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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 13, 2013


As we look at today's setup for the S&P 500, the range is 23 points or 0.25% downside to 1771 and 1.04% upside to 1794.                            

                                                                                                   

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.55 from 2.56
  • VIX  closed at 15.54 1 day percent change of 0.78%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: PPI m/m, Nov., est. 0.0% (prior -0.2%)
  • 8:30am: PPI Ex-Food/Energy m/m, Nov., est. 0.1% (pr 0.2%)
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • 8am: Medicare Payment Advisory Commission holds mtg, with sessions on Medicare Advantage, hospice svcs, rehabilitation
    • 10am: CFTC holds closed mtg
    • 11am: Senate Finance Cmte votes on nominations: Sarah Bloom Raskin Deputy Treasury Sec.; John Andrew Koskinen IRS commissioner; Rhonda Schnare Schmidtlein ITC member
    • 1pm: Panel of President’s Export Council meets on encouraging trade, incl Export control reform update

WHAT TO WATCH:

  • Ford to hire 11,000 in U.S., Asia next year with new plants
  • SAC reconsidering relationship with Deutsche Bank: WSJ
  • Steinberg told by judge to decide whether he’ll testify
  • U.S. House passes $625.1m defense authorization bill
  • Microsoft said to consider Qualcomm’s Mollenkopf for CEO
  • Anadarko may be liable for up to $14b from Tronox spinoff
  • Boeing says it has evaluated 54 sites for newest 777 work
  • KKR, Goldman said to exit stakes in Dollar General: WSJ
  • Texas Indus. said to explore sale as construction rebounds
  • DirecTV said to be near deal to extend NFL Sunday Ticket
  • RRJ Capital buys Everbright Intl. stake for $350m
  • Hilton exploring new lifestyle hotel brand, WSJ says
  • Calpers criticizes Carl Icahn’s push for Apple cash return
  • Coke makes management changes to improve North America ops.
  • Wetjen said to face vote to become acting CFTC head
  • Mexico’s 2 legislative chambers pass energy reform bill
  • China to take deposits on some U.S., Japan, EU steel imports

EARNINGS:

    • No earnings scheduled for S&P 500 companies

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Swings as Investors Weigh Demand Signs Against Fed Outlook
  • Crude Declines in Survey as Fuel Supply Grows on Weaker Demand
  • Copper Bulls Extend Run as Tight Supply Lifts Price: Commodities
  • Freeport Working With Indonesia to Clarify Planned Export Ban
  • Palm Oil Imports by China Climbing to Eight-Month High on Demand
  • Copper Drops on Record China Output, Fed Stimulus: LME Preview
  • Palm Oil Tumbles Most in Three Months as Demand Seen Weakening
  • Rebar Caps First Weekly Loss in Four as Production Costs Fall
  • Abe Breaks Micro-Farms to End Japan Agriculture Slide: Economy
  • Amplats Agrees to Wage Deal With National Union of Mineworkers
  • Eric Shi Said to Join Newedge in Commodities After Bank of China
  • Shale Boom Shakes U.K.’s $32 Billion Chemicals Industry: Energy
  • Rubber Set for Third Weekly Advance on Weak Yen, China Optimism
  • Brent Set for Weekly Loss Before Reopening of Libyan Oil Ports

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


The Veil of Ignorance

This note was originally published at 8am on November 29, 2013 for Hedgeye subscribers.

“Whenever you feel like criticizing any one . . . just remember that all people in this world haven’t had the advantages you’ve had.”

-F. Scott Fitzgerald

 

Yesterday, I read a great column in the New York Times by Nicholas Kristof about compassion and empathy.  The point of the article was to look at the distinction between asking someone to be personally accountable versus recognizing in a civil society that it is our responsibility to help others.

 

The origin of the article was based on some comments Kristof had received from a number of recent columns he’d written on the federal food stamps program. The gist of the feedback was that we shouldn’t be subsidizing families that are “too lazy” to take care of themselves.  As Kristof writes:

 

“Let’s acknowledge one point made by these modern social Darwinists: It’s true that some people in poverty do suffer in part because of irresponsible behavior, from abuse of narcotics to criminality to laziness at school or jobs. But remember also that many of today’s poor are small children who have done nothing wrong.

 

Some 45 percent of food stamp recipients are children, for example. Do we really think that kids should go hungry if they have criminal parents?”

 

The current public debate over healthcare personifies this dilemma we face when trying to emphasize with those that were given less in life.  (Unfortunately, the inability of the government to execute on the implementation of Obamacare has somewhat tainted this debate.)

