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Nickel Surges On Heavy Volumes

Although selling off sharply from the highs, Nickel has gone on a huge run over the last week to touch two-year highs on healthy volumes. The snapshots below from yesterday's close provide a good visual for the magnitude of the recent move. The volume table represents all active nickel contracts traded. 


Nickel Surges On Heavy Volumes - 05.14.14 Nickel Price.Volume


Nickel Surges On Heavy Volumes - 05.14.14 USD Cor


Nickel Surges On Heavy Volumes - 05.14.14 Standard Deviation



Without drawing any unfounded causality, a few data points surrounding the recent volatility are included below:


  • Last week VALE SA, one of the top 3 Nickel producing companies in the world, suspended its operations off the coast of the South Pacific Island of New Caledonia after a contaminants spill


  • BHP Hilton has recently announced its intent to sell its Nickel unit. To put a perspective on the margin pressure they have dealt with, the company’s net margin for the year through June 2013 from its Nickel unit was 1.8% vs. 41% in 2007  


  • Supply concerns surrounding the Indonesian export ban along with the Russian/Ukrainian conflict have fueled supply concerns: 


An axiomatic geopolitical dynamic may exist behind Indonesia’s ban of two major minerals in January, nickel ore and bauxite (commercial ore of aluminum). Two Russian companies, Rusal and Norilsk Nickel, the world’s largest aluminum and Nickel companies respectively, made a deliberate push for Jakarta to pass a controversial mineral ore export ban despite opposition from domestic mining companies and Asian buyers. The campaign was viewed as a positive for both parties at the expense of other global players in the space, namely China, Japan, and the U.S. Company personnel from both Rusal and Norilsk traveled to Indonesia repeatedly last year during a 6-month campaign in which they only agreed to spend billions of dollars on smelters if Indonesia banned nickel and bauxite exports.


Although China is becoming a significant trading partner with Russia, they will undoubtedly face supply constraints. China currently consumes 47.4% of Nickel produced globally:


Nickel Surges On Heavy Volumes - 05.14.14 Chinese Nickel Consumption


The campaign by Rusal and Norilsk was aimed at replacing costly capacity in Russia. The current regime in Indonesia has emphasized the need to earn more form its mineral resources. The export ban will force domestic mining companies to move up the production chain by pushing the processing of the minerals excavated. Jakartra denies having been influenced by either Russian company.


The ban will halt approximately $3Bn of annual exports and has probably helped propel Nickel higher this year (+45% YTD). The shares of both companies quickly rose over 10% in less than a month after the news hit. China and Japan are two of the largest buyers of Indonesian nickel ore, and Beijing is organizing a delegation of Chinese firms to travel to Jakarta to discuss the newly implemented rules. Japan is considering taking the Indonesian export ban to the World Trade Organization. The move has also hurt U.S. miners in Indonesia. Freeport-McMoRan and Newmont Mining Corp have now halted shipments and cut output due to a dispute over an escalating export tax under the new rules.



Macro Team







1 for 5 on the day today for domestic macro data.  You don’t get to play in October batting .200. 


Inflation is rising, production is slowing, goods consumption is slowing, housing is slowing, initial claims are improving.


The 10Y going sub-2.5%, a burning dollar, Russell 2K down -8% YTD, and the 1600bps performance spread between XLU & XLY are telling a cohesive price story about growth expectations.


#InflationAccelerating:   In short, it’s our simpleton view that the conflation of dollar depreciation and rising inflation serves to slow growth as food/energy/rent costs take down a rising share of the consumer’s wallet. 


This is particularly true in an environment of flattish wage growth and when food, energy, and shelter (collectively ~55% of the CPI basket) cost growth is running at multiples of income growth. 




Additionally, and perversely perhaps, the policy response to the growth slowdown only perpetuates it further as the pavlovian investor response to the expectation for (real or rhetorical) incremental easing continues to be to bid up commodities and other slow growth, inflation hedge assets.  In variant forms, this dynamic has played out recurrently in the peri-QE periods over the last 5 years. 


