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Around The World In 5 Charts

Takeaway: "No need and no possibility for helicopter money," BOJ's Kuroda told BBC. Add in the ECB presser today, central planning nonsense abounds.

Around The World In 5 Charts - World Market No 12.16.14 large 

 

As the hopes and whims of investors swing wildly through markets, these delusions become increasingly disconnected from economic reality. 

 

A case study in delusion: Japan. "No need and no possibility for helicopter money," BOJ head Haruhiko Kuroda said in a BBC Radio 4 program that was broadcast Thursday. “At this moment, the Bank of Japan has three options with quantitative and qualitative easing with negative interest rates."

 

The Yen jumped 1.1% on the news. Now the WSJ reports this broadcast was recorded in June and FX markets backed off.

 

This is all getting rather silly...

 

We reiterate today that the supposed catalyst "helicopter money or bust" is not a risk management process. Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today: 

 

"Heli-Ben money hits a wall with Kuroda saying “no need or possibility for helicopter money” – doesn’t that suck. Reiterating short Nikkei as the Yen just popped +1.1% on that after failing to break-down through 108 vs. No support for Nikkei to 14,993."

 

While We're on Central planning nonsense...

 

ECB head Mario Draghi kept rates on hold today but had a number of innocuous things to say about the Euro-area economy, like this gem:

 

"Headwinds to economic recovery in euro area include outcome of UK referendum and other geopolitical uncertainties."

 

And then Draghi suggested that a "public backstop" would be "very useful" to help struggling European banks. Furthermore, Draghi added that the bad debts in Italy’s banking sector are a “very big problem.” Italian bank UniCredit popped 4% on the news (after falling more than -60% in the past year) along with other bank related stocks pushing the FTSE MIB index up marginally today. 

 

Around The World In 5 Charts - Italian bank cartoon

 

McCullough dissects the latest out of Europe:

 

"Protracted recession pending in Europe? What’s the catalyst to get Italy, France, etc. out of one? Reiterating the short call on both European Equities (Germany, Spain, and Italy… in that order) and the Euro vs. USD (Italian stocks haven’t joined the helicopter party, -0.3% this am and -30% vs. where you could have bought them at this time last year)."

 

It's getting ugly out there...

 

"Turkey's president has declared a state of emergency for three months following Friday night's failed army coup," the BBC reports. "The emergency allows the president and cabinet to bypass parliament when drafting new laws and to restrict or suspend rights and freedoms." (For more analysis on what to expect out of Turkey, check out Hedgeye Potomac National Security analyst LTG Dan Christman USA Ret.  "What Comes Next After The Failed Coup In Turkey.")

 

In COMMODITIES MARKETS...

 

The #StrongDollar ravaging continues.

 

  

Meanwhile, Here at home...

 

Equity markets are within spitting distance of all-time highs. But, as we've pointed out before, the recent stock market rallies have come on declining total market volume. Not good.

 

  

In these uncertain times, What do you buy?

 

On pullbacks... Gold (GLD), which has developed a seemingly antithetical correlation of 0.9 to the U.S. dollar over the last 30-days. Note: Gold has been working all year (and remains a Hedgeye Long call):

 

 

As our outspoken CEO Keith McCullough is fond of saying, "Risk happens slowly at first, then all at once."

To be crystal clear, market risk is rising.


TIF | Watching and Waiting

Takeaway: Weak watch demand. Weak global demand at every price point. That's a bad omen for TIF ahead of 2Q, where we should see another guide down.

The Swiss Watch Exports numbers are the best indicator that we can find to gauge the global demand for luxury items - particularly jewelry. Of course watches have their very own demand constraints and TIF is underexposed to the category  -- but the iWatch, FitBit, and other connected fitness wrist wear we'd argue don't compete with items priced above $3,000, which oh by the way was down 19.5% for the month.

 

Here's what we think it means for TIF:

 

Looking at the trend in TIF comp sales vs. the global Swiss Watch exports numbers paints a pretty tight correlation between the two metrics, with the two most recent Swiss Watch export numbers showing a sequential deceleration in the YY trend. The only problem is that TIF Consensus estimates currently expect a reacceleration in comp trends sequentially on a 1yr and 2yr basis for 2Q16 and the balance of the year. With a positive comp bogey embedded in numbers for 4Q. We think that's a pipe dream.

 

All in, we think TIF takes numbers down again which will mark the eighth time in two years that the company readjusted guidance to the downside. We're at $3.23 in 2017 vs. the street at $3.92. And we think the TIF story from here is much more tied into weak consumer demand for the core product offering with a FX/tourism kicker. So what's a company putting up the worst comp numbers in retail (ex-Lumber Liquidators) worth? Because it's TIF, we'll give it a little bit of a luxury buffer - so low teens P/E multiple gets us to a $42 dollar stock on 2017 numbers. That's 30% downside from here.

