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Just Don’t Call it Inflation

Client Talking Points

USD

Fed Minutes yesterday remind you that these un-elected, lagging economics majors have a 0% policy to fight inflation. So, whether you like it or not, you are going to get more inflation, and that is going to slow consumption growth moar – buy bonds on growth slowing, because that’s all the 10-year yield trades on.

COMMODITIES

Beef prices hit an all-time high yesterday (LA Times), and while all-time is a long time, do not call this inflation. The CRB Index powered to new highs yesterday at +10.7% and Gold charges forward this morning back to +10% year-to-date. Silver is up +2.5% this morning too. This is Fed front-running 101.

10YR

Consensus continues to expect our call from last year (#RatesRising), and rates continue to fall. A 2.65% 10-year yield is basically yelling that the rate of change in US growth from here is down, not up. Meanwhile, the SPX risk range is wide open now to 1830-1890. Should be fun.

Asset Allocation

CASH 34% US EQUITIES 0%
INTL EQUITIES 8% COMMODITIES 16%
FIXED INCOME 20% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

 

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

China's March Exports -6.6% y/y; Imports -11.3% y/y! @KeithMcCullough

QUOTE OF THE DAY

"A man with no imagination has no wings." - Muhammad Ali

STAT OF THE DAY

Come grilling season, expect your sirloin steak to come with a hearty side of sticker shock. Beef prices have reached all-time highs in the U.S. and aren't expected to come down any time soon. The retail value of "all-fresh" USDA choice-grade beef jumped to a record $5.28 a pound in February, up from $4.91 the same time a year ago. The same grade of beef cost $3.97 as recently as 2008. (Los Angeles Times)


Someone's Smoking Some Keynesian Crack

Takeaway: There is no inflation. Just ask one of these unelected and unaccountable government guys.

No inflation for four years.

 

That’s what this Keynesian character from the Minnesota Fed (Narayana Kocherlakota) said earlier this week. I couldn’t make this up if I tried, but here’s his explanation:

 

"The low inflation in the United States tells us that resources are being wasted...I’ve said that the FOMC is undershooting its price stability objective and is expected to continue to do so. But we should all keep in mind that this outcome—and especially the forecast for continued undershooting—typically means that the FOMC is also underperforming on its other objective of promoting maximum employment."


In related news, our Q2 Macro Themes released to subscribers on Tuesday has the exact opposite view. Ping sales@hedgeye.com for more info.

 

Someone is smoking something here, and since I don’t do drugs, I don’t think it’s me. This guy is cheering on the very thing that is slowing real growth (#InflationAccelerating).

 

Simple equation: Fed Minutes  = Burn The Buck --> Commodity Inflation rips.

Someone's Smoking Some Keynesian Crack - FoodPrices02.18.2014

Take a look around this morning:

  • COMMODITIES: freshly squeezed YTD highs in commodity #InflationAccelerating (CRB Index +10.7% YTD)
  • COFFEE prices up 68% YTD
  • BEEF prices hit all-time record high in US
  • GOLD: ramps the whiners another new one (back to +10% YTD); Silver (which we're long in #RTA too) +2.5% this morning too

Your un-elected Fed says food prices are "non-core" to American life. Try telling that to average Americans in the grocery store. In other words, there is no inflation. Just ask one of these unelected and unaccountable government guys smoking Keynesian crack.


Retail Callouts (4/10): BBBY, PIR, RH, WSM, KER, LULU, TGT, WMT, LB, VNCE

Takeaway: RH/WSM vs BBBY/PIR tag team – no contest. KER looking for sports brands -- LULU? TGT and WMT battle over granola. LB/Vicy sheds outerwear.

COMPANY NEWS

 

BBBY and PIR Both Put Up Less-Than-Stellar Results. But there's an Important Theme.

 

Look at the SIGMA trajectory for both retailers. Sales down, inventories up, weak margins. But how come that is in such stark contrast to what we saw out of RH and WSM? Aside from better product, merchandising, and marketing, there's a structural factor as well.  BBBY generates only 4% of its sales online. PIR is only at 5%. That means when people don't want to leave their homes due to weather, sheer laziness, or whatever, BBBY and PIR are at a competitive disadvantage. RH and WSM, however, generate nearly half of their respective sales online.  They both have the ultimate channel hedge to complement their premium product offering. This quarter it made a difference.

