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BOJ Not Buying Stocks = Nikkei Back In Crash Mode

Takeaway: Nikkei back in crash mode as the BOJ didn't buy stocks last night.

Dollar Down, Yen Up …. And the Nikkei smoked right back into crash mode (-1.6% overnight and -21% from the 2015 Global Equity #Bubble peak) as the BOJ did the un-thinkable and didn’t “buy stocks” into the bell… (this should all end well). The JGB 10yr Yield fell 2bps to -0.11%.


Meanwhile, Nikkei Asian Review reports that Japan's stalling growth is adding fuel to the GDP measurement debate between the Bank of Japan and the Cabinet Office. Funny how these debates always heat up when output sucks.



Editor's Note: The snippet above is from a note written by Hedgeye CEO Keith McCullough and sent to subscribers this morning. Click here to learn more.

TGT | Short The News

Takeaway: Manageable expectations. Deteriorating fundamentals. Competitive pressures intensifying. Short the news.

We're bearish on TGT, and think that the print on Wednesday will support that view. That is we expect softening numbers on the margin in the form of decelerating comps and negative earnings growth. With the key caveat being that expectations headed into the print are more than manageable for the company to manufacture a beat. If for some reason TGT should fail to meet what we see as the most modest/conservative expectations in the space, we’d still short on weakness as we think an earnings miss, however unlikely, is a much greater statement about this company’s competitive position now that Cornell has made the easy fixes (Canada, Rx, headcount) and the state of the US consumer. Assuming things play out the way we think they will, we’d short on strength. Regardless of the outcome tomorrow, short the news.


On the one hand, TGT has recouped all (and then some) of the market cap the company coughed up after the 2Q guide down back in May. And expectations from here are far from easy. With the Street baking in an acceleration in comps on both a sequential basis from 0.2% in 1H to 1.4% in 2H and in the underlying trend (up 30bps in the 2yr run rate). That ultimately flows through to earnings growth rate of 14% in 2H vs. 4% in 1H. If there is any risk to the print, it’s on the full year guidance, as management took a 'wait and see' approach before taking down numbers past 2Q.


But we’ll curb that prior statement by pointing out how low expectations are headed to the print up and down the P&L. Current Consensus expectations assume i) a -0.9% comp, the lowest TGT will have printed (assuming it hits the mid-point of its guide) since it lost 70mm customers’ credit card information, ii) 50bps of margin deleverage, which translates to 100bps+ of deleverage when you factor in the benefit the company is getting from the sale of its Rx business to CVS, and iii) a 7% earnings decline that’s being propped up by a share count 7% lower than it was a year ago.


The point there is that TGT was proactive three months ago when it took down numbers to a level where it could manufacture a beat in 2Q and allow the company to hold FY guidance for now, while it peddles the consumer/weather bottomed in 2Q narrative for another three months until it has to face the music of back-loaded guidance against equally tough comps.


Over the long-term, we’re not buyers of that storytelling, as we think that TGT’s competitive positioning – hello WMT and AMZN – and underinvestment relative to its competition equates to a flattish 4yr earnings CAGR compared to the Street at 11%. As we think flattish margins on a 2.5% top-line is a pipe dream. That gets us to a sub-$5.00 earnings number in 2018 vs. the Street at $6.25.

TGT | Short The News - tgt financials 



Key space considerations headed into the print…


TGT Hated, WMT Loved

We think this chart is particularly interesting given the space we allocate to the relationship between TGT and WMT in the paragraphs below. Essentially, this tells us that sentiment on TGT relative to WMT is at all-time lows. Demonstrated by a trough relative multiple (TGT 14x NTM P/E, WMT 16.8x NTM P/E) and peak short interest. At the same time short-interest ticked up to its highest rate in a half a decade. The irony is that we’d own WMT here over TGT without hesitation. The pessimism around TGT is deserved. Over the long-term, people are bearish – but not bearish enough.

