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[video] Keith's Macro Notebook 2/3: JAPAN OIL UST10YR

FLASHBACK: Dinero Caliente

Editor's note: This prescient "Morning Newsletter" was originally published July 19, 2013. It was written by Macro analyst Christan Drake who was filling in for CEO Keith McCullough. It's another nice Hedgeye #timestamp on the early side of this bearish emerging market story. Click here to subscribe.

“Never memorize something that you can look up.” Albert Einstein

The big picture

I used to have something of a photographic memory.  Lately, however, a plot of my capacity for short-term recall and a YTD chart of Gold would probably be hard to distinguish. 


I’d proffer that my bout with Cognitive Deflation is only transient and simply the byproduct of late nights with infants, serial overconsumption of caffeine, and serial under-consumption of exercise.  At least that’s what I tell myself. 


Either way, I’ve come to more closely relate to the aphoristic wisdom embedded in Einstein’s quote above.


With some beach time on the August calendar, I’m holding out hope the downtime catalyzes some needed cerebral exfoliation. 

Macro grind

We have been negative on emerging market debt and equities for most of 2013 with #EmergingOutflows & #AsianContagion headlining our 2Q13 and 3Q13 Macro Investments themes calls, respectively. 


The story of emerging market pain is one birthed from emergent strength in the U.S. dollar, acceleration in U.S. growth and the associated reversal in unprecedented Fed policy driving an expedited reversal in Hot Money & Yield Chase Flows out of developing economies.   


We’ve presented the principal conclusions of our research and suggested positioning in recent presentations, but it’s probably worthwhile to take an illustrative, didactic tour of capital flows to understand how the cycling of capital into and out of emerging economies can work to propagate negative economic and market impacts in an archetypical scenario.


Capital Flows to Emerging Economies for 3 Principle Reasons:


1.   External:  “Push” flows occur for reasons external to the capital-importing economy and generally relate to relative investment attractiveness.  Perhaps the simplest way to understand it is in the context of U.S. interest rates.  If growth slows, policy turns easy and interest rates in the U.S. decline, investment yields available in emerging economies become relatively more attractive and capital flows accordingly. Historically, this has been the largest driver of rich-to-poor capital flows.  It’s also generally the most volatile.   


2.   Internal:  “Pull” flows are catalyzed by improving economic fundamentals, sound policy and/or trade & capital market liberalization initiatives.  Pull flows provide firmer bedrock for sustained inflows. 


3.   Financial Globalization:  Here we’d highlight the ongoing, global trend towards Financial & Capital market integration and the proliferation of conduit investment vehicles allowing broad institutional and retail access to developing economies.   A secular shift in portfolio allocations towards international diversification holds positive longer term opportunity for developing economies.  However, in compressed periods in which flows chase performance, it can work to amplify volatility in market prices.     


It’s the potential transience of “push” and portfolio (i.e. equity & debt) flows that are of most concern to capital-importing countries, particularly given the reality of hyper-fast capital mobility.


So, what happens when the Hot Money starts to flow?


In a generalized model, the body of empirical evidence points to a number of discrete macroeconomic impacts:


1.   Currency Appreciation:  Absent Central Bank intervention the demand for foreign currency drives the exchange rate higher.


2.   Consumption Growth:   The influx of foreign capital provides for a higher level of domestic investment.  This higher level of investment is generally accompanied by a decline in the domestic savings rate.  Consumption rises as consumerism displaces saving.  


3.   Rise in the Money Supply & Inflationary Pressure: Stemming from a rise in economic activity along with any attempts by the central bank to quell the currency appreciation.


4.   Widening of the Current Account Deficit:  Don’t worry if you don’t remember the details about what the Current Account is.  Here, it’s sufficient to understand that imports rise relative to exports generally due to an appreciating currency and rising consumption. 


