Oil and Inflation: BRENT and WTI Reach Nine-Month Highs

The quantitative set-up for Brent Crude is in what we call a Bullish Formation (i.e. bullish on all 3 of our core risk management durations, TRADE, TREND, and TAIL).


Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - BRENT Levels


Brent Crude increased +4.4% on ICE last week to its highest level since September and now sits at +1.8% YTD after hovering unchanged for most of the year. WTI also touched 9-month highs on NYMEX on Friday, closing at +4.1% on the week (+8.6% YTD). Market sentiment, as measured by net positions in all actively traded futures and options contracts, suggests the market is leaning 4.7% longer than its 6-month average. Volume in Brent has spiked and front-month implied volatility has more than doubled to 18% from the lowest levels since 1988 on June 3rd (7.2%). 


Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - Friday Brent Volume


Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - Brent Implied Vol


Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - CFTC Net Contracts NYM Crude


Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - USD 1 week correlations


The CRB sits at +10.5% YTD with 16 out of 19 commodities in green territory. We reiterated our consumer slowing call yesterday in the chart-of-the-day by showing a snapshot of just how sensitive the average American is to food and housing prices: 


Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - PCE Expenditure Survey Visual


Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - Median Consumer


Hedgeye’s inflation call has not been to ignore the potential price impact of unexpected weather and geopolitical tension in commodity markets year-to-date. Periods of relative calmness followed by bouts of heightened volatility have historically been commonplace. The commodity inflation that perpetuates our #consumerslowing theme remains a self-reinforcing headwind on the consumer. With a final Q1 GDP revision that could be as low as -2% on the 25th coupled with a CPI reading this morning that doubled-up expectations (+0.2% vs. +0.4% estimated), an easier than expected policy response tomorrow from Janet Yellen is probable.

Market participants choose to hold commodities for different reasons. For example, our view on Gold’s interaction with policy has been well documented. We added Gold (ETF: GLD) to Hedgeye’s investing ideas on May 23rd and remain comfortable on the long-side:


To clarify our process, we do not view the choice to hold GOLD or something like a COFFEE futures contract to hedge the heightened expectation of future dollar devaluation as interchangeable. With regard to the push-back we have received on highlighting weather-driven, overextended softs and agricultural commodities as a driver in our inflation call...


We have not made the argument that the entire complex’s negative correlation with the dollar is purely a growth and policy relationship. However, a spike in the cost of the goods and services that people consume alongside a flat dollar perpetuated by wealth-destroying monetarism burdens the consumer on the margins. This squeeze results in slower-than-expected consumption growth. We highlight the risk in this environment by alluding to sector variances and the increasingly negative correlations between the U.S. dollar and the commodity complex as a whole as this shift takes place.

Therefore, ignoring all arguments for why commodity prices are at artificially-high levels (i.e. weather, geopolitics, etc.), the reality is that they ARE in fact much higher from three months ago:


Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - CRB Dashboard


It will always be difficult to predict the next volatility-producing event in the space, but consequential responses to sharp changes in supply and demand are almost certain to follow. Unfortunately monetary policy has made the average consumer increasingly sensitive to commodity and asset price inflation as margins become thinner on a micro level. Almost 50% of the average American’s after-tax income is spent on food, housing, and utilities. 




Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - nat gas brent wti ytd


Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - brent futures curve


Proven crude oil reserves seem plentiful with North America’s newly utilized capacity. Brent has hovered in negative territory for most of the year with the crack spread near all-time highs despite geopolitical tension and a surge in the commodity complex. The forward curve suggests this downward trend will continue:


Oil and Inflation: BRENT and WTI Reach Nine-Month Highs - nat gas brent wti ytd


However, a number of factors suggest that today’s geopolitical dynamic is capable of instilling fear of short-term supply disruptions:

1)      Chinese reserve-build policy and forceful effort to obtain production capacity   abroad (East and South China Seas)

2)      Political Unrest in OPEC’s second largest producing country

3)      Supply restraints imposed on Ukraine   

On Friday June 6th we hosted guest speaker, Professor Charles Hill to highlight some of the axioms of these three points of concern:


The EIA estimates that southern Iraq holds about 75% of the country’s proven reserves. Iraq shipped 3.3MM barrels/day last month on average and it ranks second in oil exports among OPEC countries behind Saudi Arabia. All of May’s exports were shipped out of southern ports. ISIL militants were successful in seizing the Kirkuk-Ceyhan pipeline, halting repairs, and taking Iraq’s second-biggest city, Mosul, but oil has ceased had flowing through this Mediterranean port since March 2nd. Nevertheless ISIL has successfully halted stopped the repairing of this pipeline which is capable of exporting 310K barrels/day. Abdalla El-Badri, Secretary General of OPEC, said yesterday in front of the World Petroleum Congress that Iraq will maintain its production limit of 300MM barrels/day for now. Iraq successfully shipped 5.43M barrels of oil from Basra in Southern Iraq on Friday and supply disruptions have not yet materialized.     