 

In “A Theory of Justice” the philosopher John Rawls proposed the veil of ignorance to help us in determining our role in helping others and as a way to find morality in many situations.   According to Rawls, under the veil of ignorance:

 

“No one knows his place in society, his class position, or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength, and the like.”

 

As a result, since a person may occupy any position in society after the veil is lifted, the person must then evaluate any position from all perspectives of society.  

 

Certainly, the idea that I could wake up one day and not be preparing for a festive thanksgiving with friends and family, but rather be a homeless person wandering the icy streets of New York provides a different perspective as to how to treat those that are less fortunate.   

 

Back to the global macro grind...

 

As it relates to the U.S. equity markets, today is a day that is a bit of a market veil of ignorance as it is historically is the lowest volume trading day of the year.  As a result, there probably won’t be a lot of read through from the market action today.  Internationally, there has actually been a slew of data out over the last 24 hours and some key points to highlight include:

  1. Euro-area unemployment dropping to 12.1% from 12.2% in October and Eurozone flash CPI coming in at a anemic 0.9% (but higher versus last month’s 0.7%);
  2. German retail sales came in at -0.8% month-over-month versus and estimate of +0.5%; and
  3. Japanese unemployment came in at 4.0%, CPI inline at 1.1%, and industrial production disappointed versus growing 0.5% month-over-month versus an estimate of 2.0%.

In aggregate the big macro data points this morning do not point to any reason for the policy makers in Japan or Europe to change their views.  If anything, there is only increased support for the current extremely dovish policies that are in place.

 

As it relates to Japan, though, late last week we actually encouraged investors to consider taking off the Abenomics trade, as my colleague Darius Dale wrote there are a number of reasons to consider booking gains, namely:

  1. The Fed will likely dominate headlines with surprising levels of dovish monetary policy amid a 3-6M monetary and fiscal policy vacuum in Japan;
  2. Sentiment towards Japanese equities amongst foreign speculators has reached euphoric levels; and
  3. Speculators have recently adopted an overwhelmingly bearish position on the yen. Historically, the USD/JPY cross has faded hard from such asymmetric setups in the futures and options market. Moreover, what’s bullish for the yen has been almost perfectly bearish for Japanese stocks.

In my purview the point on sentiment may be the most compelling reason to take a break on the long Japan equity trade.  Specifically, in the YTD, foreigners have purchased a net ¥13-plus trillion of Japanese shares – the highest total on record. This contrasts with a net ¥6T of net sales amongst Japanese institutional investors.

 

Moreover, the aforementioned foreign/domestic bifurcation has intensified in recent weeks. The most recent weekly data shows a net purchase of ¥1.3T by foreign investors, which represents a 7M-high.  Conversely, net sales of domestic assets by Japanese retail inventors hit ¥174B last week – the largest weekly divestment since 2008. 

 

I think we can all agree, buying when the locals are selling is rarely a good thing!

 

Switching gears, in the chart of the day today we highlight a key point from our expert call last week with Dr. Tancred Lidderdale from the Energy Information Administration.  As the chart shows, for the first time in more than twenty years, U.S. production of crude oil has surpassed imports.  Arguably, even the environmentalists when wearing the veil of ignorance would agree that increased U.S. oil independence is a good thing.

 

I’ll be heading to my first Apple Cup later today, which is the annual match-up between Washington University and Washington State in Seattle.   Wherever you spend the rest of the holiday weekend, I hope it is a great one.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.69 - 2.82%

SPX 1795 - 1814

DAX 9206 - 9345

VIX  11.91 - 13.31
USD 80.35 - 81.15

Gold 1226 - 1289

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Veil of Ignorance - US Oil Production

 

The Veil of Ignorance - rta


RH: Accept The Gift

Takeaway: Every single bear case - especially dot com concerns - was just blown out of the water. Fundamentals look phenomenal. Embrace the CEO trade.

Conclusion: This sell-off is a gift.  The departure of Carlos Alberini is not the end of the world. The C-suite is crowded. They need a warm body in there when they start opening mega stores in 12-18 months. They've got time. Our long-term estimate is going up to $10 from $8.50. The market will do what it wants as it relates to this announcement. But we can confidently say that for long-term investors looking for the rare triple over a 3-4 year time period (not many of them out there), we'd recommend buying into the pessimism, and accepting what we thing is an early holiday gift.

 

 

This is as polarizing a quarter as we've seen from any company in a while.

 

Obviously, RH announcing that Carlos Alberini is moving on is not good news. There's no way we'd try to sugar coat it. But consider the following.

