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Keith's Macro Notebook 2/18: USD | UST 10YR | Sentiment

 

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


Retail Callouts (2/18): Chain Store Sales, NKE, KATE, LULU, FOSL, URBN

Takeaway: NKE patent makes customized product design easier. LULU's first store in Dubai. KATE/FOSL watch agreement.

EVENTS TO WATCH

Retail Callouts (2/18): Chain Store Sales, NKE, KATE, LULU, FOSL, URBN - 2 17 chart2

 

 

ICSC RETAIL SALES (80 General Merchandise Stores)

 

Takeaway: Comps decelerated this week on a 1, 2, and 3 year basis. Through the first 7 weeks of the year the trend has been down and to the right against the easiest compares of the year. Compares get tougher as we enter April.

Retail Callouts (2/18): Chain Store Sales, NKE, KATE, LULU, FOSL, URBN - 2 18 chart1B

Retail Callouts (2/18): Chain Store Sales, NKE, KATE, LULU, FOSL, URBN - 2 18 chart3

 

 

COMPANY HIGHLIGHTS

 

FOSL, KATE - FOSSIL GROUP AND KATE SPADE & COMPANY ANNOUNCE

GLOBAL LICENSING AGREEMENT

 

Takeaway: To see our full note on the KATE/FOSL agreement CLICK HERE 

 

NKE - Nike Developing Technology to Make Customization Easier

(http://www.cnet.com/uk/news/nike-eyes-holographic-technology-for-sneaker-design/)

Retail Callouts (2/18): Chain Store Sales, NKE, KATE, LULU, FOSL, URBN - 2 18 chart4

Takeaway: This seems a little bit odd, but after we re-read the article a few times it made perfect sense. Nike is about to revolutionize the way we design, manufacture and buy sneakers. FlyKnit technology is a big part of that. That is, a shopper could go into a store design a shoe, grab a burrito at Chipotle, and come back an hour later and leave with the new custom shoe that was assembled in the back room. This is one of the only industries where we haven't seen any major disruption to the typical wholesale model in at least 40 years. Nike is starting to push the envelope on that front.

We identified how important customization was to the 18-24 year old demographic, with 100% of customers who shop for athletic footwear online saying that the ability customize was the reason why. One of the problems with consumers designing shoes is that they can't see the end product. Now with this patented technology, consumers can put on a pair of goofy glasses and design 3D shoes in store.

Retail Callouts (2/18): Chain Store Sales, NKE, KATE, LULU, FOSL, URBN - 2 18 chart6

 

 

LULU - First Lululemon store in Dubai to open this year

(http://gulfbusiness.com/2015/02/dubais-maf-open-canadian-brand-lululemon-stores/#.VOSCePnF83i)

 

Takeaway: This a new development for LULU and should give the brand additional touch points outside of the 40 new doors it will add in Europe and Asia by 2017 with very little risk. LULU has used licenses in the past to build it's geographic reach with mixed success. The Japanese joint venture shuttered in 2008. But, the Australian joint venture was taken in house in 2012. AUS/NZ now has 30 doors. One of the arguments we hear on LULU all of the time is centered on the company's slow paced expansion. The company has always taken a measured approach when it comes to new markets. First using a showroom to  measure demand and then a store 12-18 months later. That made sense for the company when the finance organization was extremely weak, but we think that new CFO Stuart Haselden has the ability to build the financial/logistical infrastructure in a way that supports a more rapid expansion effort.

 

OTHER NEWS

 

FOSL - 4Q14 Earnings

Retail Callouts (2/18): Chain Store Sales, NKE, KATE, LULU, FOSL, URBN - 2 18 chart5

 

Gilt - A $50M investment may make Gilt relevant again

(http://www.crainsnewyork.com/article/20150217/TECHNOLOGY/150219878/a-50m-investment-may-make-gilt-relevant-again)

 

Tory Burch to Open 4th Canadian Location at Sherway Gardens

(http://www.retail-insider.com/retail-insider/2015/2/tory-burch)

 

AAPL - Report: Apple redesigning its retail stores

(http://www.retailingtoday.com/article/report-apple-redesigning-its-retail-stores)

 

URBN - Urban Outfitters e-commerce fulfillment center moving to Pennsylvania

(http://www.chainstoreage.com/article/urban-outfitters-e-commerce-fulfillment-center-moving-pennsylvania)

 

