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An Open Letter To Target Management | $TGT

Takeaway: Winners find a way to win. But TGT points fingers while #failing to reinvest for growth.

Editor's Note: Below is a brief excerpt from an institutional research note written by Hedgeye Retail analyst Alexander Richards. For more information about our institutional research contact sales@hedgeye.com

 

An Open Letter To Target Management | $TGT - TARGET cartoon

 

The obvious place to start the conversation on TGT would be on the numbers, and the company gave us plenty of ammo to poke holes in the print this morning. But we think the far greater concern for the long-term health of this company is the lack of definable plan or any clear insight by the management team as to what actually caused the worst quarterly comp number since the data breach and subsequent guide down for 2H16.

 

We heard a lot of excuses, everything from Apple products losing their cache, to deflation, e-commerce pressure, and soft Rx traffic. Which all may be legitimate in their own right – but we have a NEWSFLASH for Cornell and team...

 

This is something we like to call RETAIL. The environment/consumer isn’t going to throw anyone a bone, especially at the tail end of a seven year economic expansion. In this sport, only losers point fingers. Stocks that make investors money on the long side find a way to win. Target is doing the opposite.

 

All in, we think this is all very characteristic of a management team playing defense instead of offense. Need further evidence? How about 2 consecutive quarters of earnings beats generated by cost cuts and share buy-backs with the stock at or near all-time highs. We’d argue that the team in Minneapolis would be better served missing expectations and taking down numbers by 2x the rate we saw today in order to build a superior platform from which to grow.

 

That may sound harsh, but after running through the numbers and sitting through the 60-minute conference call, we were still left asking what actually happened? In the absence of a clearly articulated answer from the TGT C-Suite. Meanwhile, we think Target is underinvesting in its business at a time when the Retail industry is becoming more competitive.

 

We expect Target to continue to lose market share.


Capital Brief | Election 2016: Fasten Your Seat Belts People

Takeaway: Mail Call; Scorched Earth Policy; Fish Or Cut Bait

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 | Election 2016: Fasten Your Seat Belts People - JT   Potomac under 1 mb

MAIL CALL

Inboxes on Capitol Hill are full of unread Clinton emails having received the Clinton-FBI interview notes. The Republican caucus is now sifting through pages of detailed summaries, inspecting every nook and cranny for a smoking gun. You could see this coming from a mile away - it’s an election year and Republicans are slipping and have little to show on the accomplishment front for the past seven months. No new findings are expected, but the House Judiciary Committee plans to press the FBI in next month on allegations that Clinton committed perjury. As we’ve seen in the past, Republicans do have a tendency to overextend, and while it truly does deserve a vetting, let’s hope it doesn’t supplant the duties of Congress (pass a budget).

SCORCHED EARTH POLICY?

Freshly-minted Campaign Chair Steve Bannon’s mission is almost perfectly aligned with Trump’s – he’s a rabid fighter, enraged by Washington and Wall Street insiders, the Republican establishment and the Clintons. Known as a devil-may-care conservative, Bannon’s populist and nationalist sympathies reflect his longstanding disgust with both major political parties, which perfectly outlines his overall objective - disrupt the narrative. Bannon has been floating around the campaign for a while now, and is expected to be an expansion of Trump’s mind and values. With the Republican party also in his crosshairs, the Trump campaign may widen the gap between themselves and the party, and run their campaign however they may choose.

FISH OR CUT BAIT

Usually a campaign shakeup this late in the game shows a struggling candidate righting the ship, but not here - more Trump is expected, and the move is irking Republicans. A letter, signed by more than 120 Republicans, warned the RNC that Trump is a threat to House and Senate seats, and the RNC should refocus resources to down-ballot races instead. The RNC is standing by Trump…for now, and won't make a decision until the fall. Not wasting any time, Republican PACs are investing heavily in down ticket races, while ignoring the presidential campaign. With the final leg of the election kicking off after Labor Day weekend, the RNC will need to make a final decision – keep him or toss him back in the water. Either way, the party is likely to feel the repercussions for cycles to come.


Daily Market Data Dump: Friday

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: Friday - equity markets 8 19

 

Daily Market Data Dump: Friday - sector performance 8 19

 

Daily Market Data Dump: Friday - volume 8 19

 

Daily Market Data Dump: Friday - rates and spreads 8 19

 

Daily Market Data Dump: Friday - currencies 8 19

 

Daily Market Data Dump: Friday - commodities 8 19


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.

The War On Active Management - Part 2

Takeaway: Lipper is reporting another -$4B in outflows from U.S. equity mutual funds while passive equity funds took in another +$4.3B WoW.

The war on active management continues with U.S. equity beta trouncing most strategies YTD.

