Predicting Age

This note was originally published at 8am on January 20, 2015 for Hedgeye subscribers.

“People do predictable things as they age.”

-Harry Dent


People also do unpredictable things. Give them more than a few cocktails and you’ll see that prediction in motion! While simple, the aforementioned quote is true too. It comes from a macro research book I just finished reviewing called The Demographic Cliff:


“The average family borrows the most when parents are age 41, typically the time of their largest home purchase. They spend the most at age 46, although more affluent households reach that peak later… People save the most at age 54 and have their highest net worth at age 64…” (pg 11). These are obviously generalizations, but they are about the most important spending generation in American #history (Baby Boomers).  


Interestingly, but not surprisingly, Life-Cycle Economics was one of the most talked about macro topics when Darius Dale and I were on the road seeing Institutional Investors in NYC last week where I’d ask everyone the question we have on slide 22 of our Q1 Macro Themes Deck: “What Matters Most: Gas Prices, Jobs, or Demographics?”


Predicting Age - 90


Back to the Global Macro Grind


While many like to call themselves “long-term investors”, when it comes to answering the question in our Chart of The Day thoroughly, I think you should call yourselves multi-duration, multi-factor, risk managers. That’s my new marketing pitch!


Here’s one way to think about all 3 factors, across durations:


  1. GAS PRICES – immediate-to-intermediate-term (bullish TRADE and TREND duration impact to consumers)
  2. JOBS – intermediate-term (making a bearish turn? The cycle tends to be less lumpy and cyclical, or TRENDING)
  3. DEMOGRAPHICS – long-term (what was a long-term tailwind in the USA, Japan, and Europe is now a headwind)


Yep, after a long weekend, that’s a lot to think about – and I’m thinking that the immediate-term positioning of Consensus Macro futures/options in both the Spooz and Long Bond doesn’t quite agree with me yet on JOBS and DEMOGRAPHICS:


  1. SP500 (Index + Emini) = +110,971 net LONG position (-59,269 last wk but up big vs the 1yr avg of -11,681)
  2. US 10yr Treasury = -(187,997) net SHORT position (+62,166 last wk but a lot shorter than 1yr avg of -62,100)
  3. Crude Oil = +326,134 net LONG position (+11,230 last wk vs. 1yr avg of +368,447 net LONG contracts)


What consensus continues to think about is perpetually being long Macro Style Factors (growth and inflation) that have worked in the past. This implies nothing but volatility around these changing expectations in the future.


Let’s go through these (SPX, 10yr, Oil) one by one. First on US equity beta (SPX):


  1. SP500 (SPX) had its highest net LONG position since 2007 only 2 weeks ago at +170,240
  2. But the SPX didn’t pay the bulls, closing down for the 3rd straight week last week during its -3.5% correction
  3. Within the SP500’s -1.9% YTD return, the Top 2 Sectors are #GrowthSlowing + #Deflation winners
  4. Top 3 YTD = Utilities +2.6% last wk to +3.0% YTD, Healthcare (XLV) +2.9% YTD, Consumer Staples (XLP) +1.6% YTD
  5. Bottom 3 YTD = Financials -2.6% last wk to -5.0% YTD, Energy (XLE) -5.0% YTD, Consumer Discretionary (XLY) -3.4% YTD


Then on the best way to be long our global #GrowthSlowing + #Deflation view:


  1. UST 10yr Yield was down another -11bps last week to -33bps (-15% YTD) to 1.84%
  2. Yield Spread (10yr minus 2yr) was down another -3bps last wk to -15bps YTD
  3. Long-term Treasury (TLT) is already smoking everything US stocks at +6% YTD (pre-int payments!)


Finally, on the beloved Oil “space”:


  1. WTI Crude has its 1st up week in the last 8, closing up a whopping +0.7% last week
  2. WTI Crude has already given up another -3.1% to start this week and is already -11.4% YTD
  3. Whoever bought me the falling steak knives catching set for my birthday isn’t invited to next year’s party


In other words, you and I are having a great time to start 2015. Consensus Macro is not. And that’s mainly because consensus does predictable things as a global growth, inflation, and demographic cycle ages past a long-term cyclical peak.


