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#Quad414 Confirmation

Takeaway: Our #Quad414 theme is picking up steam with the deluge of this week's U.S. economic data and remains core to alpha generation in 1H15.

Per our 1Q14 Macro Themes presentation:

 

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.”

 

Focusing on the first part of that outlook, this week we received a fair amount of data that confirmed our forecasted #Quad4 setup in the fourth quarter of 2014, none larger than today’s Q4 GDP release. Key highlights:

 

  • Real GDP growth decelerated -20bps to +2.5% YoY
  • The GDP deflator decelerated -40bps to +1.2% YoY
  • “C” accelerated +10bps to +2.8% YoY, though this preliminary estimate is likely to get revised down if/when DEC PCE data is reported, assuming the DEC data tracks the deceleration in Retail Sales growth
  • “I” was mixed with Nonresidential Fixed Investment growth decelerating -100bps to +4.9% YoY as Residential Fixed Investment growth accelerated +330bps to +2.6% YoY
  • Inventories contributed a sizeable +80bps to the headline QoQ SAAR growth rate of +2.6%, which itself decelerated from +5% in 3Q14
  • “G” accelerated +40bps to +0.7% YoY
  • “Ex” decelerated -180bps to +2% YoY
  • “Im” accelerated +190bps to +5.3% YoY

 

#Quad414 Confirmation - UNITED STATES

 

#Quad414 Confirmation - RETAIL SALES

 

#Quad414 Confirmation - REAL PCE

 

Second derivative trends across a variety of key high-frequency economic indicators imply much more weakness in the domestic economy than the preliminary -20bps deceleration in Real GDP growth suggests:

 

For example, Industrial Production growth is slowing on a sequential basis while CapEx growth is slowing on a trending basis:

 

#Quad414 Confirmation - INDUSTRIAL PRODUCTION

 

#Quad414 Confirmation - CAPITAL GOODS

 

Export growth slowing on both a sequential and trending basis is clearly weighing on both reported and prospective Corporate Earnings growth:

 

#Quad414 Confirmation - EXPORTS

 

#Quad414 Confirmation - Russell 3000 Earnings Season

 

Slowing Corporate Earnings growth on both a reported and prospective basis is perpetuating a deceleration in Employment growth:

 

#Quad414 Confirmation - PAYROLLS

 

#Quad414 Confirmation - Energy State Claims

 

Lastly, Import growth slowing on both a sequential and trending basis and is continuing to weigh on reported and prospective Inflation:

 

#Quad414 Confirmation - IMPORTS

 

#Quad414 Confirmation - CPI

 

#Quad414 Confirmation - CORE CPI

 

Net-net-net, the U.S. remains a +/- 2% economy. All of the conjecture surrounding "+3-5% growth" is horribly misguided -- at least according to the data.

 

Moreover, everywhere you look across the compendium of high and low-frequency economic data, #Quad4 is ringing true. According to our empirical studies, this is precisely why interest rates continue to make new lows and bond proxies continue to outperform within the domestic equity market.

 

All it not dour, however. Specifically, the probability of a #Quad1 setup in the first quarter of 2015 is high and rising with the release of the first batch of JAN high-frequency economic data.

 

While late-cycle manufacturing continued to show weakness per the Markit PMI data, services sector growth posted a solid sequential acceleration, which led the composite index higher:

 

#Quad414 Confirmation - MANUFACTURING PMI

 

#Quad414 Confirmation - SERVICES PMI

 

#Quad414 Confirmation - COMPOSITE PMI

 

This dynamic is supported by meaningful sequential and trending accelerations in the Conference Board’s Consumer Confidence Index and in the NFIB Small Business Confidence Index:

 

#Quad414 Confirmation - CONSUMER CONFIDENCE

 

#Quad414 Confirmation - BUSINESS CONFIDENCE

 

It’s clear that “Main Street” America favors the trend of reported disinflation and layering their confidence and activity on top of an extremely easy base effect for Q1 GDP is likely to produce a 2-4 month trend of #GrowthAccelerating data in the U.S.

 

#Quad414 Confirmation - CONSUMER SQUEEZE INDEX

 

#Quad414 Confirmation - GDP COMPS

 

That said, however, the probability that we tip right back into #Quad4 for the Q2 and potentially for Q3 (depending on how the U.S. dollar trades from here) is equally elevated.

 

Worst of all, by then the domestic labor market could be showing a clear trend of deterioration that may not inflect until we’re the other side of the next U.S. recession.

