Rumors about helicopter money aside, Japan's Nikkei is still down 19.8%, inclusive of last week's 10% pop.
Takeaway: In the last seven days of trading, the Nikkei is up +10.7% and USDJPY +5.5% on helicopter money speculation. That's a mirage.
Last week was an undoubtedly good week for Japanese equity bulls.
Conflicting rumors from Japanese officials stoked "helicopter money" speculation and the bulls cheered. In the last seven days of trading, the Nikkei is up +10.7%. Unsurprisingly, the Yen weakened (USDJPY: +5.5%, over that same period). But hang on...
Take a deep breath.
Before dogpiling into Japanese equities, consider the broader trend not dictated by helicopter money hot air and speculation. The Japanese economy continues to slow. Today, the IMF lowered its 2016 estimate for Japanese growth to 0.3%, from 0.5% prediction in April. Not good. That also explains why the Nikkei is down -19.8% in the past year, inclusive of the recent pop.
The BOJ has been desperately trying to devalue the Yen in an effort to stimulate sluggish economic growth. That's the standard central planning playbook but it isn't working. In the past year, the yen has strengthened (USDJPY is down -14.6%), despite the ¥80 to ¥90 trillion in quantitative easing. That's roughly equivalent to 16% of Japan's gross domestic product. Again... not working.
Can Japanese central planners actually stimulate economic growth or is helicopter money merely a mirage?
Takeaway: RH miss just became very improbable. But moreso we think CEO buy speaks to a tighter org chart, which outweighs any business initiative.
Conclusion: We like Gary Friedman’s (RH CEO) stock purchase for a couple of reasons – some obvious, some not…
1) He bought his stock with just two weeks left in the quarter when he knows 95% of his revenue for the period – remember that a purchase today won’t be recognized as revenue until the product is delivered – sometime in 3Q.
2) The purchase comes at a time when the market is holding a quarter of the float short despite the stock trading at all-time trough price AND valuation. Furthermore current value is a third that of Wayfair, which has yet to earn a red cent.
3) Keep in mind that Friedman could have purchased the stock a week after the print (mid-June) at virtually the same price as we see today. But he waited…likely to ensure that everything management said to the street is playing out as expected. In other words, business trends are likely at or above what the company guided.
4) Most important to us is probably the hardest to extrapolate from a stock trade, and that’s the organizational solidarity. That sounds boring and academic, but things like store openings, new business lines, new territory penetration, the Waterworks acquisition, category ‘newness’, and about a dozen other business drivers mean squat to us if the right people aren’t in the right jobs, and are empowered with the right capital budgets and incentives to execute on the company’s vision. Here’s where we can go either way as it relates to the stock purchase. On one hand, it could be a gesture for internal constituents far more than Wall Street – specifically to give RH employees a confident message from their fearless leader and help stop additional attrition. The flip side is obvious…that Friedman finally has confidence in the team after watching the new roles he and the Board created, the promotions, and the layoffs affect the company at all levels of the org chart. Our inclination is that it is more the latter. Friedman is not one to cough up a cool million just to make people feel better. Our sense is that he himself is simply more confident about the org chart today than he did when he could have otherwise have made the purchase four weeks ago at a similar price.
ADDITIONAL FACTS and READ-THRU
The Facts: RH CEO, Gary Friedman, purchased 33k shares at an average price of $27.59 for a total outlay of $900k on Monday. This is the 2nd time that Gary has been active in the open market. The first time was back in September of 2014, following a reported comp and sales miss due in large part to the miss-execution of the Spring 2014 Source Book launch. In between there was a reported sale of $160k shares that will show up in most ownership screens, which was in fact a transfer of shares from Gary to his ex-wife as part of divorce proceedings. The circumstances behind this transaction couldn’t be more different given that we’ve seen $3.1bn in market cap evaporate over the past seven months before Gary stepped into buy shares vs. a 5% move from $82 to $77 the last time around. But, there were some limiting factors over the past few months which restricted management’s ability to step in and buy stock mainly – a) the company’s 2 month quiet period between FY15 year closing and reported numbers at the end of March, and b) the acquisition of Waterworks in the 1st quarter which all but chewed up the Senior Level transaction window.
