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Cartoon of the Day: Identity Crisis

Cartoon of the Day: Identity Crisis - Fed Hawk Dove cartoon 09.08.2016

 

The Fed pivoted from hawkish in December...

to dovish in March... 

to hawkish in May...

to dovish in June...

and back to hawkish in August.

 

5 policy pivots in just 7 months.

 


Increasingly Consensus

Takeaway: A number of stress and volatility indicators continue making fresh lows.

Following on a note from a mid-August (Re-Visiting Volaility's Assymetry), with the exception of volatility being bid up on front month contracts (Think VIX), a number of volatility and stress indices across asset classes continue to be pushed to new lows.

 

Whatever your view hopefully the following sentiment gauges of contract positioning, short-interest, volatility expectations, and stress indices offer a refreshing perspective – most of them are important behavioral additives to the quantitative risk management process which objectively signals a NASDAQ and S&P in a BULLISH TREND set-up currently. As we mentioned this morning through various airwaves, “bad” is a “good” #growthslowing allocation theme which is our preferred way to position for the current chop.

 

Ping us back with any comments or questions – We’re happy to look into anything in more detail.

 

Key Highlights:

  • Consensus derivative positioning in U.S. equity indices continues making new YTD highs in net long positioning (longest since May 2013 in the S&P)
  • Against increasingly bullish index positioning in derivative markets, total U.S. market short-interest continues to get cut across sectors
  • The VIX has priced in slightly higher front month volatility expectations from the Mid-August lows, but when you look out passed front month pricing, volatility expectations remain low by historical standards through the balance of the year. This is evidenced by S&P index at-the-money implied volatility outright and a more bullish skew across a number of metrics
  • Realized trading ranges remain near the cycle lows which we show 1) hasn’t ever lasted; 2) has taken implied volatility premiums with it when looking beyond near term expectations (the VIX and bombed out index strikes on front month)
  • Following equity volatility, the treasury volatility index (MOVE Index) and the BAML global financial stress index (GFSI Index) continue making new YTD lows

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1)     Consensus derivative positioning in U.S. equity indices continues putting in new YTD highs

 

  • Net futures and options positioning in the S&P 500 (aggregate of index+e-mini contracts) reported to the CFTC for non-commercial reporters is at its longest point of the year and the longest since May 2013. This equates to +2.1x and +2.4x on a TTM and 3Yr z-score basis respectively
  • Net positioning in RUSSELL 2000 Mini contracts is also at its longest positioning of the year (longest since June 2013) which equates to +2.9x and +2.2x on a TTM and 3Yr z-score basis
  • Net positioning in treasuries, crude oil, and gold is also extended >1x on a TTM z-score basis 

Increasingly Consensus - CFTC Positioning Table

 

Increasingly Consensus - S P 500 CFTC Positioning

 

Increasingly Consensus - Russell 2000 Net Positioning

 

2)      Against increasingly bullish index positioning in derivative markets,  total U.S. market short-interest continues to get cut across sectors

 

  • A longer-term view of total U.S. market short interest shows that short interest as a % of total float is still above its cycle average;
  • But, total market short interest has been cut 12% from the end of February which was not coincidentally right after equity markets put in 2016 lows
  • The largest trimming of short interest over the last month has come in Materials (-8.1%), Consumer Staples (-6.1%), Industrials (-5.6%), and Health Care (-5.3%)

Increasingly Consensus - Sector Short Interest Table

 

Increasingly Consensus - Total U.S. Market Short Interest

 

3) The VIX has priced in slightly higher front month volatility expectations from the Mid-August lows, but when you look out passed front month pricing, volatility expectations remain low by historical standards throughout the balance of the year. This is evidenced by S&P index at-the-money implied volatility outright and a more bullish skew across a number of metrics

 

*Note* To the extent you want to dig into the table below we are showing realized volatility over different durations compared to implied volatility on a go forward basis in the top two sections and relative skew (upside strike vs. downside strike) in the bottom two sections. The table is busy, so we’ll try to sum it up with bullets:

  • Front month implied volatility (30 days to expiration) may be trading at a relatively large premium to realized 30D vol. (which is at a cycle low currently), but looking out passed front month and short-term expectations, volatility expectations for the rest of the year are just as near current realized volatility levels, or even lower – the expectation for continued tight trading ranges for 2016 is priced into markets- If you don’t want to look at the table, look at the 60D/3M/6M charts relative to the 30D chart – Realized vol. has come in and brought implied volatility premiums down with it
  • Although not in a straight-line, skew has moved increasingly bullish throughout the year. The last two charts compare the implied volatilities of upside strikes vs. downside strikes. A positive sloping line indicates that downside strikes relative to upside strikes are becoming less expensive in volatility terms – we doubt it’s a coincidence from a sentiment standpoint that skew was most lopsided right after equity markets put in their Feb lows, just like contract positioning and short-interest.