Ben Ryan








Trending along the bottom, not worse but not significantly better...but that's a directional improvement.  





Prepared Comments

  • Balancing act - operating efficiency while improving guest experience.
  • Top line remains challenged
  • Focused on operational efficiencies
  • Change in culture - challenges of regional gaming...
  • Creating value for customers and stakeholders
  • Margins: 4Q margins up 90 bps


Balance Sheet:

Corporate Line of Credit $64m outstanding

Leverage 6.2x for covenant purposes

Retired $90m of debt, leverage down 0.25x

Capacity $184 million


2015 Guidance

D&A:  $80-$82 million

Int Exp: $83-$85 million

Maintenance capex $47-50 million



Q & A

  • New Golden Nugget in Lake Charles - Formulated battle plan for marketing, staffing, etc.
  • Blackhawk and Monarch expansion - expect Monarch to create more foot traffic for pod 1.  Ameristar promoting/marketing new car give away, challenge to market share battle. 
  • ISLE formal plan to go land based in Bettendorf - what is incremental capex and how to fund it? Going through application process with City, still finalizing scope of project. Could fund with capacity on revolver. 
  • Additional development plans at Pompano?  Looking at Pompano, a lot of options, but until better understanding of how Florida may develop for gaming simply wait.
  • Pompano results driven by higher slot play and higher F&B. Changes to slot reconfiguration to slot floor, especially high limit.  Big focus on customer service
  • What is meant by new reality in regional gaming?  Continuous top line pressure because traditional customer is under pressure and consumer spending is not rebounding.
  • Pennsylvania Control Board having trouble reaching consensus regarding 2nd Philadelphia gaming license. 
  • Leverage target:  5x or less within a couple of years...
  • Fan Club - revenue benefits, especially for Tier 1 customers?  Fan Club 2.0 launched end of January, still have 11 properties where yet to be rolled out. 
  • Cost savings now $3 million in the quarter, so $12 million annualized vs. $10 million annual goal.  Hit the big opportunities, now in the weeds looking for next phase.  Next round will be smaller saves.
  • Web-site:  new Pompano site live today, rest of portfolio next month. 
  • May improvement - weather, pent up demand?  Delta between where were in January, February, March was different than recent.  But May did not see a huge swing in trends to the upside (but not eroding further). 
  • June any changes?  Things haven't change for quite a while for the industry.
  • Lake Charles - Sasol plans - where will property be located?  Core market should increase visitation and local employment.
  • Gaming mix - slot/table ratio, any opportunity to change/improve?  Slots still 90%+ on GGR basis.  Still seeing weakness on slot play because the <$100 theoretical customer just not playing as much. 
  • CO December ballot initiative - still polling, testing. Location needs to be determined first, then quantify negative impact/cannibalization to Blackhawk. 
  • Pennsylvania: spent $60 million but earning $4 million vs. prior expectation of closer to $8-9 million.  Operating under restrictive daily/annual access plan, customers have other options without access fee as well as new competition.  Seeking legislative/financial relief.  Surprised how resistant customers were/are to paying daily/annual access fee despite knowing ISLE would have to charge customers to visit.
  • Asset sales - interest in selling one-off or portfolio to deliver?  Always a market...when it make sense ISLE will divest of assets near end of life or mature/declining markets.  
  • Interact with Goldstein family?  Fully involved and 3 members sit on the Board of Directors.


Takeaway: May's headline starts/permits print looks soft, and upon closer soft.

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.




Today's Focus: May Housing Starts & Permits

The Census Bureau released its monthly Housing Starts & Permits data for May this morning. The big takeaway is this: No Growth.


Summarily, activity was weak across the board as both SF and MF starts declined, permits went sub-1MM, and single family starts and permits re-coupled at the low 600K level.  


The lone source of relative strength was the sequential rise (+3.7% MoM) in SF permits, however, the YTD trend in permits continues to suggest softish forward starts figures.  


  • TOTAL STARTS = -6.5% MoM & decelerating to +9% YoY from +26% prior
    • Single Family:  Down -5.9% MoM (-39K absolute)
    • Multi-family:  Down -7.6% MoM (-31K absolute)  
  • TOTAL PERMITS:  -6.4% MOM…with April revised lower to 1059K from 1080K
    • Single Family: Up +22K sequentially to +619K (still negative -1% on a YoY)
    • Multi-family: Down a big -90K MoM to 372K from 462K prior (-19.4% MoM)


While total starts and permits bounced sharply in April they were down in May. More importantly, however, the Single family component showed little-to-no signs of life in April and was down again m/m in May (SF starts down -5.9% m/m). Yesterday’s sequentially improved NAHB HMI print of 49 seems at odds with today's continuation of the soft single family data. 