 

#Quad414 Confirmation - JOBLESS CLAIMS

 

Good luck risk managing this likely turn in the domestic macro narrative. We genuinely mean that – it won’t be easy! Let us know how we can help.

 

Enjoy your weekend and Go Hawks!

 

DD

 

Darius Dale

Associate: Macro Team


The Best of This Week From Hedgeye

Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.

HEDGEYE TV

McCullough: Don’t Buy Most Expensive Bubble We’ve Seen Since Beginning of Mankind | $BABA

In Thursday's edition of RTA Live, Hedgeye CEO Keith McCullough did not mince words when asked about Alibaba. 

RTA Live is available exclusively to Real-Time Alerts subscribers.

 

 

McCullough: You Can Front-Run The Fed

In the Q&A segment of Monday's Morning Macro Call for institutional investors, Hedgeye CEO Keith McCullough reveals how the Fed has tipped their hand courtesy of WSJ’s Jon Hilsenrath, discusses his expectations ahead of Wednesday's FOMC meeting, and reminds us what would happen should interest rates rise.

 

McCullough: I Don't Give One Iota About Greece

In this excerpt from Monday's Morning Macro Call for institutional subscribers, Hedgeye CEO Keith McCullough talks Greece's "fascinating" weekend developments and the effects of oil's continuing tumble.

 

HEDGEYE MEDIA

 McCullough Phones It In to Maria: Why the Market’s Getting Spanked

As stocks were getting hit hard on Tuesday, Hedgeye CEO Keith McCullough explained to Fox Business “Opening Bell” host Maria Bartiromo what’s behind the market volatility and selloff.


CARTOON

HIKE

The Best of This Week From Hedgeye - Deflation Fed football 1.28.15

If the Fed raised interest rates with the world slowing, and deflation doing what it's doing right now, well.... look out.

 

ALIBUBBLE

The Best of This Week From Hedgeye - Babba bubbles 1.29.15

Very few research firms have been cautious or negative on the BABA, but at Hedgeye, we’ve been on the other side of consensus.

 

CHART

THE HEDGEYE "AVOID, SELL, SHORT" LIST

The Best of This Week From Hedgeye - COD avoid sell short 1.27.15

 

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

  1. Energy Stocks (XLE) got smoked for another -3.9% down day yesterday as Oil/Nat Gas continue to crash
  2. Financials (XLF) underperformed a -1.3% SPY, closing -1.8% on the day at -6.2% YTD
  3. Industrials (XLI) “outperformed” at -0.9% on the day but are down the same as SPY YTD at -3.1%

Since all 3 of these S&P Sectors remain on our “avoid, sell, short, etc.” list (they are both late-cycle and carry explicit Global #Deflation risks), I’ll just reiterate that call this morning – because it’s easy to.



Cartoon of the Day: #GDP Rainbows and Puppy Dogs? (Not So Much)

Cartoon of the Day: #GDP Rainbows and Puppy Dogs? (Not So Much) - GDP cartoon 01.30.2015

Contrary to what the economic Pollyannas might tell you about U.S. economic growth right now, it's not all rainbows and puppy dogs. Case in point: today's Q4 GDP report. In line with the Hedgeye macro team's forecast, 2014 full year GDP growth was +2.4%, not 5%.


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Retail Callouts (1/30): DKS, GPS, Jones NY, KATE, Week's SIGMAs, WSM, SKX

Takeaway: We still see DKS LBO as a no go, NYPost agrees. GPS gets less "Creative". Jones NY Closing Stores. SIGMA Summary.

COMPANY HIGHLIGHTS

 

DKS - Dick’s Sporting Goods not for sale after all

(http://nypost.com/2015/01/30/dicks-sporting-goods-not-for-sale-after-all/)

 

Takeaway:  The NY Post says DKS is not being sold. So naturally it must be true. We never thought that an LBO made any sense, and therefore maintained our short on DKS in the face of the rumors. 

 

If we were Ed Stack (DKS CEO) we'd sell now if it were at all possible. The reality is that the margin structure of this business is in a secular decline. We get to a negative IRR at the current price, and we suspect that any private equity firm worth its salt is getting to similar values.

 

To be clear, our model assumes…

  1. DKS tops out at 900 stores by 2018, below management's 1,100 goal
  2. 2% comp store sales growth as e-commerce offsets negative store traffic.
  3. Gross Margins fall by 50bp annually as e-commerce dilutes profitability, and aggregate sales growth is not strong enough for DKS to leverage occupancy costs.
  4. EBIT margins fall from 8% today to 5% in 2018.

