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Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement

Takeaway: We remain bullish on FXE and GLD into Thursday's ECB policy meeting.

While we don’t have a crystal ball on how the ECB will act tomorrow, we do know that the Bank has historically surprised (when the ECB last cut the benchmark interest rate in November 2013, from 0.50% to 0.25%, it was widely unexpected by consensus). Frankly, we wouldn’t be surprised if Draghi underwhelms the market’s lofty expectations this time around, and we’re setting ourselves up to buy the EUR/USD (etf FXE) on weakness as we think 1) the sell-off is largely priced in following weeks of rumors about the ECB’s intent to act, and 2) the predictable dovish monetary response by the Federal Reserve as growth surprises to the downside should continue to aid our bearish call on the USD.  (Here we look forward to the FOMC statement on the 18th for confirmation.)

 

The headline CPI estimate in the Eurozone came in lighter than expectations yesterday, increasing at an annual rate of +0.5%  for the month of May while consensus expected +0.6%. Today’s preliminary Q1 Eurozone GDP release printed in-line with expectations at +0.9% year-over-year. With the Euro coming off -2.0% from the March 18th high of $1.3934 and Gold (priced in USD) decreasing -4.5% over the last month, the market expects something from the ECB tomorrow. Draghi’s “whatever it takes rhetoric” about fighting what he has labeled a “Japanese” style deflation risk in recent weeks has successfully strengthened the market’s expectation of a dovish policy move at 7:45 a.m. EST tomorrow morning. In a survey of economists released by Bloomberg, 44 of 50 expect the ECB to implement a negative deposit rate. In a separate survey, 56 of 58 expect a cut in the benchmark interest rate. Consensus estimates expect the ECB to cut its deposit facility rate from 0.0% to -0.10% with the benchmark interest rate being cut from 0.25% to 0.10%.  

 

We believe Gold is a hedge against future dollar devaluation and the price activity in both the Euro and Gold have legitimized this view. We added Gold (etf GLD) on the long-side to Hedgeye's investing ideas list on May 22nd:

 

https://app.hedgeye.com/feed_items/35712-stock-report-spdr-gold-trust-gld?page=1&with_category=32-investing-ideas 

 

The Euro-Gold correlations have trended much stronger relative to historical interaction since the ECB’s first mention of an asset purchase plan back in February:  

 

Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - FXE vs. GLD ETF

 

Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - Euro vs. Gold Spot

 

Gold has historically held a meaningful negative correlation to the arithmetic mean of the U.S. Dollar and ten-year treasury yields. As growth surprises to the downside, the expectation for future dollar devaluation in response to Fed policy response increases. Judging by the move in Gold and currency markets into the meeting, anything short of a significant move from the European central bank is widely unexpected. 

 

Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - Gold vs. Euro Spot Chart YTD with Annotations

 

Also, the anticipation of even easier policy from the ECB moving forward has pushed sovereign debt yields across the Eurozone to historically low levels. Ten-year yields have come in significantly over the last year: 

 

Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - European ten year yields

 

After receiving a $125Bn IMF aid package just two years ago, Spanish yields now hover approximately 30bps over ten-year treasuries. Portugal, which just exited its IMF bailout program in March, borrows at ~100 bps over treasuries. A Bloomberg article published yesterday noted just how drastic this shift has been:

 

“Bond yields in Germany and its predecessors haven’t been this low since at least the early 1800s, when French forces under Napoleon Bonaparte fought wars throughout the European continent.”

 

The Federal Reserve is up next on June 18th, and we expect a dovish statement after a horrendous revised Q1 GDP print last week.

 

We continue to play the sector variances in the market as growth slows and inflation accelerates in the U.S. by remaining long  of utilities (XLU +12.6% YTD), REITs (+15% YTD), and commodities (CRB +9.0% YTD; GLD +8.7% YTD). We remain short of consumption-driven sectors that negatively diverge as the consumer is squeezed with inflation:  XLY (-1.2% YTD) and IWM (-2.6% YTD). As the prospect for future dollar devaluation increases, we like leaning long of inflation in Gold terms as consensus GDP comps for 2H14 become merely impossible. Despite the slowdown, our non-consensus call into Q2 of 2014 remains just that: NON-CONSENSUS. JPMorgan recently cited that its clients have not been as short of treasuries since 2006. Bullish bets on Gold peaked in Mid-March, right before the Euro began selling off from its YTD highs.

 

Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - gold levels

 

Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - eur.usd spot

 

 

Macro Team

 

 

 

 

 

 

 

 

 

 


Poll of the Day Recap: 76% Think the VIX Is Heading Higher

Takeaway: 76% said HIGHER; 24% said LOWER.