 

This morning, Lipper is reporting another -$4B in outflows from U.S. equity mutual funds while passive equity funds took in another +$4.3B WoW. We’ve written extensively about the upside capitulation we’re seeing in the SPX futures and options data and via the reversal in style factor performance – which itself reeks of a massive career-risk driven chase.

 

With high beta stocks up +19% and Utes down -30bps since the June 27th Brexit v-bottom, we’re again starting to see opportunity on the long side of lower-for-longer strategies for those investors who’ve missed the big move.

 

Take a look at the style factor breakdown below:

 

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***Editor's Note: The snippet above is from a note written by our Macro team and sent to subscribers this morning. Click here to learn more.


CHART OF THE DAY: Doh! A Closer Look At Faulty Fed Forecasts

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more. 

 

"... In the Chart of the Day, we show the course of Federal Reserve GDP projections over the course of the last years. As the chart shows, they have been down and to the right. For those newish to reading charts, that means that growth has been gradually slowing and so the Fed's projections have been coming in."

 

CHART OF THE DAY: Doh! A Closer Look At Faulty Fed Forecasts - 2 dj


Generals Eat Last

"If your actions inspire others to dream more, learn more, do more and become more, you are a leader."

-John Quincy Adams

 

The team at Hedgeye has been waxing a bit philosophically the last few weeks. That happens when we get away from the office, and get a chance to read and reflect. Today the topic is leadership and a book we've been recently reading called, "Leaders Eat Last: Why Some Teams Pull Together And Others Don't".

 

In Rio, the Olympic Games have so far provided some classic case studies of individual leadership. The Games also provide examples of just the opposite. Front and center in the "lacking leadership" department is the group of American swimmers who feigned a robbery to cover up a drunken fight at a gas station.

 

But this all begs the question: how should leaders act and conduct themselves?

 

The premise of the book is that for teams to succeed, leaders need to foster an environment where people matter first and foremost. So much so that hiring, according to the book, should be akin to adopting a child into your family.

 

One chapter of the book is actually devoted to the idea of having a policy in which your employees are given lifetime employment. The premise here is that hiring becomes incredibly rare and every employee is highly vetted. On the flip side, they can't be fired (with the exception being some criminal or unethical act), so if they aren't performing they must be coached, moved around or trained to improve.

 

As former Marine Corp Lieutenant General George Flynn wrote in the introduction (and no doubt the two retired Generals on our team would agree):

 

"When leaders inspire those they lead, people dream of a better future, invest time and efort in learning more, do more for their organizations and along the way become leaders themselves. A leader who takes care of their people and stays focused on the well-being of the organization can never fail. My hope is that afer reading this book readers will be inspired to always eat last."

 

Indeed.

 

Back to the Global Macro Grind

 

Generals Eat Last - trump 45

 

In the current Presidential race in the U.S., leadership of sorts is on display. In what JT Taylor, the Managing Director from our Washington office, is calling Groundhog Day, nominee Trump has brought in a new set of advisors and is executing another pivot. Interestingly, the new CEO of Trump's campaign is Steven Bannon of Breitbart news fame and as JT writes:

 

"Known as a devil-may-care conservative, Bannon's populist and nationalist sympathies reflect his longstanding disgust with both major parties, which perfectly outlines his overall objective - disrupt the narrative. Bannon has been floating around the campaign for a while now, and is expected to be an expansion of Trump's mind and values."

 

So, in essence the pivot is to double down on "Trump". Bannon certainly has his work cut out for him as with less than 90 days left in this race, Trump is trailing in poll aggregates by about 6 points, which, depending on who you ask, gives him about 20% chance of winning. The larger question that looms is whether the Republicans can maintain control of the Senate ... More on that and its implications in coming weeks.

 

Staying with the topic of leadership, New York Fed head William Dudley came out yesterday reaffirming his view that growth will be stronger in the second half. As a result, he and presumably by extension the FOMC, believe we are getting closer to raising rates. Talk about Groundhog Day! The Fed has nothing on Trump.

 

In the Chart of the Day, we show the course of Federal Reserve GDP projections over the course of the last years. As the chart shows, they have been down and to the right. For those newish to reading charts, that means that growth has been gradually slowing and so the Fed's projections have been coming in.

 

The market, of course, continues to largely track growth. As an example, the U.S. 10-year Treasury yield is trading at 1.55% down from 2.27% at the start of the year. But even the venerable Alan Greenspan joined in the chorus by suggesting the Fed should raise rates in recent days. Perhaps we will see the interest "river card" on August 26th when FOMC Chair Yellen speaks in Jackson Hole.

 

Interestingly, this chatter of an imminent rate hiking is not dissimilar from the chatter surrounding the Fed about a year ago. Unfortunately, not only did a hike not appear, but rates have declined dramatically since then. Maybe, as they say though, this time will be different.

 

No levels today. 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Generals Eat Last - 2 dj


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