Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Editor's note: This is a brief excerpt from Hedgeye morning research. For more information on how you can become a subscriber click here.
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Collapse, crash – use whatever word you want to describe a CRB Index (19 commodities) that dropped another -1.4% to fresh year-to-date lows yesterday.
For those of you keeping score, it’s down -25% since June.
While it’s fascinating to hear a wide range of narratives on why, the reality is that being positioned for #deflation risk (net short Commodities, Junk Bonds, etc.) is paying off big time now.
Takeaway: In this note, we take a closer look at the industry-wide trends implied by consensus same-store sales estimates for 2015.
- Casual Dining, Family Dining, Fine Dining, and Sandwich two-year comps are expected to accelerate throughout 2015.
- Coffee, Fast Casual, and Pizza two-year comps are expected to decelerate throughout 2015.
- Comp estimates, in aggregate, appear aggressive perhaps driven by recent encouraging reports from Black Box and Knapp as well as declining gasoline prices.
- For this reason, we believe we are well-positioned to identity several opportunistic shorts next year.
Casual Dining Consensus SSS Expectations (3Q14-4Q15)
- Casual Dining two-year accelerating 100 bps to 1.7%
- BJRI two-year accelerating 200 bps to 1.1%
- BLMN two-year accelerating 30 bps to 1.8%
- BBRG two-year accelerating 240 bps to -2.8%
- BWLD two-year decelerating 60 bps to 4.5%
- CAKE two-year accelerating 35 bps to 1.7%
- CHUY two-year decelerating 50 bps to 2.6%
- DIN (Applebee’s) two-year accelerating 60 bps to 1.3%
- DIN (IHOP) two-year decelerating 95 bps to 2.1%
- DRI two-year accelerating 230 bps to 1.6%
- EAT two-year accelerating 160 bps to 2.0%
- IRG accelerating 225 bps to -0.1%
- KONA two-year decelerating 5 bps to 2.6%
- RRGB two-year decelerating 65 bps to 2.7%
- RT two-year accelerating 660 bps to 1.5%
- TXRH two-year accelerating 55 bps to 4.9%
Coffee Consensus SSS Expectations (3Q14-4Q15)
- Coffee two-year decelerating 156 bps to 3.4%
- DNKN two-year decelerating 130 bps to 1.9%
- KKD two-year decelerating 60 bps to 2.9%
- SBUX two-year decelerating 95 bps to 5.1%
Family Dining Consensus Expectations (3Q14-4Q15)
- Family Dining two-year accelerating 78 bps to 2.1%
- BOBE two-year accelerating 225 bps to 1.3%
- CBRL two-year decelerating 20 bps to 2.9%
- DENN two-year accelerating 30 bps to 2.1%
Fast Casual Consensus Expectations (3Q14-4Q15)
- Fast Casual two-year decelerating 52 bps to 4.3%
- CMG two-year decelerating 230 bps to 10.7%
- FRGI (Pollo Tropical) two-year decelerating 160 bps to 4.6%
- FRGI (Taco Cabana) two-year accelerating 55 bps to 3.2%
- NDLS two-year accelerating 20 bps to 2.1%
- PBPB two-year accelerating 30 bps to 1.8%
- PNRA two-year accelerating 130 bps to 2.7%
- ZOES two-year decelerating 210 bps to 4.7%
Fine Dining Consensus Expectations (3Q14-4Q15)
- Fine Dining two-year accelerating 52 bps to 1.9%
- DFRG two-year accelerating 75 bps to 2.5%
- RUTH two-year decelerating 105 bps to 3.5%
Pizza Consensus Expectations (3Q14-4Q15)
- Pizza two-year decelerating 173 bps to 3.9%
- DPZ two-year decelerating 160 bps to 5.0%
- PZZA two-year decelerating 185 bps to 2.8%
Sandwich Consensus Expectations (3Q14-4Q15)
- Sandwich two-year accelerating 44 bps to 2.6%
- BKW two-year accelerating 55 bps to 2.2%
- JACK (JIB) two-year accelerating 120 bps to 2.1%
- JACK (Qdoba) two-year accelerating 155 bps to 6.4%
- MCD two-year accelerating 145 bps to 0.3%
- PLKI two-year decelerating 230 bps to 3.9%
- SONC two-year decelerating 220 bps to 3.1%
- WEN two-year decelerating 15 bps to 1.8%
- YUM two-year accelerating 340 bps to 1.4%
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Takeaway: Idea List. With ICSC & ChannelAdvisor, tough to argue that sales are not decelerating into final wk of Holiday. Demand down, discounts up.
HEDGEYE RETAIL IDEA LIST
Several changes to the Idea List this week.
- We put all athletic retailers in our Core Short list. This follows our Athletic Black Book last week where we outlined the changes happening with distribution in that space, and how FL, HIBB and DKS are uniquely positioned to fail.
- We removed DDS from our Short Bench. With HBC making noise about acquiring the company, it hardly makes sense for us to continue to hold our breath waiting for an entry point.
- We contemplated moving KATE ahead of RH on our idea list into the #1 slot -- not because of lack of confidence in RH, but because we think that there's more controversy around KATE over the near-term. We're going to keep our positioning as is. But if KATE weakens or RH plows forward, we might make the switch.
