Can the U.S. Consumer Handle the Pinch?

Following up on a note we published yesterday from the MACRO team on inflation we are publishing a chart that takes a broader look at consumer inflation trends.  It was pointed out to us yesterday that a fairly unique set of circumstances is leading to this bout of protein inflation – nothing cures high prices like high prices especially in commodity land.  This is certainly true in some respects, but the consumer inflation pinch is coming from multiple sources. 


Hedgeye’s MACRO GURU, Darius Dale, created an index that tracks food, fuel and utility inflation for the median consumer.  It’s a weighted average of the YoY and MoM percentage change in the monthly averages of the CRB Foodstuff Index (CRB FOOD Index), the American Automobile Association’s Daily National Average Gasoline Price Index (3AGSREG Index) and the iBoxx Electricity Price Index (IUTPELC Index). The weights are based on their respective shares of PCE (i.e. 12.45%, 6.39% and 8.28%, respectively).


Holding current prices flat, this index should accelerate towards +13-15% YoY by year’s end. On a MoM basis, the YTD pattern is tracking very similar to early 2008 and early 2011. While the “pinch” on consumer’s wallet isn’t as sharp in magnitude as it was in those periods, we’d argue that the consumer/economy may be in a similarly precarious position now. 


Can the U.S. Consumer Handle the Pinch? - z.  dd


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Retail Callouts (6/24): ICSC, TGT, WMT, AMZN

Takeaway: ICSC numbers strong as 2Q nears close. No quick fix to problems that led to Steinhafel's ouster. TGT reworks shipping policy.



Wednesday (6/23)

  • BBBY - Earnings Call: 5:00pm


Thursday (6/24)

  • NKE - Earnings Call: 5:00pm


Friday (6/25)

  • FINL - Earnings Call: 8:30am




ICSC - Chain Store Sales Index


Takeaway: Three solid weeks of data as the 2nd quarter nears a close. Numbers have looked much better over the last 12 weeks compared to the start of the year. QTD growth rate up 20bps from last year.


Retail Callouts (6/24): ICSC, TGT, WMT, AMZN - Chart 1 6 24 2014




TGT - Retailer Target Lost Its Way Under Ousted CEO Gregg Steinhafel



  • "Just days before Chief Executive Gregg Steinhafel resigned from Target Corp., a small group of senior executives huddled together to discuss ways to improve the flagging retailer's fortunes. Shortly after their gathering on May 2, executives delivered a message to the board: If Mr. Steinhafel didn't leave immediately, others would. The following Monday, the CEO was out."
  • "The sequence of events, according to people close to the situation, was the climax of a tense narrative that had been playing out within Target's top ranks...interviews with more than two dozen former and current Target executives, managers and vendors reveal a deep malaise within a chain that, increasingly, had lost its way. Management became mired in a new thicket of bureaucracy. Creative leeway—once the DNA of the chain affectionately dubbed 'Tar-zhay'—took a back seat to rigid performance metrics."
  • "Mr. Steinhafel held the view that online purchases risked cannibalizing sales from visits to physical stores, say former employees. It wasn't until 2009 that Target embarked on a plan to build its own website, an effort it called 'Project Everest.'"


Takeaway: Target's decision to enter Canada and the data breach are polarizing events which helped catalyze the coup documented here. But, that was the climax of a series of misguided initiatives that guided TGT away from its core. As CEO during this time period, the blame falls squarely on Steinhafel's shoulders - right or wrong. We give the existing management team credit for realizing that change needed to be made. But, in order to fix the structural issue inside the company it’s going to cost money…lots of it. There are no quick fixes to the underlying problems (P-Fresh, RedCard, e-commerce) if the company wants to drive long term profitability.


TGT - Target further incentivizes customers to shop online



  • "Target is giving customers added incentive to shop online by offering free shipping for all orders of $50 or more. The new policy, which takes effect immediately, excludes oversize and heavy items, which will be subject to a handling fee."
  • “'We’ve heard from guests they don’t fully understand our shipping policy — so we’ve changed it to make it simpler and reduce the friction in making purchases on the site,' said Jason Goldberger, SVP, and Mobile. 'Providing our guests a better free shipping offer is just one of the many ways we continue to improve the experience.'”