TSCDY - Report: Tesco may lay off 10,000 workers

(http://www.chainstoreage.com/article/report-tesco-may-lay-10000-workers)

 

Ace Hardware pilots same-day delivery

(http://www.chainstoreage.com/article/ace-hardware-pilots-same-day-delivery)

 

ASNA - Ascena to Close Brothers Brand

(http://www.wwd.com/retail-news/specialty-stores/ascena-to-close-brothers-brand-8197286?module=Retail-latest)

 

AMZN - Regulations may ground Amazon.com's drones

(http://www.retailingtoday.com/article/regulations-may-ground-amazoncoms-drones)


Guest Speaker Call TODAY | Outlook For Natural Gas Prices and Basis

TODAY at 11:00am EST Hedgeye’s Macro and Energy teams will host a guest speaker call on US natural gas fundamentals with Keith Barnett, Head of Fundamental Analysis at Asset Risk Management (ARM), which is an independent producer services company that provides solutions for more than ninety clients through financial hedging advisory, physical marketing, and midstream solutions.

 

 

DIAL-IN INFORMATION AND MATERIALS

  • Wednesday, February 18th, 11:00am EST
  • Toll Free:
  • Toll:
  • Conference #: 39017544
  • Slides: CLICK HERE

Send questions for Keith to

 

 

TOPICS FOR DISCUSSION

  • Rapid growth in US production driven primarily by emergence of Marcellus / Utica shale play has created basis price dislocations as infrastructure and demand re-calibrate to new supply / demand regional balances…
  • Demand growth along the US Gulf Coast [industrial, LNG exports, and pipe exports to Mexico] create a “battle zone” for basis differentials to re-balance in 2016-2020, with the Haynesville waiting in the wings…
  • British Columbia / Northern Alberta shale plays will look for a home, especially if BC LNG exports continue to be delayed and lower crude prices dampen oil sands (gas demand) development…
  • Lower crude prices will affect the supply side through reduced liquid-oriented gas, and the demand side by impacting petchem plant development, global LNG price arb, and Mexico project development…
  • And more…

 

RELEVANT TICKERS......BWP, LNG, ETE, KMI, WMB, OKE, TRP, SE, MWE, DPM, DVN, CHK, ECA, SWN, RRC, COG, AR, EQT, XCO, UPL, WLK, LYB, DOW, MEOH, and many more... 

 

 

ABOUT KEITH BARNETT

Keith Barnett is Senior Vice President and Head of Fundamental Analysis at Asset Risk Management.  He has over 30 years of experience in the energy industry with leading companies like Chevron, Columbia Gas Transmission, American Electric Power, and Merrill Lynch Commodities. Keith held engineering, managerial and executive positions with those companies in the areas of production, drilling, offshore platform design, natural gas marketing, fuel procurement, trading and structuring analytics, corporate strategy and fundamental analysis of energy markets. He had significant participation in two National Petroleum Council studies; including leading the power demand team in the 2003 natural gas study and serving on the steering and report-writing committees. Keith was also the Natural Gas Task Force lead for the Edison Electric Institute for several years. He has testified before the Federal Energy Regulatory Commission and the Senate Sub-committee on Energy on natural gas and power matters. He is a frequent speaker on natural gas, power, and global energy markets. 

 

Prior to joining Asset Risk Management, Keith served as Director of Strategic Analysis for Merrill Lynch Commodities where he led the effort to create an integrated global point of view for energy commodities that could serve short term trading and longer-term investment horizons. He also worked most recently with Spring Rock Production, which is producing a state of the art natural gas and oil production forecast for the USA and Canada.  Keith has an engineering degree from Texas A&M University.

 

 

ABOUT ASSET RISK MANAGEMENT 

Headquartered in Houston (with offices in Chicago, Denver and Pittsburgh), Asset Risk Management (ARM) has been helping oil and gas producers make better hedging decisions since 2004. ARM represents more than 85 public and private companies and interacts with all major energy commodity counterparties. ARM’s value is realized not only in the development and implementation of dynamic strategies, but in the ongoing optimization of those strategies as warranted by market volatility, execution efficiencies, reporting and continual monitoring of technical and fundamental factors in the market with the client's best interests and specific objectives in mind.  Learn more: http://asset-risk.com/.


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.

