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Capital Brief | 3 Takeaways: Passing The Torch, Obama To Clinton

Takeaway: Passing The Torch; Mark of Kaine; Climbing Capital Hill;

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.

 

Capital Brief | 3 Takeaways: Passing The Torch, Obama To Clinton - JT   Potomac under 1 mb

 

“Things don't turn up in this world until somebody turns them up.”

-James A. Garfield

PASSING THE TORCH

Day three was immensely important for Democrats as it signified a passing of the party torch from President Obama to Hillary Clinton. In his speech, Obama emphasized Clinton’s vast experience as a leader in public office, touting her ability to adapt to any situation, while imploring voters to defend his legacy by electing her as president. VP Joe Biden vouched for Clinton’s character, recalling weekly breakfasts with Clinton, where he learned her true passions, intellect, and toughness.

 

Both hit on Donald Trump for his lack of substance and reluctance – even inability – to expand his limited knowledge of policy and international affairs, despite the information being at his fingertips. But the most vital speaker of the night was veep pick Tim Kaine, who introduced himself to an unfamiliar nation and highlighted the reasons why he was the right choice to round out the ticket.

MARK OF KAINE

In a year when the veep choice matters so much, two questions remain – can Kaine make enough of a positive impact and is he liberal enough to woo leftist voters? Clinton took the safe route by tapping Kaine as her running mate, but it’s yet to be seen if he’s too safe of a pick. His style is anything but electric and he really doesn’t ignite progressives or other party factions.

 

The Wall Street crowd is pleased with him because he is not Warren, and his pros ultimately outweigh his cons since VA is a highly contested swing state, his moderate views can corral undecided voters, and he speaks fluent Spanish. However, the pick is still a direct slap in the face to progressives as they feel they are not adequately represented.

CLIMBING CAPITOL HILL

Veep pick Mike Pence, a former congressman with close ties to the Hill, has helped Trump and his campaign step up its courtship of wary Republicans - and the efforts appear to be fruitful. The charm offensive comes after months of Trump picking on other Republicans and is aimed at rewarding surrogates who make the case for him around the Hill.

 

Pence is working hard to reel in Republicans who’ve kept an arm’s length – even extending an olive branch to those once against Trump. If this is any indication of how Pence will perform in the future, Trump has made the right decision in choosing him. It’s imperative he grows his army as he will need all the backup he can get in the coming months.


UUP: Adding PowerShares DB US Dollar Index Bullish Fund to Investing Ideas (Long Side)

Takeaway: We are adding the US Dollar to Investing Ideas today.

Editor's Note: Please note that our Macro team will send a full report outlining our high-conviction long thesis next week. Below is a brief summary of our new idea from Hedgeye CEO Keith McCullough.

UUP: Adding PowerShares DB US Dollar Index Bullish Fund to Investing Ideas (Long Side) - strong dollar

 

"There's the very short-term (which I was waiting for a pull back on and, luckily, just got one). Then there's the long-term (we've been bullish on the US Dollar since 2013).

 

Short-term, you get the GDP "is back, baby" (tomorrow). Long-term, you have #EuropeImploding (bearish Euro) and Japan going for a 28 TRILLION Yen fiscal stimulus...

 

Oh, and not that perma bulls need to be consistent on the prior narrative... but both the Chinese Yuan and Oil are breaking bad again (that's been the TREND) too.

 

Buy Red,

KM


Special "Super Show" Friday Morning at 9:00AM ET

a Must-see show Friday ... 9:00AM ET

 

 

 

 

In light of big economic news and recent market developments, Hedgeye CEO Keith McCullough is hosting a special Super Show Friday morning exclusively for subscribers. Keith will review the investing implications of the Q2 GDP report, discuss the "Top-3" things in his macro notebook, and update his current signals in Real-Time Alerts.

 

As always, he will answer your questions live. 

 


EVENT | Return of Short CAT To Best Ideas List, Last Leg?

Thursday, August 4th at 11:00AM ET

CLICK HERE to access the audio-only replay.

Watch the replay below:

 

 

 


EVENT | Restaurants Speaker Series: "Wall Street Meets Main Street"

Monday, August 8th at 11:00AM ET

Watch a replay below.

CLICK HERE to access an audio-only replay.

CLICK HERE to access the associated slides.

 

 


NKE/UA | Endorse This

Takeaway: NKE adding $3bn+ in endorsement contracts in a yr. Doesn’t keep pace with UA. Ante chip for growth just went up.

