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CHART OF THE DAY: Central Planning, Swiss Style!

CHART OF THE DAY: Central Planning, Swiss Style! - 01.15.15 chart

Editor's note: This is a brief excerpt from today's Morning Newsletter by Hedgeye CEO Keith McCullough.

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While I probably don’t deserve a Ph.D. (or a perma bull II vote) for this, I’ve always said that un-elected central market planners would perpetuate the next crisis. That’s #on this morning – follow the interconnected risk:

 

  1. SWISS – there’s CTRL+Print, then there’s panic – and this is rightly A) freaking people out and B) equating to a massive margin call on levered FX trades – Swiss cut by 50bps (to neg -0.75%!) and cut the wire loose on their exchange rate? (Richemont -11.2%, Swatch -8.5%, UBS -7.2%, Adecco -7.9%, Credit Suiss -8.2%, Julius Baer -7.5%, ABB -7.4%) #nice

 


Macro Stars

“Stars can’t shine without darkness.”

-Unknown

 

It is indeed the contrast that draws one’s eye towards something that is different.

 

Every once in a while in Independent Research we earn an opportunity to see that light develop before consensus does. God willing, the search for macro stars is what has my two feet on the floor each morning of every risk management day.

 

While it would be convenient to skip over the #deflation part of an epic central planning experiment, unfortunately that’s not the way the cycle from day to night works. There will be darkness before America’s free market economy can shine again.

Macro Stars - 445

 

Back to the Global Macro Grind

 

Don’t forget that I had the lowest grade in my freshman creative writing course @Yale. “So”, I’m still working on it (thanks for bearing with me over the years!). I’d love to go back to New Haven and slap some hash-tags on my English Lit prof’s desk.

 

While I probably don’t deserve a Ph.D. (or a perma bull II vote) for this, I’ve always said that un-elected central market planners would perpetuate the next crisis. That’s #on this morning – follow the interconnected risk:

 

  1. SWISS – there’s CTRL+Print, then there’s panic – and this is rightly A) freaking people out and B) equating to a massive margin call on levered FX trades – Swiss cut by 50bps (to neg -0.75%!) and cut the wire loose on their exchange rate? (Richemont -11.2%, Swatch -8.5%, UBS -7.2%, Adecco -7.9%, Credit Suiss -8.2%, Julius Baer -7.5%, ABB -7.4%) #nice
  2. OIL – follow the #Deflation Dominos – Yens, Euros, Francs panic/burn > Up Dollar > Crashing Oil Spreads blow out in High Yield Energy > Energy States lose moneys and jobs > Financials and Industrials follow (late-cycle rolls) > Fed doesn’t hike … this was the call I made in our Macro Themes Deck for Q1, reiterating it this am
  3. FINANCIALS – yesterday’s drop in JPM was its biggest since 2011. Volume was huge. Remember 2011? Financials worst perf #divergence vs Utilities, ever. XLF already -5% for the YTD and the Regional Banks are in the midst of a 10% draw-down since that no-volume all-time SPX high on December 29th (2090)

 

“So” how are you feeling about some of our #Quad1 US equity long ideas now? After seeing the US stock market drop in 10 of the last 12 trading days, I’m thinking some of those look a tad early!

 

What’s really cranking for us are these #Quad4 Deflation ideas (Long #TLT!). And that makes complete sense to me, because:

 

  1. In Q1, globally #Quad4 doesn’t bounce to #Quad1 anywhere but in the USA
  2. USA is still coming to grips with the #Quad4 slowdown that happened in DEC and Q4 of 2014

 

Slowing? Yeah, that “everything is awesome” LEGO gas station thesis that everyone and their brother in long-only USA equity land ended up being almost as fictional as the movie. At -0.9% month-over-month, that was a big US Retail Sales miss.

 

It wasn’t recessionary, and that wasn’t our call anyway. It was simply A) slower in rate of change terms (both sequentially and on a 2yr comp basis) and, more importantly, B) way worse than the Old Wall was prepped for.