Before I leave the keyboard this morning, here are some other big movers in Global Macro from last week that you need to keep front and center ahead of the BOJ and ECB central planning decisions this week:


  1. The Euro (vs. USD) was -2.3% last wk and signaled immediate-term TRADE oversold at $1.15
  2. Gold ripped +5% last week and is showing follow-through, up another +1.3% this a.m. to $1291
  3. Dr. Copper got blasted for another -5% #deflation last week and is down again this morning to $2.56


Of all that, what matters most?


All of it does. It’s interconnected. And I think it’s suggesting that Mario Draghi might not be able to deliver the Policy To Inflate drugs that central planning fans are begging for on Thursday.


Any short-term bottom in Euros = Down Dollar (from overbought highs) – and Gold loves nothing more than Down Dollar + Down Rates, at the same time.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.76-1.90%

SPX 1984-2037
USD 91.94-93.11

EUR/USD 1.15-1.19

Gold 1235-1297

Copper 2.48-2.65


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Predicting Age - 01.20.15 Chart

Cartoon of the Day: Groundhog Day for the Fed

Cartoon of the Day: Groundhog Day for the Fed - Groundhog cartoon 02.02.2015


Expect more of the same from the world’s unelected central planners including America’s own Fed chief Janet Yellen.


Rearview Report: Income & Spending Diverge in December

We received the 4Q growth estimates on Friday so there was little in the way of surprise in the aggregate household spending and income figures for December released this morning.  There are, however, a few dynamics worth highlighting in the detail data.


In short: Consumption growth slowed in December alongside a rising savings rate and likely moderation in revolving credit growth.  Aggregate Disposable Income growth, meanwhile, continued to accelerate alongside an accelerating employment base and rising salary and wage growth.  The annotations in the summary table below highlight these trends.


Rearview Report:  Income & Spending Diverge in December - Income   Spending Table


Spending: Real household spending declined -0.1% sequentially while decelerating modestly on both a 1Y & 2Y basis. 


Spending growth slowed across all of Services/Durables/NonDurables with goods spending leading the December slowdown.   The rise in the savings rate to 4.9% in December from +4.3% in November was responsible for most of the retreat in spending.


Revolving consumer credit growth broke out of its 3Y slumber in 2Q14 alongside accelerated spending on durables and the two have moved in lockstep the last 6+ months.  It’s likely card spending moderates alongside the moderation in higher ticket discretionary consumption.


Rearview Report:  Income & Spending Diverge in December - PCE YoY


Rearview Report:  Income & Spending Diverge in December - Revolving Credit YoY


Rearview Report:  Income & Spending Diverge in December - Revolving Credit vs Durable Goods


Income:  Aggregate disposable income growth, per capita income growth and salary and wage growth all accelerated on both a 1Y/2Y basis in the latest month.  Note, however, that the reported acceleration in December comes against a very easy comp and that compares get decidedly harder beginning in January.    


Rearview Report:  Income & Spending Diverge in December - Salary   Wage Dec


HOURLY WAGE vs AGGREGATE INCOME GROWTH: The following, somewhat conflicting trends in Wage growth and Income growth have characterized the better part of the last 6 months: 


  • Wage Growth The trend in nominal wage growth in the private sector has been stagnant at ~2% (a bit better for production & nonsupervisory workers)  and decidedly soft in December with average hourly earnings growth slowing to 1.7% YoY.  Note that the more recent ECI data – a more comprehensive measure of compensation – showed stronger compensation trends than those reflected in the monthly wage figures released alongside the establishment survey.   


So, wage growth remains soft, but……


  • Aggregate Income Growth:  With total employment growth accelerating (ie. an accelerating employment base) in recent months, aggregate personal income growth has been able to accelerate in spite of middling hourly/weekly wage growth.  The aggregate figures tell us nothing about distribution effects, but with the highest income quintile supporting the bulk of consumption spending and with the correlation between aggregate income growth and total household spending extremely tight over decades of data, the aggregate figures are the predominant driver of reported PCE growth.  


Rearview Report:  Income & Spending Diverge in December - PCE 3D


Accelerating salary and wage growth and a rising savings rate are favorable fundamental developments although the rising savings rate mutes the flow through to actual spending growth. 


Fundamental positives manifesting as a reported slowdown in household spending - in conjunction with a discrete deceleration in ROW growth – all (further) complicate dynamically allocating capital across asset classes, equity  sectors, and style factors. 


