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Is the Russell 2000 the Canary in the Market Coal Mine?

After doing nothing in November (it was literally flat for 4 straight weeks), the Russell 2000 dropped -1.7% yesterday in a straight line. It's back to down -0.9% for 2014 and down -4.5% since July.


Bull market? Or still a #bubble popping?


Is the Russell 2000 the Canary in the Market Coal Mine? - chart


On a related note, Total U.S. Equity Market Volume was up +14% vs. its 1 month average yesterday as stocks fell.


Is the Russell 2000 the Canary in the Market Coal Mine? - table


In other words, the TREND of U.S. equity volume accelerating only on DOWN days continues to signal that the #LiquidityTrap (especially in small caps) remains.


Editor's note: This is an excerpt from Hedgeye morning research. For more information on how you can become a subscriber click here.

CoreLogic | HPI Stabilization Confirmation

Takeaway: October's Corelogic data is the nail in the coffin of the bearish Housing thesis. Time to go the other way.

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. 


CoreLogic | HPI Stabilization Confirmation - Compendium 120214


Today's Focus: October CoreLogic Home Price Report

Corelogic Home price data for October released this morning showed home prices growing +6.1% YoY – a sequential acceleration relative to the +5.3% rate of appreciation reported last month. Price trends in the Ex-Distressed series were similar, accelerating to +5.6% YoY from +4.8% in September. The short-term projections for November are calling for further acceleration to +6.3% and +5.9% in the national and ex-distressed series, respectively. 


The Dilemma…Resolved? Back on 9/2, we put out a note titled: THE DILEMMA where we considered the reported stabilization in home price growth for the Jun/July period in the context of the change in CoreLogic's HPI estimate methodology and the rise in magnitude of estimate revisions in 2014. 


Our conclusion was that the emerging stabilization in 2nd derivative HPI – the trend of which is central to our top down view on the directional outlook for housing (see last week's note: INFLECTION INSPECTION for a summary review of our top-down model) – warranted more caution on remaining bearish but that we were content to await confirmatory data, both from CoreLogic and the other primary home price series.    


While the subsequent data was, indeed, revised to reflect ongoing price deceleration, the trend across the CoreLogic, Case-Shiller, and FHFA series have shown a gradual slowdown in the sequential rate of year-over-year price deceleration over the last two-to-three months.  


*The important takeaway is that what was a fledgling stabilization in HPI trends is now showing a nascent shift towards stabilization/acceleration. Historically, housing related equities have followed the slope in price growth, so an inflection in pricing would sit as a discrete positive for the complex. We’re still a bit weary of a single month of CoreLogic data in isolation but the multi-month stabilization in price growth across HPI series suggests the shift is more legitimate than not.   



CoreLogic | HPI Stabilization Confirmation - Corelogic NSA YoY   TTM 


CoreLogic | HPI Stabilization Confirmation - Corelogic Ex Distressed NSA YoY   TTM 


CoreLogic | HPI Stabilization Confirmation - Corelogic   CS 2nd Deriv Inflection


CoreLogic | HPI Stabilization Confirmation - Corelogic NSA YoY   LT 


About CoreLogic:

CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic's property information database. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate constant-quality view of pricing trends than basing analysis on all home sales. The CoreLogic HPI covers 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."


Joshua Steiner, CFA


Christian B. Drake

Keith's Macro Notebook 12/2: Russell 2000 | Volume | Gold

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


Takeaway: In today's Macro Playbook, we show how the current quantitative setup within the equity market supports reiterating our #Quad4 theme.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares MSCI European Monetary Union ETF (EZU)
  2. iShares MSCI France ETF (EWQ)
  3. iShares Russell 2000 ETF (IWM)
  4. SPDR S&P Regional Banking ETF (KRE)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)



If you tangentially followed our research in the YTD, you’d probably arrive at the conclusion that we’re ultra bearish and/or always negative on the stock market – insomuch as you would’ve arrived at the polar opposite conclusion(s) when we were the bulls of bulls in 2009 or in 2013.


Fortunately for those who are actually paying attention, our research views are much more nuanced. Specifically, being bearish on growth and/or inflation affords us the opportunity to BUY and SELL a number of sectors and style factors.  


Along those lines, we reiterate our BULLISH bias on the sectors and style factors associated with #Quad4 outperformance (healthcare, consumer staples, REITs, mega caps) and our BEARISH bias on those that are associated with #Quad4 underperformance (energy, materials, regional banks, small-to-mid caps).


Both recent performance and current levels of momentum support reiterating that view. On a WoW basis, the XLV, XLP, VNQ and USMV ETFs are up +1.6%, +1.1%, +1.5% and +0.8%, respectively. This contrasts with the XLE, XLB, KRE and IWM being down -9.4%, -4.0%, -2.4% and -1.5%, respectively. The domestic E&P ETF (XOP) – another one of our core short ideas – continues to crash, having dropped -19.2% in just the last week alone!