 

Go back and read their tweets. My boy Lavorgna was tweeting in sync with Bloomberg/CNBC’s new editorial JV macro team that the US economy was “booming” and that it was a “closed economy, unaffected by the global slowdown.”

 

Then they got Swissy’d.

 

Don’t you hate when that happens? When an un-elected Swiss dude wakes up in the morning and whacks his country’s stock market for a 7% down day and takes out Zervos’ spoooz at the knees?

 

Yes, I am going to call these people out by name this time. Oh, right – I did last time too. And, no, it’s not “mean” or unprofessional. It’s what someone with a spine needs to do, or our profession will never be held to account and evolve.

 

Due to the countless conflicts of interest associated with the aforementioned brokers, banks, and advertisers, the consensus complacency about risk remains the greatest risk to your country, children, and their future stars.

 

Our immediate-term Global Macro Risk Ranges are now (I’ll give you all 12 Big Macs in our Daily Trading Ranges report from this morning – in brackets is our intermediate-term TREND views):

 

UST 10yr Yield 1.78-1.97% (bearish)

SPX 1 (bearish)

SMI (Swiss Index) 8 (bearish)

FTSE 6 (bearish)

VIX 19.27-22.51 (bullish)
USD 91.48-93.11 (bullish)
EUR/USD 1.16-1.19 (bearish)

Yen 116.43-119.12 (bearish)
Oil (WTI) 44.43-48.97 (bearish)
Natural Gas 2.74-3.31 (bearish)

Gold 1 (neutral)

Copper 2.45-2.71 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro Stars - 01.15.15 chart


January 15, 2015

January 15, 2015 - Slide01

 

BULLISH TRENDS

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January 15, 2015 - Slide3

 

 

BEARISH TRENDS

January 15, 2015 - Slide4

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January 15, 2015 - Slide9

January 15, 2015 - Slide10

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investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we quantitatively evaluate the systemic risk in the U.S. equity market and offer our thoughts on what to buy.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. Health Care Select Sector SPDR Fund (XLV)
  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)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. CurrencyShares Japanese Yen Trust (FXY)
  3. SPDR Barclays High Yield Bond ETF (JNK)
  4. iShares MSCI Emerging Markets ETF (EEM)
  5. Industrial Select Sector SPDR Fund (XLI)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)

 

QUANT SIGNALS & RESEARCH CONTEXT

Is the U.S. Equity Bubble Finally Popping?: After a -3.8% draw-down from its 12/29 peak, the S&P 500 is now down -2.3% for the YTD – its worst start to the year since 2009. Every time the VIX gets above the 20, you almost can hear the equity bear community shout in unison, “aha – this is it!”.

 

Is this it? While no one knows for sure, we do have a variety of quantitative tools that can not only help answer that question, but also a potentially more important question of: “What sectors and style factors should we be invested in?” (for the majority of you who must remain fully invested).

 

Step #1 is checking in with our proprietary quantitative factoring of price, volume and volatility. On this metric, the S&P 500 closed just below our intermediate-term TREND line of 2020. A bounce today would imply this key support level held; a sustained draw-down through this level on accelerating volume would surely portend a test of our long-term TAIL line of support at 1938.

 

THE HEDGEYE MACRO PLAYBOOK - SPX

 

Recall that in our 12/22 edition of the Hedgeye Macro Playbook, we discussed how the U.S. equity market tends to peak well after broad-based deterioration at the single stock level and that the degree of deterioration at the 12/5 peak was well shy of most recent bull market top. On this metric, the 12/29 peak is substantially less worrisome than the 10/9/07 peak and more closely resembles the 12/5/14 peak than all of the other noteworthy peaks along the way.