It’s not difficult to understand how the confluence of the above dynamics can work to drive recurrent boom and bust cycles for emerging and formerly, capital-rationed, economies.  Consider how the interaction of the above factors, which initiates with a large influx of foreign capital, can work to drive a self-reinforcing cycle in both directions:


U.S. growth slows, Bernanke cuts to 0%, institutes financial repression and forces capital to search out yield. Capital flows into the EM economy causing increased investment, falling domestic savings and rising domestic consumption.  Incomes rise alongside accelerating growth, driving a further increase in consumption in a positive, reflexive cycle.  Further, foreign capital inflows along with diverted domestic savings provide a bid for real (i.e. housing) and speculative financial assets.  Net wealth increases alongside inflating asset values.  Faster growth, higher incomes, and rising net wealth all serve to increase capacity for credit. Credit expansion then serves to amplify the cycle.  Everything is great, until…….


U.S growth starts to inflect to the upside, #StrongDollar starts to sniff out a Fed Policy reversal, and “push” flows begin to reverse.  


When portfolio capital starts to exit, asset prices deflate and credit gets tighter, investment and consumption both decline.  The currency depreciates, driving local inflation higher at the same time that aggregate demand accelerates to the downside. If demand is local and the debt is denominated in foreign currency, the debt burden on business is amplified.  Declining demand in the face of a crashing currency and elevated inflation can leave policy makers handcuffed. 


Thus, capital flows, this time the expedited exportation of foreign capital, catalyze a reversal of the boom cycle described above with some version of a self-reinforcing, contractionary cycle playing itself out.   


Of course, country specific fundamentals, policy decisions, and monetary systems matter and understanding the prevailing risk for a particular country is more nuanced, but the generalized model described above captures the broader dynamics that tend to drive the cycle. 


Further, given the large-scale proliferation of EM related investment vehicles whereby investors indiscriminately bought ‘international diversification’ without a real understanding of the underlying exposures, it’s unlikely they will be overly discriminate in their selling.  Historical precedent suggests #StrongDollar driven outflows from emerging markets are protracted. 


In short, we don’t think #EmergingOutflows have bottomed yet. 


Hopefully the decline in my recollective ability has.

  • CASH: 51

Our levels

Our immediate-term Risk Ranges are now:


UST 10yr yield 2.49-2.74%
SPX 1670-1701
VIX 13.23-14.78

USD 82.61-83.48

Brent 106.99-109.27

Gold 1216-1306 


Enjoy the weekend.  


Christian B. Drake

Senior Analyst


FLASHBACK: Dinero Caliente - vv. EL

$LULU Sheer Pants Redux

Takeaway: The yoga retailer's customers are complaining about sheerness again, this time after an online warehouse sale.

LULU - Lululemon 'Inadvertently' Sold A Bunch Of Sheer Pants Again


$LULU Sheer Pants Redux - lu

  • "Once again, the yoga retailer's customers are complaining about sheerness, this time after an online warehouse sale in Canada."
  • "While the items came with a tag saying 'things don't always go as planned, this garment has fit, function, or visual imperfections,' the defects apparently weren't disclosed at the point of sale online."
  • "A Lululemon spokesperson confirmed to us that some defective pants were sold to customers without proper disclosure. 'This is the first time we’ve had an online warehouse sale, which included a variety of items. Some items with a 'things don’t always go as planned' tag inadvertently ended up in our inventory,' the spokeswoman said."

Quick Take from Hedgeye Retail Analyst Brian McGough: Is this really the way to rebuild customer loyalty LULU? Unfortunately for the company, it is in a fishbowl right now. Everyone is watching its every move and is criticizing them accordingly. Is it fair? Nope. But life isn't fair and Lululemon made its own bed. Now it has to sleep in it. 

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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 80.46%
  • SHORT SIGNALS 78.35%

A Nikkei & Bronco Beatdown

Client Talking Points


An absolutely horrendous start to 2014 for the Nikkei. It's down another -2% overnight to -10.3% year-to-date. Ugly like Denver. In our Global Macro Themes deck for Q1, Japan was a big outlier on sequential #GrowthSlowing from its tax-pull-forward 2013 peak. JGBs agree with 10-year yields -12 basis points month-over-month to new lows this morning of 0.61%.


Brent Oil looks like hell. It's nothing like the CRB Index right now. Brent remains bearish TREND here at Hedgeye with resistance up at $108.62. The US consumer is in dire need of a tax cut, and she won’t get it from new Fed Head Janet Yellen via a rate hike, so Oil is a big hope.