  1. Co-CEOs don't work. They never have, and they never will.
     
  2. The only reason why Carlos has 'CEO' on his business card is because Gary Friedman was forced to step down and take a different role due to his extracurricular activities. THAT's when Carlos got what he wanted -- the CEO role.
     
  3. But less than a year after stepping down, Friedman stepped back up again and told Carlos that he'd need to share the top job. Probably not a good day for Carlos -- especially given that he spent well in excess of 10 years playing second fiddle to the Marciano Brothers at Guess and was ready to be THE man.
     
  4. And make no mistake -- title or no title -- this was Gary's company. In fact, if it were Gary who was stepping down right now, we'd consider it an absolute thesis-changer.  He's the brains behind the plan to get to $10 in earnings. Carlos was good, but he is replaceable.  In fact, we'd argue that Karen Boone (CFO) is less replaceable than Carlos.  The guy is good. Really good. But they have a CEO, COO, CFO -- and though they'll probably get someone to replace Carlos (it's a pretty appealing job -- many will want it) they can certainly continue to execute without him.
     
  5. Where we really viewed Carlos as being critical is when the company starts opening significant numbers of 40k-50k square foot stores. That's where we thing Gary's expertise starts to run its course, and RH needs a proven retail store growth expert.  Gary is not replaceable. But finding someone to execute on store openings -- while a very hard job -- is something that has a pool of many hundreds of people that could do the job.
     
  6. Lastly, Carlos will remain on the Board of RH. We question how long he'll last given that being CEO of Lucky is like two full full-time jobs. But at least until the store openings start en masse (in 12-18 months), and until they have an extra head to execute on the rollout, they've still got their hooks in Alberini.

 

 

Now let's hit on the good news…and that's pretty much everything else.

The quarter was phenomenal. The company beat on the top line, gross margin, SG&A, and, of course, EPS.

The big stat was the RH Direct was up 47%.  We only have data going back 5-years -- but we can't find a quarter where it was up remotely that high.


The key, of course, is all the noise investors made over the past two weeks about dot.com being weak because of the elimination of the Fall Sourcebook -- and weak ComScore data pointed to a precipitous dropoff in the numbers.
 

We looked at things a bit differently. We tracked RH.com's internet traffic ranking over the past six months -- and while everyone else thought the Direct business was falling apart, we saw RH.com's traffic rank improve by better than 35%. How can the dot.com business be losing momentum when we're seeing such strong numbers out of RH.com's traffic rank?  Anyway…that's what we argued earlier this week (see our analysis below), and it proved to play out in the company's financial results.

 

We're not changing our estimates for store growth, comp, but we are tweaking higher our gross margin forecast. We had been assuming a relatively flat gross margin over time (steady at 36%), but now we're looking at something closer to 38%. Simply put, as product mix changes, it will move to higher margin product that turns faster. So not only do we get to a $5bn business at a 14% EBIT margin, bus also one that has an ROIC profile that goes from 12% today, to near 30% in 5-years.

 

The punch line is that there's nothing we can do about the pessimism surrounding Alberini's departure. But we can confidently say that for long-term investors looking for the rare triple over a 3-4 year time period (not many of them out there), we'd recommend buying into the pessimism, and accepting what we thing is an early holiday gift.

 

 

 

HERE'S OUR RH NOTE FROM EARLIER THIS WEEK

12/10/13

RH: Our Take On The Market's Bearishness

 

 

We've never seen the Street more bearish on RH -- especially headed into a print.  We find that interesting, if not perplexing, given that there should be such a positive change in fundamentals with the upcoming quarter. We still think RH is on its way to $175. The quarters will ebb and flow. But despite the bearish sentiment we like it into the 3Q print.

 

Consider the following

Last quarter -- when RH was flirting with $80...

    1. RH missed the comp -- coming in at 'only' 26% versus expectations of something well into the 30s.
    2. RH continued its string on new business announcements -- but instead of announcing businesses that are actually commercially viable, it came out and announced that it would  start RH Music and RH Hotels (whereby it would outfit a small number of niche hotels with RH garb). The company made a mistake in announcing these -- even though it only cost them about $5mm annually out of the $35mm they saved by not producing the Fall sourcebook -- it was really more of a marketing initiative than a new business initiative.  All they succeeded in doing is scaring the lights out of Wall Street about their strategic direction.
    3. Gross Margins were off by 253bps, the biggest decline RH experienced since 2009 -- when it was in the tank.
    4.  They announced the elimination of the Fall sourcebook -- which caused a not-so-minor freak out by investors who were concerned that the company's Direct (non-store) business -- which is about 47% of total -- would start to evaporate.
    5. Shortly after the print, the three 'founding shareholders' who took it private and subsequently public all sold out simultaneously (the structure of the deal required that they all move in tandem).
    6. Then as a kicker there was one extremely bearish sell-side initiation with a Sell rating due to structural reasons -- arguments that we think are weak at best (we'll debate them anytime). Then earlier this week, another firm was out talking about how weaker ComScore data suggested that dot.com sales were falling.