USD, Bonds and Sentiment

Client Talking Points

USD

It doesn’t take much to whip the correlation risk around between the USD and Oil; on the BOJ Burning Yen move, USD stabilizes, Oil drops -1.5%, and the Nikkei ramps +1.2% to new year-to-date highs of +4.3%. Get the USD right, you get a lot of things macro right.

UST 10YR

Daily body blows for us staying with the lower-rates view in FEB – the UST 10YR was at 2.16% this morning with a wide refreshed risk range of 1.70-2.18%. We are seeing massive percentage moves off the lows, but the UST 10YR was at 2.26% only 2 months ago. We’ll see if #deflation in the PPI today, Fed Minutes, and/or the CPI next week will matter to the hawkish narrative – FEB jobs report really matters now.

SENTIMENT

U.S. stock sentiment bottomed after the JAN selloff, with Bulls in the II FEB 3rd survey hitting 49% (bears = 16.3%, and the Bull/Bear Spread = +3270 to the bullish side). Today that’s +30% more bullish with Bulls ramping back up to 56.6%, and few admitting bearishness at 14.1% Bears (close to all-time lows, putting the Bull/Bear Spread of +4250 near all-time highs).

Asset Allocation

CASH 41% US EQUITIES 9%
INTL EQUITIES 7% COMMODITIES 0%
FIXED INCOME 33% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
EDV

You want to own the Vanguard Extended Duration Treasury (EDV) in this current yield-chasing, growth slowing environment. The trend in domestic growth continues to signal growth slowing, and the counter-TREND moves we’ve seen over the last few weeks (@Hedgeye TREND is our view on a 3-Month or more duration) remain something to fade until we can see more follow-through that growth is trending more positively (second-derivative positive).

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

HOLX

Hologic (HOLX), at this stage in their product cycle and in the current stage of the economic cycle, has some very impactful tailwinds emerging to their revenue growth and the implied growth in the future. A stock generally will perform really well when doubt about future growth turns to optimism while the most recent data confirms the optimism. So far, we have a little bit of both; recent positive data like the December 2014 quarter upside and consensus estimates and ratings starting to move off of multi-year lows. A less-worse trend in Pap testing and rising patient volume can combine to get us close to flat for HOX’s Cytology (Pap) business. As the growth in Cytology improves and is less of a drag, the 3D Mammography growth can flow through. We think the outlook is bright, and with a few more data points, we think a lot more investors will agree with us.

Three for the Road

TWEET OF THE DAY

COPPER: we remain bearish on #Deflation and the Dr. at -9.1% YTD $2.57/lb

@KeithMcCullough

QUOTE OF THE DAY

Do not let what you cannot do interfere with what you can do.

-John Wooden

STAT OF THE DAY

The typical order at Chipotle has about 1,070 calories. That’s more than half of the calories that most adults are supposed to eat in an entire day. The recommended range for most adults is between 1,600 and 2,400.


CHART OF THE DAY: News of Oil Bears' Death May Be Premature

CHART OF THE DAY: News of Oil Bears' Death May Be Premature - COD updated 2 18

 

Below is a brief excerpt from today's Morning Newsletter written by Daryl Jones, Hedgeye Director of Research. 

 

In Chart of the Day, we highlight weekly U.S. oil production in the U.S. going back to 1983 (as long as the data has been kept).  As you can see, weekly oil production in the U.S. hit its highest level in more than 32-years last week.  If Wood Mackenzie is correct, it seems we may not be done with #DrillBabyDrill just yet.

 

Inasmuch as oil bulls want the bottom to be in for WTI, the chart is very telling.  Not only is oil production at a 32+ year high in the U.S., it is growing some 10% year-over-year.  Unfortunately, again for oil bulls, on the demand side, the outlook is not overly robust either, with U.S. oil demand at a more than 12-year low (as a % of GDP).

 


Spurious Correlations

“Shallow men believe in luck or in circumstance.  Strong men believe in cause and effect.” 

-Ralph Waldo Emerson

 

If you are human, when the global macro market correlations go against your position, you undoubtedly classify them as spurious.  After all, they don’t fit your thesis, so how else can they be classified?

 

In reality, when we think of spurious correlations, we think of things that have no business or rationale in being correlated.  We’ll give you a few examples:

 

  • From 1990 to 2009, the inverse correlation between honey producing bee colonies in the U.S. was -0.93 inversely correlated to juvenile arrests for marijuana;
  • From 1990 to 2010, the positive correlation between people who drowned falling out of a fishing boat in the United States with the marriage rate in Kentucky was +0.95;
  • And last but not least . . . from 2000 to 2009, the per capita consumption of mozzarella cheese was +0.96 correlated with civil engineering doctorates awarded in the United States.

