• run with the bulls

    get your first month

    of hedgeye free


Bloody High Meat Prices (and Sticky Wages)

Takeaway: Livestock prices are heating up ... just in-time for grilling season.

This unlocked research note was originally published on June 30, 2014 at 16:39 in Macro

Bloody High Meat Prices (and Sticky Wages)  - chip1


A sign at Chipotle in NYC notifying customers of “conventionally raised” steak has been up for two months now. Chipotle is either seeing outright supply scarcity or experiencing supply shortages at a price it’s willing to pay.


Granted this is only one location, prices have recently increased +8.3% for steak and 11.1% for guacamole at New York locations… And for “conventionally raised!” With the exception of a -3 bps correction in front-month live cattle futures during the week ending June 20th, Livestock prices closed in positive territory every week this month:


June 6th: Live Cattle: +1.7%; Lean Hogs: +1.1%

June 13th: Live Cattle: +5.3%; Lean Hogs: +1.2%

June 20th: Live Cattle: -0.3%; Lean Hogs: +10.3%

June 27th: Live Cattle: +3.2%; Lean Hogs: +2.4%


Bloody High Meat Prices (and Sticky Wages)  - chart 2 Performance Table


Rather than making a call on the direction of agricultural and soft commodity prices on a daily basis, we accept that the speculation of supply shortages can whip prices for a number of reasons outside our control. What we choose to dissect is the consumer and outlook for the U.S. dollar. For the first half of 2014, the consumer slowed and will continue to face similar headwinds in 2H:


  1. A Fed revision for 2014 full-year GDP from 3.0% to 2.1 - 2.3% at the last FOMC meeting will likely face a further downward revision after a -2.9% Final Q1 print last week
  2. The Fed gets more dovish with the data
  3. The bond market adjusts for growth expectations and the prospect for future dollar devaluation perpetuates the yield spread compression
  4. Commodities, which are priced in U.S. dollars, face continued pressure to the upside


Unfortunately this headline commodity inflation is not considered the kind of inflation that concerns the Federal Reserve formula. Forgive us on the repetitive call-out, but the Hedgeye Macro team felt the following article from Reuters last week was an epic interview with Yellen on the linearity of the Fed’s model.


Every FOMC meeting in the last several years precedes an abundance of financial media punditry that dissects the sequential change in the language of each statement. Although rare, we enjoy this direct commentary in the Reuters article for insight into the assumptions made by the fed machine:


"My own expectation is that, as the labor market begins to tighten, we will see wage growth pick up some to the point where ... nominal wages are rising more rapidly than inflation, so households are getting a real increase in their take home pay," she said last week, adding: "If we were to fail to see that, frankly, I would worry about downside risk to consumer spending."


Janet Yellen is, in this quote, referring to her belief in what is called “money neutrality” which is basically the idea that prices and wages move together without harm over the intermediate to long-term. In our opinion, she sounds rather nervous in her assessment of this “reality".


To further quote the Reuters reporter in this article:


“Over the last year Fed staff changed their main model for forecasting wage and price inflation to reflect evidence that companies were adjusting prices more slowly than in prior years. That implies the Fed has more time to allow wages to rise and employment to expand before having to be concerned about inflation accelerating.”


This seems like a convenient way to make room for an extension of accommodative policy as wage growth has stagnated against a flat dollar and skyrocketing cost of living…


Bloody High Meat Prices (and Sticky Wages)  - chart 3 wage growth vs. livestock and USD


Income earners save less and spend more with an increase in cost-of-living:


Bloody High Meat Prices (and Sticky Wages)  - chart 4 savings rate vs. USD and CRB


Our process points to Fed and consensus full-year growth and inflation estimates that are still too optimistic. Yellen’s comments point to the predictable FOMC policy response that we have continuously highlighted as a catalyst for further dollar devaluation. With the CRB Index up 10% in 2014, both the dollar and ten-year treasury yield remain in @Hedgeye bearish formations. 