The 10-year yield down at 2.65% continues to signal lower-highs (2.76% resistance) and lower-lows on our intermediate-term TREND duration which is now bullish for bonds (bearish for yields) as rate of change in US #GrowthSlowing manifests.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.


We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


JAPAN: Nikkei bulls getting splattered, -2% overnight to -10.6% YTD Manning to be sponsored by the Nikkei @KeithMcCullough


"Being the richest man in the cemetery doesn't matter to me. Going to bed at night saying we've done something wonderful, that's what matters to me."

- Steve Jobs


Global funds pulled $6.3 billion from emerging-market stocks in the week through Jan. 29, the biggest outflow since August 2011. More than $12 billion has fled the funds this year, already approaching 2013’s outflow of $15 billion. (Bloomberg)

What's New Today in Retail (2/3)

Takeaway: WMT new CEO starts day after miss. Coincidence? AdiBok loses another sponsorship/NKE. LULU sells defective pants again. JOSB behaving badly.



KORS - Earnings Call: Tuesday 2/4 8:00 am




Walmart updates FY14 underlying EPS guidance for fourth quarter and full year



  • "The company had provided fourth quarter diluted earnings per share from continuing operations (EPS) guidance of $1.50 to $1.60, which included a $0.10 per share impact from two discrete items, which resulted in an underlying EPS guidance range of $1.60 to $1.70." 
  • "For the full year, the company expected to deliver EPS of $5.01 to $5.11 and accounting for the $0.10 of discrete items, the range for underlying EPS was between $5.11 and $5.21."
  • “'We now anticipate that our underlying EPS for the fourth quarter of fiscal 2014 will be at or slightly below the low end of our range of $1.60 to $1.70,' said Charles Holley, Wal-Mart Stores, Inc. chief financial officer.  'For the full year, we expect underlying EPS to be at or slightly below the low end of our range of $5.11 to $5.21.'"


Takeaway: Key consideration -- new CEO Doug McMillon's first day on the job was Saturday, the day after the EPS guide-down. Clear the deck for the new boss? That's what it sounds like to us.


LULU - Lululemon 'Inadvertently' Sold A Bunch Of Sheer Pants Again



  • "Once again, the yoga retailer's customers are complaining about sheerness, this time after an online warehouse sale in Canada."
  • "While the items came with a tag saying 'things don't always go as planned, this garment has fit, function, or visual imperfections,' the defects apparently weren't disclosed at the point of sale online."
  • "A Lululemon spokesperson confirmed to us that some defective pants were sold to customers without proper disclosure. 'This is the first time we’ve had an online warehouse sale, which included a variety of items. Some items with a 'things don’t always go as planned' tag inadvertently ended up in our inventory,' the spokeswoman said."


Takeaway: Is this really the way to rebuild customer loyalty LULU? Unfortunately for the company, it is in a fishbowl. Everyone is watching its every move, and criticizing them accordingly. Is it fair? No. But LULU made its bed, and now it has to sleep in it.


NKE, ADDY - Tennessee athletic department says it will switch to Nike when its Adidas contract runs out



  • "Tennessee has agreed on an apparel deal with Nike that will take effect when its contract with Adidas expires in the summer of 2015."
  • "The university announced the eight-year agreement Friday and said it called for Nike to supply apparel, uniforms, footwear and additional equipment for each of the school's 20 athletic programs as well as its spirit squads. Contract details obtained through a public records request indicated the deal was worth approximately $35 million."
  • "Tennessee's contract with Adidas runs through June 30, 2015. Tennessee had partnered with Adidas since 1997."


Takeaway: This is less about Nike and more about Adidas. It lost Notre Dame to UnderArmour just a few weeks ago. Now it loses another school to Nike. Either AdiBok is getting more conservative with resources allocated to US college sports, or the US brands are simply upping the ante and going for Adi's jugular. Our sense is that the company realizes that its market share has been decimated even while paying up for these expensive endorsements. It needs to allocate resources to higher ROI initiatives -- like coming out with product that people actually want to buy.