 

BBBY may have printed earnings that are in line with prior guidance, but any way we slice it, this SIGMA trajectory looks horrendous. A 6% sales decline on a 5% inventory build is was out of character for BBBY.

 

Retail Callouts (4/10): BBBY, PIR, RH, WSM, KER, LULU, TGT, WMT, LB, VNCE - chart1 4 10

 

As bad as Bed Bath looks, Pier 1 looks even worse. Not enough sales, way too much inventory, and no margin to be found.

 

Retail Callouts (4/10): BBBY, PIR, RH, WSM, KER, LULU, TGT, WMT, LB, VNCE - chart3 4 10

 

KER - Gucci Owner Kering to Consider Buying Sports Brands

(http://www.bloomberg.com/news/2014-04-10/gucci-owner-kering-to-consider-buying-sports-brands.html)

 

  • "...Kering SA will consider acquiring sports and lifestyle brands in three years as it assesses the performance of the Puma label, Chief Executive Officer Francois-Henri Pinault said."
  • "Any deal will hinge on Kering’s ability to reverse the fortunes of Puma...which has been undertaking a reorganization since 2009, he said in an interview in Hainan, China. Pinault, who’s also Kering’s chairman, said he’s 'convinced' the Paris-based company should have a sports-and lifestyle-oriented business."

 

Takeaway: The list of premium sports brands that Kering can buy is actually quite small. But there's one that is a) premium, b) global, c) in need of major help, and d) is run by a fellow Frenchman.  In case you have not guessed already, that's Lululemon.

 

WMT and TGT Fight Over Granola

 

Takeaway: Wal-Mart offering organics at a 25%+ discount is a daunting development for incumbent organic brands at WMT. But what's more interesting is that TGT came out with a simultaneous announcement that it will dramatically up its organic product -- but it is not bringing price into the equation. Ultimately, will people want a better brand selection at Target, or a focused selection with deep discounts at WMT? Our sense is that Wal-Mart will win this one. But the wild card remains how each company conveys the value proposition to consumers.

 

WMT - Walmart to Offer Organic Line of Food at Discount Prices

(http://www.nytimes.com/2014/04/10/business/walmart-to-offer-organic-line-of-food-at-cut-rate-prices.html?partner=rss&emc=rss&_r=0)

 

  • "Walmart plans to announce on Thursday that it is putting its muscle behind Wild Oats organic products, offering the label at prices that will undercut brand-name organic competitors by at least 25 percent."
  • "For now, Walmart will carry the Wild Oats label, which is owned by the Yucaipa Companies, a private investment firm, only in its pantry section, with items like tomato paste, chicken broth and cinnamon applesauce cup. Over 90 percent of its offerings at Walmart will be organic…"
  • "Instead of hitting the entire national market at once, Walmart will first introduce Wild Oats at 2,000 stores in the coming months, only half of its national footprint, and then roll it out to the rest of the country. Mr. Sinclair said that concerns about supply kept the retailer from introducing the brand in all its stores at once."

 

TGT - Target Ups Organic Offering

(http://www.wwd.com/retail-news/mass-off-price/target-ups-organic-offering-7635834)

 

  • "The mass retailer is expanding its selection of natural, organic and sustainable brands under the 'Made to Matter' umbrella."
  • "The 'Made to Matter — Handpicked by Target' collection is comprised of 17 leading natural, organic and sustainable brands. Target is making the products more accessible to consumers. Merchandise will be available throughout the store, both in the products’ usual aisles and as part of displays for the collection. Select products also will be available on target.com and Target’s mobile app."
  • "'Made to Matter' brands include Annie’s Homegrown, Burt’s Bees, Chobani, Clif Bar & Co., Ella’s Kitchen, Evol, Horizon Organic, Hyland’s, Kashi, Method, Plum Organics, Seventh Generation, SheaMoisture, Target’s Simply Balanced, Vita Coco, Yes To and Zarbee’s Naturals. 'The Made to Matter' collection includes all products now offered at Target by the participating brands and at least one new exclusive item from each brand."

