Daily Trading Ranges, Refreshed [Unlocked]

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published January 23, 2015 at 07:26. Click here to learn more and subscribe.

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Takeaway: Breaks 'wall of silence' and takes a step to get people focused back on the strength of its model

There's a first time for everything. KATE pre-announced that next Thursday it is going to pre-announce. As bizarre as this seems to be, the only negative is that it confirms a severe disconnect between this company's communication strategy vs. the fundamental strength in its business, and the upside to the long-term financial model. 


As we stated on January 14th (see below) we welcome a pre-announcement, as it bulldozes the 15 week wall of silence between the start of the abnormally long quiet period and the print. 


We think the company's presentation next week will quiet many of the errant bear cases  that have hurt the stock so much year to date. 


01/14/15 10:10 PM EST



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 - WALL OF SILENCE BROKEN - kate financials



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.




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 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 4 looks at the year over year change in traffic for both and 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 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.




Replay | HAIN: Best Idea Short Call

Yesterday we hosted a conference call reviewing our bearish thesis on The Hain Celestial Group (HAIN).  Link to audio replay and materials are below.


Audio Replay: CLICK HERE 

Presentation: CLICK HERE


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#Deflation and Volatility Perpetuated

Client Talking Points


$1.12! vs USD this morning.  And European equities absolutely love it – taking everything from Belgian to French stocks to +7-8% year-to-date in Burning Euro terms. For now, that crushes year-to-date returns in U.S. equities (SPX =0.2%, Russell -1.2% year-to-date).


But don’t confuse Draghi’s move with results where it matters; inflation expectations are falling faster now (Down Euro = Up Dollar à #Deflation Risk) with the CRB Index dropping -1.3% yesterday to multi-year lows. Copper is getting smoked to -10.2% year-to-date this morning, and Oil signaling a lower-low of support down at $44.82.


Short-term U.S. Equity beta chasing just knocks front-month volatility to higher-lows within a bullish intermediate-term TREND. Refreshed risk range for VIX = 16.05-23.05, so they can move this market as fast to the downside as they did to the upside. Be nimble and trade this macro market. Panic central planning perpetuates volatility.




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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


Yield Spread (leading indicator for rate of change in US growth) compresses 6bps vs yesterday - short $KRE on that



Giving should be entered into in just the same way as investing. Giving is investing.

-John D. Rockefeller


A WBUR poll showed that 75% of Boston residents want a public referendum on whether the city should host the Olympic Games.

CHART OF THE DAY: Central Planners + Panic Mode = Volatility

CHART OF THE DAY: Central Planners + Panic Mode = Volatility - 01.23.15 chart


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

...As we learned in both 2008 and 2011, when central planners move into panic mode, they also perpetuate volatility, across asset classes. That’s mainly because they are trying to artificially inflate (centrally plan) asset prices higher. 


In doing so, they open up what we call the risk of the market’s most probable range. What I’ve learned by doing over the course of the last 15yrs is that widening risk ranges tend to lead to rising volatility.  



“I consider that all that I have learned of any value to be self-taught.”



I disagree with Darwin on that. In both my formal Ivory Tower econ education and my Wall Street experiences, I’ve found tremendous value in learning what not to do. Believing gravity-bending-linear-economists and their forecasts tops the list.


In markets and economies there are plenty of theories, but there are also realities. My self-teachings come from both books and Mr. Macro Market – not what some un-elected ideologue is trying to jam down my throat.


Pardon the terseness of that. I’m sick and in no mood to pander to what most financial media did yesterday as Mario Draghi provided 2008 like “shock and awe” to currency and equity markets, but only perpetuated #deflation risk in doing so.

Self-Teachings - Sisyphus cartoon 01.22.2015

Back to the Global Macro Grind


As we learned in both 2008 and 2011, when central planners move into panic mode, they also perpetuate volatility, across asset classes. That’s mainly because they are trying to artificially inflate (centrally plan) asset prices higher.


In doing so, they open up what we call the risk of the market’s most probable range. What I’ve learned by doing over the course of the last 15yrs is that widening risk ranges tend to lead to rising volatility.  


The only way to tone down volatility is for the output of the central plan to actually be believed. So that’s really your #1 risk management question this morning: do you believe that Draghi devaluing the Euro is going to deliver “price stability”?


What does Mr. Macro Market think?


  1. On the “news”, Euro’s burned to $1.12 vs USD, taking the US Dollar Index to multi-yr highs
  2. European equities ripped higher, making them some of the best YTD returns in Global Equities at +7-8%
  3. US Equities had a big up day (SPX 6th + day in the last 15), taking SPX and Russell to +0.2% and -1.2% YTD
  4. Commodities (CRB Index) deflated -1.3% on the “news”, hitting multi-yr lows
  5. US Equity Volatility sold off to higher-lows but held both TRADE and TREND duration support


In other words, if you are long France because the economy sucks, you’re killing it! The CAC 40 (France) is now beating the beloved SP500 by +800bps for 2015 YTD. Oh, and #deflation expectations only rose yesterday in the face of Draghi smirking.


When one of the few reporters with a spine questioned the sly Italian jobber on the actual economic impact of his decision to float a number (50B) to the media that he could beat by 10B, he did everything but answer the question.


Do you think a ramp in Belgian stocks to +7% YTD is going to improve the youth unemployment situation in Southern Europe? Or is the story now that crushing the purchasing power of Europeans is the new consumer spending catalyst?


In other European news this morning:


  1. France’s services PMI for JAN (oui, c’est le service economie, stupide) 49.5 vs 50.6 in DEC
  2. Germany’s flash PMI slowed again to 51.0 from 51.2


Get used to nothing. Unless it’s different this time, I don’t see Draghi delivering inflation or real economic growth.


Does anything in our Global Macro playbook change post yesterday’s central plan? Not really:


  1. BEST IDEA: Our best way to play global #GrowthSlowing and #Deflation = long the Long Bond (TLT, EDV, ZROZ, etc.)
  2. COMMODITIES: while I’m getting interested in Gold, I’ll keep our net allocation to that asset class at 0%
  3. CENTRALLY PLANNED EQUITY MARKETS: from this time/price, I’d rather buy Weimar Nikkei than Europe
  4. US EQUITY LONGS: stick with the long early cycle-consumption and yield chasing sectors (XLP, XLV, XLU, VNQ)
  5. US EQUITY SHORTS: stick with the late-cycle economic and #Deflation ideas (XLE, XLB, KRE, XLI)


Notwithstanding the 2-day ramp in European, US, and Japanese equity beta, the best vs. worst returns (highest absolute, with the lowest volatility = best kind of #alpha people pay for) remain glaring:


  1. YTD Winners: Healthcare (XLV) +4.3%, Utilities (XLU) +3.8%, Consumer Staples (XLP) +3.6%
  2. YTD Losers: Financials (XLF) -2.8%, Energy (XLE) -2.5%, Consumer Discretionary (XLY) -1.6%


Put another way, Mr. Macro Market’s self-teachings have set up for one of the best Global Macro investing environments for active managers (long and shorts – over-weights and under-weights) that I can remember.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.93%


VIX 16.05-23.03
EUR/USD 1.12-1.15
Oil (WTI) 44.82-49.06

Gold 1

Copper 2.48-2.61


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Self-Teachings - 01.23.15 chart

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