Three factors are principally responsible for the ongoing weak 1H14 performance for housing. First, QM rules that took effect on January 10 of this year are having a suppressing effect on credit availability. Second, institutional investor demand for properties is waning sharply. Third, affordability dynamics have swung sharply; whereas 12-18 months ago there was a strong asymmetry favoring homeownership, today renting vs owning are close to a toss-up.














About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 



Joshua Steiner, CFA


Christian B. Drake

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VIDEO | Keith's Macro Notebook 6/17 UK OIL UST 10YR

RETAIL CALLOUTS (6/17): ICSC, JCP, M, WMT, TGT, WWW, KSS ***Update w/ Chart

Takeaway: ICSC - QTD growth rate flat to last year. JCP gets a slap on the wrist over MSO agreement. WMT investing in e-comm talent.



Wednesday (6/18)

  • H&M - Earnings Call: 2:00pm



ICSC - Chain Store Sales Index


Takeaway: Two solid weeks of data. Plus 3% and 3.1% YY over the past two weeks respectively. QTD growth rate is flat to last year.


RETAIL CALLOUTS (6/17): ICSC, JCP, M, WMT, TGT, WWW, KSS ***Update w/ Chart - chart2 6 17




JCP, M - Macy's Wins Case Against J.C. Penney



  • "New York State Court Judge Jeffrey Oing ruled that Penney’s 'tortiously' interfered with Macy’s agreement with MSLO and ordered that a hearing be scheduled to determine how much Penney’s owes Macy’s in damages and attorneys’ fees. The judge did not award Macy’s punitive damages…"
  • "The judge continued that Johnson’s 'only motivation' was to 'gain an edge' on the competition. He denied Macy’s its request for punitive damages, which are normally granted to punish a defendant for misconduct and to deter others from similar behavior in the future. Oing said Penney’s firing of Johnson in April, combined with the fact it was 'on the verge of financial collapse,' amounted to 'abject retail failure,' which proved to be a sufficient deterrent to the company and its rivals. Still, Oing noted that a judicial hearing officer or special referee would determine damages and attorneys’ fees at a later date."


Takeaway: Looks like Penney's will walk away from this with a slap on the wrist. M prolonged the case in an attempt to inflict maximum pain on JCP. The irony is that this is behavior that is typical of wanting to hurt a financially-strained competitor. We're not beating Macy's up over this -- it's what companies do. But, Macy's management will swear all day that it does not compete with JCP. The big loser in this whole mess is MSO.


WMT - @WalmartLabs Grabs Its First “Silicon Alley” Startup With Acquisition Of Fashion App Stylr



  • "@WalmartLabs, the retailer’s Silicon Valley-based R&D and innovation center, is today announcing its 13th acquisition – and its first from New York’s 'Silicon Alley' – with the acquisition of fashion app Stylr. The app, which helps consumers find clothes they love in nearby stores, will be shut down. It will be pulled from the iTunes App Store by the end of this month."
  • "Terms of the deal were not disclosed, but we understand it was more of an 'acqui-hire' related to bringing the talent of the founders, Eytan Daniyalzade and Berk Atikoglu, to Walmart."


Takeaway: WMT continues to invest in talent. The company has recognized the importance of this channel for its long term growth algorithm and is investing accordingly. Compare that to the guys in Minneapolis who formed a Digital Advisory Council to solve TGT's e-commerce problem.




TGT - Target: Device glitch caused check-out delays



  • "Target Corp. said Monday that the 'glitch' that slowed many of its check-out registers to a crawl Sunday night was related to a defect with a network device."
  • "The Minneapolis-based retailer didn’t provide more details about the problem, noting that the issue was resolved by about 11 p.m. Sunday. The company also reiterated there was no evidence that it had anything to do with a cyberattack. The malfunction lasted a few hours but affected stores nationwide…"


KSS, SHOO - Juicy Couture, Steve Madden Partner for Footwear



  • "Juicy Couture is stepping into the footwear category through a partnership with Steven Madden Ltd. The line will be available internationally in spring 2015 in Juicy Couture stores, shops-in-shop, select department stores and online at the brand’s Web site."
  • "The higher-priced line, starting at $80 and going up to $200, will be available internationally, while a lower-priced collection referred to as the midtier line will come later and is expected to be sold primarily at department store doors in the U.S."


