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Keith's Macro Notebook 1/9: UST 10YR | Oil | Russia


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

Retail Callouts (1/9): Dept Store Closures, M, JCP, KSS, UA Footwear, BBBY

Takeaway: M comp doesn't translate well for KSS. Dept store closures - another 90mm sq. ft. needs to go. UA footwear milestones. BBBY off Long Bench.



M - Our Take on Macy's Comp and Restructuring Plans



Takeaway: What's more important to us than the 2.7% comp (2.1% owned) is the relative outperformance of JCP. This is the first quarter that JCP was comping against market share gains from both KSS and M after ceding over $5bil in sales. Our work suggests that M took $450mm, and KSS took a whopping $1bil of the market share, and both are in denial about the potential risk of JCP winning/buying the share back. It's unlikely that KSS will release a sales update based on the trend of less disclosure over the past year, but we're pretty comfortable in what we'll see on the print. For the past 11 quarters M has outcomped KSS - the average spread = 2.7%. That coupled with JCP stealing market share, and the recent trend in e-commerce visitation, doesn’t translate well for KSS.


JCP - J.C. Penney Closing 39 Stores in April -- Not Nearly Enough



Takeaway: We weren't surprised by the JCP's decision not to announce any store closures at its Analyst Day in October. It was too close to Holiday for Ullman to stand up in front of his rank and file announce closings/layoffs. Employees who know they'll soon be out of a job aren't exactly positive for the top line.

Our work shows that JCP needs to close 300 stores. Whether it actually will is up for debate because of the inextricable link between e-comm and B&M which we quantified in our Department Store Black Book from October. Our sense is that retailers will be more hesitant to close stores than in the past because of the fear that e-comm sales will go along with them.

JCP's 39 paired with M's announced 14 means that 6.5mm sq. ft. is being pulled out of the industry's aggregate sq. ft. Our model suggests that 93mm sq. ft. or over 1,000 stores needs to be shuttered over the next 5 years to compensate for $20bn in sales that will be lost by the department store group.

Bottom line -- 6.5mm square feet is nice, but the reality is that half of that will come back as capacity selling apparel. We need to see another 90mm square feet, or 950 stores need to go away -- and never come back.


UA - New Speedform Iteration, First Signature B-Ball Shoe


Takeaway - Two announcements out of UA on the footwear side yesterday.

1) The company released the 3rd iteration of it's Speedform platform. UA's answer to Nike's FlyKnit but instead of being made on a cotton loom its assembled in a Bra factory. The shoe itself is notable - though the marketing behind it is far below where it was last year when UA took over Grand Central station in New York to host one of its brand holidays around the release. One thing that caught our eye in the email blast sent around was the phrase at the bottom, "Also available at your local Brand House." This is new for UA for a reason. It finally has a store platform (UA Brand House) to showcase its full price line outside of its wholesale partners. The footprint is still small - just 5 stores- but the company is slowly building out its network. The newest door will be 30K sq. ft. on Michigan Ave in Chicago. Another example of the content owners circumventing the 40yr old wholesale model to reach the end consumer.

Retail Callouts (1/9): Dept Store Closures, M, JCP, KSS, UA Footwear, BBBY - 1 9 chart2

Secondly, UA released its first signature basketball shoe for Steph Curry yesterday. It's a milestone for the company for sure, but we wonder why it took them so long. Curry signed with the brand in October of 2013 and it took them this long to build up the infrastructure to release his first signature shoe? Imagine what would have happened if UA had stolen KD from Nike. Think about UA and Nike in the footwear space like this - Nike releases a new iteration of its signature line for its athletes about once a month. UA just released its first in 8+ years.

