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RH: MANAGING RISK BY DURATION ***Reminder - Today (1 pm EST)

Takeaway: Today we’ll host a Flash Call on RH to review key issues impacting RH. More importantly, we’ll address puts/takes across 3 key durations.

Please join us on Today, February 10th at 1:00pm EST for a Flash Call on Restoration Hardware (RH) titled RH: Managing Risk By Duration. On the call we will revisit our bullish thesis on RH and address current challenges in the market - real and perceived. 

 

RH: MANAGING RISK BY DURATION ***Reminder - Today (1 pm EST) - RHclient

 

Given all the noise out there in the market, we want to be clear about delineating risk/reward around each of the following three durations:

  • TRADE (3 weeks or less)
    • Sentiment - and the key issues we hear from investors
    • Risk scenarios based on how RH likely fared operationally and financially in 4Q while retailers were dropping like flies
    • Is the Company's guidance at risk, and if so, how much?
    • 'Deferred Revenue' has gotten a lot of attention year-to-date. Is the concern justified, or overblown?
    • How is e-commerce trending?

 TREND (3 months or more)

    • Catalyst calendar throughout CY2014
      • Store opening cadence
      • Category launch
      • Catalog drops, or lack thereof
    • Management transition - life after Carlos

 TAIL (3 years or less)

    • Inflection point(s) in square footage model
    • Impact of larger format stores on the comp
    • Trade-off between in-store vs. direct revenue
    • Gross Margin Opportunity, real or perceived
    • SG&A leverage - or lack thereof?
    • Capital intensity (something no one asks about)

 Call Details

    • Toll Free Number:
    • Direct Dial Number:
    • Conference Code: 367968#
    • Materials: CLICK HERE  (slides will download one hour prior to the start of the call)

CONTACT

Please email  for more information.

 


EMPLOYMENT DATA: BEARISH FOR RESTAURANTS

January’s jobs report was disappointing as employers only managed to add 113,000 jobs in the month despite expectations of 185,000.  Following suit, the narrower data sets released were largely bearish for the restaurant industry.  Employment growth across the youngest two cohorts slowed on a sequential basis, suggesting that sales at QSR chains could remain light in the coming months.  Furthermore, employment growth in the Full-Service, Limited-Service, and Leisure & Hospitality categories continues to decelerate from its mid-2013 highs.

 

Below, we discuss employment by age and restaurant industry employment.  These serve as proxies for demand and operator confidence, respectively, in our models.

 

 

Employment by Age (demand)


Employment growth by age came in mixed in January as the 20-24 YOA cohort saw growth decelerate to +242 bps from +277 bps in December, the 25-34 YOA cohort saw growth decelerate to +19 bps from +149 bps in December, the 35-44 YOA cohort saw growth accelerate to +184 bps from +73 bps in December, the 45-54 YOA cohort saw growth slowing decelerate to -52 bps from -87 bps in December, and the 55-64 YOA cohort saw growth accelerate to +76 bps from +52 bps in December. 

 

Employment by age is an important metric for the restaurant industry.  Given the discretionary nature of casual dining expenditure, and the highly competitive nature of the industry, we infer that sustained employment growth in core demographics is necessary for continued comp growth in the absence of new unit growth or income per capita growth.  The sequential improvement in the 35-44, 45-54, and 55-64 YOA cohorts is, on the margin, bullish for the casual dining industry.

 

Within the QSR segment, we continue to find that the majority of management teams we track consistently highlight the importance of employment growth to the success of their business – particularly growth in the younger cohorts.  The sequential deceleration in the 20-24 and 25-34 YOA cohorts suggests that demand for quick-service and fast casual restaurants could be waning. 

 

EMPLOYMENT DATA: BEARISH FOR RESTAURANTS - 1

 


Restaurant Industry Employment (confidence)


The Leisure & Hospitality employment data, which leads the narrower food service by one month, suggests that employment growth in the food service industry decelerated -17 bps sequentially in January.  That being said, this category registered a month-over-month increase of +24K jobs (second chart below).  

 

The narrower restaurant-focused data sets are also bearish for the restaurant industry.  Both Full-Service and Limited-Service employment growth decelerated sequentially in December.  Growth across all three categories has been decelerating since mid-2013. 

 


Sequential Moves

 

Leisure & Hospitality: Y/Y employment growth at +3.09% in January, down -17 bps versus October

 

Full-Service: Y/Y employment growth at +3.17% in December, down -47 bps versus November 

 

Limited-Service: Y/Y employment growth at +4.05% in December, down -37 bps versus September

 

EMPLOYMENT DATA: BEARISH FOR RESTAURANTS - 2

EMPLOYMENT DATA: BEARISH FOR RESTAURANTS - 3

EMPLOYMENT DATA: BEARISH FOR RESTAURANTS - 4

 

 

Howard Penney

Managing Director

 

 


THE WEEK AHEAD

The Economic Data calendar for the week of the 10th of February through the 14th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - week


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 80.64%
  • SHORT SIGNALS 78.61%

This Is Not 2013

“Everything is the same, until it is not.”

