Monday (Here) we profiled the special QM related questions included in the Fed’s 3Q14 Senior Loan officer Survey and the negative impact on housing demand.  


Yesterday (HERE) we highlighted the G.19 consumer credit data and the continued acceleration in revolving credit growth.


Below we summarily highlight the balance of the 3Q Senior Loan Officer Survey data and a selection of domestic credit metrics. 


CREDIT INTUITION:  Credit is typically pro-cyclical with banks loosening standards and extending credit in response to rising demand and improved credit risk.   


The reason for the pro-cyclicality is rather straightforward - Household capacity for credit increases as incomes rise alongside positive employment growth and as net wealth rises alongside the rise in real and financial assets that typically accompanies an expansionary economic phase. 


Cash flows to service debt and the collateral values backing the debt both support incremental capacity for credit and serve to drive an upswing in the credit cycle.


Thus, credit sits as the Sangre Vital of modern macroeconomies in expansion, serving to jumpstart and/or amplify the economic cycle. 


Of course, leverage works both ways and amplifies the impacts of a contractionary phase as well.



3Q14 Senior Loan Officer Survey:  Rising Demand, Stable-to-Easing Standards 

  • Demand:  Loan demand was broadly higher across C&I, CRE, and Consumer Loan categories.
  • Credit Standards:  Loan spreads were largely static sequentially while Credit standards were flat-to-down

In short, loan demand continues to rise (particularly across the C&I category), on balance, while credit standards continue to trend favorably alongside that increase in demand and the moderate, ongoing improvement in the labor market.


The Senior Loan Officer Survey data mirror the broader trends in the high frequency H.8 data which currently shows a positive slope of improvement across all major loan categories. Unless the labor data inflects negatively, it’s probable both loan demand and ease of credit access continue to follow their current, pro-cyclical trend.  




SANGRE VITAL: A QUICK TOUR OF CREDIT TRENDS - Residential Loans Demand 3Q14 Fed Survey




SANGRE VITAL: A QUICK TOUR OF CREDIT TRENDS - Senior Loan Officer Survey 3414 Table


CREDIT FLOW:  The idea of the “Credit Impulse”, popularized by Biggs, Meyer & Pick (2010), centers on the idea that it’s the flow, not the stock, of credit that matters relative to economic growth


The first chart below illustrates the Credit Impulse (Household and Non-Financial Corporate Debt, Flow of Funds data) vs. the Y/Y change in consumer and business demand (represented by the y/y change for the Consumption and Investment components of GDP) along with the Y/Y change in total household and Non-financial corporate debt. 


As can be seen, the trend in private sector demand growth tracks the credit impulse closely and leads the positive inflection in y/y debt growth.  


The second chart shows the Credit impulse vs. the ‘Banks Willingness to Lend’ measure from the Senior Loan Officer Survey. 


Again, the Trend relationship is strong and with Willingness to Lend accelerating in 3Q14 the read through for credit catalyzed private consumption remains favorable


In short, the “credit impulse” tends to lead private demand for credit and “banks willingness to Lend” tends to front-run the credit impulse.  


SANGRE VITAL: A QUICK TOUR OF CREDIT TRENDS - Credit Impulst vs Private Demand 080814




HOUSEHOLD DEBT:  After running negative for 18 consecutive quarter beginning in 1Q09, household debt growth returned to positive YoY growth in 3Q13.


Given improving mortgage, auto, and consumer loan trends YTD, credit growth should remain positive thru 2Q/3Q as well when the official Fed data is released.  With rates largely static, the closing of the delta between income and debt growth represent the principal upside to credit driven consumption.   






The PCE data tells an expectedly similar story.  While disposable income grew at a premium to consumption during the acute deleveraging, peri-recession period, that trend has reversed over the TTM with nominal household spending running on par to slightly ahead of nominal aggregate income.   


After a 19-quarter, -18.1% decline from peak, Household debt-to-GDP troughed at 77% in 4Q13 and ticked up to 77.4% in 1Q14 alongside the worst post-war, expansionary period GDP print ever.      






BIG PICTURE/THE CYCLE: Credit trends are improving and, in a reflexive macroeconomy, can serve to drive incremental spending in the immediate/intermediate term. 


Bigger picture, we remain on the wrong end of a credit/interest rate and demographic cycle and haven’t delevered enough to allow debt growth (alongside a rising cost of debt) to run ahead of income growth for any sustainable LT period. 


