Oil prices have slumped almost 50% this year, set for the biggest annual decline since 2008. "It's flat out ugly for whoever is long inflation expectations in Energy terms," says Hedgeye CEO Keith McCullough.
Takeaway: ICSC-intermediate downtrend continues, but 2015 comps get easier. UA steals Murray from Adi. AMZN comments on Holiday & Free Shipping
HEDGEYE RETAIL IDEA LIST
Takeaway: The ICSC numbers end the year on a low note decelerating on a 1,2, and 3 yr basis after the pre-Christmas rebound which we suspect was helped by retailers need to clean up inventory positions headed into January. Since the week 36 peak, the trend has been overwhelmingly negative. That being said, comps in the first calendar quarter of 2015 get very easy with an average comp of 1.6% compared to the rest of the year at 3.1%.
UA - Under Armour Signs Andy Murray
Takeaway: At 27 Murray isn't quite a tennis dinosaur but he's getting close. Still this is a coup for UA which was able to steal him away from Adi. The 4 year deal is just north of $5mm per year or about 2% of the company's 2014 projected marketing spend and less than a half of a percent of total revenue. That's a drop in the bucket for UA. And it gives them a bonafide presence on the court. The company's current lineup of athletes (Sloane Stephens and Robert Ginepri) don't spend a lot of time playing in front of a national TV crew. UA has been unafraid to diversify, trying its hand at everything from speed skating to supermodels, so tennis is a logical extension for the brand. At the price that they are paying…this is a win for UA.
AMZN - Free shipping saved consumers $2bil+, volume up 100mm units
Takeaway: If we assume that each order on average cost the consumer $5 to ship, we get to a total of 400 million packages shipped for free this holiday season, up 100mm units or 33% from last year. That's pretty damaging for the rest of retail. Especially when you consider the drag it has on profitability. AMZN pays close to 10% of it's revenue to cover its shipping expense every year and its e-comm operation is 6x bigger than WMT and 16X bigger than M. If it's an issue for AMZN you can bet it's a bigger issue at just about every other retailer on the planet. We've seen that from KSS where the online EBIT margin is 4% margin compared to Brick and Mortar closer to 10%. Historically, retailers have been lemmings when it comes to shipping charges and we think the trend towards free continues.
BABA - Tmall global sales increase 10 times in 10 months
WAG - Walgreen Shareholders Approve Alliance Boots Deal
APP - American Apparel Faces Growing Calls to Sell
SHLD - Sears ecommerce chief resigns
Hedgeye Macro Analyst Darius Dale shares the top three things in Keith's macro notebook this morning.
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Takeaway: Case/Shiller is now showing similar trends in HPI stabilizing on a second derivative basis as Corelogic & FHFA.
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.
Today's Focus: October S&P/Case-Shiller Home Price Report
THE DATA: The Case-Shiller HPI data for October showed home prices growing +4.5% YoY, decelerating -30bps from +4.8% in September. Recall that the Case-Shiller HPI series is constructed as a 3-month moving average so the October release reflects HPI changes over the Aug-to-Oct period, effectively amounting to September data. The Case-Shiller series tracks the Corelogic data closely, but on a lag, and with the Corelogic figures released almost a full month before Case-Shiller, the slope and likely magnitude of the C-S HPI is pretty well advertised.
BOTTOM-LINE: Home-Price growth continued to decelerate but, from a modeling perspective, we're primarily concerned with the rate of deceleration and, on that score, the trend remains one of improvement. The sequential change in the YoY Rate of Change improved to -0.3% in October from -0.8% the month prior. As we’ve highlighted alongside the other HPI releases, all three primary price series are now confirming the same (2nd derivative) stabilization story. The 1st chart below illustrates that trend. Given the correlation between 2nd derivative HPI trends and housing related equities, a stabilization/re-acceleration in home price growth augurs positively for the group.
About Case Shiller:
The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.
Frequency and Release Date:
The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.
Joshua Steiner, CFA
Christian B. Drake
Editor's note: This is a brief excerpt from Hedgeye morning research. Click here for more information on how you can become a subscriber to the fastest-growing independent research firm in America.
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At the S&P 500's all-time closing high yesterday, Total U.S. Equity Market Volume (including dark pool) was down -14% and -33% versus its 1-month and year-to-date averages.
In size, we would much rather be long the Long Bond via TLT than SPY with this illiquidity setup in stocks looking very similar to the end of September and November. That of course was just before the abrupt 10% and 5% corrections in early October and December.
