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Capital Brief: GOP Tiptoeing Towards Trump ... & DNC Infighting

Takeaway: Ryan Tip Toeing Toward Trump; Dems Dropping Debbie; Almost There

Capital Brief: GOP Tiptoeing Towards Trump ... & DNC Infighting - capital brief

 

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 sales@hedgeye.com.

TIP TOEING TOWARDS TRUMP

 

Capital Brief: GOP Tiptoeing Towards Trump ... & DNC Infighting - trump 44

 

Looks like Speaker Paul Ryan will take his time deciding when to endorse Donald Trump despite rumors that he was on the verge this week. Ryan and Trump remain deeply divided over major policy issues, particularly free trade and immigration, but Ryan allies feel the longer he holds out, the more damage he may inflict on the party’s chances this fall.

PLOTTING THE PLATFORM 

 

Republicans have chosen to name three conservative members to lead the committee that will decide this summer’s convention platform. Moves were made after Trump mentioned he’d like to see changes made to the agenda that has essentially stayed the same since the days of Ronald Reagan. Look for issues that have united Republicans in the past to be highlighted; a strong party platform is important for unity going into July as well as corralling corporate convention sponsors and major donors already agitated by Trump’s views and commentary.

DEMS DROPPING DEBBIE?

 

Capital Brief: GOP Tiptoeing Towards Trump ... & DNC Infighting - bernie sanders 44

 

High level Democrats are discussing whether or not Rep. Debbie Wasserman Shultz (FL) should step down as DNC chairwoman before the big blue party in July. Democrats feel that Shultz has been too disruptive in uniting the party and whether her continued and veiled support for Hillary Clinton muddies the water for future discussions and negotiations. Adding to that, her most recent squabble with Bernie Sanders (we lost count) over rigging the system only adds fuel to the fire.

ALMOST THERE

For those of you keeping score...with his win in Washington State, Trump finds himself just a handful of delegates shy of the Republican nomination. He now holds 1,229 of the 1,237 delegates needed to clinch.


A Special Update On Our Tiffany SHORT Call

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."

Editor's Note: Below is an institutional research note on Tiffany (TIF) written by Hedgeye Retail analysts Brian McGough and Alec Richards following the company's earnings this week. They outline why a combination of horrible results and arrogance have caused the stock to decline over -3% so far this week.

 

A Special Update On Our Tiffany SHORT Call - tiffany box

TIF | It’s Time To Man-Up

 

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).

 

A Special Update On Our Tiffany SHORT Call - TIF image


A Closer Look At Today's Durable Goods Data

Takeaway: Headline Durable Goods orders jumped +3.4% MoM and improved to +1.9% YoY but the internals were less sanguine.

A Closer Look At Today's Durable Goods Data - economic indicators cartoon 02.24.2016

 

Hiding in plain sight behind Wall Street's fallacious "all is good" narrative is U.S. economic reality. A deep dive into today's durable goods data confirms our dour outlook for U.S. growth.

 

Below is analysis from Hedgeye U.S. Macro analyst Christian Drake in a note sent to subscribers earlier this morning:

 

"Headline Durable Goods orders jumped +3.4% MoM and improved to +1.9% YoY but the internals were less sanguine with the bulk of the gain stemming from the +65% MoM increase in commercial aircraft & parts. Durables ex-Defense and Aircraft, which is most aligned with what actual households buy, rose +0.6% MoM but remains down -0.4% YoY.  

 

Meanwhile, Core Capital Goods fell MoM for a 3rd consecutive month, dropping -0.8 sequentially and holding at -5% YoY -  continuing the epic run of declining capital spending with negative year-over-year growth in 15 of the last 16 months."   

 

Here's the detailed breakdown in the chart below

 

Click image to enlarge

 

A Closer Look At Today's Durable Goods Data - durable goods 5 26

 

Next up Updates on GDP and corporate profits.

 

 


Early Look

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'We're In A Position Of Extreme Vulnerability' says Neil Howe

Takeaway: America is in a "position of extreme vulnerability."

Conventional wisdom suggests economic and related tensions wrought by The Great Recession are in the rearview. All is good. Sunny skies for miles.

 

Not so says Hedgeye Managing Director and Demography Sector Head Neil Howe, who kicked off John Mauldin's Strategic Investment Conference in Dallas with a bang. "Our first presentation from Neil Howe on the First Turning was the perfect set-up... and truly was a show stopper," Mauldin wrote following Howe's presentation.

 

In the wide-ranging interview below following his speech, Howe explains why America is in a "position of extreme vulnerability" based on "the mood of the electorate" and "widening generational inequity." He discusses everything from the rise of polarizing political figures like Donald Trump and Bernie Sanders to the Fed's "destructive monetary policy."  

Click to watch


3 Nasty Looking China Charts

Takeaway: All clear in China? Not by a long shot.

Editor's Note: As our Financials analyst Josh Steiner remarked on The Macro Show today, "Markets were in free-fall earlier this year and pundits were saying a recession was imminent. Then, in mid-February, it all stopped. One of the reasons is that China started pushing credit like crazy, reflating commodities, emerging markets and the U.S. stock market. But China cannot keep rapidly growing credit like it has been. China is now an enormous systemic risk to the global economy."