Headline CPI hit 2.0% for the first time since July of last year in April while Core CPI accelerated 10bps to +1.8% YoY, its fastest rate of growth in 13 months. 


Notably, while shelter inflation (~31% weight) has almost singularly supported the headline number over the last year and food/energy inflation have been the outliers YTD, the rise in prices has been broader based the last few months.   


1 for 5: DOMESTIC MACRO HITS THE MENDOZA LINE - CPI  Shelter vs All items ex Shelter


As can be seen in the chart of CPI breadth below, the % of components showing sequential accelerating is beginning to show some 2011’esque mojo. 




Through the lens of the reflexive inflation-growth-policy dynamic described above, it shouldn’t be a surprise that sector variance is looking a lot like 1H11.   


1 for 5: DOMESTIC MACRO HITS THE MENDOZA LINE - SPDR performance table


INITIAL JOBLESS CLAIMS:  Party Like It's 1999 ...

Josh Steiner, our Head of Financials research, provided this summary context with respect to this morning’s positive initial claims data:


The labor market is heading very much in the right direction again. This morning's data marked just the second time since 2007 that the SA print came in below 300k. As the chart below shows, 300k is a Rubicon of sorts in that it has historically coincided with levels of near-peak employment such as 1999 and 2006.


It's interesting to look at the contrast between then and now as the unemployment rate and NFP reports remain well off the levels seen in those respective timeframes.


The disconnect has largely to do with the long-term unemployed, both those being counted in the data and those who've dropped out of the work force, either due to disability or otherwise. If one excludes those in the long-term unemployed category one finds that the labor market today is functionally similar to that last seen in the '99 and '06 periods, albeit with much more modest wage inflation. 


We would reiterate the question, however, that if claims are a measure of slack in the labor force and slack is tight it would seem reasonable to assume that wage inflation should be coming in the near future.


The one wrinkle here remains housing, which is showing plenty of signs of ongoing deceleration


source: Hedgeye Financials




Industrial production declined 0.6% MoM in April, decelerating on both a YoY and 2Y basis. The deceleration was pervasive across industries/sub-indices as capacity utilization dipped back below 79.  


On balance, the April IP data largely agree with the previously released PMI figures which could generally be characterized as “okay”, but certainly not reflecting a recapture of significant, deferred demand from 1Q. 


So, in the battle for accelerating wage inflation, improving initial jobless claims, positive trends in short term unemployment and declining productivity continue to be counterbalanced by ongoing weakness in broader employment measures, middling manufacturing activity and capacity utilization figures, a slowdown in housing, and ongoing softness in household credit and business capex growth.   






We touched on the NAHB data in the inaugural launch of the Hedgeye Housing research vertical this morning - BUILDER CONFIDENCE SLUMPS AGAIN - but the takeaway is rather straightforward = #HousingSlowdown continues. 


The NAHB HMI declined to 45 in May, declining from a downwardly revised April reading of 46. The slowdown remained geographically pervasive with the cratering of sentiment in the West region again leading the declines. 


The builder “optimism spread” (6M expectations less Current Traffic) continued to expand as well – not a particularly favorable harbinger historically.  







Christian B. Drake



Scary WMT Visual

Takeaway: The comp miss is obvious. But the EPS miss is startling given historical context.

***Originally published today at 8:38am EDT, the following note is sourced directly from the Hedgeye Retail Team, led by Managing Director Brian McGough. If you're coming around to our Macro Team's view that #InflationAccelerating slows consumption growth, ping sales@hedgeye.com to speak with Brian regarding his team's Best Ideas on the short side of the US consumer.***


Chart 1 shows what everybody already knows, that WMT comps disappointed. The company cited weather for 20bps of the decline. If there's any retailer who's data we trust, it's Wal-Mart's. But the 2-year trend, which we place much heavier weight on as it relates to drilling down the real underlying trend, is nothing to write home about. This plays right into Hedgeye's #growthslowing theme as it relates to the US Consumer.