WWW - Wolverine Worldwide Announces Key Leadership Changes And Additions To Accelerate Global Growth



  • "Wolverine Worldwide today announced important organizational changes to strengthen its senior leadership team and help accelerate global growth."
  • "...James D. Zwiers has been appointed President of the International Group.  Mr. Zwiers has held numerous and increasingly significant leadership roles during his 16 years with the Company, including President,Performance Group; President, Outdoor Group; President, Hush Puppies USA; and Senior Vice President with responsibilities for strategy, business development, consumer direct and legal."
  • "...James A. Gabel will succeed Mr. Zwiers as President of the Performance Group...having most recently served as President of adidas Group Canada
  • "...Andrew Simister as President of the Company's Lifestyle Group...Most recently, Mr. Simister was President of the Lacoste Footwear brand…"


WMT - Wal-Mart to Triple Spending on Food-Safety in China



  • "Wal-Mart Stores Inc. said it will triple its spending on food-safety in China to 300 million yuan ($48.2 million) between 2013 and 2015 amid scrutiny of its operations by officials there."
  • "The Bentonville, Ark., retailer is increasing its food safety investment from the 100 million yuan it previously pledged to spend over the three-year period, said Wal-Mart's China Chief Compliance Officer Paul Gallemore in a press briefing Tuesday. The funding will go to additional food testing and supplier audits, Mr. Gallemore said, adding that Wal-Mart will double its DNA testing on meat products."


GIII - G-III Apparel Group, Ltd. Announces European License for G.H. Bass Footwear



  • "G-III Apparel Group, Ltd. announced today that it has entered into a multi-year wholesale license agreement with UK based Overland Ltd. for the sale of men's, women's and children's footwear under the G.H. Bass and related brands in Europe. Overland plans to sell G.H. Bass footwear primarily to department and specialty stores beginning in the fall of 2014. A companion agreement also enables Overland to operate retail locations throughout Europe."
  • "This latest agreement marks the second license that G-III has entered into since acquiring G.H. Bass from PVH Corp. in November 2013. Earlier this year, G-III announced a multi-year license with PVH Corp. for G.H. Bass better men's sportswear for department store distribution throughout North America."


UHR - Swatch Waiting With Apple for Smartwatch Market to Grow



  • “'You won’t see us participating in a race of who’s going to introduce what first,' Hayek said over coffee in his cluttered office in Biel,Switzerland. 'There’s still big resistance from the consumer, so we’re going to wait.'"
  • "Hayek says his company has all the technology it needs to make a smartwatch. His plan is to sell components to others, a quiet way to benefit from a potential revolution in the $62 billion watch industry. If demand crystallizes, the company is ready to jump in and push a smartwatch through its extensive distribution network."


NKE, JD Sports - JD Sports Fashion jumps 3% after World Cup boost



  • "JD Sports Fashion ... has issued a positive trading update, saying it expected a satisfactory increase in first half profitability in line with expectations."
  • "The build up to the World Cup has enhanced the trading performance of our most significant segment of the business, the sports fascias. As a consequence, precise like for like sales figures, at this stage, would be potentially misleading. However we are certainly pleased with the underlying performance of this segment in the period to date."

RH – De-Risks The Growth Plan

Takeaway: The punchline on this financing deal is that it de-risked the growth strategy, and took out one of the key bear arguments on this stock.

We were initially caught off guard in seeing the announcement from RH hit the tape last night about its convertible offering. But after going through the numbers and the logic, we think it makes all the sense in the world. Here’s what we’re thinking…

  1. The company is, in effect, creating $350mm of low-cost liquidity through a convertible note offering.  It currently has only $149mm outstanding on a $417.5mm credit facility. So why would it need to do this deal?
  2. First off, because it can. We’d like to see the company tap the capital markets for lower cost financing from a position of strength rather than from a defensive position if the long-term growth plan is thrown a curve ball.
  3. The cost of the debt is not the issue at hand. Yes, it’s nice that the structure of this deal suggests that there is no dilution until the stock is $170 – about 105% above current levels. And even then, we’re only talking about 3-4% dilution.
  4. No, the KEY ISSUE here is duration matching. The company just started what will be a 5+ year store growth plan where it will take square footage from 825k to about 2.3mm. It is signing leases today for 2H16. Its current credit facility expires in August 2016. One of the bear cases we hear is that the company would be locked into expensive leases in 2017/18 without having liquidity protection. Then we go into a recession, which would hurt cash flow and close the window for the company to find liquidity to finance its growth. That argument is officially shot in the foot.


The punchline on this financing deal is that it de-risked the growth strategy, and took out one of the key bear arguments on this stock. If there’s any bad news, it’s that that there will be dilution at some point over the next few years – because we think that RH trades through $170.

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