In today’s Morning Newsletter, Hedgeye Director of Research Daryl Jones questioned the lack of current market fear writing:

 

"…The area of foreign policy may be one key area in which the amount of concern or fear is lower than reality warrants.  From the Taliban in Pakistan, to the potential for an Iranian nuclear arsenal, to the ongoing conflict in the Ukraine, foreign policy risks remain.  Certainly these global hot spots create buying opportunities more often than global calamity, but at a VIX of sub 12, not a lot of calamity is priced in.”

 

But we wanted to know what you thought, so today’s poll question was: Is the VIX heading higher or lower?

 

Poll of the Day Recap: 76% Think the VIX Is Heading Higher - a storm is coming 246411
 

At the time of this post, 76% said HIGHER; 24% said LOWER.

 

Of those who voted HIGHER, they explained:

  • "I voted higher because, darn it, it can't really drift much lower, can it? Hey, everything is calm and serene...until it's not. It works until it doesn't, then a little panic sets in. One thing is certain: nothing is certain as long as the Fed keeps micro-managing my checking account."
     
  • "Currently, VIX is unusually low, so the expectation is steady, if not healthy robust growth.  The VIX will jump much higher when this rosy expectation isn't being realized."
     
  • "The risk reward on the VIX is definitely up. So higher."
     
  • "DJ said it best. The market is not expecting the unexpected. When unexpected things happen, reactions in financial markets turn flat-out violent."

However, this voter, who said it was heading LOWER, pointed out: "Like shorting the SPX, the VIX has been the pain trade of 2014. Of course a geopolitical event could send the VIX to 20 in a millisecond, but what type of event? Until such event happens, I believe the VIX will stay within KM's risk range of 11.## to 14."

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Hedgeye Retail: $NKE Continues to Innovate with New Patent

Takeaway: It's another arrow in Nike's quiver that differentiates it from its competition.

 Hedgeye Retail: $NKE Continues to Innovate with New Patent - Brands Nike Fire and ice 046145

 

NKE Files Patent for Form Fitting Shoe

  • "A footwear customization kit is disclosed. The kit comprises a container including an article of footwear, a stand, a steaming bag and a set of instructions. The article of footwear includes a customizable portion that can be deformed when heated. The stand and the steaming bag can be used to heat the article of footwear in a steam environment. The stand includes a base portion and a footwear engaging portion. The stand can also include a detachable portion configured to engage the base portion in one position and the footwear engaging portion in another position.

Hedgeye Retail: $NKE Continues to Innovate with New Patent - chart1 6 4

TAKEAWAY FROM HEDGEYE’S BRIAN MCGOUGH:

Nike leads the footwear category in innovation and the margin isn't even close. We're not as excited for a form fitting shoe as we are for the in-store FlyKnit customizer, but it's another arrow in NKE's quiver that differentiates it from its competition. It's much easier to take price when its associated with technical innovation. Even if the wholesale partners (FL, FINL, DKS, etc…) don't initially carry this technology, it is something that Nike can wave in front of them as an incentive to strengthen its leverage over these retailers.

 

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Editor's Note: This is a complimentary research excerpt from Hedgeye Retail sector head Brian McGough. Follow Brian on Twitter @HedgeyeRetail

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Fourth Week of Consecutive Decline in Mortgage Demand

Takeaway: Despite falling rates and solid labor market indicators, the demand to buy homes keeps dropping.

Fourth Week of Consecutive Decline in Mortgage Demand - 18x74ymmndzzhjpg 

MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended May 30. Mortgage purchase application volume slid further this week dropping another -3.6% week-over-week. This brings the streak of negative sequential prints to four in a row on the purchase side. And while 2Q14 is tracking higher vs 1Q14 by 2.9%, it remains down year-over-year by just over -17%.

 

Activity cooled off on the refinance side as well. Despite falling rates, refinance application volume has been negative in both of the last two weeks, falling -2.9% this week and -1.4% in the prior week.  

 

We're more interested in the mortgage purchase volume data as it's the better leading indicator of the direction of housing's momentum, while the refinance data is largely a reflection of rates on a coincident basis.

 

As the chart below shows, demand recently peaked in 2Q13 and has fallen significantly since. Admittedly, 2Q14 is tracking up vs 1Q14 by 2.9%, but relative to the -19% decline since mid-2013 (and the positive shift in weather) this bounce remains quite minor.

 

Fourth Week of Consecutive Decline in Mortgage Demand - Purchase   Refi YoY

 

About MBA Mortgage Applications

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

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Editor's Note: This is a brief excerpt of a research note that was originally sent to subscribers on June 4, 2014 at 8:33 a.m. EST by by Josh Steiner and Christian Drake from Hedgeye's Financials and Macro teams. Follow Josh & Christian on Twitter @HedgeyeFIG and @HedgeyeUSA.