 

Suffice it to say, not all correlations are created equal.

 

In yesterday’s Early Look, Keith highlighted the fact that some of our macro views that are highly correlated have been going against us for the last week or so – dollar down, oil up, Euro up, Russia up, Greece up, Brazil up . . . and the list goes on.  Versus say mozzarella and engineering degrees, these assets, even if we disagree with their recent price direction, have a lot more business being correlated.

 

Certainly, almost every asset and asset class has a price, but what we have seen in February remains a counter TREND move.  In our view, the underlying fundamental circumstance of global #deflation and slowing growth remains intact.

 

Back to the Global Macro Grind...

Spurious Correlations - Hamlet cartoon 02.17.2015

Speaking of spurious, the most interesting central banking comments of the day award has to go to Bank of Japan Governor Kuroda, who indicated he will potentially act if the drop in the price of oil continues to hurt his outlook for inflation and general price levels (read: his inflation statistics).  Since the Bank of Japan has bought almost every other asset available globally, perhaps the next move will be to lever up and buy oil futures!

 

On the topic of oil and counter trend moves, oil continues to be one of the more hotly contested asset classes globally.  After a decline of epic proportions, WTI is now up about 10% in the last month and this is, admittedly, on contract volume that is up about 61% versus the 3-month average.  Certainly, declining rig count in the U.S. and some level of short covering has helped, but what of production and future supply?  Interestingly, Wood Mackezie in a recent report noted the following per a Bloomberg article:

 

“. . . that of 2,222 oil fields surveyed worldwide, only 1.6 percent would have negative cash flow at $40 a barrel. That suggests there won't be a lot of chickening out at $40. Keep in mind that the marginal cost for efficient U.S. shale-oil producers is about $10 to $20 a barrel in the Permian Basin in Texas and about the same for oil produced in the Persian Gulf.”

 

In Chart of the Day, we highlight weekly U.S. oil production in the U.S. going back to 1983 (as long as the data has been kept).  As you can see, weekly oil production in the U.S. hit its highest level in more than 32-years last week.  If Wood Mackenzie is correct, it seems we may not be done with #DrillBabyDrill just yet.

 

Inasmuch as oil bears want the bottom to be in for WTI, the chart is very telling.  Not only is oil production at a 32+ year high in the U.S., it is growing some 10% year-over-year.  Unfortunately, again for oil bulls, on the demand side, the outlook is not overly robust either, with U.S. oil demand at a more than 12-year low (as a % of GDP).

 

The nearest term catalyst for oil markets may well be in the April / May time frame in the U.S.  Based on projections of current production, it is expected that Cushing, and other U.S. repositories, may be at full capacity by then.  In theory, this may force producers to dump near term supplies on to the market at seriously discounted prices.  #Contango, anyone?

 

Switching commodity gears slightly, at 11am ET this morning, we will be hosting a call with Keith Barnett the Head of Fundamental Analysis from Asset Risk Management (http://asset-risk.com/author/kbarnett/ ) on the outlook for natural gas prices (he will also discuss oil).  If you don’t already have it and would like to get the dial in for the call, please email .  The key topics Barnett will discuss include:

  • Rapid growth in US production driven primarily by emergence of Marcellus / Utica shale play has created basis price dislocations as infrastructure and demand re-calibrate to new supply / demand regional balances;
  • Demand growth along the US Gulf Coast [industrial, LNG exports, and pipe exports to Mexico] create a “battle zone” for basis differentials to re-balance in 2016-2020, with the Haynesville waiting in the wings;
  • British Columbia / Northern Alberta shale plays will look for a home, especially if BC LNG exports continue to be delayed and lower crude prices dampen oil sands (gas demand) development; and
  • Lower crude prices will affect the supply side through reduced liquid-oriented gas, and the demand side by impacting petchem plant development, global LNG price arb, and Mexico project development.

 

We hope you can join the call.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.70-2.18%

SPX 2070-2110
Nikkei 176

VIX 14.35-19.33

EUR/USD 1.12-1.14

Oil (WTI) 48.37-54.02
Gold 1195-1232 

 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Spurious Correlations - COD updated 2 18


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