 

LB - Victoria's Secret Trims Apparel Collections

(http://www.wwd.com/markets-news/intimates-activewear/victorias-secret-trims-apparel-collections-7636621)

 

  • "WWD has learned that Victoria’s Secret will be narrowing its apparel offering by dropping most of its wovens, outerwear, denim and some of the dress offering as well. Hundreds of millions of dollars worth of revenues will be shed, with one apparel source estimating anywhere between $500 million and $750 million of volume."
  • "Changes to the Victoria’s Secret collection will begin being evident right away but most noticeably by next fall. The decision to cut back, revealed internally at L Brands headquarters in Columbus, Ohio, on Tuesday, impacts Victoria’s Secret Direct. It does not affect the Victoria’s Secret stores, which stick to the core offerings. It also does not affect Pink…"

 

Takeaway: No argument here. The reality is that if you ask a hundred consumers what Victoria's Secret does best, not a single one will say 'denim'. The one product extension that makes sense to us is Yoga, where it has had very good success (which will continue).

 

VNCE - Vince Unveiling Kids' Collection in June

(http://www.wwd.com/markets-news/juniors/vince-unveiling-kids-collection-in-june-7636284)

 

  • "The brand’s new kids’ line will be launched in June at stores such as Barneys New York, Bergdorf Goodman, Neiman Marcus, Saks Fifth Avenue, Bloomingdale’s and Nordstrom, as well as 25 kids’ specialty retailers, select Vince locations and vince.com. The collection is licensed to Tawil Associates in New York, which is Vince’s second licensing partner. Its first is with Brown Shoe for women’s and men’s footwear."
  • "For girls, retail prices range from $24 for a tank to $598 for a scuba leather jacket. For boys, prices start at $34 for a crew-neck T-shirt and go as high as $398 for fall and winter jackets."

 

Retail Callouts (4/10): BBBY, PIR, RH, WSM, KER, LULU, TGT, WMT, LB, VNCE - chart2 4 10

 

Takeaway: It's way too early in Vince's lifecycle to be extending into kids. It's one thing to sell a T-shirt for $75 and jacket for $1,000 to an adult, but to push a $500 price point for an 8-year old? Seems a bit extreme for product that from 20-feet away looks like it might have come from Uniqlo at 1/10th the price point.

 

OTHER NEWS

 

ANF - ABERCROMBIE & FITCH NAMES JOANNE C. CREVOISERAT EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

(http://phx.corporate-ir.net/phoenix.zhtml?c=61701&p=irol-newsArticle&ID=1917376&highlight=)

 

  • "Abercrombie & Fitch Co. today announced that Joanne C. Crevoiserat has been named Executive Vice President and Chief Financial Officer of the company, a position she is expected to take up in May, 2014."
  • "Since 2007, Ms. Crevoiserat has served in a number of senior management roles at Kohl's Inc., most recently as Executive Vice President of Finance and prior to that, as Executive Vice President of Merchandise Planning and Allocation. Prior to Kohl's, Ms. Crevoiserat held senior finance positions with Wal-Mart Stores and May Department Stores, including serving as CFO of the Filene's, Foley's, and Famous-Barr brands."

 

GPS - Gap CEO Glenn Murphy Compensation Falls

(http://www.wwd.com/retail-news/people/gap-ceo-glenn-murphy-compensation-falls-7636071)

 

  • "Murphy’s total reported compensation was $18.7 million, 24 percent below the $24.6 million reported for 2012, according to Gap’s definitive proxy filed this week with the Securities and Exchange Commission."
  • "His salary was unchanged at $1.5 million while his cash bonus — or non-equity incentive plan compensation — fell 40.5 percent to $2.7 million from $4.5 million a year ago, when he received the highest amount possible under Gap’s compensation plan."
  • "Combining salary and bonus, the cash portion of his compensation fell 30.4 percent to $4.2 million from $6 million in 2012."