 

3 Nasty Looking China Charts - China cartoon 05.09.2016

(STEEL) free fallin'

"Chinese Steel – Risk measures were subdued last week. However, the price for Chinese steel continued to drop, falling by another 5% last week, bringing the month-over-month change to -21% as the mid-February to mid-April artificial reflation trade unwinds. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy." 

 

3 Nasty Looking China Charts - steiner3 5 25

GOT nON-PERFORMING LOANS?

"Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% 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."

 

3 Nasty Looking China Charts - steiner2 5 25

Debt, Debt & More Debt...

"Chinese Credit Outstanding – Chinese credit outstanding amounts to 148.7 trillion RMB as of April 30, 2016, which is up +11.9% year over year. Note: this data is only updated monthly."

 

3 Nasty Looking China Charts - steiner1 5 25

 

*This is an excerpt from an institutional research note. To access our research email sales@hedgeye.com.


Liquidation Risk, Durable Goods, #UKSlowing

Client Talking Points

Liquidation Risk

Bloomberg this AM: hedge funds have lost 1.8 percent this year, according to Hedge Fund Research's global index, the poorest performance since 2008.  The industry had net outflows of $16.6 billion in the past two quarters, the most since 2009, according to HFR.  In 2015, 979 funds closed, more than any year since 2009, according to the research firm.  To the extent redemptions and closures accelerate, expect to see crowded names and sectors like Kraft, Time Warner, Consumer Discretionary and Tech take a hit, while under-owned names and sectors like Utilities, Energy and Materials continue to thrive.

Durable Goods

Headline Durable Goods orders jumped +3.4% MoM and improved to +1.9% YoY but the internals were less sanguine with the bulk of gain stemming from the +65% MoM increase in commercial aircraft & parts, which is most aligned with what actual households buy - rose +0.6% MoM but remains down -.4% YoY.  Meanwhile, Core Capital Goods fell MoM for a 3rd consecutive month, dropping -0.8 sequentially and holding at -5% YoY -  continuing the epic run of declining capital spending with negative year-over-year growth in 15 of the last 16 months.   

 

#UKSlowing

The Financial Times was out w/ a piece this morning citing the risk to the FTSE All-Shares Index due to the downturn in the U.K. economy, which we’ve been forecasting since late last year and is being corroborate by every key category of high-frequency data slowing on a trending basis. This mainstream media’s first mention of economic risk to U.K. assets that doesn’t have anything to do with Brexit. Expect such headlines to accelerate even beyond next month’s likely “remain” vote.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/25/16 58% 2% 0% 10% 28% 2%
5/26/16 58% 2% 0% 10% 28% 2%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/25/16 58% 6% 0% 30% 85% 6%
5/26/16 58% 6% 0% 30% 85% 6%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
GLD

When Janet does have to acknowledge the deterioration in U.S. growth, we expect the policy shift to be dollar bearish on the margin. And, to the contrary, if the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway. And there’s nothing Gold (GLD) likes more than a falling dollar and falling interest rates which is why we added it to the long-side of Investing Ideas this week. Remember, this is the same week various Fed members were in public calling for a rate hike with the worst jobless claims print since 2012. #GoodLuck.

MCD

McDonald's (MCD) continues to evolve. The company's latest step is testing never frozen burgers at 14 units in the Dallas, TX area. This initiative could give them the ability to compete with better burger concepts such as Shake Shack, In-N-Out and Five Guys.

 

Meanwhile, there has been chatter about the lack of identity for their value platform in 2Q16. MCD is truly still in the testing phase as to what their national value message will be. We can appreciate the fact that they are testing multiple formats before fully committing.

 

In the meantime, the tailwind from all-day breakfast will continue to propel growth going forward, until lapping this initiative in 4Q16. We continue to favor MCD as one of the best LONGs in the market right now, due to actual growth and style factors that are friendly in volatile markets.

TLT

If you haven’t yet, you got another chance to buy long-term Treasuries at lower highs this week. If you’re already long of Long Bonds (TLT, ZROZ), stick with it. None of the relevant data released this past week suggests that growth could inflect and trend positive:

  • Thursday’s Jobless Claims Report was the worst print, in Y/Y rate of change terms, since 2012, and it was the fourth consecutive week of increasing jobless claims
  • Industrial Production declined -1.1% Y/Y for April, marking the 8th consecutive month of Y/Y contraction: #IndustrialRecession

Tying together a continued deceleration in growth with policy expectations, the most important callout is that our expectation for growth in Q2 is well below consensus and Fed expectations (which have been horribly inaccurate). 

Three for the Road

TWEET OF THE DAY

Had an interesting discussion on The Macro Show with @KeithMcCullough!

@HoweGeneration

QUOTE OF THE DAY

"There are three types of baseball players: those who make it happen, those who watch it happen, and those who wonder what happens."

-Tommy Lasorda

STAT OF THE DAY

John Kruk batted exactly .300 over his 10 year MLB career. In his rookie season, he batted .309


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