Scary WMT Visual - 1


The more telling visual is the EPS miss. In 11 years, WMT has only missed 12 times, and nine of those were by a penny. Today it missed by a nickel. That's only happened once before -- in 2007. The blue bars in this chart show the absolute EPS variance to consensus for each quarter. The dots refer to the right axis showing the percent beat or miss in each period.   Not a good way to start things off in the first quarter for new CEO Doug McMillon.


Scary WMT Visual - 2


Brian McGough

Managing Director


Alec Richards



Jeremy McLean



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Cartoon of the Day: Inflation Shipwreck

Takeaway: #InflationAccelerating slows growth.

Cartoon of the Day: Inflation Shipwreck - Inflation ship wreck 5.15.20



Takeaway: Builder confidence slumped again in May. Taking a step back, this is consistent with the majority of recent housing data.

Welcome to The Hedgeye Housing Research Vertical

Today we are introducing our inaugural Hedgeye Housing Vertical research product. The effort is being led by Josh Steiner and Christian Drake from the Financials and Macro teams. Subscribers to Financials and/or Macro verticals are currently set up to receive this product. If you'd prefer not to receive our housing-focused research going forward please let us know.


Our goal is to help investors understand the trends and spot inflection points in the US housing market by tracking 15-20 different housing data series and presenting them in a hyper-simple format. Whenever data hits we will publish a brief note summarizing its importance, or lack thereof. Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


We've broken the market into four main categories: Home Prices, the existing home market, the new home market, and other miscellaneous data. The focus is on simple supply and demand measurements and whether they're weakening or strengthening, on the margin. We're using red and green to make it easy for investors to gauge, at a glance, whether there's widespread improvement, deterioration or a mixed bag. 


As the housing research effort evolves we hope you'll engage us with questions and feedback.  




THE BULLS TURN BEARISH:  Summarizing the Evolution of our Call

After being discretely bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly negative at the beginning of the year and elevated #HousingSlowdown to a top Macro theme for 2Q14. 


The 2Q14 Macro Investment Themes presentation detailing our expectation for an intermediate term slowdown in housing can be found HERE


Additionally, we’ve compiled ~300 housing related research notes that had previously been published within the Financials vertical.  That research is now available for review in the new Hedgeye Housing vertical on our website.   


Today's Focus: NAHB HMI (Builder Confidence Survey)

This month, the NAHB’s HMI, which measures builder confidence, fell to 45, a drop of one point from April’s print of 46 (which was downwardly revised from 47).


This is the fourth consecutive month of decline/stagnation. While NAHB Chairman Kevin Kelly interprets this as “in line with the market reality of a continuing but modest recovery,” we see it as a clear inflection from the path housing had been on between June 2013 and January 2014, when the HMI posted its strongest post-housing crisis prints (ranging from 51-58).


In February of this year, the index dropped 10 points to 46 with the weakness extending through the latest reading.  It's notable that the step function move lower in builder confidence has been geographically pervasive and has persisted in the face of the positive turn in the weather. Though these prints are still well above those of 2008-2011, they do not suggest a housing market in the midst of an accelerated comeback.


At the sub-index level, the components that make up the HMI were mixed. That gauging current sales conditions fell from 50 in April to 48 in May. The component measuring buyer traffic increased two points to 33, and the component gauging sales expectations during the next six months rose from 56 to 57. Once again, these numbers do not speak to great strength; the NAHB expects only a one point increase in sales until the end of 2014.


On a regional level, builder confidence remains strongest in the South and weakest in the Northeast. The only significant movement in regional HMIs was a four-point drop in the West, where the significant and expedited drawdown from the January peak of 71 to 44 in May further extended itself.


While the last four months’ prints have been stronger than those of 2008-2011, they remain weak in comparison to 2013's rising prints. Don’t let ABC News Nightline talk of bidding wars fool you; the recovery is losing momentum and the appropriate question from here is how low will it go? 