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FLASHBACK: McCullough Warns In Morning Newsletter About Bubble Bursting

Takeaway: I know no one wants to call it a bubble. There’s career risk in calling something what it is.

Editor’s Note: This is one (among many) recent warnings issued by CEO Keith McCullough in his daily “Morning Newsletter” to our customers about the Social Media Bubble bursting. Keith and the analysts here at Hedgeye have been dead right about this outside-consensus market call. We have been steadfastly advising our customers to buy Gold, buy Utilities, short highflyers like YELP, TWTR and much more. If you want to be a part of a winning team and be ahead of the Wall Street herd, you should join us today. Click here to learn how. Why wait any longer?

 

This note was originally published at 8am on March 27, 2014.

 FLASHBACK: McCullough Warns In Morning Newsletter About Bubble Bursting - bubble

“Boom, crush. Night, losers. Winning, duh.”

-Charlie Sheen

 

I was in Vegas playing cards with Sheen last night and that’s what he told me about his short Facebook (FB) position. Social Media Bubble, yep. Crushing it.

 

I’m here to give the keynote rant today (11AM Las Vegas time) at the Government Investment Officers Association (GIOA) conference. Kidding on the Sheen part; not on the government.

 

USA going on the fritz (Federal Reserve Induced Trauma Zone) won’t be the subject of my speech. I’m going to give these guys the Hedgeye wood - #InflationAccelerating slows real US growth.

 

Back to the Global Macro Grind

 

I know no one wants to call it a bubble. There’s career risk in calling something what it is. But seriously mo bros, with Facebook (FB) -17% since March 10th (coincided with the all-time-bubble-high in US stocks) and Twitter (TWTR) -30% YTD, what’s the fuss?

 

BREAKING: Candy Crush (KING) -15.6% on IPO day

 

Boom! Crush. This stuff gets real in a hurry doesn’t it? But does the whole free world care? While 2AM PST isn’t my favorite wakeup call on The Strip, I did smile to see that almost all of Asian and European Equity markets didn’t care about USA’s baggage.

 

Baggage?

 

Yes, after creating the 1st internet bubble (1999), then the US real estate bubble (2005-2006), then the commodity bubble (2011-2012)… then the bond bubble (2011-2012), then the 2nd half-baked internet bubble (2013), this is a uniquely American experience.

 

Maybe that’s why (in spite of the social media stock time-spanking into the close yesterday):

  1. South Korean Stocks (KOSPI) built on yesterday’s gains, closing +0.7%
  2. Indian Stocks (BSE Sensex) closed up another +0.3% to +4.7% YTD
  3. Italian Stocks (MIB Index) are trading up small this morning at +11.5% YTD

I know. The Italians have a lot of crony socialism issues, but one of them is not trying to talk their entire country into calling $2B for a headset (Ocular) another brilliant Zuckerberg idea. WhatsApp was a cool Bud Light commercial for a few weeks too don’t forget.

 

Back to the real world and our GIP model (Growth, Inflation, Policy):

  1. US continues to see #InflationAccelerating (CRB Commodities Index up again yesterday to +7.6% YTD)
  2. And the slope (rate of change) in real US Growth continues to slow (not just the weather)

But don’t take my word for it, ask the bond market:

  1. US 10yr Treasury Yields down again this week to 2.70%
  2. Yield Spread (10yr minus 2yr) continues to compress (-7bps this wk)

This is precisely what happened in 2011. As the Yield Spread compressed (leading indicator for growth slowing) the Financials (XLF) started to underperform slow-growth-yield-chasing (Utilities) and the US stock market saw multiple compression.

 

In other words, if you weren’t levered long YELP yesterday, but had:

  1. Commodities long
  2. Bonds long
  3. Anything that looks like a bond (Utilities, REITS, etc.) long

You crushed it.

 

Yeah, I know. We have you long Gold, and that’s not working this week. At -0.7% this morning, it’s still +7.7% YTD though. Beats Twitter. And it sure beats being long who gets crushed by inflation (US Consumers):

  1. US Consumer Discretionary Stocks (XLY) -4.1% YTD
  2. Utilities (XLU) +7.0% YTD

These performance divergences are called variance. And finally we have ourselves an Angry Bird like game here folks – where stuff actually goes down (hard), while other things stay up.

