prev

The Hedge Fund Draft: Would You Select Stan Druckenmiller Or Janet Yellen?

In this excerpt from The Macro Show, Hedgeye's Keith McCullough and Darius Dale discuss a hypothetical "Hedge Fund Draft", who they would (and wouldn't) pick, and why.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.


Capital Brief: Trump Turmoil... Is Time Running Out For The GOP?

Takeaway: Trump Trumoil; Continuing The Kahn Controversy; Time Running Out For Trump;

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: Trump Turmoil... Is Time Running Out For The GOP? - JT   Potomac under 1 mb

 

“Words without actions are the assassins of idealism.”

-Herbert Hoover

TRUMP TURMOIL

Donald Trump is losing support within Republican party - and his campaign - at a time when unity and consolidation should be a foregone conclusion. His refusal to back Speaker Paul Ryan and Senator John McCain is the latest salvo with no end in sight. Republicans are refusing to campaign with Trump and are denouncing him or even withdrawing their endorsements – with NY Congressman Richard Hanna being the first to announce that he’s throwing his weight behind Hillary Clinton.

 

To make matters worse, turmoil is the norm at Trump Towers these days with fresh news that senior campaign officials are either being fired or are beyond frustration with their candidate. Not a good time to reshuffle the decks with 96 days to go.

CONTINUING THE KAHN CONTROVERSY

We’re now entering day five of the Khan saga after Trump (and his son) let fly a series of comments about the Gold Star family of a fallen U.S. soldier whose father spoke out against him at the DNC. The rift is starting to take a toll on the Republican party just as they were feeling better about their chances to keep the Senate this fall. The sooner Trump moves off this issue (neither the Khan family nor the media should sit by the phone waiting for an apology), the sooner he and the party can address the elephant in the room - Republican unity.

TIME RUNNING OUT FOR TRUMP

Letting Trump be Trump worked for the Trump campaign in the Republican primaries and it even helped him make it through the convention with a decent bounce. Through each and every controversy his supporters have stood by him with abandon - but in reality, he will not win over Independents and undecideds growing his base and appealing to those outside the party without making some character changes. If he wants to win the general election, picking up these two voter groups has to be the top - if not only - priority. There’s no time left for Trump’s tirades and twitter tantrums.


5 Charts: A Macro Market Check-up With Hedgeye CEO Keith McCullough

5 Charts: A Macro Market Check-up With Hedgeye CEO Keith McCullough - World Market No 12.16.14 

 

In the charts below, Hedgeye CEO Keith McCullough analyzes the important happenings in macro markets this morning. 

 

1. Japan

 

2. Euro

 

3. Commodities

 

4. Oil

 

5. Gold 

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Ex-Energy S&P 500 Earnings Still Stink

Takeaway: So far in 2Q16, 367 of 500 S&P 500 companies have reported an aggregate y/y non-GAAP EPS decline of -4.0%.

Ex-Energy S&P 500 Earnings Still Stink - earnings 8 3

 

For Q2 Earnings Season to-date:

 

  1. 367 of 500 S&P 500 companies have reported an aggregate y/y non-GAAP EPS decline of -4.0%
  2. 6 of 10 S&P 500 sectors have reported year-over-year EPS declines.
  3. 27 of the 367 companies that have reported are “Energy” companies – and no you can’t “ex-that-out”
  4. 79 of the 367 companies are called Financials, and their aggregate y/y EPS decline is -5.4% 

 

Bottom Line: The whole "ex-Energy earnings are great" narrative is as illusory as it is dishonest.


PREMIUM INSIGHT

Obama's Affordable Care Act: Success Or Failure? It Depends What You're Grading It On

Obama's Affordable Care Act: Success Or Failure? It Depends What You're Grading It On - aca signing

This is an institutional research note written by Health Policy Sector Head Emily Evans on President Obama's Affordable Care Act. "As a jobs program, the ACA was a soaring success. As a health care reform effort, there was still much work to be done and the tools were there to finish the job," Evans writes. To access our institutional research email sales@hedgeye.com.


HBI | Press the Short

Takeaway: This quarter gave us an unadulterated peak into the underlying issues we have been highlighting. Short thesis is just starting to play out.

Conclusion: HBI remains our top short, and despite the after hours weakness in the stock and 17% decline since announcing the Pacific Brands acquisition, we’d press the position here. To be clear, this is a company that has no (and perhaps negative) organic growth opportunity, as it is facing increased competition from both the high and low end and at the same time it is staring down the barrel of an over-inventoried US wholesale channel. As such HBI turned into a serial acquirer and is buying companies in jurisdictions where it has neither scale, brand, expertise, nor competitive advantage. Importantly, HBI is sitting at peak margins due in large part to unsustainable capacity utilization levels, which we think will give way and expose the operating leverage inherent to this model that most retail investors don’t acknowledge. And to boot, HBI has the most egregious spread between GAAP and ‘adjusted’ earnings than any company in its class – and is backed by a board and a compensation structure that encourages management to act in a way that we think is inconsistent with long-term shareholder interests.  All in, we think that HBI has another 40% downside until the risk/reward looks more balanced in our model, with the possibility of yet a bigger move in the worst case scenario.