Policy remains a blunt (and now exhausted) tool and exorbitant privilege and dollar hegemony can only defy the gravity of long-term budget constraints for so long. 





Christian B. Drake



McDonald's: Not Lovin' It

This note was originally published July 28, 2014 at 13:01 in Restaurants


MCD is under siege on three continents (America, Europe, Asia) and senior management's response to these crises will determine the future and the future profitability of this company.  Hopefully we don't see a pattern of missteps similar to those that created one of the biggest public relations nightmares in the history of McDonald's.


Students of McDonald's history know that the "McLibel" case was a very dark period for McDonald's Corporation.  This case was an English lawsuit for libel filed by McDonald's Corporation against environmental activists Helen Steel and David Morris over a pamphlet highly critical of the company.  The litigation, drawn out over a ten-year period, embarrassed McDonald's and caused the U.K. business to underperform for more than a decade.


McDonald's is currently under attack from different groups over varying issues in three key countries across three separate continents.  How management handles these issues will be critical to the future of the company.


  1. In the U.S., McDonald's (and other QSR chains) are under attack for poor wages and inferior food quality compared to other, more "fashion forward," restaurants.
  2. In Russia, the country's Consumer Protection Agency has filed a claim accusing the restaurant chain of violating government nutritional and safety codes in a number of its burger and ice cream products.
  3. In China, the meat supplier issue is creating serious issues in the form of availability and product quality concerns.


How management responds to these issues is critical to the future performance of the company, as they are not insignificant markets.  If the company's initial response to the meat supplier issue is any indication, we could be in for an extended period of underperformance.


China - Last Thursday, McDonald's said it is sticking with a Chinese meat provider, even after saying earlier in the week that it may have been misled regarding sales of allegedly expired meat.  The supplier is Shanghai Husi, which is owned by U.S. based OSI Group, a longtime supplier of McDonald's.  Clearly, the company's ties to its Chinese supplier run deep.  Today, however, news came out that McDonald's cannot sell its core menu items in China.  China is the last bastion of growth for McDonald's and, prior to today's news, the company was not able to meet its unit growth targets.


Russia - We haven't seen any official response to the Russian lawsuit from McDonald's, but how they respond will be critical.  Is McDonald's a pawn in the ever-increasing tension between the U.S. and Russia or did McDonald's bring on this pressure by shutting down its three restaurants in Crimea after Russia's annexation of the peninsula in March?  Either way, McDonald's is in a very difficult spot.  They need to settle this issue immediately and not let another legal case be played out in the press.


U.S. - Wages are headed higher for McDonald's in the U.S. and the company needs to get ahead of the curve.  Unfortunately, being a franchised system, the issue is in the control of the franchisees.  They won't want to pay higher wages with same-store sales and margins declining.


Turning back to the McLibel case, some of the leading allegations were that McDonald's:


  1. Wastes vast quantities of grain and water
  2. Sells unhealthy, addictive fast food
  3. Alters its food with artificial chemistry
  4. Exploits children with its advertising
  5. Is responsible for torture and murder of animals
  6. Poisons customers with contaminated meat
  7. Exploits its workers and bans unions
  8. Hides it malfeasance


McDonald's is a strong global brand that must protect itself against erroneous allegations.  It appears that any one of these could be made again today.  With that being said, how management proceeds with all the issues the company is currently facing will determine the financial performance of the company for the balance of the decade.

Retail Callouts (8/8): LULU, URBN, HIBB, TGT, AMZN, WMT

Takeaway: This Chip/Advent deal is money for LULU. URBN buying Lorna Jane makes sense from where we sit. HIBB goes from cult stock to show-me story.



LULU - lululemon athletica inc., lululemon founder chip wilson and advent international announce stock sale and support agreements



Takeaway: This is right in line with our thesis on LULU. With this announcement, we're taking LULU up a notch in our Best Ideas List to be #2 behind RH.  For our thoughts on the deal and its implications for the company and the stock, see the note we published last night. LULU: Chip Away (Link)


URBN, FL, LULU - Urban Outfitters Said Eyeing Lorna Jane



  • "Urban Outfitters Inc. is contemplating a more active future with Australia-based activewear retailer Lorna Jane."
  • "The Philadelphia-based retailer — which has been actively looking for deals — is taking part in the Credit Suisse-run auction for the chain, according to two financial sources."
  • "The auction is said to be in the 'late second round' with the price tag near $500 million. Foot Locker Inc. is also said to be vying for the retailer, which was founded by creative director and former fitness instructor Lorna Jane Clarkson in 1990."