What do you do when you have global growth slowing and #deflation? You buy the Long Bond (TLT), and anything liquid equities that looks like a bond. On a related note, Utilities led U.S. Equity gainers (again) yesterday, +1.2% on the day to a monster +29.3% year-to-date.
Click image to enlarge.
Takeaway: In today's Macro Playbook, we revisit the #Quad4 vs. #Quad1 debate, highlighting the US equity market's transition to #Quad1, on the margin.
THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- Health Care Select Sector SPDR Fund (XLV)
- iShares National AMT-Free Muni Bond ETF (MUB)
- Consumer Staples Select Sector SPDR Fund (XLP)
- iShares 20+ Year Treasury Bond ETF (TLT)
- Vanguard Extended Duration Treasury ETF (EDV)
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
#Quad1 Lands Another Punch in the #Quad4 vs. #Quad1 Debate: In last Friday’s edition of the Hedgeye Macro Playbook, we went back to the well on what we think is the most important debate across the investment community – i.e. #Quad4 vs. #Quad1 in the U.S. In that note, we detailed how #Quad1 had finally “landed a punch” and, in the prose below, we show how proponents of #Quad1 are gaining incremental support from the domestic equity market.
Looking to our Tactical Asset Class Rotation Model (TACRM), we see that the sectors and style factors which have tended to outperform in historical instances of #Quad1 are starting to dominate the leader board as far as our proprietary Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading is concerned.
***Recall that our VAMDMI metric is simply the arithmetic mean of three independent z-scores of volume-weighted average price data, in which the three sample sizes (i.e. short-term, intermediate-term and long-term) accordion inversely to the trend in global financial market volatility. The metric is designed to standardize recorded momentum across securities and asset classes with variant betas, effectively normalizing the degree to which marginal investors might have a propensity to buy or sell a given market. Our emphasis on “marginal” is warranted due to the fact that the model is not programmed to be concerned with trailing price performance on longer durations; the velocity of the move is really all that matters as it relates to the proclivity of marginal investors chasing momentum in any given direction.***
Going back to our U.S. Equity Style Factor VAMDMI Ranker, we see that sectors and style factors which have tended to underperform in historical instances of #Quad4 continue to head up the rear – with the noteworthy exception of healthcare.
- 8 of the top 11 VAMDMI readings are pro-#Quad1 sectors and style factors: large-cap consumer discretionary (XLY), retailers (XRT), small caps (IWM), small-cap growth (IWO), broker-dealers (IAI), large-cap financials (XLF), regional banks (KRE) and small-cap value (IWN)
- 2 of the top 11 VAMDMI readings are pro-#Quad4 sectors and style factors: utilities (XLU) and REITs (VNQ)
- 7 of the bottom 11 VAMDMI readings are anti-#Quad4 sectors and style factors: gold miners (GDX), oil and gas E&Ps (XOP), oil servicers (IEZ), MLPs (AMLP), large-cap energy (XLE), large-cap materials (XLB) and semiconductors (SMH)
- 3 of the bottom 11 VAMDMI readings are pro-#Quad4 sectors and style factors: large-cap healthcare (XLV), pharmaceuticals (IHE) and biotech (IBB)
These signals are consistent with the very nascent trend of pro-#Quad1 sectors and style factors outperforming from a single-factor price performance perspective as well:
Obviously a couple of weeks of outperformance does not a trend make, but in the context of our GIP Model signaling a probable transition to #Quad1 in the upcoming quarter – which begins in two days – we think these are some of the most important signals emanating from global financial markets at the current juncture.
To the extent the U.S. equity market has legs to the upside – which Keith’s quantitative model continues to signal via consistent higher-highs of immediate-term resistance for the SPX (a la late-October) – we are starting to think the next phase of outperformance in the U.S. equity market is likely to come from those sectors and style factors most closely associated with #Quad1.
That is especially noteworthy in the context of the next recession being roughly 18 months away according to the trend in initial jobless claims or in the context of the relative healthiness of the broad equity market itself:
Stay tuned for our Q1 macro themes call, which is tentatively scheduled for January 8th at 1pm EST; we’ve had another fantastic year signaling the important phase transitions in macro and we don’t want to overstay our welcome with respect the thematic investment conclusions highlighted above.
***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.
Early Look: New Discoveries (12/29)
#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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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.