Ben Ryan








Retail Callouts (7/3): KSS M JCP COH TGT LULU APP AdiBok



M, JCP, KSS - Internet Traffic


Takeaway: Retail numbers per ICSC and Redbook show that the last few weeks have been relatively strong. But it's interesting to see that Internet traffic has ticked down ever so slightly. This might very well be seasonal (we're looking into it), but on a relative basis, we see that JC Penney is still within striking distance of Macy's. That's good for both of them. KSS not only remains behind the pack, but it appeared to tick down before the peer group over the past three weeks. Not enough to draw a major conclusion. But enough for us to remain confident in our KSS short.

Retail Callouts (7/3): KSS M JCP COH TGT LULU APP AdiBok - Chart1 7 3 2014


LULU - Lululemon Founder Explores Buyout


"Advisers to Lululemon Athletica Inc. founder Dennis "Chip" Wilson have been sounding out private-equity firms, including Leonard Green & Partners, about taking the yoga-gear maker private..."


Takeaway: Right in line with our thesis -- keeping in mind that a buyout is the least likely of all the outcomes we outlined on June 25 when we presented why LULU is worthy of being on our Best Ideas List as a long. We think that a strategic buyer is twice as likely as a 'Chip-led and PE-supported' buyout. But the greatest likelihood is that Wilson fails outright in his effort to control or sell the company, and he therefore defaults to selling all his stock. That's the highest return move for shareholders. See our separate LULU note from this morning for our rationale.

Retail Callouts (7/3): KSS M JCP COH TGT LULU APP AdiBok - Chart2 7 3 14


APP - Ousted American Apparel CEO Dov Charney Hands Over His Entire Stake To A Hedge Fund


"Dov Charney has handed over his entire stake and voting rights in the struggling retailer to Standard General LP, enabling the fund to negotiate directly with the independent directors over the company's future, two sources close to the matter said on Wednesday."


Takeaway: Charney would probably get nowhere with the Board on his own. Makes perfect sense for him to designate someone who could be more effective.  Standard General has never been a holder before its recent 2Q filing. But 98% of its fund is Media General (MEG) which it bought over the past six months. The other two stocks are American Apparel, and the other staple of retail excellence that we call Radio Shack. 


TGT - Leave the Guns Outside, Target Asks


"Target Corp. on Wednesday said it would "respectfully" ask customers to not bring guns into its stores, "even in communities where it is permitted by law," responding to a month-long campaign from a gun-control group."


Takeaway: This is such a hairy issue -- and one where we certainly won't take sides. But the reality is that allowing customers with gun permits to carry inside its stores clearly ruffles feathers with the soccer Mom crowd. But many -- if not most -- would shop there anyway. Unfortunately, the 4.8mm members of the NRA won't be too pleased with this decision, and might boycott Target outright.  This is a tough call for Target, or any retailer for that matter.


COH - Lew Frankfort's Role at Coach Inc. Shifts to Part-time


"Lew Frankfort’s role as executive chairman of Coach Inc. is moving to part-time from full-time and his salary to $500,000 from $1.5 million."


Takeaway: Let me get this straight, the stock has lost 40% of its value in 12-months, and the company is still paying Frankfort $500k to work half as much as he has been? In the grand scheme of corporate governance issues, this is hardly egregious. But definitely seems odd.


ADS, EBAY, AMZN - Adidas lifts ban on sales via eBay, other online sites


""We have decided to extend our e-commerce guidelines to also include open market places: if our retail partners adhere to our criteria, there will be no restriction for online sales in any channel," Adidas said"


Takeaway: It's rarely a good sign when a company relaxes standards on selling through channels that it previously banned because they threatened the health of its business. It's possible, of course, that Adidas has finally devised a system to manage these accounts profitably. It's also possible that it simply needs the sales. We'll see how it's dot.com margins shape up in the coming quarters.