TGT | Short The News - TGT WMT relative PE


Competitive Dynamics Still Evolving

Core to understanding the TGT story here is the company’s competitive placement in US retail. Currently, it’s right smack dab in the middle of very unenviable competitive set that is: WMT, Dollar Stores, Grocers, Department Stores, and AMZN. There are puts and takes on each as it relates to the TGT call, but we think the one worth focusing from a demand perspective is AMZN. And no, it’s not because TGT started stocking Kindle’s on its shelves once again.


The real callout is the overwhelming share of consumers wallets that AMZN has taken over the past 12 months. The numbers look like this…1) per the government, US retail has added an incremental $111bn added over the past 12mnths, 2) AMZN alone has accounted for 26% of the incremental growth, 3) that’s $28bn when you incorporate 3rd party sales, and 4) that’s good for the highest rate we’ve ever seen and a rate 50% higher than the company recognized a year ago.


For a company like TGT that needs perfect conditions to comp in excess of 2% in its core US business, that’s a material change to the competitive landscape.

TGT | Short The News - AMZN usretail 


Where’s The Investment?

Let’s take this step by step...

1) We are seeing considerable market share pressure as AMZN takes a bigger and bigger chunk of the retail pie, that’s up to 26% on TTM basis as of the latest AMZN print.

2) TGT’s biggest brick and mortar competitior, WMT, announced last year that it would open up its usually-tight pockets to invest in employees, e-commerce, stores, vendors, and, to a certain extent, price. At the same time, WMT lowered expectations to a level that meant it wouldn’t hit 2015 earnings levels again until 2019.

3) We’ve seen that play out in pretty dramatic fashion over the past 4 quarters, as WMT put its money where its mouth was in the US with SG&A/Sq.Ft. up 9% in the quarter the company reported 3 months ago. That compares to TGT, who just went negative, opening up the biggest spread in SG&A dollars that we’ve seen between the two companies in at least 3 years.

4) From here, the TGT playbook calls for the company to free up $2bn in cost savings to fund the investments needed to prop up a 3% comp. The key buckets of that investment are as follows: people (they’ve added a lot of new faces in the C-Suite alone), e-commerce, stores, grocery, infrastructure, and of course…buying back stock.   

5) Not only do we think that’s the wrong strategy for a company that must now grow 100% organically, but it’s also not enough to keep pace with a competitive set who are making material and quantifiable investments needed in order to win the traffic/market share battle. The low hanging fruit for Cornell and Co. has already been picked and the easy comps have already been lapped. Ultimately, we think this plays out with TGT being the net market share loser.

TGT | Short The News - TGT WMT spend 


WMT Throwing Down The Gauntlet…Again With Jet.com

While we think the purchase of Jet.com at ~6x sales at the tail-end of an economic cycle is a poor use of shareholder capital for WMT, the company’s newest (and most expensive) acquisition we think signals a few things to the both the market and the rest of retail – the most important being that e-commerce is the single most important growth vehicle going forward. That’s not new news by any means, but when WMT is willing to fork over $3.3bn to supplement the talent/technology in its perennially underperforming channel, it sets the investment hurdle rate that much higher for the rest of its competitive set.


That’s particularly important for a company like TGT, who like WMT, has consistently underperformed in the e-commerce channel. Heck, TGT’s dot.com sales penetration at 3.6% is within spitting distance of WMT, and it’s not like near-term execution or communication of the opportunity in that channel has been well-handled. Back in March, the management team backed off its long-term 40% e-commerce growth CAGR as well as the long-term investment needed in order to get TGT to a competitive level with the most of its competitive set. Between this most recent move by WMT and the relative gap between TGT and the rest of retail, we think that means a much higher investment rate than is currently embedded in street numbers. 