Looking to our Tactical Asset Class Rotation Model (TACRM) we are pleased to see this theme continuing to play out from a volume-weighted perspective across multiple durations. Specifically, among the 47 domestic equity sectors and style factors we track, healthcare (XLV, IHI, IHE), consumer staples (XLP), REITs (VNQ) and mega caps (USMV) account for 6 of the top 8 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings. Meanwhile, mall-to-mid caps (IWM, IWO, IWN), materials (XLB, GDX) regional banks (KRE) and energy (XLE, XOP, IEZ, AMLP) account for 10 of the bottom 11 VAMDMI readings.




To top it all off, trends across key economic indicators continue to augur for a continuation of our #Quad4 theme in the domestic equity market (click HERE and HERE to review said data). As both Black Friday and Cyber Monday sales and traffic data suggest, Consensus Macro remains dead wrong on its [lazy] “lower gas prices = consumer renaissance” thesis.


***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Early Look: Golden Headfakes (12/2)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


QE Conundrums – Draghi’s Misguided Intervention? (11/26)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: S&P500 Levels, Refreshed (11/18)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.

Retail Callouts (12/2): Cyber Monday, KSS, TGT, WMT, PETM, AMZN

Takeaway: Cyber Monday as big a bust as Black Friday. KSS fesses up that on-line mgns are 4% vs 10% in store. Wait til it has to offer free shipping.


Retail Callouts (12/2): Cyber Monday, KSS, TGT, WMT, PETM, AMZN - 12 2 chart2





Early Cyber Monday Data Points



Takeaway: The Cyber Monday numbers don't look any prettier than the data points we saw coming out of the weekend. Sales were up 8.5% compared to the 20.6% growth rate we saw last year, according to IBM (numbers that we've found to be reliable). That's not going to cut it. Especially when you consider the fact that average ticket was down and units were up which translates to an AUR down mid-singles.


The department store numbers are even uglier. According to IBM on Black Friday online sales growth was 23% versus 61% on the same day last year.  Similarly, on Cyber Monday online sales grew 17.9%, down from 70.3% LY with average ticket down 10%.


One concern we have with the shift to online is 1) e-commerce is lower margin for department store and multi-line retailers -- full stop. It's higher margin for brands like Nike and Ralph Lauren. But not for any retailer with a basket size under $150.  2) Retailers don't know where sales will show up -- in store or on-line.  As such, they need to keep stores fully-staffed (at 2-3x pay on Thanksgiving) in order to satisfy demand that might or might now be there.  Our point is that the kick off of the holiday season is a dilutive event both ways.


We still think shorting KSS is the best move here. We'd also short TGT, M, FL, DKS, and DG.


KSS - Kohl's has 4% online operating margin, vs 10% for brick and mortar



KSS CEO Kevin Mansell said in a WSJ interview that "online operating margins at Kohl’s are about 4%, less than half the 10% operating margins of its nearly 1,200 physical stores."


Takeaway:  Tough sledding when the only line item on the P&L that is growing is 600bps below the core. Especially when you put that up against where the company guided 2017 targets at its Analyst day in late October. Just to refresh, the company guided to $21bn in revs at a 9% operating margin. Not only does the company have to comp nearly 3% for the next 3 years, but we also have to see operating margin expansion as the company moves back towards national brands and pushes its 'Greatness Agenda' online.  We made a big deal about this when we added KSS to our Best Ideas short list. The only line on the P&L that's growing (besides SG&A) is on-line sales. And yet consensus has KSS earning $5 in two years versus $4 today. After this year ends, we don't think KSS will ever earn $4 again. We're at $3.50 versus the Street at $5. 





PETM - Apollo leading the pack in PetSmart bid, sources say



  • "Black’s Apollo Global Management is seen as the most aggressive suitor, and likely winner..."
  • "Private-equity firms BC Partners and the team of KKR and Clayton, Dubilier and Rice are also still in the running, sources said."


WMT - Wal-Mart to Cut 250 Jobs in China -- Update



AMZN - To Gain the Upper Hand, Amazon Disrupts Itself



  • "But people are not going to be getting their stuff from an Amazon store in Midtown Manhattan this holiday season. A spokeswoman said in a statement that the 470,000-square-foot building was “primarily” corporate office space, and that the ground floor retail shops would be subleased."


AMZN - Moody’s Cuts Outlook After Amazon Debt Offer



  • "Moody’s Investors Service in turn cut its outlook on the company’s “Baa1” credit rating to negative from stable."


TGT - Target to Open Second Brooklyn Store



  • "Target is planning to open its second Brooklyn store in 2016, a CityTarget in downtown Albee Square, Brooklyn."


Black Friday breaks records at John Lewis



  • "The lure of Black Friday bargains lifted weekly sales at John Lewis to the highest levels recorded in its 150-year history, with one tablet computer sold every second in the rush for pre-Christmas bargains."


WMT - Wal-Mart Canada adding more Grab and Go lockers



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