About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.



Joshua Steiner, CFA


Christian B. Drake


KSS – 1Q Gives Us Greater Confidence in our Short

Takeaway: Not much in 1Q to challenge our Short call. We're taking down our estimates, which are already well below consensus. We'd press it.


No change to our KSS Short Thesis. If anything, the lack of conviction and strategic thought process from management on the conference call reaffirmed our view that the problems at this company go far beyond a singular quarterly report.  The weak comp (-3.4%) was not a major surprise given what we’ve seen out of other retailers, but even we didn’t think we’d see anything worse than -2.5%. What’s surprising is that the company held its full year EPS guidance constant despite the $0.03 miss.


We get the favorable impact of a lower tax rate and lower share count. But KSS is taking down D&A – which helps by $0.15 (or 3.7% EPS growth). Companies don’t make a decision to change depreciation rates so early in the year if they’re confident about where they’re headed. Also, KSS didn’t disclose its dot.com growth for the first time in at least three years. KSS has had the best growth rate in e-commerce out of any major retailer over the past eight years (38.9% CAGR) and it has served as a pillar of support for KSS’ growth algorithm. That’s clearly weakening.


And of course, JC Penney as an emerging competitive threat was not mentioned even once on the call. We think the Macro and industry cross currents are going to smack KSS from every direction, and we don’t think it sees it coming. We’re lowering our already below-consensus estimate for this FY by a nickel to $3.84. We don’t see how sales or margins are up for the year. In the outer years, we remain 20-30% below the consensus.


KSS – 1Q Gives Us Greater Confidence in our Short - kss financials



Here’s a few points relevant to KSS from our revenue overlap study from earlier this week regarding JCP and KSS. The punchline – based on a detailed analysis – is that JCP has about 300 stores to close. We overlapped each of those locations with every KSS store market by market to gauge the potential revenue windfall for KSS, as we viewed a meaningful revenue shift from JCP closures as one of the few risks to a KSS short. In the end, it was far less than we suspected.


1.   Revenue Impact of Closures. Our math suggests that these stores would only result in about $550mm-$600mm in revenue loss to JCP. Importantly, KSS only overlaps in 42% of these markets. Our research shows that KSS took about 19% of the $5.4bn in sales JCP hemorrhaged over the past three years. If we apply a 20% share gain level to this analysis for KSS, it suggests about $73mm, or less than 0.4% to KSS in comp. If you want to get more aggressive and assume that KSS takes 100% of that revenue (which WMT won’t allow) you’re looking at about 1.9% in comp to KSS. We think something far below 1% is closer to reality. Here’s the sensitivity analysis below.


KSS – 1Q Gives Us Greater Confidence in our Short - kss2


2.   No Growth KSS. This analysis suggests to us that KSS can only add stores in lower demographic areas. We fully recognize that there are few people running around touting KSS as a unit growth story. But this math is definitely worth sharing. The numbers on the horizontal axis refer to JCP’s entire store base. The bucket to the far left is represents the most attractive demographic locations. The bucket to the far right represents the least attractive locations. The columns show the percent overlap KSS has in each bucket of those JCP stores. The point is that in the top 600 locations, KSS has near 100% overlap with JCP. Then it begins to tail down slightly – with the only real opportunity for growth in JCP’s worst 300-400 markets.


KSS – 1Q Gives Us Greater Confidence in our Short - kss3


3.   KSS Has The Greatest Exposure to JCP Prior (Not Future) Share Loss. Every time we conduct a survey, we look at the dispersion of the of the lost JCP business by retailer. We had a lot of people argue with us over the past two quarters when we presented our 18-19% share stat – but this time around, it was validated yet again. The numbers suggest that KSS captured about $1bn of the $5.4bn JCP gave away. WMT is slightly higher, but as it relates to percent of each retailer’s sales, no one even comes close to KSS at 5.3% of total sales. 


KSS – 1Q Gives Us Greater Confidence in our Short - kss4 

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