Takeaway: URBN introduced its own active wear line (Without Walls) in April with limited distribution. Because everyone else was doing it - even Whole Foods. As with FL we can't justify $90 yoga pants on URBN shelves. But for URBN, the logic makes sense. It's a multi-brand concept with its namesake brand struggling. They'll fix it, but the best way to divert people's attention is to buy something else. Lorna has the added bonus of International exposure, and a call option on bringing the brand to the US. If anyone can do that right, it's URBN management. We're not advocating doing a deal to get out of a bind, but that does not mean it won't happen.  


HIBB - Hibbett Provides Business Update and Adjusts Full Year Guidance



  • "Net sales for the 13-week period ended August 2, 2014 are expected to increase 4.2% to $194.0 million compared with$186.2 million for the 13-week period ended August 3, 2013. Comparable store sales are expected to increase 0.1% for the second quarter."
  • "The Company anticipates that earnings per diluted share will be in the range of $2.63 to $2.73 for the 52 weeks ending January 31, 2015, with comparable store sales increasing in the low single-digit range for the year. This compares to previous guidance of earnings per diluted share in the range of $2.78 to $2.98, and comparable store sales increasing in the low-to-mid single-digit range."


Takeaway: Before this miss, the stock had already underperformed the market by 30% YTD. Its problems were already fairly well-telegraphed. This company has never been afraid to miss a quarter, nor has it been a stranger to blowing away numbers. But this stock traded down after nine of the past ten earnings prints. And now this? Mickey Newsome stepped away just in time. It has to get a lot cheaper for us to even consider getting involved here.




TGT - Target to sponsor ASP’s Maui Women’s Pro surfing contest



  • "Target Corp. along with the Association of Surfing Professionals (ASP), announced that the retailer will be the title sponsor of this season’s Maui Women’s Pro, November 22 through December 6, 2014 in Honolua Bay, Maui."





  • "Gap Inc. comparable sales for July 2014 were up 2 percent versus a 1 percent increase last year." 


GPS - Introducing ‘The New Look of Banana Republic’



  • "Starting today, Banana Republic is revealing a new look, anchored in the fresh styling point of view of the brand’s new Creative Director and EVP of Design, Marissa Webb. Fall signals a significant shift across the entire brand, from the product and styling of the collection, to the debut of the global marketing campaign, 'The New Look of Banana Republic.'"


Adibok - Adidas to Cut Jobs, Boost Marketing Spend



  • "Adidas is taking action following a weaker-than-expected first half of the year. "
  • "The Herzogenaurach, Germany-based sporting goods firm on Thursday revealed a restructuring of its ailing golf business, which will include job cuts. The group will also resort to bigger marketing spending for the remainder of the year and 2015, which will see 'the biggest campaign so far for the Adidas brand,' according to Herbert Hainer, the group’s chief executive officer."


BKS, AMZN - Barnes & Noble, Google partner on same-day book delivery



  • "Barnes & Noble Inc. and Google Inc. are reportedly teaming up on a pilot of same-day delivery of book orders from local Barnes & Noble stores in several U.S. cities. According to the New York Times, customers in Manhattan, West Los Angeles, and the San Francisco Bay area can have online book orders fulfilled from nearby Barnes & Noble locations via the Google Shopping service."
  • "The service is free for Google Shopping members and $4.99 per order for other consumers."


AMZN, WMT - Report: Twitter may be considering e-commerce



  • "Twitter is reportedly making moves that indicate it is considering launching e-commerce services. According to The Next Web, users of the Twitter Android app are reporting a dormant “Payment & Shipping” option appearing in the settings menu."


ANN - ANN INC. Updates Outlook For Second Quarter 2014



  • "Total Company net sales for the fiscal second quarter of 2014 are now expected to be $648 million, reflecting a comparable sales decline of 2.3."
  • "At the Ann Taylor brand, total comparable sales increased 0.7%, reflecting an increase of 2.0% at Ann Taylor partially offset by a decline of 1.9% in the Ann Taylor Factory channel."
  • "Kay Krill, President and Chief Executive Officer, said, 'Despite positive performance through mid-June, the remainder of the second quarter proved more challenging, with soft traffic across the industry and a highly promotional environment. While we delivered a positive comp for the quarter at Ann Taylor, we were disappointed in our performance at LOFT, which experienced continued softness in basic knit tops that represent a meaningful component of LOFT's summer assortment.'"


