prev

Keith's Macro Notebook 1/23: Euro | Commodities | VIX

 

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

 

Sign up for Hedgeye's Market Marathon on January 27:  http://live.hedgeye.com/market-marathon/


THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we show why the deterioration in the domestic labor market is perpetuating underperformance in the Financials.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. iShares U.S. Home Construction ETF (ITB)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. iShares 20+ Year Treasury Bond ETF (TLT)
  4. Consumer Staples Select Sector SPDR Fund (XLP)
  5. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  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. iShares MSCI Emerging Markets ETF (EEM)
  3. Industrial Select Sector SPDR Fund (XLI)
  4. CurrencyShares Japanese Yen Trust (FXY)
  5. SPDR Barclays High Yield Bond ETF (JNK)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)

 

QUANT SIGNALS & RESEARCH CONTEXT

Reviewing the Very Nascent Negative Inflection in the U.S. Labor Market: Core to our repeatable process is an extensive focus on rate-of-change and how inflections, accelerations and/or decelerations in the second derivatives of key economic variables impact financial markets.

 

In the spirit of this never-ending interplay, why are Financials (XLF) down -2.8% YTD when Consumer Staples (XLP) and Healthcare (XLV) are up +3.6% and +4.3%, respectively, over the same duration?

 

Perhaps the answer lies within the domestic labor market, which is showing both late-cycle strength and very nascent signs of what could become permanent deterioration – for this particular business cycle, that is. Recall that labor is critical to the rate-of-change in both credit demand and asset quality for banks.

 

From the perspective of “late-cycle strength”, the rolling 6-month average of seasonally-adjusted initial jobless claims is now ~295k. Moreover, this month marks the fourth month of readings at or below 300k. That is important because it’s very difficult for seasonally-adjusted initial jobless claims to continue to fall once this critical level is breached. In fact, you can officially set your U.S. recession clock to this indicator; the last three recessions began 18, 19 and 20 months after this metric hit ~300k. Repeat: we’re only four months into the topping process, which tends to last about a year-and-a half.

 

THE HEDGEYE MACRO PLAYBOOK - JOBLESS CLAIMS  2

 

From the perspective of “nascent signs of deterioration”, neither jobless claims nor non-farm payrolls are showing the strength that they once were.

 

Regarding the former: The YoY percentage change in the rolling 4-week average of non-seasonally adjusted initial jobless claims is another way us macro mavens examine the U.S. labor market. On this metric, the U.S. labor market is improving at a worse pace than in previous weeks and months. In other words, it is showing classic deterioration on a 2nd derivative basis.

 

THE HEDGEYE MACRO PLAYBOOK - Energy State Claims

 

Regarding the latter: The MoM nominal change in non-farm payrolls is among the most pronounced ways investors examine the labor market. On this metric, employment growth is not as robust as it has been in recent months. Another way to put that: the U.S. labor market is showing classic deterioration on a 2nd derivative basis as well.

 

THE HEDGEYE MACRO PLAYBOOK - PAYROLLS

 

Whether or not the peak in the employment growth is in the rear-view mirror is something that we cannot confirm at the current juncture. What we can confirm is that the probability that the peak in employment growth is in the rear-view mirror is substantially higher than it was a month ago.

 

What I won’t do is lick my finger in the air and give you some fabricated estimation of said probability; markets and economies move in non-linear and uncertain terms; so should you.

 

Pardon our comfortableness with uncertainty. If you ask us, the “uncertainty” regarding the state of the U.S. labor market is precisely why Financials are underperforming our recommended U.S. equity sectors (i.e. Consumer Staples and Healthcare) by 638bps and 717bps, respectively, for the year-to-date.

 

If only I received nickel over the last 6-9 months for every PM that said: “but I can’t buy Consumer Staples or Healthcare [or Utilities, or REITs] because they are expensive”…

 

***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.

 

Draghi Delivers the Drugs! (1/22)

 

#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.