Takeaway: Target already offered free shipping on orders over $50, but the number of items eligible was limited. This now unifies TGT's shipping policy and puts it in line with its peers. Here's how TGT stacks up to AMZN and WMT. AMZN - free shipping for Prime members and orders over $35. WMT - free shipping on orders over $50 (6-9 day delivery window). TGT - free shipping for RedCard member and items over $50 (3-5 day shipping window). We can't imagine that WMT lets TGT hold the advantage for long.




WMT - Wal-Mart Appoints 13 Merchandising Executives in Shake-Up


  • "Wal-Mart Stores Inc. (WMT), the world’s largest retailer, named 13 executives to its U.S. merchandising operations, marking the latest shake-up since Chief Executive Officer Doug McMillon took the reins in February."
  • "As part of the changes, Scott Huff will be promoted to executive vice president overseeing merchandising operations for the U.S., according to a company memo sent by U.S. Chief Merchandising Officer Duncan Mac Naughton. Huff has been at Wal-Mart since 1994, when he started as an intern. Seven of the 13 executives named are women."

M - Macy’s adds Starbucks exec to board



  • "Macy’s has added Annie Young-Scrivner, EVP of Starbucks Coffee Company and president of its Teavana business, to its board of directors."
  • "The addition of Young-Scrivner brings the size of Macy's board to 11 members. Of the 10 independent directors, five are women."


APP - American Apparel's Dov Charney Fighting Back



  • "A filing with the Securities and Exchange Commission Monday detailing Charney’s position said his termination was 'without merit' and that he 'intends to contest it vigorously.' He is working with Los Angeles law firm Glaser Weil Fink Jacobs Howard Avchen & Shapiro."
  • "After Charney was sidelined — he was technically suspended for 30 days to await termination — he was approached by 'certain people, including stock holders…who expressed support for his continued leadership' of the company, according to the filing."
  • "Charney’s been holding discussions with these people about 'potential changes to the composition of the board and management of [American Apparel].'"


UA - Sprint Teams with Samsung, Under Armour and MapMyFitness to Drive Advances in Growing Health and Fitness Technology Market



  • "Sprint is stepping up its presence in the growing health and fitness markets, announcing today the launch of an exclusive device from Samsung Telecommunications America and a collaboration with health and fitness market leaders Under Armour and MapMyFitness to offer mobile solutions for today’s active lifestyles."
  • "Sprint will provide convenient mobile access to fitness tracking, educational information, and music, as well as offer applications to help consumers as they exercise, watch what they eat and take better care of themselves."


NKE, ADDYY - Wimbledon’s stricter dress code isn’t meshing well with sports brands



  • "While Wimbledon first stipulated in 1963 that all competitors have to dress 'predominantly in white' on the court, then changed it in 1995 to 'almost entirely in white,' this year the players have been given an even clearer mandate: accessories such as undergarments, headbands, and wristbands are now also included in the mandate."

Early Look

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Client Talking Points


BSE Sensex +1.4% to +20.9% year-to-date led gainers in Asia overnight; India is doing all the right things (on the margin) from a Hedgeye Macro Playbook perspective – we continue to like it on the long side.


#Crashed, in June. Dubai stock market down another -7-8% this morning puts it -22% for June and while there is no subtle news flow on the why, we think what’s happening there is pretty obvious. Putin’s petrodollars (and his stock market +2.3% this morning) are strengthening as U.S. weakens geopolitically.


There was barely a correction after last week’s breakout above @Hedgeye immediate-term TRADE line of $1285/oz and this morning we are seeing what we like to see: follow through. Closing > $1336, Gold can easily re-test its year-to-date highs of $1381ish. The Macro setup is almost perfect for that.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


RUSSIA: Putin powers a +2.3% move in the Russian stock market today



“The real test is how you behave when the crowd is roaring the other way.”

-George Goodman


Energy (XLE) is up +14.4% year-to-date vs Consumer Discretionary (XLY) down -1% year-to-date, inflation slowing consumption growth.

Living the Dream

“The very substance of the ambitious is merely the shadow of a dream.”



I’m in the throes of the Nevada desert with some colleagues and friends of Hedgeye. Later today, we will be attending the 2014 NHL Awards at the Wynn Casino.   For the hockey players receiving awards, this is the epitome of their success and acknowledgment of their ability to fulfill their lifelong dreams.  They have reached the pinnacle of their chosen profession. In hockey speak, they are #LivingTheDream.