Keith's Macro Notebook 8/8: DAX GOLD UST 10YR

LEISURE LETTER (08/08/2014)



  • Aug 8:
    • CHH 2Q 10am: , pw: 30848466
    • DRH 2Q 10am: , pw: 153358818
    • AHT 2Q 11am:
    • SHO 2Q 12n:
  • Aug 11:
    • HPT 2Q 1pm:
    • CZR 2Q 430pm: 844.231-441, pw: 55917191
    • STN 2Q 430pm
    • HTHT 2Q 9pm: , pw 7103 4558
  •  Aug 12:
    • HMIN 2Q 9pm: , pw HOME INNS
  • Aug 14:
    • Revel Auction Proceedings


LVS – in its 10Q, the Company updated its comments regarding Parisian and the construction delay and indicated the Company expects to resume construction

"pending receipt of certain government approvals, which management has been informed are scheduled to issue in October 2014."

Takeaway:  A 4-month delay will make 2015 a difficult target opening date.   


034230:KS – Paradise Company Ltd, reported total revenue in the second quarter increased 12.4% year-over-year to KRW172.5 billion based including casino revenue increased 16% year-over-year to KRW148.8 billion and net profit of KRW23.9 billion (US$23.1 million) in the three months to June 30.  The company attributed the stronger growth to increased visitation and play by Chinese high rollers. Chinese VIP players accounted for 66.1% of table drop at Paradise casinos during the second quarter of the year

Takeaway:  Stronger growth than Macau


IGT – announced the Company has begun cost-cutting consolidation of manufacturing functions that will include moving at least some operations from Las Vegas to Reno.  The effort is aimed at consolidating some of their manufacturing functions as a viable method to improve operating efficiencies.

Takeaway: Despite the announced merger, it sounds like a restructuring charge is in the near future. 


LVS – The Nevada Supreme Court on Thursday upheld a lower court ruling requiring the Las Vegas Sands Corp. to turn over unredacted documents in LVS' continuing legal proceedings with Steve Jacobs, who led the company’s Macau operations until 2010.  Additionally, a new court hearing is scheduled for August 14 at the District Court of Clark County in Nevada, to address an attempt by Mr Jacobs and LVS legal team to get the court to reconsider its earlier dismissal of a defamation claim he also made in March 2011 against Las Vegas Sands chairman Sheldon Adelson as well as against Las Vegas Sands and Sands China.

Takeaway:  Does anyone still care about Jacobs?


NCLH (Seatrade Insider)– Pride of America will depart Nawiliwili, Kauai, at 7 p.m. Thursday and spend Friday at sea to avoid Hurricane Iselle.  But as Norwegian Cruise Line closely monitors the rare double hurricane situation in the Pacific, it still anticipates the ship's Aug. 9 embarkation from Honolulu to take place as scheduled.

Takeaway:  Hawaii is having a tough year so far in 2014.  This rare duel hurricane threat will make trends worse.



PENN – CFO Saul Reibstein bought 2,500 shares of stock on Monday, August 4th at an average price of $10.16 per share and now owns 10,300 share.


LHO – CEO Michael D. Barnello sold 30,000 shares of stock on Monday, August 4th at an average price of $35.57 and now owns 211,331 shares.


California I-gaming - Internet poker will not be legalized in California this year.  Sen. Lou Correa has pulled his bill saying there is not enough time to build consensus before the legislature goes home for the year this month.

Takeaway: No surprise here. 




Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

Boy Band

This note was originally published at 8am on July 25, 2014 for Hedgeye subscribers.

“Shot everytime Janet says “Slack””.

-Hedgeye FOMC drinking game


I was trained as a research scientist, not as an economist.  Given that I’m charged with front running the flow of the domestic macro economy, that could be viewed favorably or not – and is probably most dependent on one’s particular ivory tower predilection. 


Truthfully, in a debate with an econ PhD scored on the use of technical jargon and unnecessarily complicated verbiage to describe largely pedestrian macro concepts – I’d probably bet on the other guy.


Generalize the contest to one scored on general cerebral alacrity and proficiency in information processing and contextualization – I bet on myself.  I’m cool with that tradeoff. 


The “Yin” thing about hours of toil in grad school biochem labs and research libraries is that it builds transferable analytical skills. 


The “Yang” - when comparing science with investing –  is that the conclusiveness of the output and the manner in which the research is applied is almost antithetical. 


