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.
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.
1) Consensus derivative positioning in U.S. equity indices continues putting in new YTD highs
2) Against increasingly bullish index positioning in derivative markets, total U.S. market short-interest continues to get cut across sectors
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:
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)
5) With equity volatility, the treasury volatility index (MOVE Index) and the BAML global financial stress index (GFSI Index) continue making new YTD lows
Hedgeye CEO Keith McCullough answers an important question from a subscriber during The Macro Show this morning.
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.
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].
-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].
-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].
-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].
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.
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…
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