Daily Market Data Dump: Tuesday

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




Daily Market Data Dump: Tuesday - equity markets 8 16


Daily Market Data Dump: Tuesday - sector performance 8 16


Daily Market Data Dump: Tuesday - volume 8 16


Daily Market Data Dump: Tuesday - rates and spreads 8 16


Daily Market Data Dump: Tuesday - currencies 8 16


Daily Market Data Dump: Tuesday - commodities 8 16

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.

August 16, 2016

Want more from Daily Trading Ranges? CLICK HERE to submit up to 4 tickers you'd like to see on the list. 


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
1.60 1.47 1.55
S&P 500
2,160 2,195 2,190
Russell 2000
1,207 1,243 1,241
NASDAQ Composite
5,120 5,275 5,262
Nikkei 225 Index
15,990 17,103 16,869
German DAX Composite
10,298 10,948 10,739
Volatility Index
11.01 14.70 11.81
U.S. Dollar Index
94.75 96.51 95.57
1.09 1.13 1.11
Japanese Yen
99.43 102.40 101.24
Light Crude Oil Spot Price
39.67 45.99 45.74
Natural Gas Spot Price
2.45 2.90 2.59
Gold Spot Price
1,330 1,372 1,347
Copper Spot Price
2.13 2.21 2.15
Apple Inc.
103.39 110.37 109.48
Amazon.com Inc.
753 780 768
Netflix Inc.
91.90 97.68 95.31
J.P. Morgan Chase & Co.
62.82 66.71 65.72
Intel Corp.
34.10 35.98 34.91
Home Depot Inc.
133 139 137
SPDR S&P Oil & Gas Explore
33.77 36.91 36.81
1,235 1,265 1,242

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

CHART OF THE DAY: A Key Consideration At All-Time Highs In U.S. Equities

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.


"... And what about the “paradigm shift” U.S. equities are currently undergoing right now? You know – the one where fundamentals cease to matter; all that matters is the collective fear of monetary easing or fiscal stimulus."


CHART OF THE DAY: A Key Consideration At All-Time Highs In U.S. Equities - 8 16 16Chart of the Day


“How did we ever go two-a-days for all that time? I don’t know. What I do know is [that] everyone was doing it so everyone was relatively beat down. So when they were playing you couldn’t tell because everyone was pretty much worn out.”

-Pete Carroll, Head Coach of the Seattle Seahawks


That’s odd. Who would’ve ever thought that the NFL’s oldest and 7th most tenured head coach would be in support of new collective-bargaining rules that limit full-contact practices to just one per day during training camp? After all, this is a guy who played in an era where three-a-days were all too common – as was prohibiting players from drinking water during practice because the need for hydration was a widely viewed as a form of weakness.


While I’m certain the physical and mental toll of football camp falls shy of the beating the brave men and women of our armed forces experience in the process of training for combat, I’m relatively sure it’s not terribly far behind. The physical cost of hitting and being hit by other really large, really fast men day in and day out in 80-100+ degree temperatures adds up in a hurry.


But don’t take my word for it; in the following 90-second video, John Brenkus (host of ESPN’s Sport Science) explains how the average helmet-to-helmet collision among NFL players is effectively equivalent to being struck in the forehead with a sledgehammer: https://www.youtube.com/watch?v=iUED67SsKAQ.


Now, largely thanks to a bevy of medical research and intensified public scrutiny, football coaches are more willing than ever to adopt measures that make the game safer for their players. As evolving always does across industries and disciplines, the recent evolution in player safety required a critical mass of participants stepping away from perceived wisdoms and cultural norms in order to implement processes that could systematically improve results.


Back to the Global Macro Grind


What new processes have you put in place lately to systematically improve your results? Did you eschew, tweak or double-down on existing processes in hopes of finishing 2016 on a high note?


And what about the “paradigm shift” U.S. equities are currently undergoing right now? You know – the one where fundamentals cease to matter; all that matters is the collective fear of monetary easing or fiscal stimulus.