JOSB - Jos. A. Bank in Talks to Acquire Eddie Bauer



  • "Jos. A. Bank Clothiers Inc. is in talks to buy fellow apparel retailer Eddie Bauer, according to people familiar with the matter, a deal that, if consummated, would dramatically shake up a takeover battle Jos. A. Bank has been waging with Men's Wearhouse Inc. Details including what price is being discussed couldn't be learned."


Takeaway: On a standalone basis, JOSB buying Eddie Bauer doesn't make a whole lot of sense. Synergies are tough to envision or model. It's hard to shake the premise that JOSB is doing a deal simply to shake up the MW offer. The lack of Corporate Governance here is pathetic. 


JOSB, MW - Jos. A. Bank Sends Letter to Men's Wearhouse



  • "We, the directors of Jos. A. Bank Clothiers, Inc., are writing in response to your January 30, 2014 letter. After carefully reviewing your offer with our financial and legal advisors, we continue to believe that your offer to acquire Jos. A. Bank substantially undervalues our Company and that your proposal is not in the best interests of our stockholders. Accordingly, we see no benefit in commencing negotiations with Men's Wearhouse."


Takeaway: This is pretty ridiculous. MW said that if JOSB opened discussions it would consider raising the bid. But JOSB is in a state of sheer denial.




BBY - Best Buy lays off 950 Canadian workers; no stores closed



  • "Best Buy Co. Inc. said Thursday that it is laying off 950 of its Canadian employees, the first major cutback since the electronics retailer reported disappointing holiday sales earlier this month."
  • "... the layoffs affected 6 percent of its workforce in Canada and will not result in any store closings. At the end of January a year ago, Best Buy closed 15 stores in Canada. It currently has 265 stores in Canada and had 16,000 Canadian employees before the layoffs."


PVH - PVH Adds Two to Board



  • "PVH Corp. has expanded the size of its board to 14 with the addition of Steven Madden chief executive officer Edward Rosenfeld and Uber Technologies chief financial officer Brent Callinicos as directors."
  • "Rosenfeld has been chairman and ceo of Steven Madden since August 2008. He joined the company in 2005 and was earlier a vice president of investment bank Peter J. Solomon Co."
  • "Callinicos has been cfo of Uber since last September and was earlier vice president, treasurer and chief accountant of Google Inc."


WMT - Wal-Mart Challenges Labor Board's Complaint



  • "Wal-Mart Stores Inc. told the National Labor Relations Board that it was within its rights when it disciplined workers for taking part in short strikes, setting up a legal test of a phenomenon that is reshaping relations between companies and labor."
  • "In a filing last week that responded to a complaint brought by the labor board, Wal-Mart argued those intermittent job actions are hard to distinguish from absenteeism and it was defending its legitimate business interests when it warned strikers it would enforce its policies about being away from work."


DXLG - Destination XL Group Names Board Member John Kyees as Interim CFO -- Expands Board with Election of Will Mesdag as Director -- Provides Update to Fiscal 2013 Financial Guidance



  • "Destination XL Group, Inc...today announced the resignation of its Executive Vice President, Chief Operating and Chief Financial Officer, Dennis Hernreich, and the appointment of Board Member John E. Kyees as Interim Chief Financial Officer. In addition, the Company announced that it has elected Will Mesdag, 60, to its Board of Directors."
  • "The Company expects earnings per share for fiscal 2013 to be a net loss in the range of $(0.11) to $(0.13) per share compared with previous guidance of a net loss of $(0.05) per share.  The guidance excludes severance and post-employment benefits charges.  Sales for fiscal 2013 are expected to approximate $388.0 million, compared with the Company's previous guidance of $395.0 million."
  • "For the fourth quarter and fiscal year 2013, comparable sales for the Company are expected to increase approximately 3.9% and 2.9%, respectively, from the prior-year period. The increase in comparable sales for fiscal 2013 was previously expected to be approximately 5.0%." 


TBAC - Tandy Brands plans to liquidate assets to pay off lenders



  • "After years of financial and operational losses, Dallas-based Tandy Brands Accessories Inc. plans to sell its remaining assets to pay off $29 million in debt."
  • "The company's lender, Salus Capital Partners LLC, notified the company on Tuesday it would dispose of the collateral following the default on Tandy Brands' $29 million loan."







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