Increasingly Consensus - Volatility Dashboard

 

Increasingly Consensus - Implied Over Realized 30Day

 

Increasingly Consensus - Implied Over Realized 60Day

 

Increasingly Consensus - Implied Over Realized 3Mth

 

Increasingly Consensus - Implied Over Realized 6Mth

 

Increasingly Consensus - CBOE Skew Index

 

Increasingly Consensus - S P 30 Day Skew

 

Increasingly Consensus - S P 60Day Skew

 

4)     Realized trading ranges remain near the cycle lows which we show 1) hasn’t ever lasted; 2) has taken implied volatility premiums with it when you look passed near term expectations (the VIX and bombed out index puts on front month)

 

  • The simple and most important takeaway from the table is that realized volatility has rarely remained as low as it’s been recently for any extended period of time
  • In the table below, an observation is triggered when volatility moves below 6% for 20 and 30 days and below 5% for a 10-day periods. The ensuing changes in realized volatility are shown over different durations. There aren't many precedents for realized volatility at current levels, and the past is not a predictor of the future, but the analysis provides some perspective nonetheless

Increasingly Consensus - S P 30Day Realized Vol

 

Increasingly Consensus - S P 60Day Realized Vol

 

Increasingly Consensus - Realized Volatility Backtest

 

5)     With equity volatility, the treasury volatility index (MOVE Index) and the BAML global financial stress index (GFSI Index) continue making new YTD lows

 

Increasingly Consensus - BAML Stress Index

 

Increasingly Consensus - MOVE Index

 

 

 


Are Central Bankers Buying Stocks?

Hedgeye CEO Keith McCullough answers an important question from a subscriber during The Macro Show this morning. 


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M | Where We Do/Don’t Agree w Terry

Takeaway: Golf clap to M CEO for transparency at GS. BUT, it highlighted so many challenges inherent to his successor, AND the KSS/JWN’s of the world.

Macy’s is always salient when the company presents at a conference – especially when it sends Terry Lundgren, who rarely makes Wall Street appearances unless he has fires to extinguish (like when he had to jump on the 3Q15 (Nov) conference call to tell activist investors that he wasn’t going to do a REIT deal).  No big bombshells from today’s GS conference, but we had a few takeaways [in italics].

 

Store Closures

-America has too much real estate - way out of proportion on real estate per capita [Not exactly a NEWSFLASH, but nice when CEOs admit it. Note to Kohl’s and Nordstrom.]

-some rationalization has to happen, and M is taking the first step in getting ahead of the curve. [Our sense is that he’s further defending his decision not to pursue the REIT structure. Note though, that Macy’s progress is slower than he’s intimating as it relates to impact on the P&L]

-others will probably follow [But not fast enough. Let’s be clear, KSS needs to close 400 stores and shrink box size by 30%. Not close 5 stores at a time].

-all of the 100 stores closing are cash flow positive. [This might be the most interesting factoid of all. Traditional standards for anchor tenants has been to keep money-losing stores open so long as they are cash flow positive. Kudos to Macy’s here].

-refocus talent and capital on smaller base [Definitely things we like to hear. Too bad this is not a company in an industry that is investable. But if they follow through on this, it could be a good long – espec at the start of the next eco cycle].

 

Strategy/Math

-restart Macy's all over again - where stores are critical to omni-channel retail [While omni-channel is a buzzword that has to go away, we get the point. Nothing new, but nice to note.]

-amalgamation of deals over time, companies had overlapping real estate [Terry, this was clear in 2005 when you bought May Department stores].

-don't need density of current foot print, need to drive dot.com sales, which he seems confident he can do. [Nicely said. But he’s leaving. Promises are easy to make when left for successors. Karen likely not far behind. #accountability].

 

Omni-Channel

-misperception that e-commerce not profitable [No, but there’s a misperception about the capital structure/allocation needed to succeed and take share in this day and age. Also – it is definitely dilutive to margins. We don’t think people assume it is unprofitable.]

-can no longer ‘meaningfully’ leverage store-level fixed expenses. [Obvious, but a big statement from CEO. Golf Clap on his clarity and transparency].

-on the flip side, variable cost structure of online doesn't provide that risk Macy’s sees at retail [Not sure we agree. That’s only true under the current cost structure, which is not right in order to compete and win. The right cost structure will be harder to leverage, but in fairness, should result in higher revenue].


Rolex | Short the Rich

Takeaway: Rolex is evolving. We’re not so sure it should.

We always pick up on anecdotes of private brands, as do most retail analysts. But here’s our take on an interesting one as it relates to Rolex (private) that we think serves as a good brand study.