Consider the typical thought train and level of confliction/cognitive dissonance prevailing in recent investor discussions:   OUS is slowing and we’re late cycle domestically.  Late-cycle exposure is underperforming significantly alongside negative deflation leverage and the more recent domestic manufacturing data suggest the US is not divorced from the broader global reality.  However, select early-cycle exposure could work alongside lower energy prices, TTM underperformance, stable labor market trends and lower rates catalyzed more by global than domestic forces.  But, wait, how could early-cycle exposure work when we’re late-cycle, when shale state woes are beginning to pressure what had been accelerating improvement in initial jobless claims data and when while the preponderance of domestic macro data – while still okay on an absolute basis – is slowing on a rate of change basis. 


Our rejoinder has simply been to remain long the long bond as both the fundamental data and quantitative setup continue to support it.  We also continue to like defensive yield sectors along with select early-cycle exposure such as housing, but not at every time and every price.  


Rearview Report:  Income & Spending Diverge in December - Eco Summary



Christian B. Drake



Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH

Takeaway: Idea Bench Update. Tory Burch trading hands for $3.5bn. LULU’s Chip saga updated. Confusing brand messages in Aussie Open Final (UA).


Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart1


  1. HBI: Removed HBI from our Long Bench. We like the balance sheet story, but now it's printing bad numbers even with the benefit of acquisitions. Not for us.
  2. COH: Took COH off Long Bench. This name was there for all of 2 weeks (an odd call for us). After it bought Stuart Weitzman -- which we think is perhaps the worst deal we've seen in retail in a year, we actually added to our LONG bench. The reason is that COH -- a company whose net income is below levels experienced in the Great Recession, would finally manufacture earnings growth with this deal. But we think that COH will end up having to pay closer to $1bn vs the reported $574mm due to underinvestment by the former owner. This stock might work for a few bucks on the 'less bad' trade. But it should start with a $2-handle.
  3. DG: Removed from Short Bench. Our short bias was a "lose if they win, and lose if they lose" scenario as it relates to Family Dollar. Either DG pays too much (12-13x EBITDA), or it loses and the stock falls back to where it was when it started.  The deal appears to be a non-starter, and DG is only 6% above where it was when the bidding began. With gas prices having fallen so far, there's likely no catalyst on the downside here.



Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart2





LULU - lululemon athletica Founder Chip Wilson Announces Resignation from Board



Takeaway: No surprise here at all. First Wilson traded in his Chairman title in exchange for the Board putting through Laurent Potdevin as new CEO (despite his lack of qualifications). But handing in his Chairman title, in effect, neutered Wilson -- a) could no longer call a Board vote, b) did not have anything close to a majority vote on the Board, and c) was banned from the building except for Board meetings due to his behavior.  Within six months, Wilson sold half of his stake to Advent International at $38 for $845mm. For the record, that investment is now worth $1.38bn not six months later. Wilson has stated publicly that he feels 'handcuffed' to LULU due to his ownership. To his credit, he's a successful entrepreneur at heart, and his family members are trying to start up a retail concept without his 'official' involvement.  It makes all the sense in the world that he'd pull away from the Board, and we wouldn't be surprised to see him sell the rest of his stock in a negotiated transaction -- like with Advent. In fact, if he doesn't, it probably means that the pool of buyers out there is slim, which will worry us.


Tory Burch's Growing Value: Firm Now Worth $3.5B



Takeaway: A good article outlining the ownership of Tory Burch -- something we think equity investors will need to know in 12-18 month's time when the company goes public.  The $3.5bn valuation implied by recent private transactions makes sense to us. Kate Spade is trading about $4.3bn, 23% higher despite the fact that it's footprint is actually a third smaller than Burch.  This isn't a function of KATE being overvalued -- in fact we'd argue the opposite.  Getting in at $3.5bn for Tory appears to be a no-brainer.  We think that the bankers couldn't have made this name more marketable by getting Roger Farrah on board from Ralph Lauren. The Burch/Farrah co-CEO one-two punch is easily good for another 5-10 multiple points -- whether Roger actually succeeds or not. Wall Street will definitely give him the benefit of the doubt (they'll remember his success at RL, and forget his failures at Foot Locker and Federated).


Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart5


UA, FAST - Murray/Djokovic Sport Confusing Brand Images


Takeaway: We got confusing brand messages in the Final of the Australian Open.