Generally, the goal of scientific research is to arrive at a definitive, singularly right answer.  In investing, such a thing rarely exists.  Even if a hard conclusion is, in fact, reachable, bandwidth and time constraints often limit the ability to fully distill the available data.   


For someone trained as a scientist, big-time decision making based on imperfect information, data mosaics, and preponderances of evidence amounts to living in a kind of perma-purgatorial state of cognitive dissonance. 


If the Hedgeye Macro team was a Boy Band, I would probably be “the overly analytical, loveable one.


Boy Band - 11


Back to the Global Macro Grind


Hard hat utilization among the domestic construction bulls continues to run at peak capacity with the housing market throwing up nothing but bricks in 2014. 


Wednesday’s Mortgage Application data showed housing demand to start 3Q is running -3.6% QoQ with the purchase index sitting just 6% above the 10Y lows recorded during the peak weather distortion back in February. 


Yesterday’s New Home Sales data for June was equally uninspiring, declining -8.1% MoM and -12% YoY.  Notably, the June decline was on top of a -12% downward revision to the May data.


To quickly review the evolution of our housing call:   After being discretely bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly negative at the beginning of 2014 and elevated #HousingSlowdown to a top Macro theme for 2Q14. 


With demand flagging, home prices in conspicuous deceleration and the ITB down -6% YTD (vs. the SPX +7.5%), that call has played out rather well. 


Does it still have legs?   We think so.


THE SECRET SAUCE:  There’s endless housing data available and enough moving parts across the industry to build as much nuance into a housing call as one would like.   Where we can, however, we prefer to keep it simple.  


Two core, empirical realities sit underneath our base contextual framework for modeling the housing market and the resultant impact on market prices


I won’t keep the sauce secret, but I will make you work for it, kinda   You’ll internalize it too if you actually go through this 2 step exercise – Pop-tarts have more directions than that!


  1. Plot housing demand (pending home sales Index)  vs. price (Case-shiller 20 City HPI Index) with demand leading price by 18-months
  2. Plot Home Price change vs. ITB (U.S. Home Construction ETF)


What you’ll observe is that demand leads price by 12-18 months and housing related equities track the 2nd derivative of price like a glove.  


In other words, current demand trends tell you what home prices will do about a year from now and, if the model holds as it has for numerous cycles, equities will follow the slope in HPI. 


“RIDING THE SHORT BUS”:   The Corelogic HPI data for June showed home prices growing +7.7% YoY – a sequential -110bps deceleration in the rate of home price change vs. the +8.8% recorded in May.  In fact, we have seen approximately 100bps of deceleration in HPI in each of the last four months since the February peak of +11.8% YoY growth.   Housing demand trends in 2H13 suggest the home price deceleration should continue over the back half of 2014 – implying there’s still some runway left on the short side.       


CAPTAIN OBVIOUS:  “Everyone expects HPI to decelerate at this point, isn’t that priced in?”…we’ve heard some version of that reasoning multiple times this year and at multi-points along the recurrent housing cycle.  We get that sentiment and, intuitively, it feels more right than not, but the data argues otherwise.   We’re inclined to stick with the data.  With more downside in HPI, demand listing alongside weak income growth and regulation dragging on credit availability, we think sideways represents the bull case for housing related equities over the intermediate term.  


GOING BOTH WAYS:    A flattening and inflection in the 2nd derivative on HPI will be a key signal for us in terms of shifting off our bearish view.  Who knows….by then, maybe the labor data will have held positive, incomes will be growing at a multiple to HPI, comps will be easy, we will have annualized the implementation of the QM regulations and we can get back on the long side.        


DRINKING GAMES:  I’m on vaca with the fam next week, so I’ll miss the non-event that will be the official reporting of growth accelerating in 2Q off the easiest, non-recession comp ever. 


I will, however, try to rally the beach brigade for a ‘spirit’-ed searching of the FOMC announcement for “slack” mentions.


Back in the day, the FOMC “shot” word was “dollar”, but somewhere along the way we had to switch it’d think the man whose lone job was to control the supply of money would have mentioned “the dollar” or “currency” at least once in 8 years…


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.45-2.55%

SPX 1964-1995

Shanghai Comp 2091-2146

VIX 10.32-14.11

USD 80.32-81.07

Gold 1288-1322

Copper 3.20-3.29 


To Growth,


Christian B. Drake

Macro Analyst


Boy Band - Compendium 072414

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