Retail Callouts (1/9): Dept Store Closures, M, JCP, KSS, UA Footwear, BBBY - 1 9 chart3


BBBY - 3Q14 Earnings, Off the Long Bench


Takeaway: We added BBBY to the Long Bench following the 2Q14 beat. After missing 7 of the last 8 quarters and seeing the multiple compress from 16x to 11.5X our thinking was that expectations had been right sized and the top line would stabilize. But the run in the stock from the low-60's to the high-70's and last nights underwhelming #'s make this less attractive to us on the long side. We're taking it off of our Long Bench.

Retail Callouts (1/9): Dept Store Closures, M, JCP, KSS, UA Footwear, BBBY - 1 9 chart1





ZU - Zulily mulls closing U.K. operations after tough year



FIVE - Five Below Names Michael Romanko EVP of Merchandising



ZARA - Inditex to open more than a dozen Zara stores in U.S. this year



China to allow online sales of prescription drugs as early as this month: sources


Deflation Continues to Roil the Globe

Oil bounced, and then failed. Remember when they said that higher lows could be good for oil? Well, that’s gone now. Stay tuned … . Our immediate risk range for WTI Oil today is 46.43-51.86.


Don’t forget that most bounces were led by counter-trends: oil, Russia and junk. That’s low value bouncing.


As far as Russian equities (RTSI) are concerned, they’re getting tagged and bagged for another -5.3% loss. So much for the oil-driven bounce. And that has everything to do with deflation.


Deflation Continues to Roil the Globe - 14

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Takeaway: In today's Macro Playbook, we highlight one of the key demographic components to our bullish bias on long-duration U.S. Treasury bonds.


Long Ideas/Overweight Recommendations

  1. Health Care Select Sector SPDR Fund (XLV)
  2. Consumer Staples Select Sector SPDR Fund (XLP)
  3. iShares U.S. Home Construction ETF (ITB)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares 20+ Year Treasury Bond ETF (TLT)

Short Ideas/Underweight Recommendations

  1. Industrial Select Sector SPDR Fund (XLI)
  2. iShares TIPS Bond ETF (TIP)
  3. CurrencyShares Japanese Yen Trust (FXY)
  4. iShares MSCI Emerging Markets ETF (EEM)
  5. SPDR Barclays High Yield Bond ETF (JNK)



Developed World Demographic Tailwinds? Yes, For Bonds, That Is: Yesterday afternoon we held our 1Q15 Macro Themes conference call (CLICK HERE to review). As always, the presentation was jam-packed with cutting-edge data analysis and thoughtful, well-researched assertions. One of those cutting-edge analyses in the presentation is among my favorite slides in the deck, #24:


THE HEDGEYE MACRO PLAYBOOK - 65  Year Olds as a   of 25 54 Year Olds


What this chart shows is the ratio of the number of people in the world that are at/above retirement age as a ratio of 25-54 year-olds (black bars). The grey line shows the YoY bps change on the right axis. What you should quickly note is the steepening of the slope starting in 2014 and continuing over the next four years.


The key takeaway here is that the population of people that are predisposed to de-risk their investment portfolios (think “60/40” going to “40/60”) and have little-to-no income growth is growing increasingly faster than those that are inclined to own “stocks for the long term” and have (or at least prefer) income growth.


The net result is the number of people that prefer deflation is growing faster than the number of people that prefer inflation, at the margins. We think this demographic trend has the potential to weigh on both reported inflation readings and long-term interest rates across the developed world’s liquid bond markets over the long term.


With 10Y Treasury yields at/near 2%, that call seems downright preposterous – especially to someone who has yet to sit down and do their homework on the subject. But I’m guessing 10% on the 10Y Treasury yield sounded equally as preposterous to an investor in the early-to-mid 1980s. It certainly doesn’t sound preposterous to retirees in Germany or Japan right about now.



Source: Bloomberg L.P.



Source: Bloomberg L.P.


So why does the buy-side remain heavily short of 10Y Treasuries on a tired U.S. “escape velocity” thesis?




Perhaps we’ll learn the answer to that question in the coming weeks and months…


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



Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.


#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.


Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.


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 – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective. 