In one corner was Novak Djokovic, who wore his trademark Uniqlo apparel, while donning nondescript white Adidas court shoes. We've grown to accept that, as his primary endorser -- Uniqlo -- does not make shoes.


But it was Andy Murray who was more interesting. After signing a deal with UnderArmour on Dec 30th, he was proudly covered head to … knee in UnderArmour product.  His toes, unfortunately, were still wearing Adidas.   This simply shows the complexity of the footwear business model vs apparel. The day UA announced the deal, Murray was proudly wearing top-of-the-line UA apparel. But five weeks later, UA does not have a shoe that he is comfortable performing in at a major event. That's not a knock on UA -- as it's almost impossible for most brands to work that fast (Nike probably could).  But the design, development and production process might mean that Murray has to wear dual-brands for another few months at least.   On the bright side, UA can blame Murray's loss on Adidas (and believe us, they will).


Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart3


Retail Callouts (2/2): IDEA LIST, LULU, Tory Burch, UA, DKS, RSH - 2 2 chart4





DKS - DICK'S Sporting Goods Announces that Chief Financial Officer Andre J. Hawaux will Assume Additional Responsibilities as Chief Operating Officer



TGT - Target to seek two-month extension of protection from creditors



RSH - Chapter 11 as Early as Today



Neiman Marcus, Office Depot to accept MasterPass



L Capital Acquires 50% of Ba&sh



Gucci to Appeal Guess Case in Paris



DSW - DSW shifts exec roles, responsibilities


Monday Mashup: WEN, CMG, DNKN, YUM, BWLD

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 111


Recent Notes

01/26/15 Monday Mashup: EAT, SONC and More

01/27/15 Shorting the White Space Opportunity

01/28/15 Changes in Latitude, Changes in Attitude

01/29/15 MCD: A New Beginning

01/29/15 EAT: Tough Crowd


Events This Week

Tuesday, February 3rd

  • WEN earnings call 8:30am EST
  • CMG earnings call 4:30pm EST

Wednesday, February 4th

  • GMCR earnings call 5:00pm EST

Thursday, February 5th

  • DNKN earnings call 8:00am EST
  • YUM earnings call 9:15am EST
  • BWLD earnings call 5:00pm EST


Chart of the Day

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 2


Recent News Flow

Monday, January 26th

  • WEN introduced its newest LTO, the new Bacon and Blue on Brioche, which features “a blue cheese herb aioli topped with spring mix and three strips of freshly cooked, thick-cut, Applewood Smoked Bacon, all served on a toasted brioche bun.”
  • RRGB announced it is two weeks away from opening its newest restaurant in New Jersey.
  • DNKN announced the completion of its refinancing efforts by replacing the company’s old $1.9 billion senior secured credit facility with a $2.6 billion securitized debt facility.

Tuesday, January 27th

  • BLMN announced the completion of its sale of Roy’s to United Ohana, LLC.

Wednesday, January 28th

  • QSR Tim Hortons confirmed it is laying off an unspecified number of employees, now rumored to be close to 350.
  • PZZA declared a quarterly dividend of $0.14 per common share, payable February 20, 2015 to shareholders of record on February 9, 2015.
  • BWLD announced the opening of its first restaurant in the Philippines.
  • LOCO El Pollo Loco celebrated the opening of its newest restaurant in Katy, TX.  The restaurant is 2,900 square ft. and has seating for 70 guests.
  • MCD President and CEO Don Thompson announced his retirement, effective March 1st.  The board elected Senior Executive VP and Chief Brand Officer, Steve Easterbrook, to replace Thompson as President and CEO.

Thursday, January 29th

  • SONC declared a quarterly cash dividend of $0.09 per common share, payable February 20, 2015 to shareholders of record on February 11, 2015.
  • PLKI appointed S. Kirk Kinsell to its Board of Directors.  Mr. Kinsell has devoted more than 35 years to the hospitality industry and was recently named Chief Executive Officer of Loews Hotels & Resorts.


Sector Performance

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 3


Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 4


Quantitative Setup

From a quantitative perspective, the XLY remains bullish on an intermediate-term TREND duration.


Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 5


Casual Dining Restaurants

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 6


Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 7


Quick Service Restaurants

Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 8


Monday Mashup: WEN, CMG, DNKN, YUM, BWLD - 9

Keith's Macro Notebook 2/2: China | Oil | UST 10YR


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

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.