KR - Kroger to Buy Vitacost for $280 Million


Kroger Co., the largest U.S. supermarket chain, agreed to buy online retailer Vitacost.com Inc. (VITC) for $280 million to add a new channel for selling nutrition and healthy-living products.


FIVE - Five Below Announces Departure of Jeffrey Moore, EVP Merchandising


"Below, Inc., the leading retailer of trend-right, high-quality, extreme-value merchandise for pre-teens, teens and beyond, today announced the departure of Jeffrey Moore, EVP of Merchandising."



While an ugly report was expected, on a hold-adjusted basis, June was positive. 



As we noted before, we believed June was affected by low hold.  Adjusting for direct play, market hold was 2.8% vs 3.0% in June 2013.  Assuming normal hold (3.0%) in both June periods, June GGR would have grown +1% YoY.  While VIP volume fell almost 10%, the biggest decline since May 2009, June mass revenues continued its strong performance of 27% YoY growth – although it was slower than the growth seen from Jan-May 2014 of +37%


VIP was certainly the story in June.  MPEL had a disastrous June, owning to poor VIP performance and very low hold.  Galaxy was easily the best performer, despite lower VIP hold.






Here are some takeaways:



  • Mass revenues grew 27%, off of a 31% comp
  • Rolling Chip (RC) volume tumbled 10%, worst performance since May 2009
  • VIP revenues fell 17%, its worst performance since June 2009
  • Slots revenue grew 2%
  • Assuming normal hold in both periods, GGR would’ve grown +1% YoY 



  • GGR grew 4% YoY – the slowest rate since Sept 2011
  • The LVS properties held at 3.3%, higher than the 2.8% seen in June 2013
  • Still, VIP revenues fell 14% and RC dropped an alarming 28%, the worst performer in the market
  • One would expect high hold to negatively impact volumes but not this much
  • Mass grew 25%, the slowest rate since February 2012 


  • GGR declined 10%
  • WYNN held 2.7% on VIP vs 3.0% last June
  • WYNN VIP revenues dropped 26% while RC volume fell 20%
  • Thanks to easy comps, mass growth of 55% led the market.  For Q2 2014, WYNN mass have grown 48%.



  • GGR declined 10% for the 2nd consecutive month
  • MGM held close to normal, in-line with last June
  • Mass growth of 39% is relatively consistent with the YTD average growth
  • VIP revenue and VIP volume fell 23% and 21%, respectively.


  • Held well below normal on VIP (2.1%) compared with 3.2% last June
  • MPEL had the worst GGR performance at -20%, worst performance since June 2009
  • RC volume continues to be a major drag – falling double digits for the 4th consecutive month
  • Mass grew 34%, in-line with recent trends


  • Galaxy’s +6% GGR growth is what kept the market from tumbling further.  It was the best performer despite lower hold.
  • Hold was 2.8% vs 3.3% last June
  • Mass grew only 17% - the slowest in the market
  • Galaxy was the clear winner in the VIP race with RC volume growing 19% and VIP revenue up 2%

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Spanning the Globe

Client Talking Points


The Swedish Riksbank cut its main repo rate to 0.25% from 0.75%, double what was expected. This was the first time the central bank lowered borrowing in six months. In response the Swedish krona has plummeted to a three-and-a-half year low against the euro.


Japanese June Services PMI came in at 49 from 49.3, in line with recent post tax hike stabilization. We are seeing more mixed signals out of China on the growth and policy front.  It appears Chinese Premier Li is out threatening further mini-stimulus, although we aren’t convinced the statement has much bite. All told, we maintain our dour second half view on the Chinese economy, citing a likely void of meaningful stimulus measures amid continued deterioration in the property sector.


GDP in Ireland rose 2.7%, the most since 2012. Finance Minister Michael Noonan has said the budget

adjustment needed next year to bring the deficit below 3% GDP may be less than the 2 billion euros ($2.7 billion).

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


Semis a growing Cash Return story. Firms that can pursue LARGE dividend hikes are: $SNDK, $QCOM, $BRCM, $NVDA, $MRVL, $ALTR, $AVGO, $POWI



He loves his country best who strives to make it best. 