 

The Hedgeye Macro Playbook (1/16)

 

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.

 

HOUSING: FHFA HPI | Notable Acceleration (1/22)

 

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.          


Retail Callouts (1/23): KATE, RH, AdiBok, TGT

Takeaway: KATE breaks 'Wall of Silence' pre-announces pre-announcement Thurs 1/29. RH adds new member to Board.

COMPANY HIGHLIGHTS

 

KATE - To Pre-Announce 1/29, Breaks 'Wall of Silence'

 

Takeaway: 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. For the full link to our note from this morning, CLICK HERE.

 

RH - RH APPOINTS ALI ROWGHANI TO BOARD OF DIRECTORS

(http://ir.restorationhardware.com/phoenix.zhtml?c=79100&p=irol-newsArticle&ID=2009793)

 

Takeaway: RH needed one more independent Board member to be compliant with the listing requirements after Barry Sternlicht stepped down from the board mid-Summer. We don't know Rowghani personally but his resume speaks for itself. Sternlicht was invaluable in helping build out the blueprint for the Full Line Design Gallery. A framework that is still guiding the negotiations for new deals. We like that that Rowghani checks a box in two departments - finance and tech.

 

 

OTHER NEWS

 

AdiBok - ADIDAS GROUP TO SELL ROCKPORT TO A NEW ENTITY FORMED BY BERKSHIRE PARTNERS AND NEW BALANCE

(http://www.adidas-group.com/en/media/news-archive/press-releases/2015/adidas-group/)

 

TGT - Target launching its first plus-size clothing line in 7 years

(http://www.nydailynews.com/life-style/fashion/target-launching-plus-sized-clothing-line-article-1.2087089)

 

HBC - Hudson's Bay Company Announces $100 Million Bought Deal Offering

(http://investor.hbc.com/releasedetail.cfm?ReleaseID=892575)

 

WMT - Wal-Mart Canada opening 11 supercenters in January

(http://www.chainstoreage.com/article/wal-mart-canada-opening-11-supercenters-january)

 

EBAY - Ebay Cutting 2,400 Jobs

(http://www.wwd.com/business-news/human-resources/ebay-cutting-2400-jobs-8130460?module=Retail-latest)

 

CACH - Caché Closer to a Ch. 11 Filing

(http://www.wwd.com/business-news/financial/cach-closer-to-a-ch-11-filing-8133845?module=Business-latest)


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

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.

Daily Trading Ranges, Refreshed [Unlocked]   - Slide1

BULLISH TRENDS

Daily Trading Ranges, Refreshed [Unlocked]   - Slide2

Daily Trading Ranges, Refreshed [Unlocked]   - Slide3

Daily Trading Ranges, Refreshed [Unlocked]   - Slide4

Daily Trading Ranges, Refreshed [Unlocked]   - Slide5

Daily Trading Ranges, Refreshed [Unlocked]   - Slide6

 

BEARISH TRENDS

Daily Trading Ranges, Refreshed [Unlocked]   - Slide7

Daily Trading Ranges, Refreshed [Unlocked]   - Slide8

Daily Trading Ranges, Refreshed [Unlocked]   - Slide9

Daily Trading Ranges, Refreshed [Unlocked]   - Slide10

Daily Trading Ranges, Refreshed [Unlocked]   - Slide11
Daily Trading Ranges, Refreshed [Unlocked]   - Slide12

Daily Trading Ranges, Refreshed [Unlocked]   - Slide13


KATE - WALL OF SILENCE BROKEN

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

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 - WALL OF SILENCE BROKEN - 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 - WALL OF SILENCE BROKEN - kate ads 3

 

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 - WALL OF SILENCE BROKEN - 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 - WALL OF SILENCE BROKEN - 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 - WALL OF SILENCE BROKEN - KATE EX 5

 


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

 

(For security purposes you will need to log-in using your Hedgeye username and password. If you don't have this information email .)

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.

next