Takeaway: A big rebound in sales for the week, but it follows two big weekly declines in the context of an intermediate downtrend. The point there is that with sales trending down so much heading into the biggest Holiday week, it makes sense that retailers would really turn the discounting machine into overdrive to have any shot at hitting numbers and prevent a glut of inventory in January.
We're seeing the same here out of the ChannelAdvisor numbers -- which show e-commerce trends. The consistency in spending decline is clear as day.
NKE, FL, DKS, FINL - e-Commerce Trends
Takeaway: Following up on a major theme of our Athletic Black Book here is a look at e-Commerce sales growth for the relevant companies. If you are wondering when Nike's commitment to DTC starts to have an effect... it's now.
Dick's and Foot Locker occasionally report their main banner performance, which outpaces their consolidated company e-commerce growth. We have used that data here and included our estimates where necessary.
As a reminder HIBB does not have an e-commerce business. That's a problem.
The key takeaway is that there have only been two quarters in history where Nike outgrew its wholesale partners with online sales. Those two quarters just happened. And we're going to see a third, and a fourth...etc...
BABA, COST - Alibaba’s Tmall Global Site Stumbles
M, VFC - Ranking the Top 20 Finance Chiefs
DDS - Hudson's Bay could wrap up Dillard's in 2015
WMT, TGT - Walmart stores busy, Target stores, not so much
Client Talking Points
Once upon a time, yield curve compression (flattening) was a clean cut #GrowthSlowing signal (it still is, as both U.S. and global growth slow in Q4 vs. Q3 – you’ll get that data in JAN); UST 10YR 2.16% (-29% year-to-date) minus 2yr 0.70% = +146 basis points spread registering fresh tear-to-date lows as commodities continue to collapse.
Collapse, crash – use whatever word you want for a CRB Index (19 commodities) that dropped another -1.4% to fresh year-to-date lows yesterday (-25% since June); while it’s fascinating to watch the narrative on why, reality is that being positioned for #deflation risk (net short Commodities, Junk Bonds, etc.) is paying off big time now.
At the all-time (which is a long time) closing highs for the SPX (2078), Total U.S. Equity Market Volume was -12% and -30% vs. its 1 month and year-to-date averages yesterday. We would say #NoWorries on the liquidity trap if it wasn’t for the 100-150 handle draw-downs we saw from the no volume SEP and NOV highs – enjoy the markups.
|FIXED INCOME||30%||INTL CURRENCIES||7%|
Top Long Ideas
The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.
We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).
The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.
Three for the Road
TWEET OF THE DAY
VIDEO (2mins) Why I’m Using the Word “Recession” for the First Time This Year https://app.hedgeye.com/insights/41363-mccullough-why-i-m-using-the-word-recession-for-the-first-time-thi via @hedgeye
QUOTE OF THE DAY
Excellence is the gradual result of always striving to do better.
STAT OF THE DAY
Greece is leading losers his morning down -2.5% to -26.8% year-to-date.
Takeaway: In today's edition of the Macro Playbook, we review our intermediate-to-long-term outlook for the U.S. dollar (HINT: much higher from here).
THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- iShares National AMT-Free Muni Bond ETF (MUB)
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Staples Select Sector SPDR Fund (XLP)
- Vanguard Extended Duration Treasury ETF (EDV)
- iShares 20+ Year Treasury Bond ETF (TLT)
Short Ideas/Underweight Recommendations
- iShares Russell 2000 ETF (IWM)
- SPDR S&P Regional Banking ETF (KRE)
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
QUANT SIGNALS & RESEARCH CONTEXT
#StrongDollar Continues: The U.S. Dollar Index’s +1.9% WoW delta is yet another reminder of what has been one of the sharpest rallies in the free-floating history of the U.S. currency (up +12.6% since the end of June). At just shy of 90, the DXY is trading at the strongest levels since the first quarter of 2006.
So should you short the dollar on that and reallocate capital to all the carry trades and inflation hedges born out of ~10 years of centrally planned U.S. currency debasement (2001-2011)? Absolutely not.
Lost in the fact that last price on the DXY is higher than any other point on the preset 5Y chart on Bloomberg is the fact that the USD could go much, much higher from here versus the EUR and JPY as monetary policy continues to diverge. Specifically, critical mean reversion thresholds in the EUR/USD and JPY/USD crosses auger for roughly -18% downside in the euro and yen from here.
So what would perpetuate a continued divergence in monetary policy from here? Inflation is arguably the key determinant. In our 12/19 note titled, “Does Your View on Rates Include the Risk of a “Reflexive Deflationary Spiral”?” we outlined a 6-step reflexive process whereby the USD perpetually comes out on top vis-à-vis the EUR and JPY over the intermediate-to-long term. Needless to say, we do not think you can afford to not review that note.
Looking to [Bloomberg] consensus, we think the current implied appreciation of +2.9% on the DXY through EOY ’15 is well shy of what is likely to be experienced by investors over the NTM.
As always, Consensus Macro strategists live in the perceived certainty of anchoring on last price and clustering around the median with respect to their forecasts. At Hedgeye, we prefer to live in the uncertainty of actually making the call – before the big moves occur. From our 8/5 presentation titled, presentation titled, “ARE YOU PREPARED FOR QUAD #4?”:
Long live #StrongDollar!
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
#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.
#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.
Moscow, We Have a Problem (12/16)
#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.
Best of luck out there,
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 – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.
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