 

October 9, 2007 peak: a substantial degree of negative momentum, with over half of all stocks below their 50DMAs and nearly 60% of stocks below their 200DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 10 9 07

 

December 5, 2014 peak: a noteworthy degree of negative momentum, with nearly 40% of all stocks below their 200DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 12 5 14

 

December 29, 2014 peak: some negative momentum, with nearly a third of all stocks below their 200DMAs, but 75% of all stocks were still above their 50DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 12 29 14

 

Looking at the U.S. equity market through the lens of our Tactical Asset Class Rotation Model (TACRM) recall that at the start of last week we discussed how this model generated an “INCREASE Exposure” signal for DM Equities for the first time since early May.

 

Why is that important?

 

It is important because our backtest analysis shows the MSCI World Index has returned +31.5% on a cumulative one-week forward basis since the start of 2008 during periods when TACRM is generating an “INCREASE Exposure” signal for DM Equities. That compares to an actual buy-and-hold return of +4.8% for the index over that same time period.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM DM Equities Backtest

 

With the market relatively healthy from a momentum breadth perspective and with TACRM is giving a green light to the primary asset class, it is reasonable to conclude that this is a buying opportunity – assuming our TREND line of support holds.

 

So what do you buy?

 

Well, only 13 of the 47 sectors and style factors we track within the U.S. equity market have a positive Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings. Per usual, the leader board is dominated by those sectors and style factors that typically outperform in #Quad4: REITs (VNQ), health care (IHE, IBB, IHI, XLV), utilities (XLU), staples (XLP) and low-volatility (USMV). #Quad1 continues to percolate here and there with the homebuilders (ITB), retailers (XRT) and small-cap growth (IWO) showing relative strength as well. It’s worth mentioning that gold miners (GDX) have also snuck their way into the top-10 VAMDMI readings, but we’re treating that as a head fake for now.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM U.S. Equity Style Factors

 

Our call is simple: what for our oversold signals to leg into early-cycle and #Quad1 sectors and style factors in lieu of late-cycle and #Quad4.

 

When we finally feel comfortable “backing up the truck” on #Quad1, we’ll be sure to flag those changes in our thematic investment conclusions above. Patience has paid off for us and we see no need to abandon the #process here after several strong quarters of sector and style factor selection.

 

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

 

TRACKING OUR ACTIVE MACRO THEMES

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.

 

The Hedgeye Macro Playbook (1/12)

 

#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.

 

Early Look: Creatively #Patient (1/14)

 

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.

 

Mortgage Apps | Seasonal Wheel-Spinning (1/7)

 

Best of luck out there,

 

DD

 

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.    


KATE - Risk Reward Looks Solid Here

Takeaway: There’s been way too much misinformation on KATE in Jan-to-date. Trends are better than people think. Risk/reward here is outstanding.

We think that KATE’s risk/reward on the long side is simply too great to pass up with the stock in the mid-$20s. KATE is down -17.1% since the start of the year (over a whopping 9 trading sessions), vs -1.1% for the XRT due to factors that we think largely have no merit. We think that the brand is extremely healthy, business trends are strong, and the growth trajectory is squarely in-tact. In short, based on the earnings ramp we’re expecting to be evident over the next year, we think that KATE is looking at 50% base case upside from today’s $26.80. That’s $13.50 upside with what we think is about $5 downside – a risk reward we’re more than prepared to take given our view that KATE probably has the best likelihood of doubling out of any US retail name this year.

 

KATE - Risk Reward Looks Solid Here - kate financials

 