We think one of the more telling numbers Nike disclosed in its K is the $9.4bn in athlete endorsement obligations it has sitting off its balance sheet. There are particular implications not just for NKE, but UA and AdiBok as well. Here’s why…

 NKE/UA | Endorse This - 7 28 2016 Minimum Endorsement chart1

 

1) The magnitude of that number is massive. It’s $3.2bn higher than last year, the biggest increase on record by a factor of 2, and the largest percentage increase in a decade. NKE can thank the lifetime deal with Lebron James (rumored to be in the ballpark of $1bn) for at least a portion of that.

 

2) Why does this matter? Is it even a real number? Yes, it’s very real. It’s not on balance sheet, but it is just as real as the operating lease obligations that virtually every retailer in the US carries. These are actual obligations that have to be paid at some point in time, regardless of whether the company generates enough revenue to pay for them.

 

3) Is the $3.2bn increase a surprise? Well…yes, even we were surprised by the size – though we definitely expected a big increase. That’s because we’re coming off a two year period where UnderArmour came out of the blue and gave Nike several black eyes by endorsing the most memorable and inspiring sports stories of the year. That includes Steph Curry winning back-back NBA MVPS, Cam Newtown taking home NFL MVP honors, Tom Brady winning a Super Bowl, Spieth rolling in 2 majors, Andy Murray becoming tennis world #2, UA snatching up college endorsement contracts left and right (even our favorite…Yale), Lindsay Vonn taking home the World Cup skiing title in two disciplines, and Michael Phelps on tap for Rio.

 

4) The $3.2bn increase for NKE is meaningful given the sheer size of the incremental dollars, but in percentage terms the $466mm increase at UA equates to a 118% increase YY vs. just (and we say that somewhat sarcastically) 52% increase at NKE. That took UA minimum endorsement contracts as a % of Nike from 6% in 2014 up to 9% in 2015. For context it took UA about 5 years to close the gap by 300bps with Nike, and we just saw that happen in a year. The same year that NKE saw its biggest increase in sponsorship dollars in over a decade.

 

5) That tells us that the table stakes just got much richer, as the ante chip for growth from here is going to cost each of the brands more. Here are a few specific considerations for each company…

  1. NKE the company is like a gifted child that starts to act up when it’s bored in class. When competition picks up, that’s when we see the best from the company on the product side which is then woven into compelling sports related stories its sponsored athletes create. With the elimination of AdiBok as a serious threat, the brand needed someone to throw down the gauntlet in order for the brand to get the creative juices flowing – that appears to be UA. Yes, growth has become more expensive and will require a corresponding bump up in SG&A spend, which we think will be more than offset as the company takes GM into the low 50’s as it adds an incremental  $9bn in ecomm sales which come at a GM of ~70% vs. a traditional wholesale sale at 50%.
  2. UA – we’d characterize UnderArmour as the loser if the trend we see in athlete endorsement spend in 2015 becomes the new standard. It’s not only that growth to acquire new marketing assets is becoming more expensive as NKE and even AdiBok use deeper pockets to bid up UA’s contract terms, but when coupled with what the brand is doing on the real estate side (evidenced by the decision to occupy 53k sq. ft. on 5th Ave) it’s pretty clear that the brand is getting squeezed by both sides. That type of investment into a still healthy but decelerating top line equals margin compression. And it’s already showed up in numbers with 200+bps of margin deleverage in our model from ’14 to ‘16(e).

 

6) We’d go to the mat with anyone who claims that UA and NKE don’t compete against one another for talent (yes, many people make this case to us). The reality is that when we chart sponsorship obligations over time as a percent of sales, the trends are unmistakable for these two companies. Nike operates on a higher (more expensive) plane than UA. But in each of the past eight years, they have moved in exactly the same direction. Nike’s not worried about this. UA probably should be.

When we plot the minimum endorsement obligations for the brands vs. the minimum rent obligations for the key footwear wholesale partner in the US (FL), the three move more or less in tandem at slightly different scales. The alarming part of the most recent move for FL going the high-40s to the mid-50s in one year is that the retailer should benefit from increased marketing dollars shelled out by its wholesale partners in the way of free marketing spend. That, however, isn’t the case as FL needs to invest in its store base, SG&A, and CapEx now that the Nike tailwind has come to an end.

 NKE/UA | Endorse This - 7 28 2016 Lease Endorsement chart2

 

7) As a % of Demand Creation Spend, UA has become Nike. This chart is fascinating to us, as it shows how sponsorships went from 15% UA’s Demand Creation budget in its earlier years, and has essentially doubled to a level that sits on par with Nike. The bifurcation over the past two years isn’t because UA isn’t spending – in fact the growth rate in year 1 obligations for UA was up 41% in 2015 vs. 19% at Nike – but is skewed a bit by UA spending up on other marketing vehicles where NKE endorsement contracts have accounted for the lion’s share of growth in the demand creation bucket.

 NKE/UA | Endorse This - 7 28 2016 Contractual Sponsorships chart3


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