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Macro Meets Micro: Behind The Bursting Biotech Bubble

In this excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough and Healthcare analyst Andrew Freedman discuss the macro and micro fundamentals behind the bursting biotech bubble.

 

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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


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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. 


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


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