 

Package that all together, and it's easy to see why sentiment is so poor.

 

But here why we're more optimistic…

    1. We think comp will accelerate meaningfully this quarter -- from 26% to something well north of 30%. The company did not articulate as well as it should have that comps were weak because it simply did not have enough inventory. Part of that was that product was on the water for 2-4 weeks longer than expected, and as such they could not recognize revenue. That revenue will show up in 3Q. Is the supply chain issue fixed? No. That will take the better part of a year. But we're convinced that the problem has not gotten worse, and in fact has started to improve.
    2. Gross Margins should improve dramatically this quarter -- from -253bps last quarter to better than -100bp this quarter. We would not be surprised to see it closer to flat.
    3. As it relates to dot.com, we're simply not as concerned as everyone else seems to be.  We think that the following chart flies in the face of those who think that the elimination of the sourcebook hurt revenue. Specifically, it shows the traffic trend at RH over the past six months. To be clear, you want to have a declining traffic rank (Facebook is #1,  Nike is 972, and Saucony is 77,500). The point here is that RH.com's traffic rank improved consistently from 15,000 down to 10,000 over the time period that people are worried that RH's web business dried up. 

 

RH: Accept The Gift - 1 

 

THIS IS THE CORRELATION BETWEEN SOURCEBOOK MAILINGS AND REVENUE -- NADA

RH: Accept The Gift - sourcebook

 

HERE'S WHAT 1,000 PEOPLE TOLD US ABOUT WHAT WHAT THEY DO WITH CATALOGS. THEY DON'T DO MUCH.

RH: Accept The Gift - whatpeople do with catalogues

 

 

Sentiment for RH is just about as low as it's ever been  -- despite the fact that fundamentals are getting better on the margin, and we’re inching closer to the period (in 12 months) when square footage should start to accelerate.

 

RH: Accept The Gift - 11

RH: Accept The Gift - rhsqftge

 

 

 

 


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Extended (Again): SP500 Levels, Refreshed

Takeaway: There’s mean reversion risk down to 1734 TREND (-4.1% downside) versus +0.4% upside from the all-time closing high of 1808.

This note was originally published December 10, 2013 at 12:41 in Macro

POSITION: 5 LONGS, 5 SHORTS @Hedgeye

 

During the 5-day correction in the SP500 (which ended Thursday) I went to 11 LONGS, 3 SHORTS. So all I am doing here is aggressively managing the immediate-term risk of this market’s range. #GetActive remains one of our Top 3 Global Macro Themes for Q413.

 

Unconventional markets call for unconventionally active risk management.

 

Across our core risk management durations, here are the levels that matter to me most:

  1. Immediate-term TRADE overbought = 1815
  2. Immediate-term TRADE support = 1785
  3. Intermediate-term TREND support = 1734

In other words, the immediate-term risk range = 1785-1815 and, from an intermediate-term TREND perspective, there’s mean reversion risk down to 1734 TREND (-4.1% downside) versus +0.4% upside from the all-time closing high of 1808.

 

The less I try to over-think this, the better. The math works more than it doesn’t.

KM 

 

Keith McCullough

Chief Executive Officer

 

Extended (Again): SP500 Levels, Refreshed - SPX


Seen the $VIX Lately?

Takeaway: This equity market is as complacently positioned as I have seen it in six years.

Equity volatility starting to look primed to breakout into 2014.

 

After making a series of higher-lows since August, front month VIX (volatility) broke out above our Hedgeye TREND resistance of 14.91 yesterday.

 

Fed confusion is going to breed contempt.

Seen the $VIX Lately? - VIX

This equity market is as complacently positioned as I have seen it in six years. Yesterday’s II Bull/Bear survey hit a fresh year-to-date high of +4390 basis points to the Bull side!

 

Editor's note: This a complimentary excerpt from Hedgeye CEO Keith McCullough's research this morning. Click here for more information on you can subscribe to Hedgeye research.


#GROWTHSLOWING (LOTS OF CHARTS)

Takeaway: We are getting increasingly negative on the slope of domestic economic growth.