 

GPS - New Gap Brand President Restructures Marketing, Creative Director Role Eliminated

(http://www.gapinc.com/content/gapinc/html/media/pressrelease/2015/med_pr_gapbrand_12915.html)

 

Takeaway:  This is obviously part of a much bigger brand and marketing restructuring, but it can't be a great sign that 'Creative Director' role is being eliminated by a brand that needs to be increasingly creative to fend off faster, more relevant, and more profitable competition.

 

Jones New York to close stores, end wholesale business

(http://www.philly.com/philly/wires/ap/business/20150129_ap_a89ebf615ab5473492a463c1271d0f26.html)

 

Takeaway:  We wonder if Sycamore was planning on this when they took JNY private? The deal to sell Stuart Weitzman to Coach came very soon after the buyout. Sycamore is acting fast to sell what they can, and shutter the perennial dogs.

 

KATE - Strong Q4, Remains a Best Idea Long

Takeaway: For our full note, KATE – Watch What They Do, Not What They Say, from yesterday morning CLICK HERE

 

 

SIGMA Summary:

 

COH

Retail Callouts (1/30): DKS, GPS, Jones NY, KATE, Week's SIGMAs, WSM, SKX - 1 30 chart1

 

 

AMZN

Retail Callouts (1/30): DKS, GPS, Jones NY, KATE, Week's SIGMAs, WSM, SKX - 1 30 chart2

 

 

HBI

Retail Callouts (1/30): DKS, GPS, Jones NY, KATE, Week's SIGMAs, WSM, SKX - 1 30 chart3

 

 

ETH

Retail Callouts (1/30): DKS, GPS, Jones NY, KATE, Week's SIGMAs, WSM, SKX - 1 30 chart5

 

 

H&M

Retail Callouts (1/30): DKS, GPS, Jones NY, KATE, Week's SIGMAs, WSM, SKX - 1 30 chart6

 

ELY

Retail Callouts (1/30): DKS, GPS, Jones NY, KATE, Week's SIGMAs, WSM, SKX - 1 30 chart7

 

 

OTHER NEWS

 

WSM - Williams-Sonoma, Inc. Announces Election of Sabrina Simmons to Board of Directors

(http://www.williams-sonomainc.com/files/press-releases/Press-Release-re-Sabrina-Simmons-Appt.pdf)

 

SKX - Pete Rose Enters a Hall, Just Not THE Hall, in Skechers' Super Bowl Commercial

(http://www.adweek.com/adfreak/pete-rose-enters-hall-just-not-hall-skechers-super-bowl-commercial-162645)

 

J.CREW - J.CREW LOSES 2ND MAJOR EXEC IN 3 WEEKS

(http://fashionista.com/2015/01/james-scully-leaving-jcrew-for-avon)

 

NKE - Feds, NFL Grab $19.5M in Sports Fakes

(http://www.wwd.com/business-news/government-trade/feds-nfl-grab-105m-in-sports-fakes-8155175?module=Business-latest)

 

SHLD - Sears cuts 115 jobs in effort to reduce expenses

(http://www.chicagotribune.com/business/ct-sears-layoffs-0129-biz--20150128-story.html)

 

ROST - Ross Stores Announces Departure Of Doug Baker, President, dd's DISCOUNTS

(http://phx.corporate-ir.net/phoenix.zhtml?c=64847&p=irol-newsArticle&ID=2011429)

 

SHOO - STEVE MADDEN ANNOUNCES ACQUISITION OF BLONDO

(http://phx.corporate-ir.net/phoenix.zhtml?c=113367&p=irol-newsArticle&ID=2011242)

 

EBAY - Michael Kliger to Exit eBay Enterprises

(http://www.wwd.com/business-news/human-resources/michael-kliger-to-exit-ebay-enterprises-8154964?module=Business-latest)

 

FDO - Report: Family Dollar CEO to sell up to 2 million shares

(http://www.chainstoreage.com/article/report-family-dollar-ceo-sell-2-million-shares)


Keith's Macro Notebook 1/30: China | USD | UST 10YR

 

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


PODCAST | McCullough: Short (with Impunity) the "Booming Growth!" Cheerleaders and Mo-Mo Monkeys

 

In this must-listen, complimentary podcast of Hedgeye’s Morning Macro Call, CEO Keith McCullough discusses today’s lackluster GDP report,  the ‘horrific’ earnings season and where the best opportunities are right now around the globe.

 

PODCAST | McCullough: Short (with Impunity) the "Booming Growth!" Cheerleaders and Mo-Mo Monkeys  - ch5

 


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