves as Hispanics and Millennials. Both are left-of-center groups, with one favoring Sanders and the other favoring Clinton.
CA is too blue for Republicans to be competitive in the fall, but look for a more engaged electorate to impact the Democratic race there in less than two weeks.
Takeaway: "When you call yourself a luxury brand, but your reputation on the Street starts to converge with Kohl’s, you know there’s a problem."
Shares of luxury retailer Tiffany (TIF) lost some of their luster today as the company slashed its outlook and reported that results had deteriorated on virtually every line of their P&L. Shares are down 1.6% today.
To be clear, Retail analyst Brian McGough has been ahead of the crowd. Since TIF was added to the short side of Investing Ideas, the stock is down -22% while the S&P 500 is up 5.2%.
Ahead of TIF's results today, here's what our Retail team wrote in a weekend update to Investing Ideas subscribers:
"Tiffany (TIF) reports 1Q earnings on Wednesday, May 25th. Looking at recent data points, it seems that this event is more likely to be negative than positive.
An update following the results...
Retail analysts Brian McGough and Alexander Richards minced no words this morning in a note to institutional subscribers:
"When you call yourself a luxury brand, but your reputation on the Street starts to converge with Kohl’s, you know there’s a problem... What we are sure of, however, is that this stock is still a short barring a massive correction today that erases a third of TIF’s market cap."
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During the live Q&A section of The Macro Show earlier today, Hedgeye CEO Keith McCullough provides a “stick with the process” pep talk for a subscriber worried about his short positions.
Takeaway: Despite the Fed's talk of rate hikes, we remain the bulls on Long Bonds (TLT).
"Unfortunately, the bond market isn’t buying into the hope that GDP is +2.5% here in Q2 (we’re still below 1%) – at 1.86% this am the 10yr Yield is signaling at 1.68% is still very much in play ahead of next week’s #EmploymentSlowing report," Hedgeye CEO Keith McCullough wrote in a note sent to subscribers earlier today.
Take a look at the 10-year Treasury since the Fed's December "rate hike."
The flattening of the 10s/2s yield spread to a year-to-date low is another explicitly bearish U.S. growth signal.
That's why we remain THE BULLS on Long Bonds (TLT).
Takeaway: When you call yourself a luxury brand, but your reputation on the Street starts to converge with Kohl’s, you know there’s a problem.
We don’t know what’s more surreal…Tiffany’s horrible results, its forecast accuracy, its seemingly blasé attitude towards consistently missing forecasts, the arrogance of its management team in addressing its issues, or lastly – it’s multiple. What we are sure of, however, is that this stock is still a short barring a massive correction today that erases a third of TIF’s market cap. Here’s our brief thoughts on each of the aforementioned points…
1) Horrible Results. There’s no ifs ands or buts about this. The company comped down 9% (or -16% on a 2-yr stack), with sales down in every region (excl. Japan easy comp). Margins were off by 256bp, and pre-tax income was down by 29%. Virtually every line of the P&L eroded sequentially in a very material way. But the balance sheet was no better. The days in inventory was 612, which was up 52 (!) days versus last year. To put that into context, TIF has to wait longer to convert a dollar of earnings into cash than Kohl’s, Target, JC Penney, Macy’s, Nordstrom and Wal-Mart -- combined. There are absolutely no redeeming financial characteristics here.
2) Forecast Accuracy. There are too many examples to fit here, but let’s look at the last two annual updates. On the Jan 2015 holiday update, TIF guided to FY15 $4.15-$4.20 in earnings, which was 15% below expectations at that time. By year end they reported $3.83. On this year's holiday update, it gave initial 2016 guidance of ‘minimal growth in earnings’, which just 4 months later is now guided to a mid-single digit decline, assuming back half improvement. Needless to say, we don’t think that back half improvement will come.
3) Complacency in Missing. Is it me, or has management grown seemingly comfortable in missing numbers? It really does not seem to bother them anymore. The only other management team we can think of that is this comfortable missing numbers is Kohl’s. KSS can’t be the affiliation a once-great company like TIF aspires to keep. But by its actions, you’d never know.
4) Arrogance. Ok…you just missed – AGAIN, guided down for the seventh time in two years, which just happens to be just two weeks after your CFO resigned. And all we get is what was likely a pre-recorded message by IR with no Q&A? TIF has one of the most stand-up IR programs in the business, but let’s face it…when you miss by this magnitude – and this frequency – you get the CEO on the phone, take your lumps, and stand accountable to your business. Heck, when Macy’s dropped a lousy quarter on the Street last November, Terry Lundgren (CEO) jumped on the call for the first time in almost a decade to show his confidence and support. So…we can’t expect this from Tiffany, but we can from Macy’s? The question here is whether TIF management really wants this to be a public company.
5) Multiple. First we heard from people that a ‘low 20s’ multiple is fair. Then ‘20x’. Then 17-18x was ‘cheap’. But what’s really the appropriate multiple for a company that is shrinking earnings at a mid-teens rate, and seemingly has no strategy to ever grow again sans a rebound by spending in US Tourist markets? The best we’d give it is a 10% discount to the market – or 15x. We’re well below the Street next year, which we think will be another down year. We’re looking at earnings of $3.25, vs the Street at $4.15. Give our number a 13-14x multiple and we’re looking at a stock about $20 lower than what we’ve got today ($40-$43).
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