Yesterday, Keith and I did a full slate of meetings with funds in NYC; without violating any confidentiality by getting bogged down in the details, here are the key takeaways we were effectively pounding the table on:

 

  1. We still like our #EuroBulls theme (CLICK HERE to launch our @HedgeyeTV video) and continue to see opportunities on the long side of European growth equities. We continue to like the UK and GBP then Germany and EUR in that order.
  2. Based on early warning signals, we think 3Q13 is a cycle-peak in the sequential rate of US economic growth. If we were mandated to allocate capital to US equities, it would be in high yield, slow growth, low short interest and/or commodity-linked stocks, at the margins – basically a return to the 2011-12 playbook. The UST 10Y yield has probable downside to 2.5% in this scenario.
  3. A potential 1H14 macro theme we see developing is inflation-hedge/consensus yield chasing plays continuing to make higher-lows alongside US equity volatility (CLICK HERE to launch today’s @HedgeyeTV video on a potential breakout in the VIX). That list would include gold, commodities, emerging markets, TIPS and REITs. The Abenomics trade (i.e. short JPY/long Japanese equities) would make lower-highs in this scenario.
  4. Fund flows have the opportunity to buoy the US equity market well into 1Q14, though we’d expect growth data to be decidedly cooler by then if the Fed does NOT taper. We are very differentiated from consensus in that we think that a return to prudent monetary policy is the only way to promote sustainably faster rates of domestic economic growth. We don’t buy into the consensus fear-based whining about deleveraging and the perceived risk of higher rates in the housing sector.
  5. If the Fed tapers or signals imminent tapering, we’d abandon each of the aforementioned views and would be buyers of any subsequent US equity pullback. If the Fed does NOT taper (as we expect), we’d be sellers of any subsequent US equity strength.

 

Today, we received a great follow-up question from a very sharp client in the fixed income space: “What is the data you’re looking at to support your view that GDP growth will slow down?”

 

As with any inflection-based call on growth and/or inflation, we start with the market’s risk management signals – which tend to lead the reported data. The USD is decidedly broken from a quantitative perspective and long-term interest rates are making lower-highs vs. the YTD peak in both growth data and #GrowthAccelerating expectations.

 

#GROWTHSLOWING (LOTS OF CHARTS) - DXY

 

#GROWTHSLOWING (LOTS OF CHARTS) - UST 10Y

 

Moreover, both are declining on a QoQ average basis, which is historically something you’d see during periods of marginal stagflation (i.e. Quad #3 of our GIP model = Growth Slows as Inflation Accelerates).

 

#GROWTHSLOWING (LOTS OF CHARTS) - GIP Model Backtest

 

#GROWTHSLOWING (LOTS OF CHARTS) - Quad  1 vs. Quad  3

 

#GROWTHSLOWING (LOTS OF CHARTS) - USD  UST Rates and GDP

 

That reflexive relationship is something we’ve seen throughout the YTD:

 

#GROWTHSLOWING (LOTS OF CHARTS) - 4

 

As it relates to early warning signals, the ISM data appears have materially inflected here, which confirms what we’ve already seen with respect to the respective trends in consumer and business confidence.

 

#GROWTHSLOWING (LOTS OF CHARTS) - 5

 

#GROWTHSLOWING (LOTS OF CHARTS) - 1

 

#GROWTHSLOWING (LOTS OF CHARTS) - 2

 

Recall that inventories juiced the 3Q GDP print – which we’ve argued is a healthy, pro-cyclical response to increased business confidence. Well, now said business confidence has inflected to the downside here in 4Q and we anticipate inventories will follow suit when 4Q13 GDP is reported.

 

#GROWTHSLOWING (LOTS OF CHARTS) - 3

 

Again, our call for an inflection in growth is in the very early innings so you won’t see it in the broad swath reported data just yet – much like you didn’t see a ton of data to support our #GrowthStabilizing and #GrowthAccelerating calls at the start of the year.

 

#GROWTHSLOWING (LOTS OF CHARTS) - US QoQ

 

I’m guessing to the naked ear we sound about as crazy as we sounded roughly one year ago when we were pounding the table on long side of US equities and on the short side of anti-growth assets (e.g. gold, EMs, commodities, etc.) as the biggest US growth bulls on the street. For now, that’s a position we feel comfortable taking in the absence of a change of heart at the Fed.

 

Please feel free to email us with any follow-up questions or if you’d like us to forward you the analyses supporting the conclusions laid out at the start of this note.

 

Have a wonderful evening,

 

DD

 

Darius Dale

Associate: Macro Team


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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