Read-Throughs: This is the first positive data point we’ve seen come out of RH in 7 months. And the positive part of that is solely based on market inferences associated with Senior Level management making open market transactions. Now we are not saying this transaction is all for show, as Gary just threw down an additional ~$1mm bucks in a company where he has ~90% of his net worth invested does not equal a meaningless transaction. That plus the fact that we continue to be believers in the long term opportunity for the name.
But if we had to nitpick, we point to the fact that no one in the 2nd tier of Senior Management stepped in along with Gary to make a purchase. Heck, the only other insider to be active during the stock slide was one of the new board members, Keith Belling, who bought a $100k chunk back in late June.
Our rationale on that thought lies solely in the fact that much of the bear case for RH is tethered to the belief that a) RH doesn’t have the organizational depth to execute on its growth strategy, and b) Gary will blindly follow that strategy regardless of its merits. We at Hedgeye, are on the opposite side of that belief system, but we do think that a united front (as demonstrated by open market buy’s) would make a more meaningful signal to the market that the 2nd layer of depth fully backs the company’s often polarizing leader.
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On today's Macro Overlay, Hedgeye CEO Keith McCullough provides an update on what our predictive tracking algorithm is telling us about next Friday's GDP report and what this means for our high-conviction Investing Ideas.
Takeaway: A stronger dollar matters in the housing market because foreign demand makes up ~4% of total transaction volume and ~8% of dollar volume.
Editor's Note: Below is an excerpt from an institutional research note written last week by Hedgeye Housing analysts Josh Steiner and Christian Drake. To access our Housing team's institutional research email firstname.lastname@example.org.
According to the National Association of Realtors, International Homebuyers purchased $103bn of US real estate from April 2015 through March 2016. Five countries: China, Canada, India, The United Kingdom and Mexico accounted for 51% or $52.8bn. China was the largest buyer for the second year in a row, accounting for 27% or $27.5bn of all foreign home purchases during the survey period.
The U.S. Dollar is up 23% since July 2014 and, while gains have been more muted over the 12 months, currency headwinds continue to pressure purchasing power across key demand countries.
As shown in the chart below, the Strong Dollar has increased the Median Price of US Existing Homes in the local countries of the Top 5 countries anywhere from 10% to 22% YoY.
For more information on our institutional research email email@example.com.
Takeaway: Unconventional Convention; Rules Ruckus; Rallying Republicans;
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.
“I have noticed that nothing I never said ever did me any harm.”
The highly anticipated Republican convention kicked off last night with a solid celebrity B-list group of speakers and headlined by none other than Donald Trump’s wife, Melania - whose well-received maiden speech is now mired in controversy given stark similarities to Michelle Obama’s 2008 Democratic convention speech.
But this convention was supposed to be different – we all expected that - and instead of the usual emphasis on celebrities, the focus would then be centered on politicians who typically serve to give testimonials to the nominee and represent a passing of the torch for the party, but that is in short supply in Cleveland. Despite the, well, uneven start (more below), expect Donald Trump to grab the torch on his own and run with it.
The #NeverTrump crowd’s last-ditch effort to invite discord and derail Trump’s nomination was squashed after their attempt to force a roll call vote on the convention rules failed. The group submitted signatures from a majority of delegates in more than the required seven states to force a recorded vote from all 2,472 delegates. However, a number of delegates under pressure from the party reportedly removed their names, allowing the rules package to pass by a chaotic voice vote.
#NeverTrump hoped to unbind pledged delegates from voting according to their state’s primary or caucus result and allow them to vote independently. Despite its failure, the spectacle of #NeverTrump’s last stand exposed the lack of unity in the Republican party, embarrassing Trump and diverting media attention away from his message and primetime speeches.
The ten billion dollar question heading into this week’s events is: can the party survive the convention and emerge unified and enthusiastic while scores of Republicans refrain from endorsing (or even mentioning) the nominee? Speaking to the Wisconsin delegation, Speaker Paul Ryan intimated that the party still needed to come together without mentioning Trump’s name once and while TX Senator Ted Cruz is set to participate in the festivities, we understand he will not endorse.
Top that off with OH Governor John Kasich’s very public dissing of Trump and the convention in his own backyard - which happens to be a battleground state. In fact, the only former Republican presidential nominee to attend is former Senator Bob Dole – the nominee from 1996. We haven’t mentioned the litany of excuses Members of Congress are using to stay away - from hiking the Grand Canyon to cutting the grass or even taking their kids to watch dumpster fires.
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