-Robert G. Ingersoll


Non-farm payrolls goes >200K for five months in a row for 1st time since January 2000.


Takeaway: One more step forward.

Winning the Race ...

The labor market news flow is heavy this morning with both the jobs report and jobless claims being reported at the same time. The data, however, represents neither acceleration/deceleration or any noteworthy inflection. Bottom line: the claims data indicates another week of solid progress in the labor market. The year-over-year rate of improvement in NSA claims came in at 8.7% this week, roughly in-line with last week's 9.0% y/y improvement. 


The Data

Prior to revision, initial jobless claims rose 3k to 315k from 312k WoW, as the prior week's number was revised up by 1k to 313k.


The headline (unrevised) number shows claims were higher by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.5k WoW to 315k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.7% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.0%




























Yield Spreads

The 2-10 spread rose 7 basis points WoW to 214 bps. 3Q14TD, the 2-10 spread is averaging 212 bps, which is lower by -9 bps relative to 2Q14.






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue

Takeaway: The latest survey of mutual fund trends displays continued inflows into all fixed income categories with outflows in US stock funds

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, aggregate bond funds including both taxable and tax free products netted another $3.2 billion in new investor subscriptions. Conversely, the combined equity mutual fund complex had slight outflows to the tune of $29 million with domestic equity funds contributing their 9th consecutive week of redemptions. The broad take-away is that the U.S. retail investor has been retrenching for most of the first half of the year (with only one week of outflows in the past 20 weeks in taxable bonds and 24 consecutive weeks of tax-free or muni bond inflows) compared to over 2 consecutive months of outflows in U.S. stock funds. Interestingly however, equity ETF flows last week continue to be impressive with another $7.2 billion coming into passive equity products versus a $100 million outflow in bond ETFs. We think this reflects stronger institutional demand for equities with non-retail firms allocating into the stocks at current levels despite the strong run this cycle with institutional investors also positioning for more pain in fixed income over a longer term perspective with outflows over the past several weeks. 


Total equity mutual funds put up a slight outflow in the most recent 5 day period ending June 26th with $29 million coming out of the all stock category as reported by the Investment Company Institute. The composition of the $29 million redemption continued to be weighted towards domestic equity funds with $1.3 billion coming out of domestic stock funds which was offset by a $1.2 billion inflow into international products. This outflow within domestic equity funds has become an intermediate term trend with now the ninth consecutive week of outflow in the category. The aggregate redemption of $29 million for the recent five day period was below the year-to-date average for equity funds of a $2.3 billion inflow, which is now running below the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flows had a solid week of production with the aggregate $3.2 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.1 billion. The inflow into taxable products of $2.7 billion made it 19 of 20 weeks with positive flow for the category and the inflow into municipal or tax-free products of $562 million was the 24th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.1 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 


ETF results created the tale of two tapes with equity ETFs putting up another strong week of production offset by weak passive bond flows. Equity ETFs produced another robust subscription of $7.2 billion this week, off of the back of a 2014 best $11.2 billion inflow the week prior, while fixed income ETFs suffered another outflow of $102 million. The 2014 weekly averages are now a $1.7 billion weekly inflow for equity ETFs and a $937 million weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.0 billion spread for the week ($7.2 billion of total equity inflow versus the $3.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $6.7 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue - ICI chart 1

ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue - ICI chart 2



Most Recent 12 Week Flow in Millions by Mutual Fund Product:


ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue - ICI chart 3


ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue - ICI chart 4


ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue - ICI chart 5


ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue - ICI chart 6


ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue - ICI chart 7



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:


ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue - ICI chart 8


ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue - ICI chart 9



Net Results:


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $4.0 billion spread for the week ($7.2 billion of total equity inflow versus the $3.1 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $6.7 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


ICI Fund Flow Survey - Beast Mode In Bonds - Domestic Equity Outflows Continue - ICI chart 10 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.