 

Coming off generational lows in US sector variance (i.e. you could have bought any sector and been up last yr), across longer-term investing cycles, this is as mean reverting as any portfolio risk in macro. Yep, sector and stock picking is cool again.

 

So, from here, do you buy the Candy Crusher or the new banking fees boy king at FB? Or do you do neither and go back to buying the Bernanke Bubbles (Commodities, Gold, Bonds) that blew up last year? We’ll do the latter. Mean reversion bubble trading works, duh.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.63-2.75%

SPX 1842-1878

VIX 13.03-17.14

USD 79.18-80.40

Pound 1.65-1.67

Gold 1278-1334

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

FLASHBACK: McCullough Warns In Morning Newsletter About Bubble Bursting - sheen


ICI Fund Flow Survey - Balanced on an Absolute Basis but Bond Slopes are more Favorable

Takeaway: In the most recent week, absolute money flow into mutual funds was balanced but fixed income continues to display relatively better trends

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, absolute money flow into mutual funds was balanced between fixed income and equity products but bond trends continue to display improving rates of change versus decreasing momentum in equities:

 

Total equity mutual fund flow improved sequentially week-to-week but produced a tally below the 2014 year-to-date weekly average. The $3.1 billion that came into all equity mutual funds during the most recent 5 day period ending April 2nd was split between a fairly weak $949 million inflow into U.S. equity funds versus the $2.1 billion that moved into international stock funds. This higher demand for foreign equity products has been consistent over the past two years with international stock fund inflow having averaged $2.8 billion per week this year and $2.6 billion per week last year in 2013 with domestic fund products averaging an inflow of just $1.2 billion thus far in '14 and a $451 million inflow last year in comparison. The 2014 running weekly average inflow for all equity mutual funds is now $4.0 billion, still an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual fund flow improved sequentially week-to-week and the 12 week linear trend lines in the product graphs below display improving momentum for bond funds versus equity funds. For the week ending April 2nd, $3.3 billion flowed into all fixed income funds, an improvement from last week's $1.2 billion inflow. The breakout of improving bond fund inflow amounted to $3.1 billion into taxable products and a $202 million inflow into tax-free or municipal products. The inflow into taxable products this week was the 8th consecutive week of positive flow and the inflow into municipal or tax-free products was the 12th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).

 

ETFs experienced positive trends during the week, with a very strong week of subscriptions into stock ETFs with $4.1 billion in net inflow with bond ETFs experiencing a slightly above average inflow of $1.6 billion for the most recent 5 day period. The 2014 weekly averages are now a $421 million weekly inflow for equity ETFs and a $946 million weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $2.3 billion spread for the week ($7.3 billion of total equity inflow versus the $4.9 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.2 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

 

ICI Fund Flow Survey - Balanced on an Absolute Basis but Bond Slopes are more Favorable - ICI chart 1

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey - Balanced on an Absolute Basis but Bond Slopes are more Favorable - ICI chart 2

 

ICI Fund Flow Survey - Balanced on an Absolute Basis but Bond Slopes are more Favorable - ICI chart 3

 

ICI Fund Flow Survey - Balanced on an Absolute Basis but Bond Slopes are more Favorable - ICI chart 4

 

ICI Fund Flow Survey - Balanced on an Absolute Basis but Bond Slopes are more Favorable - ICI chart 5

 

ICI Fund Flow Survey - Balanced on an Absolute Basis but Bond Slopes are more Favorable - ICI chart 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey - Balanced on an Absolute Basis but Bond Slopes are more Favorable - ICI chart 7

 

ICI Fund Flow Survey - Balanced on an Absolute Basis but Bond Slopes are more Favorable - ICI chart 8

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $2.3 billion spread for the week ($7.3 billion of total equity inflow versus the $4.9 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.2 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week).

 

 

ICI Fund Flow Survey - Balanced on an Absolute Basis but Bond Slopes are more Favorable - ICI chart 9 

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 



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