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Retail Callouts (6/4): NKE, WMT, TGT, AMZN

Takeaway: NKE files patent for form fitting shoe. WMT beats TGT to market on chip & pin. New Indian PM could be lifting FDI restraints

EVENTS TO WATCH

 

WEDNESDAY (6/4)

  • FIVE - Earnings Call: 4:30pm

 

THURSDAY (6/5)

  • PVH - Earnings Call: 9:00am
  • VNCE - Earnings Call: 9:00am

 

COMPANY NEWS

 

NKE - NKE Files Patent for Form Fitting Shoe

(http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=/netahtml/PTO/search-bool.html&r=22&f=G&l=50&co1=AND&d=PTXT&s1=Nike.ASNM.&OS=AN/Nike&RS=AN/Nike)

 

  • "A footwear customization kit is disclosed. The kit comprises a container including an article of footwear, a stand, a steaming bag and a set of instructions. The article of footwear includes a customizable portion that can be deformed when heated. The stand and the steaming bag can be used to heat the article of footwear in a steam environment. The stand includes a base portion and a footwear engaging portion. The stand can also include a detachable portion configured to engage the base portion in one position and the footwear engaging portion in another position."

 

Retail Callouts (6/4): NKE, WMT, TGT, AMZN - chart1 6 4

 

Takeaway: NKE leads the footwear category in innovation and the margin isn't even close. We're not as excited for a form fitting shoe as we are for the in-store FlyKnit customizer, but it's another arrow in NKE's quiver that differentiates it from its competition. It's much easier to take price when its associated with technical innovation. Even if the wholesale partners (FL, FINL, DKS, etc…) don't initially carry this technology, it is something that Nike can wave in front of them as an incentive to strengthen its leverage over these retailers.

 

WMT - Sam's Club to Issue MasterCard-Branded Card With Security Chip

(http://online.wsj.com/articles/sams-club-to-issue-mastercard-branded-card-with-security-chip-1401877261)

 

  • "Sam's Club...said it would unveil a new credit card that features chip-enabled security technology."
  • "The new card—co-branded with MasterCard Inc. and issued by GE Capital Retail Bank—represents the first active adoption of the technology by a mass retailer, Sam's Club said."
  • "The new card, along with a new rewards program linked to it, will become available June 23, Sam's Club said."

 

Takeaway: Talk about a punch in the gut for TGT. Target announced its intent to roll out chip and pin enabled cards this year, but gets beat to market by WMT. This is as much about PR as it is about security. TGT needs to prove that it's going above and beyond in the security department to win back its customers, but is unable to move quick enough in order to win the PR battle.

 

AMZN, WMT - Exclusive: India likely to ease restrictions for foreign online retailers next month

(http://www.reuters.com/article/2014/06/04/us-india-retail-idUSKBN0EF0V920140604?feedType=RSS&feedName=topNews&utm_source=dlvr.it&utm_medium=twitter&dlvrit=992637)

 

  • "India could allow global online retailers such as Amazon.com Inc to sell their own products as early as next month, removing restrictions that could boost competition in one of the world's biggest, and most price-sensitive, retail markets."
  • "The decision, which is likely to be announced in the budget, is one of the first tangible signs of economic reform by the business-friendly government of Prime Minister Narendra Modi, who was sworn in 10 days ago."
  • "The move is also likely to allow the government to circumvent political opposition to opening up India's $500 billion retail sector to global retail giants such as Wal-Mart Stores Inc."

 

Takeaway: New PM and the first signs that some of the FDI restraints may be lifted.

 

OTHER NEWS

 

DECK - Teva Strikes Licensing Deal With BBC International

(http://www.wwd.com/footwear-news/business/teva-strikes-licensing-deal-with-bbc-international-7708385)

 

  • "Deckers Outdoor Corp.’s Teva brand has inked a licensing deal with footwear firm BBC International to distribute the label’s children’swholesale business in the U.S."
  • "The partnership will commence this month, with the transition expected to impact the Teva’s spring ’15 product offering."

 

BOSS - Mark Brashear Exits Hugo Boss

(http://www.wwd.com/business-news/human-resources/mark-brashear-exits-hugo-boss-7708164)

 

  • "Hugo Boss said Tuesday that Mark Brashear, chairman and chief executive officer of the brand in the Americas, has left the company. Claus-Dietrich Lahrs, ceo of the Metzingen, Germany-based company, will oversee the Americas until a successor is named."
  • "Brashear joined Hugo Boss to oversee the Americas in 2009. Before that, he was with Nordstrom for nearly 23 years, from 1985 to 2008, where he was executive vice president. From 2001 to 2007, he was chief executive officer of Façonnable, which was owned by Nordstrom during those years. He could not be reached for comment Tuesday."

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 80.30%
  • SHORT SIGNALS 78.51%
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