Bonds, Oil and Russia

Client Talking Points


U.S. employment tends to look good at the end of economic cycle. The Bond market will vote on the strength of this jobs report. The UST 10YR yield continues to signal lower-highs within its formation #crash. The immediate risk range for today is 1.89-2.11.


Oil bounced, and then failed. Remember when they said that higher lows could be good for oil? Well, that’s gone now. The firings in Energy states will happen during January to March. Stay tuned. The immediate risk range for WTI Oil today is 46.43-51.86.


Don’t forget that most bounces were led by counter-trends: oil, Russia and junk. That’s low value bouncing. Russian equities (RTSI) getting tagged and bagged for another -5.3% loss, so much for the bounce, and that has everything to do with deflation.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.


As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road


VIDEO: Gabelli Unplugged: Finding Hidden Value, Secrets to Long-Term Success and Why the Knicks Will Win https://app.hedgeye.com/insights/41631-gabelli-unplugged-finding-hidden-value-secrets-to-long-term-success … @hedgeye



If I had asked people what they wanted, they would have said faster horses.

-Henry Ford


The percent of 18-34 year-olds living at home averaged 27.6% from 1983-2007, from 2008-2014 it averaged 30.5%.

LEISURE LETTER (01/09/2015)

Tickers:  LVS, GALAXY


Galaxy– The Macau government will not issue a suspension of construction order at a yet-to-be completed 36-story building at Galaxy Macau Phase 2, following a fire that partially destroyed the base of one of its ornamental cupolas.

Article HERE

Takeaway: We believe Ph2 is still on target for May holiday opening.


LVS– MBS sues chairman of For You Group for S$3.9 million over debts in HK.  “Mr Chen confirms that the action is his personal matter; the shares of one of his private companies are the subject assets of the charging order; and the matter can be resolved the soonest. The board considers that the action and all the orders are personal matters of Mr Chen. Besides, the company confirms that it had no involvement in the matters,” said For You, which changed its name from China Packaging Group last November.

Article HERE

Takeaway:  MBS has struggled with its VIP business with volumes falling 29% YTD.  LVS appears to be adequately reserved. 


Niraku – Japanese pachinko company Niraku GC Holdings is seeking a HK listing in 1H 2015. The company hopes to raise about $75 million. If successful, Niraku would become the second pachinko company to list in the city. Dynam Japan Holdings raised $202 million in August 2012. 

Article HERE


Pagcor – reported a 6% increase in collections from P12.07bn (Jan-Nov 2013) to P12.8 billion for the same period in 2014. Charisse Chuidian, who heads the public relations team handling the three-hotel complex in the City of Dreams, whose soft opening last Dec. 14 was anything but soft. “Such a big crowd, to think that we didn’t  publicize it, no fanfare at all!” Charisse gushed.

Article HERE

Takeaway:  Philippines GGR growth recently have been outperforming. This bodes well for the grand opening of CoD Manila.


Paradise– casino revenues rose 3.8% in 2014 to KRW591.3 billion (US$541.6 million). Table revenue grew 3.5% to KRW 558.7 bn YoY. Slot revenue jumped 10.4% to KRW 32.6 bn.  Table drop gained 12.7% YoY in 2014 to KRW 5.3 trillion.

Article HERE

Takeaway: Modest sales growth for Paradise in 2014. 


TUI–  assumes ownership of EUROPA 2 for 280m euros.  The transaction will replace the previous charter agreement of the ship which was newly commissioned in 2013. The transaction consists of a cash component of around 67 million euros payable to the previous owner and the assumption of 211 million euros of debt.


Lionel Leong – Macau’s Secretary for Economy and Finance Lionel Leong Vai Tac said GGR was unlikely to return to YoY expansion until 2H 2015. Leong said the GGR decline was “positive” as it could give the industry breathing room to promote a more sustainable development model for the long run.

Article HERE

Takeaway: Echos similar comments made by Macau govt leaders 


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. 

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