-Dr. Ellen Langer

 

Love that quote in chapter 3, “Variability”, in Langer’s #behavioral beauty, Counterclockwise. “People aren’t all that observant, although we think we are. We see what we expect to see, even to the point that we don’t notice things that others clearly do” (pg 33).

 

Growth investors want to see growth, Gold Bond investors want to see slow-growth, and I want to see Canada win medals at the Olympics. It is what it is – it’s called confirmation bias. And, on some level, most of us have it in us.

 

(Can you see both women in the picture below?)

This Is Not 2013 - oldyoung

 

So how do we become more objectively observant? How do we force ourselves to see what we don’t want to see? Since I’m talking about markets, I think you know where I wash out on this. Mr. Macro Market usually shows us the way.

 

Back to the Global Macro Grind

 

If you were looking to rekindle 2013’s bull market in US stocks, all you’d have to have done is look at the Dow on Friday. It was +165 points (+1.1%) on the second straight jobs report miss. Everything is the same as last year, right?

 

Nope. Including Friday’s low-volume rally (the Top 5 Volume days of 2014 have been down days), the Dow and SP500 are down -4.7% and -2.8%, respectively. And they’ll probably be down again today.

 

This is not 2013 (when inflation was falling and US consumption and employment growth were accelerating). This is 2014 and with #InflationAccelerating again last week, US consumption growth is slowing, faster.

 

Got Hedgeye Macro Theme #1 for Q114?

  1. US Dollar down -0.8% last week and back below @Hedgeye TREND support of $81.12
  2. CRB Commodities Index (19 commodities) +2.3% last wk to +3.4% YTD
  3. CRB Foodstuffs Index up another +1.1% last wk to +4.5% YTD

In other words, as the US economic data slows, Mr. Macro Market is starting to front-run proactively predictable behavior that Janet Yellen will back off on the tapering and/or change the goal posts again on the Fed’s dual mandate.

 

Everything that matters in macro happens on the margin, so don’t forget that last year the Fed got incrementally tighter – anything less would be dovish on the margin, including Yellen moving toward what print-money-forever PhDs call “forward rate guidance.”

 

Not to be confused with something that will work in getting early 2011-style #InflationAccelerating off the US consumer’s back, “forward rate guidance” is basically what Japan did decades ago in telling the world its rates would never go up.

 

Guess what, they didn’t.

 

With the 10yr yield on Japanese Government Bonds at 0.60% this morning, the US Treasury 10yr yield of 2.66% has a long way to go; if the USA wants to let an un-elected-central-planning-bureaucrat at the Fed make it like Japan, that is…

 

Who gets paid on Down Dollar, Down Rates, and #InflationAccelerating again?

  1. Gold and Silver Bulls (+1.9% and +4.3%, respectively last wk to +5% and +2.9% YTD)
  2. Real Estate Bulls (MSCI REIT Index up another +0.8% last wk to +4.9% YTD)
  3. Oil Bulls? Yep, that trade ripped on the jobs miss too – Brent Oil +3% last wk, most of it coming on Friday

Forget the lessons of 2011. In response to inflation expectations rising, we need the Fed to tell us we “need more inflation”… so that we can slow real-inflation-adjusted-growth more!

 

There’s “inequality” in America, so we definitely need to ramp up those prices at the grocery store and at the pump again. Definitely. No question. We need to re-ramp some asset prices and pulverize the purchasing power of the poor.

 

Captain Keynesian textbook will be quick to read this and say:

  1. But inflation is low, CPI is only 1.2%
  2. And if inflation rises, bond yields will rise …
  3. Because, the government says so

Gotit.

 

After deflating a small part of the mother of all inflations (Global Inflation’s all-time highs of 2011-2012), anyone who thinks there’s A) no inflation and B) no problem with inflation doubling sequentially from 1% to 2% needs their head examined.

 

If inflation expectations rise, commodities, wages, household debt levels, and breakevens rise (US 5yr Breakevens up another +4bps last wk to 1.93%); the 10yr bond yield won’t.

 

Why? Because the Fed has 0% credibility in fighting real world INFLATION. That’s why over 80% of the movement in the long-end of the yield curve can be explained by rising and falling GROWTH expectations.

 

In other news this morning:

  1. Dollar Down
  2. Rates Down
  3. US Equity Futures Down

No I didn’t buy the bounce last week (the Russell2000 actually didn’t bounce, it was down another -1.3% to -4% YTD – another growth slowing on the margin signal). Sorry, this is not 2013. Everything is the same until it isn’t.

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1

VIX 14.74-20.41

USD 80.41-81.03
Brent 107.61-109.92

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

This Is Not 2013 - Chart of the Day

 

This Is Not 2013 - Virtual Portfolio


February 10, 2014

February 10, 2014 - Slide1 

BULLISH TRENDS

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BEARISH TRENDS

February 10, 2014 - Slide9

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February 10, 2014 - Slide13


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.

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