HBI | Press the Short - 8 3 2016 HBI chart1B 

 

FULL DETAILS

 

HBI’s salesmanship was on another level this quarter as Richard Knoll took his 10yr victory lap before officially handing the reins over to Gerald Evans. But, salesmanship on the conference call can't mask lack of sales dollars on the P&L, as HBI missed sales expectations for the 8th time in 10 quarters, and posted the 3rd worst organic growth rate since the company became a serial acquirer. Margins showed the first crack we’ve seen in over 2 years -- down 75bps YY as competition and the effects of bloated inventories began to rear their heads.  Despite all the talk about inventory reduction actions, core inventory grew 11% on -3% sales growth – even more troubling when we consider the tepid demand from the company’s wholesale partners. The flexibility to financially engineer earnings growth is all but done now that the two new acquisitions have closed and HBI has added $1.2bn in long term debt. And oh by the way the two combined will add 14% of growth to the top line but only $0.07 (+4%) in annualized adjusted earnings accretion to the bottom line.

 

Organic & Acquired Growth:

We got a look behind the kimono this quarter as HBI was in a unique position where it had zero benefit from acquisitions for the first time in 3 years. And the trend was less than inspiring. Champion Europe and Pacific Brands will be consolidated into the P&L next year, and will give the illusion of growth, but we think the trend in the underlying business is perfectly clear, without acquisitions 2Q growth was -3%, and has now been negative for 5 of the last 6 quarters. 

HBI's core Innerwear business slowed to -2.5% from 1.3% in 1Q. As we outlined in our note last week HBI | Gildan A Thorn In Its Side (LINK: CLICK HERE) we think an outlier threat to organic growth for HBI has been the pressure applied at the low end by Gildan within Innerwear.  Gildan has climbed to 9% share in units within the US men's underwear space in just 3 years after its launch of Gildan branded. And not only is Gildan taking share, but share gains accelerated in 1H16 which means we don’t see this headwind waning for a long time. Competition is rising on the high end as well with dozens of new brands playing in the higher priced performance underwear space along with the lineup of heavy hitters of Nike, UnderArmour, and Lululemon continuing to invest in their underwear businesses.

HBI | Press the Short - 8 3 2016 HBI chart2

 

The two new acquisitions that closed over the last month will add about $800mm to the top line over the next year. Management sees about $350mm in flowing through in 2016, our math suggests the number may end up closer to $400mm.

We have broken out our estimate of the benefit by quarter and the corresponding growth contribution below. 3Q should see about 12% growth from the new businesses, which HBI will need as it will be facing one of its toughest "core" organic growth compares of the last 3 years at 3% as reported by the company last year.

HBI | Press the Short - 8 3 2016 HBI chart3

 

High Inventory:

HBI spent an incremental $12mm in inventory reduction initiatives, but hey the inventory clean-up plan is tracking to plan…right? Nah, not even close as the sales to inventory spread only went from -16%  to -14% after adjusting for the $51mm increase created by the closing of Champion Europe around quarter end.  When asked about how Pacific inventory might end up impacting 3Q inventory, management chose not to give an estimate.  This would leave room for underlying inventory to remain in the fog of acquisition for at least another quarter.

HBI | Press the Short - 8 3 2016 HBI chart4

 

The elevated inventory is bearish for margins on two levels:  First being the need to spend or cut price to bring levels back to normal, and the second being the utilization impact of slowing production.  To review, HBI currently sits at peak utilization while at the same time we are seeing organic growth slowing, and the sales to inventory spread around the worst levels in nearly 5 years. 

Referring back to our Black Book, the cashflow & margin risk is significantly higher at peak utilization for a company that owns a majority of production like HBI.  Negative moves in demand can have exponential flow through implications for profitability.

HBI | Press the Short - 8 3 2016 HBI chart5

 

Pacific Brands is a Potential Disaster:

One common pushback for our HBI short is that there are still plenty of brands out there to buy and plenty of charges to be taken.  However HBI may have already overstepped its bounds in this area. Not only have the multiples gotten desperately high, but we think the macro risk associated with Pacific Brands is immense.

Hedgeye Financials and Retail teams have done some deep dive work on the Australian economy.  Simply put, our work suggests that Australia is currently at the tail end of a housing/property bubble that is worse than what the US saw in 2007/2008. Given the role home equity withdrawal has played in discretionary spending, the consumption impact is likely to be much greater than what was experienced in the US.

Pacific has about 15% share in the Australasia underwear market (#1), and it will undoubtedly be significantly impacted by the impending financial crisis/recession in Australia.  HBI is already paying 12.5x EBITDA for the Pacific assets, which now make up about 10% of sales post acquisition.  When all is said and done the real multiple paid could end up being 20x plus.  We think this has the potential to be the straw that breaks the camel's back as it relates to HBI stock should the economic situation down under play out as we expect.


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next