 

TIF | Watching and Waiting - 7 21 2016 TIF chart1


DKS | Too Late? Nike Says No

Takeaway: Yeah, DKS has been a champ. But people are missing the magnitude and duration of how long this name could work.

Here’s what’s top of mind for us this morning.  

 

We were asked yesterday whether it’s too late to go long DKS. After all, the stock has been a monster – up 44% for the year-to-date, and 16% since Sports Authority filed on March 2nd.  In addition, the name has become a hedge fund hotel and no longer looks cheap at face value.  But still, we feel good about being involved on this one and even adding here. Would we rather add more on dips? Absolutely. But we’re not sure we’ll get ‘em.

 

First off, yes, the stock is up 44% ytd, but it’s flat versus a year ago – about in line with the market. That’s no reason to buy a stock, but it is an important consideration.

 

Our key thoughts are focused around the Sports Authority bankruptcy. No, that’s not exactly a proprietary idea. It explains away virtually all of the stock move from $34 to $50. But what we think is a unique thought is the dominoes that were set in motion by TSA’s demise, how vendors (esp Nike) will certainly respond, and most importantly, the duration over which this will benefit DKS. If you’re looking for a 2-3 quarter payback from TSA, and the stock, you probably got it. But the reality is that this benefit is likely to last 3-5 years, and should allow DKS to out-comp every peer except the internet, and retest a peak 9% margin level – which is 2 full points above the consensus. That translates to about $6 in earnings, versus the Street at $4.25. As lofty as this may sound, we’re likely looking at a 20x+ multiple on that number, or $120. Yes, that would make this a 3-year double.

 

We’re still doing the research to gain conviction in that number, but think that it’s more likely it gets there than where the Street is today.

 

The Nike Dynamic

People often forget the following facts. And they ARE facts.

 

1) First off, this is a generational shift in product distribution. There are not many ‘generational events’ to invest in out there.

2) Yes, DKS has been waiting for this to happen, but mark my words, it also helped cause it to happen (a la BBBY/Linens, and Best Buy/Circuit). We’ve been critical in the past about DKS’ business model, but never about Stack and his management team. Yes, it blew up its golf business. But as it relates to the core sporting goods business, there’s really no one better.

3) Nike made a tangible decision to invest in e-commerce as far back as 2005. That’s when its capex for DCs, warehousing and e-comm infrastructure started to grow, and when we started to see accelerated SG&A in e-comm headcount.

4) At that time – whether Nike outwardly admits it or not (or even realizes it) the company started to stuff the US wholesale channel to pay for its e-comm investments.

5) In the ensuing decade, its sales penetration inside Foot Locker, for example, went from 50% to 73%. Yes, 73% of FL’s inventory purchases were/are Nikes. There’s only one way for that number to go – and it’s down.

6) Sporadically over the same time period we saw the Sporting Goods channel begin to evaporate (‘08/09, and this year). Make no mistake, Nike absolutely positively NEEDS this channel for its US business to grow.

7) People are all jazzed up about the first round of Nike shoe walls that will be in place at DKS by end of year. They should be. But what they should be more excited about is the comp growth it will bring to DKS in the form of higher ASPs for the better part of 3-5 years. There’s a huge impact there on both sales and margins, as FL showed us in this economic recovery.

 

Keep in mind that this is a zero sum game. In other words, TSA had roughly $3bn in revenue. Half of that will evaporate, and at best we’re looking at about $500mm-$750mm in revenue directly from TSA. But the bigger kicker that people won’t count on is a similar contribution from better Nike product across the portfolio – and it should come at a higher margin via ASP and better traffic.

 

In the end, Foot Locker loses. Finish Line loses. Hibbett Sports loses. All will have 2 Nike-issues. 1) no longer seeing an increase in Nike (which is a negative) and 2) likely seeing a decline – especially FL.

 

Nike wins as it secures a better US distribution partner, though much of this will be robbing Peter to pay Paul.

 

DKS is the biggest winner, as quantified above.

 

Important Note

One of our key points on Nike is that the company will hit $11bn in e-comm/DTC revenue versus guidance/The Street at $7bn. THE KEY to Nike accelerating its progress will take the shape of some form of US channel conflict. We started to see that with FL on its last conference call. It should get meaning fully worse, which will cause Nike to slingshot the part of its business that actually should be growing – and that’s not brick and mortar.  The point here is that the anecdotal comments from retailers are likely to be increasingly anti-Nike. We’re fine with that. In fact, we want to see it. But it causes us to have a ‘buy on dips’ positioning as it relates to Nike. 