Incidentally, Las Vegas, as much as any city in America, also epitomizes a dream - the American dream.   From 1940 to the last census in 2012, the self-proclaimed “entertainment capital of the world” grew its population from some 8,000 inhabitants to almost 2 million, for a CAGR of north of 8%.  This growth rate well outpaced the overall population growth rate in the United States, which increased by only about 1.5x during the same period.


Living the Dream - wl5


As a function of this massive growth, 18 of the world’s largest 25 hotels are now in Las Vegas, the strip is the brightest place on earth that can be seen from space, and almost 40 million people annually visit Clark County (the home of Las Vegas).  Despite these staggering statistics, on many metrics Vegas actually peaked in 2007.  In that year, according to the Las Vegas Visitors and Convention Bureau, total gaming revenue in Clark County was $10.9 billion versus $9.7 billion in 2013.


Admittedly, gaming revenue in Clark County has recovered a fair bit off the recent bottom when it troughed at $8.8 million in 2009.  Regardless, the fact remains that Las Vegas gaming revenue is still well off the peak and hasn’t grown since 2005.  So, is this Las Vegas dream dead? Is the American dream dead?


On both questions, the answer is likely no. But whether we use the term the “new normal,” or some other cutesy name to describe the prospect for American domestic economic growth, the next five plus years will likely continue to be a normalizing of the excesses of the early 2000s.  In many ways, Las Vegas remains the poster child for the boom and subsequent bust of that period.


Of course, as investors, we can always dream of a rampant reacceleration of economic growth, but as Shakespeare also wrote:


“And this weak and ideal theme, no more yielding than a dream.”




Back to the Global Macro Grind...


In the category of “more nightmare than dream” is the under-allocation of corporate pension funds and university endowments to the U.S. equity allocation rally that began in 2009.  According a report out late yesterday, the average college endowment had a 16% allocation to equities in June 2013, versus 23% in 2008 and 32% a decade ago. Meanwhile, corporate pension funds on average had 43% of their portfolios allocated to equities versus 61% in 2003.   Given the outperformance of U.S. equities over that time, it is likely that many of these institutions have been notable laggards in performance.


One clear threat to the equity bears is the potential that these large institutions begin to chase performance in unison.  For a broad based allocation to equities to occur, these institutions would generally have to be of the view that GDP growth is set to accelerate and likely meaningfully so. If history is any indication, this is unlikely to occur. 


In the Chart of the Day below, we’ve looked at annual GDP growth in the United States going back to 1950 charted against the 10 year rolling average of growth. The takeaway from the chart is simply that U.S. GDP growth has been steadily coming down over time, and has had a sharp step down following the last recession. The U.S. economy seems to have now entered a phase of lower growth.  Absent any evidence of acceleration of this trend, it will be difficult to compel large asset allocators to over allocate to the growth asset class of equities.


Speaking of not normal, according to Xinhua yesterday, noted Chinese economist Li Yining, “refuted the notion the Chinese economy is in decline saying that the previous high growth rates were not normal”.  According to Yining’s analysis, China’s GDP should be higher than the released figure based on the fact that housing construction in rural areas is not included in the Chinese GDP calculation while it usually is in other regions.


Perhaps the Chinese government will take a page out of the U.S. government’s playbook and change the calculation as the economic statistics becomes less suitable to its needs.  This is, of course, a page right out of the U.S. government’s playbook as the U.S. government has changed how the Consumer Price Index is calculated several times over the last few decades. (Ironically, this was also a period when the U.S. government had increasing obligations that were tied to inflation / CPI.)


To her credit, this ever changing methodology of changing inflation may in fact be the reason that Federal Reserve Chair Janet Yellen said last week, “recent readings on, for example, the CPI index have been a bit on the high side but the data are noisy.” 


“Noisy” is an interesting characterization as the government’s own measure, CPI, actually jumped above 2.0% last month.  Meanwhile, what is not noisy to those of us who eat, fuel our vehicles, or consume goods that have commodity inputs (read: most goods) is that the CRB Index is now up almost 12% year-to-date.  We tend to agree with Yellein, that is noisy!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.47-2.64%


VIX 10.11-13.12

USD 80.16-80.43

Brent 113.11-116.67

Gold 1



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Living the Dream - Chart of the Day


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