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Scary WMT Visual ***Correction

Takeaway: The comp miss is obvious. But the EPS miss is startling given historical context. Not a great start for new CEO McMillon.

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 ***Correction - wmt comps

 

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 ***Correction - eps variance 


INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG

Takeaway: Sub-300k initial claims takes us back to 1999 / 2006, for better or worse. It'll be interesting to see if and when wage inflation engages.

Party Like It's 1999 ...

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.

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 9

 

The Data

Prior to revision, initial jobless claims fell 22k to 297k from 319k WoW, as the prior week's number was revised up by 2k to 321k.

 

The headline (unrevised) number shows claims were lower by 24k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2k WoW to 323k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.2%

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 1

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 2

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 3

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 4

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 5

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 6

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 7

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 8

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 10

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 11

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 12

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 13

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 19

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 14

 

Yield Spreads

The 2-10 spread fell -1 basis points WoW to 218 bps. 2Q14TD, the 2-10 spread is averaging 226 bps, which is lower by -13 bps relative to 1Q14.

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 15

 

INITIAL CLAIMS: ON THIS MEASURE, LABOR CONTINUES TO LOOK QUITE STRONG - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


VIDEO | Keith's Macro Notebook 5/15: EUROPE RUSSELL UST10YR


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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.

Consensus Is Way Wrong

Client Talking Points

EUROPE

ECB President Mario Draghi’s impact on the FX market = lower-highs for the European Equity market? Nope, that wasn’t what he was looking for – so we’ll see if he backs off on getting easier, when it’s been getting tighter (on the margin) that’s worked for both GDP and Eurostoxx.

RUT

The Russell2000 smoked for another -1.6% down day yesterday as CNBC trumpets the “all-time-highs” in their style factor ignorance. RUT is now down -8.7% from its bubbled up March top and remains bearish TREND at Hedgeye. 

10YR

Big day for the inflation slows-growth, long bonds theme yesterday (PPI up +2.1% year-over-year for April). At 2.54% 10-year this morning, (fresh year-to-date lows) bonds are signaling overbought within a very bullish TREND. Consensus on #RatesRising in 2014 is way wrong.

Asset Allocation

CASH 20% US EQUITIES 6%
INTL EQUITIES 8% COMMODITIES 22%
FIXED INCOME 22% 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

TREASURIES: big time payday for #ConsumerSlowing Bond Bulls yesterday @KeithMcCullough

QUOTE OF THE DAY

"If you want to live a happy life, tie it to a goal, not to people or things." - Albert Einstein

STAT OF THE DAY

29, the number of saves Montreal goalie Casey Price made in the Canadiens’ 3-1 victory over the Boston Bruins last night to advance to the Eastern Conference finals.



Cute NYC Rats

“A squirrel is just a rat with a cuter outfit.”

-Sarah Jessica Parker

 

“So”, Obama and I were in NYC yesterday talking about inequality (at separate events, using separate explanations on the why – a 1500 sq/ft apt in midtown going for $3.47M has nothing to do with his Policy To Inflate – eat your ripping rents, and like it)…

 

And I came across an exhibition of sorts from some of de Blasio’s new city tenants. These dudes had few teeth and stunk to high-heaven, but still appeared to have the American Capitalist spirit. They’d spray painted a shopping cart full of rats and were selling pics to tourists.

 

I thought the pink ones with the fluorescent blue were cute. And evidently the high school girl who was posing for her Mom (with two live ones on her shoulders), thought so too. Everyone smiles until someone gets bit.

 

Cute NYC Rats - rat

 

Back to the Global Macro Grind

 

With the Russell 2000 down another -1.6% yesterday, US Growth Style Factors got bit again yesterday. Bond yields crashed to fresh YTD lows too. It was a great day for risk management. The CNBC “we’re at all-time highs” thing is cute and all, but still reeks like a rat.

 

As Detroit’s very own Lily Tomlin once said, “the problem with the rat race is that you’re still a rat.” And having been called more than a few names of this nature on the ice, I can sympathize with those who are forced to chase Wall Street’s performance bogeys.

 

But that doesn’t mean we have to be brain dead about it…

 

To review a very basic if, if, then statement in the Hedgeye Macro Playbook:

 

  1. If inflation is accelerating (you buy inflation)
  2. If growth is slowing (you buy bonds and anything slow-growth-yield-chasing that looks like a bond)
  3. Then, you will win the relative performance rat race of 2014

 

So easy a Mucker can do it, eh?

 

Congrats to the Montreal Canadians for keeping all the Canadian rink rat hopes alive by knocking the Boston Bruins out of the Stanley Cup Playoffs last night. Canadian Olympic Gold medal winning goaltender Carey Price proved that the best offense is a great defense.

 

I’m not sure why some people I talk to get so defensive about being long the defensive slow-growth playbook. Maybe it’s because they are losing. Maybe because it just doesn’t make sense. But maybe it does, and consensus is simply not positioned for it.

 

When people ask me where the proof is of inflation slowing US consumption growth, at this point I simply refer to the data. Don’t forget that US GDP growth was 0.1% in Q1, Retail Sales for April (Q2) missed this week, and US inflation (PPI yesterday) “surprised” to the upside.

 

Looking ahead at the calendar:

 

  1. Post the+2.1% y/y Producer Price (PPI) report for April (versus +1.4% y/y in March)
  2. Today you’ll get another “surprise” to the upside in CPI (Consumer Prices)
  3. Then on Friday, you’ll get more data on US #HousingSlowdown

 

It wasn’t just the Russell Growth Index that got crushed yesterday. US Housing stocks (ITB) got sold to YTD lows too. For 2014 YTD:

 

  1. US Housing Stocks (ITB) are now -6.7% YTD
  2. US Consumer Discretionary stocks (XLY) are now -4.6% YTD
  3. Slow-growth #YieldChasing Utilities (XLU) was UP +0.5% yesterday to +11.1% YTD

 

But you already know that. And you know that I know that almost everyone I talk to says “well, I get it, but I can’t buy Utilities up here after this move.” Why not?  I’m not trying to be a Kenny Linesman rat about this. I’m just trying to make and/or save you money by calling out Sector and Style Factors for what they are – huge competitive advantages in a performance chasing rat race that eventually forces everyone to buy what’s working.

 

We all make mistakes. But the biggest ones I have ever made in this game were doubling and tripling down on losers that kept going down. The Russell 2000 and Bond Yields are going down because consensus US growth expectations are – not because it’s different this time.

 

Don’t let your daughters pose with live pink rats and a toothless guy in NYC. That’s not different this time either.

 

UST 10yr Yield 2.54-2.61%

RUT 1089-1121

USD 79.11-80.29

EUR/USD 1.36-1.38

Brent Oil 108.41-110.36

Gold 1

 

Best of luck out there today,

KM

 

Cute NYC Rats - Chart of the Day


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