Two-A-Days - central bank kool aid 06.09.2016


So many questions, not nearly enough answers. Certainly the act of timestamping paradigm shifts in the $25T U.S. equity market is well above my pay grade, experience level and willingness to take on undue career risk. Moreover, the fact that I am as surprised as anyone to see the stock market (S&P 500) close at another all-time high yesterday amid a plethora of very tangible risks to the profits that [allegedly] support it is evidence of my skepticism towards this line of reasoning.


And market internals support said skepticism – for now at least. As we discussed in our 8/5 note titled, “#RoadWarriors: Important Considerations for Every Investor”, one of the most thought-provoking items of pushback Keith and I received on the road in recent weeks came from a discussion with a client in London roughly one month ago:


  • Client: “If I told you a year ago that corporate profits would enter a protracted recession, domestic and global growth would slow considerably, Brexit would occur and Donald Trump would become the GOP nominee and a viable candidate for president of the United States, would you have bet that U.S. equities would be higher or lower on that? In that regard, what’s the bear case from here?”
  • Hedgeye: This line of pushback upon our bearish bias is well-received. That said, however, naval gazing at all-time highs in the SPY completely misses the point of what is perpetuating said highs – i.e. the outperformance of the sector and style factors we like on the long side because of the aforementioned bearish catalysts: Utes at +10.0% YoY, REITS at +12.9% YoY, Defensive Yield at +12.5% YoY and Low Beta at +9.9% YoY are all trouncing the S&P 500’s paltry YoY return of +4.7%. The soft bigotry of low expectations that is trumpeting [mediocre] market beta is not a doctrine we will ever subscribe to.


*NOTE: The aforementioned YoY performance figures are updated for last price.


But with High Beta stocks and the Financials up +17.5% and +12.0%, respectively, since the post-Brexit v-bottom, you can make the case that something changed, big time, in late June. For reference, Utilities and Low Beta stocks are down -1.8% and up only +5.3%, respectively, over that same duration.


As also detailed in the aforementioned note, we explained away the aforementioned reversal of sector and style factor performance as evidence of upside capitulation – i.e. formerly-bearish investors broadly throwing in the towel and piling into what hasn’t worked in order to play catch-up with market beta. Moreover, that capitulation was to a similar degree (in Z-Score terms) as the downside capitulation that preceded the v-bottom off the early-February lows:


  • Week-ended February 2nd: Net SHORT position of -248.4k contracts in aggregate SPX and e-mini futures and options for a 1Y Z-Score of -1.8.
  • Latest: Net LONG position of +115.9k contracts for a 1Y Z-Score of +1.7 (down from +175.2k and +2.4, respectively, two weeks ago).


Kudos to you if you were similarly bearish, but mentally flexible enough to make either the early-FEB or post-Brexit pivot. In plain and simple SPX beta terms, we were not. That said, however, doing so would’ve required us to completely eschew all fundamental analysis and join the legions of our competitors who get paid to market ever-changing lists of reasons why the U.S. equity market will never again experience a material draw-down.


Our reasons for why it still might have not changed since we started making the #LateCycle employment and consumption slowdown call last July. If we’re right on that fundamental view and it culminates in recession as all #LateCycle slowdowns have before it, AND stocks are still making news highs throughout that process, then feel free to consider me fully on board the paradigm shift bandwagon.


Then and only then will we have enough data to support making such a bold call and evolving our process accordingly – just as so many football coaches have done before us. Until then, however, we prefer to keep grinding away at our research process in the summer heat.


The day fundamental research becomes irrelevant is the day central planners claim victory in the war against active fund management.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.47-1.60% (bearish)

SPX 2160-2195 (bullish)
VIX 11.01-14.70 (bullish)
EUR/USD 1.09-1.13 (bearish)
YEN 99.43-102.40 (bullish)
Oil (WTI) 39.67-45.99 (bearish)

Gold 1 (bullish)


Keep your head on a swivel,




Darius Dale



Two-A-Days - 8 16 16Chart of the Day

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