OUR ANSWERS TO NINE DAYS OF INVESTOR CONCERNS

  1. Shhhh…. We’ll start with the concern that is the most valid, and that’s the Wall of Silence that emanates from the company. KATE’s quiet period started on Thanksgiving, and it might not report its fourth quarter until the first week of March. That’s about 15 weeks of sheer silence. Seriously, we’re going to see retailers on a January fiscal year report 4Q before KATE does. At this rate, nothing would make us happier than if KATE preannounced. It did so last year at this time – though that was before a series of investor meetings that are not happening this year. With no information coming from the company, investors are taking negative anecdotes and trading the stock down with nobody to answer the many questions that are swirling around. We can give it our best shot, but what we want is a press release out of KATE.
  2. ‘Excessive Discounting’ in the Department Store Channel. This was what set the stock into its initial spiral. Analyst reports talked about excessive discounting, without a) adding the context of the fact that wholesale handbags account for only 15% of KATE’s sales, b) looking at a balance of discounts for a representative sample of wholesalers over the course of the entire quarter/holiday season, and most importantly, c) without looking at the discounting cadence versus last year. Looking at sequential changes in pricing without considering velocity, inventory, and what trends were a year ago is an otherwise useless exercise. In sum, we did not find anything in any of the reports that struck as valid or concerning.
  3. Promotions Are NOT Greater Than Last Year. The graphic below shows the promotions in 2013 versus 2014. While there are some variances vs last year, one major point we can make is that there was NOT a more promotional cadence this year online. Rest assured that if KATE’s wholesale sales or store sales were suffering, there would be unexpected sales that would pop up online. That definitely did not happen.  Some subtleties…
    • In 2014 KATE moved the October surprise sale back a week into Nov.  Online traffic started to pick up immediately thereafter (see below).
    • Mid November 25% off offer was 2 days longer this year.
    • This year the Black Friday sales was shorter, but cyber Monday sale was longer.
    • Surprise sale in mid-December was a one day 75% off sale last year, this year it was a 2 day sale but it didn’t advertise any specific discount (gifts $99and under), as KATE shifts away from 70%+ ‘Flash’ Sales.
    • The 25% off sale items started earlier this year, will end up being 20 days vs 11 last year. 

EXHIBIT 2: KATE PROMOTIONS VS LAST YEAR
KATE - Risk Reward Looks Solid Here - kate ads 2

 

4. KATE On-Line Presence. We measure traffic trends for about 250 brands and retailers by triangulating many different sources. The reality is that no one source is accurate anything more than 2/3 of the time. But this approach has proven to be a very strong gauge of a company’s business. Could it be that there are excessive promotions driving traffic? No – as we already outlined in point #3 above. If we saw excessive emails promos and accelerating traffic we’d be concerned. No need to be concerned here.

    • Exhibit 3 is the Indexed traffic rank for katespade.com. We re-indexed in June 2014 (blue line) when we hit the YY mark. Not the way we typically look at this metric, but it does a good job accentuating the ramp we’ve seen in traffic rank since mid-October. You can see the divergence in performance compared to last year from July-September which coincided with the comp slowdown we saw in 3Q. Since it is a 90-day moving average the best reflection of the quarter in aggregate is the 12/28 reading – on that date Traffic Rank was up 55% YY.

EXHIBIT 3: KATE INDEXED TRAFFIC RANK

KATE - Risk Reward Looks Solid Here - kate ex 3

    • Exhibit 4 looks at the year over year change in traffic for both katespade.com and michaelkors.com. There is a meaningful divergence between the two starting in Week 22, which, because of the way we indexed, equates to 11/4/14. Week 30 marks the quarter end and as in the earlier chart is the best reflection of the quarter in aggregate because it is a 90-day moving average. The reading on that day was +55%. This is big for KATE with online accounting for about 20% of revenue compared to KORS who set a 2-3yr target to hit 10%. Overall demand in that channel looked very healthy throughout the quarter and especially so during the Holiday selling period.

EXHIBIT 4: Y/Y TRAFFIC RANK – KATE VS KORS

KATE - Risk Reward Looks Solid Here - kate ex 4

    • Exhibit 5 shows the YY reach spread for KATE, KORS, and COH – which captures the change in total reach online versus a year ago. Anything above the x-axis is positve, anything below = negative. Trend here is the same as in previous charts though you can see the relative outperformance around Black Friday/Cyber Monday through the holiday in more detail when compared to KORS and COH.

EXHIBIT 5: KATE, KORS, COH REACH

 KATE - Risk Reward Looks Solid Here - KATE EX 5

 

 

 


Cartoon of the Day: Retail Sales Decline

Cartoon of the Day: Retail Sales Decline - retail cartoon 01.14.2014

 

Retail sales suffered their largest decline in nearly a year, down 0.9% in December.


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