 

Rolex is evolving. We’re not so sure it should.

 

1) We’re seeing a number of developments with the brand. Specifically, the styling is very updated, but starting to look very much unlike the traditional Rolex that is the mainstay for a $20,000 anniversary gift that is ultimately passed down through generations. 

2) We’re not suggesting that Rolex is coming out with a ‘me too’ iWatch, but simply that a brand like this with such an amazing cache has to be careful about changing it up too quickly. Check out the images below. The first image looks more like a Tag-Heuer 1990s knockoff than a Rolex. 

3) Oh any by the way, distribution is evolving too. These things are selling in the secondary market in flash sales on sites like ‘Touch of Modern’ (which is admittedly a wicked site for men who have cash to burn and like toys – like a desk Jellyfish aquarium or a tactical Damascus Blade knifes handcrafted in Brazil). 

4) Brand evolutions are not all created equal. For example – Kohl’s and Nordstrom have failed to allocate capital in a manner that allowed them to evolve. Now they’re as close to perma shorts as you can find in retail – barring a big capital infusion to dig out of the hole. That in itself is a negative stock event. 

5) But then on the high end, there’s validity to not changing up a design. The best parallel to Rolex, we think, is the BMW 3-series. Check out a 3.25i from 2006. Then check out a 3.25xi from 2016. The styling is remarkably similar to the extent that non-owners probably cant tell the difference from a distance, which boosts aftermarket value. The same goes for a car like the Lexus RH300/450. Slight evolution, but no sudden movements. If it ain’t broke, don’t fix it. 

6) Maybe this is why the late-model Rolex designs are selling for a 50-70% discount in the secondary market. 

 

Short the rich. The best play here is Tiffany – though that call goes far beyond this Brand Study (it’s only the 446th ranked keyword on Tiffany.com). Sales should still slow, as its traditional customer gradually shifts away from the brand, sales per square foot weakens, and margins compress as the inability to sell successfully online while maintaining brand cache plagues the long-term story. Numbers remain too high.

 

Rolex | Short the Rich - 9 8 2016 Rolex Double


HBI | Why Bloomberg is So Wrong on a VFC/HBI Deal

Takeaway: This is why Reporters should not pose as Analysts. Highly unlikely that VFC touches HBI for so many reasons.

If you saw that Bloomberg story about HBI being a good strategic fit for VFC, you should ignore it. The logic is very flawed. This is why reporters should not try to be analysts. Here’s why…

  • True, it’s been a while – five years to be exact – since VFC (a serial acquirer) has done it’s last deal. That was Timberland for $2bn.
  • But there’s a reason why it’s been 5 years. VFC is extremely valuation-focused. Multiples have been inflated in the 3 years since it integrated Timberland, so it’s been out of the game. Whether we’re at the end of an economic cycle or not (we probably are), the reality is that VFC THINKS we are. It won’t step up deal flow at these multiples with earnings at risk.
  • There’s another key consideration. Circa 2007 with the sale of Vanity Fair, VFC sold out of the last of its intimate apparel brands at a 4x EBITDA multiple. It wanted out of the commodity-priced brands that owned its own manufacturing assets. Why in the world would it acquire HBI, which is exactly what it exited (but on a much larger scale)? HBI bought Maidenform in 2013 at 9.5x EBITDA.  VFC did not want it then (at that price) and it almost certainly does not want it now.
  • Does VFC want to acquire its way into Wal-Mart and Target? Seriously?
  • HBI itself has been on an acquisition tear – buying underwear assets for up to 12.5x EBITDA. They’re doing this all while the CEO (otherwise young at 58) is exiting the business.
  • It bought Pacific Brands in Australia – a big deal at $800mm. Our view on Australia is that the economy is at considerable risk of a consumer collapse as the ability to tap into home equity evaporates. The average underwear replacement cycle for dudes is about 7-years. As gross as that may be, in a consumer downturn it can stretch to an even nastier 10 years. That means sales and margins come down for anyone selling the stuff. HBI could prove, in the end, to have paid 20x or higher for this asset – one that we don’t think is scalable beyond Australia.
  • We think Pacific Brands management knew this. It was shopped and sold well before it was bought. HBI was the highest bidder. VFC knows this. HBI knows this. That is one reason why the CEO is stepping away.
  • Bottom line – not going to happen.
  • We’ll present our HBI thesis in a detailed slide deck on September 14th.

 

HBI | Why Bloomberg is So Wrong on a VFC/HBI Deal - HBI mult with gildan chart1

HBI | Why Bloomberg is So Wrong on a VFC/HBI Deal - 9 8 2016 VFC ACQUISITIONS chart2


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