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Daily Market Data Dump: Thursday

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, rates and bond spreads, key currency crosses, and commodities. 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: Thursday - equity markets 7 21

 

Daily Market Data Dump: Thursday - sector performance 7 21

 

Daily Market Data Dump: Thursday - volume 7 21

 

Daily Market Data Dump: Thursday - rates and spreads 7 21

 

Daily Market Data Dump: Thursday - currencies 7 21

 

Daily Market Data Dump: Thursday - commodities 7 21


CHART OF THE DAY: The Top 10% vs Everyone Else

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... In today’s Chart of The Day is slide 48 of our current Q3 Macro Themes deck. It’s titled “The High-End Matters” and it shows that the Top 20% of US Households account for 39% of US Consumer Spending. That’s not a typo."

 

CHART OF THE DAY: The Top 10% vs Everyone Else - 07.21.16 EL Chart


High End Money

“I like my money right where I can see it: hanging in my closet.”

-Carrie Bradshaw

 

Post Trump parading around Cleveland, we’re all well aware of what it looks like to be big time. And I mean big time. Big Daddy Rich. Money oozing out of their flow. Really expensive shoes and suits. These people are so rich, they don’t need helicopter money.

 

Admittedly, it doesn’t always go over well… but in all of my macro meetings these days, I delve into what I think is one of our better ideas in Consumer Discretionary right now – shorting a certain kind of rich people.

 

And not just people who have money – that means we’d be shorting ourselves! I mean the people who, fully levered and lathered up in the illusion of their “wealth”, are about to meet their maker – it’s called mean reversion.

 

High End Money - trumppic

 

Back to the Global Macro Grind

 

In today’s Chart of The Day is slide 48 of our current Q3 Macro Themes deck. It’s titled “The High-End Matters” and it shows that the Top 20% of US Households account for 39% of US Consumer Spending. That’s not a typo.

 

Looking at the percentage of annual aggregate US consumer expenditures by decile of income:

 

  1. Top 10% = 23.5% of consumer spending
  2. Ninth 10% = 15.5% of consumer spending
  3. Bottom 30% = 10.6% of consumer spending

 

Yeah. The Top 10% is killing it. They own 84.5% of US Financial Assets. The poor bastards in the Bottom 50% (lots of peeps) own 1%. That’s probably why plenty of card carrying Republicans are becoming politically “flexible” enough to associate with Trump.

 

You see, when you have to start every sentence with how big time you are – you know, how rich and famous … and generally just nailing it in everything that you do… there’s some implied insecurity in that. And there should be.

 

Another chart that we often show to remind you of the mean reversion risks associated with someone who acts like they are big time (all of the time) is US Household Wealth as a % of Disposable Income:

 

A) It just rolled off an all-time high of around 655%

B) When it rolls off #TheCycle high, it always crashes

 

To be fair, there’s always a chance that “it’s different this time”… and nothing (other than US Equity Volume, European and Japanese Equities, etc.) ever crashes again… but I don’t buy lottery tickets.

 

Measurable mean reversion risks complimented by real-time data is how I roll.

 

On an economy-wide basis, the “wealth effect” (i.e. how sweet the Trump Jr. slick back flow is looking at the highs) is in the process of rolling off its Q1 2015 #CyclePeak. That’s why the Fed has been desperate to protect the SPY house.

 

Newsflash: the super-high-end ballers I’m talking about didn’t make it with their daddy’s Long Bond fund. When their net worth slows, their spending slows. That’s why US Luxury Goods Spending is running at a cycle-low of down -2.7% year-over-year.

 

That’s probably why you’re seeing headlines like:

 

  1. “Christie’s and Sotheby’s High-End Art Sales -25-33% year-over-year”
  2. “This is bs. We demand helicopter-money!”

 

One of the super-rich places that my colleague and Sector Head of Demography Research, Neil Howe, has written about lately is Silicon Valley. I know. They know everything.

 

I’m sure they know Tech Employment is slowing and VC funding to the area was down -14% year-over-year in the 1st half of 2016. There’s definitely not a bubble in “wealth” there.

 

That said, with the recent addition to our Research TeamTechnology Sector Head, Ami Joseph – we’re going to ham & egg it for the next traverse of Nasdaq 5100 and see if we can find ourselves some obscene corporate behavior to sell into.

 

Not to be confused with the Nasdaq all-time-bubble-high that you could have got sucked into when “the chart looked good” at this time last year (Nasdaq 5219 turned into a -19.3% draw-down by FEB 2016), this one is a lower-high on decelerating volume.

 

Yep. Yesterday’s Total US Equity Volume was down -17% and -22% vs. it’s 1-month and 1-year averages, respectively. At the all-time highs, who is crushing it? Or, are they about to get crushed again? From this stage of #TheCycle, crush or be crushed, I guess.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.36-1.65%

SPX 2125-2184

NASDAQ 4

VIX 11.53-16.93
USD 95.99-97.45

Gold 1311-1370

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

High End Money - 07.21.16 EL Chart


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