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Macro Minute: The Truth About Today’s GDP Report


Hedgeye CEO Keith McCullough takes a quick dive inside today’s GDP report and what the latest release means for the long bond. 


here is the real gdp data 

Click to Enlarge

Macro Minute: The Truth About Today’s GDP Report  - Screen Shot 2015 02 27 at 12.33.03 PM

Crickets From the “Economy Is Booming!” Crowd

Crickets From the “Economy Is Booming!” Crowd - tweet1


Year-over-year (that's how you measure growth) U.S. GDP is closer to 2% than 4-5%. This is the most basic information in America … and yet the Old Wall and its Media Apparatchiks obfuscate it.

Here's the data:

Click to enlarge.

Crickets From the “Economy Is Booming!” Crowd - whap


So, let’s get this straight:


They’re going to lie to us about the most basic economic number? Really?  Look, if your economic "sources" lie to you about this very basic fact, they'll spin just about anything. For the record, I don't associate with people who lie to me. And I certainly won’t pretend to respect them.


Don’t forget…there are a lot (and I mean a lot…) of "experts" out there who thought the US economy was growing 4-5%. And, sadly, you will hear nothing from them today. Zero accountability.




The reason why mainstream media is being de-rated is simple - you can't trust it anymore. Old Wall and its media failed you in 2000 and 2007.


This time is not different.


Keith's Macro Notebook 2/27: Japan | UST 10YR | USD


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

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Retail Callouts (2/27): Dept Store Sigma, JCP, M, KSS, DDS, TGT, JWN

Takeaway: Entering year 7 of margin expansion cycle - inventories look healthy, but cost pressures accelerating. JCP takeaways.



Takeaway: Inventories look healthy coming out of 4Q. But, we think there is more margin headwinds facing this space than a clean balance sheet can solve for. The biggest factor on the gross margin line we're watching is shipping expense. KSS flat out said that a $25 free shipping threshold is unsustainable. TGT set the bar with a $25 minimum. And we think that has a ripple effect on the industry as retailers attempt to keep market share on the web.


Retail Callouts (2/27): Dept Store Sigma, JCP, M, KSS, DDS, TGT, JWN - 2 27 15 chart1

***JCP reduced by a factor of 4 and JWN reduced by a factor of 2


We've never gone more than 5 years without a meaningful correction in EBIT margins. We're now entering year 7 as 2 of the biggest players in the space are making big moves that we think are pretty telling. On the employment front - WMT shook up the employment paradigm, and M, considered the best in breed, goes into investing mode.

  Retail Callouts (2/27): Dept Store Sigma, JCP, M, KSS, DDS, TGT, JWN - 2 27 15 chart2


JCP - 4Q14 Earnings


 1. Mixed print, top line looked solid, but gross margins came in below expectations. The market is beating it up over that, but we’re more concerned about the comp. This is the 5th straight quarter where JCP has out comped KSS, and more importantly it lapped last year’s market share gains with another quarter of outperformance. Given what we’ve seen from a litany of retailers this holiday season on the comp line (BONT, BELK, DDS, JCP, ROST, etc.) and the fact that KSS had the most disastrous January last year – we think KSS’ big number is more a function of macro than it is the ‘Greatness Agenda’.

Retail Callouts (2/27): Dept Store Sigma, JCP, M, KSS, DDS, TGT, JWN - 2 27 15 chart3


2. Margins came in 60bps below consensus, but were still up 540 bps. Guidance on that front 50-100bps vs. consensus at 140bps. We’re 100% ok with that. A desperate JCP is much more bearish for a healthy KSS.


3. Brick and Mortar sales productivity was up 3% in 2014 at $100 even. That’s still $45 off pre-RonJon peaks. That’s not something we can get excited about. We think that JCP will step up to $115 over the next 4 years, but a) that's a really long time, and b) we’d need to see a runway to $130 to get more positive on this name. We’re not there.

Japan, USD and UST 10YR

Client Talking Points


Abenobics did not work. Japanese JAN retail sales are down -2% year-over-year, JAN household spending is down -5.1% year-over-year, and JAN housing starts are down -13% year-over-year. But if you bought the Nikkei on that you crushed it, the Nikkei is up 7.8%.  


The UST 10YR is oscillating between the current risk range of 1.84-2.08%, into the GDP missing which we have been calling for. On a quarter-over-quarter basis it was revised lower by -0.4 to 2.2%, slowing vs the 5.0% print for 3Q14. On a year-over-year basis it was revised lower by -0.10 to 2.4%, slowing vs. the 2.7% print for 3Q14. If you get the rate of change of U.S. growth right you tend to get bond yields right.


The USD had a huge move to the upside yesterday, it will be interesting to see what happens today. The trend is your friend in the USD, as you know we like the USD. The USD going up and rates going down = deflation. We are going to have more and more deflation going into May and June, you are going to continue to see slower global growth and we will continue to reiterate the long bond call as a result of that. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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).


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.


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


Central Bankers Have Lost Control, Setting Stage For Market Crash https://www.youtube.com/watch?v=ZkTDUqaD7QU&feature=youtu.be  via @YouTube



Freedom lies in being bold.

-Robert Frost


Since 2008 the correlation between housing equities and the year-over-year rate of change in HPI (House Price Index) has been 0.90.

LEISURE LETTER (02/27/2015)




  • Mar 5: The 3rd Session of the 12th National People’s Congress (NPC), China’s top legislature will convene in Beijing

headline news

  • IGT -
    • Received all gaming regulatory approvals required under the Agreement and Plan of Merger, dated as of July 15, 2014. The transactions contemplated by the Merger Agreement remain subject to U.K. court approval and other customary closing conditions set forth in the Merger Agreement, and are currently expected to close in early April 2015. The combined company will be named IGT.
    • Headquarters will be in UK; stock listed under NYSE- ticker IGT
    • 3 business units: North America, International, Italy
      • North America gaming segment (IGT gaming, Doubledown, sports betting) and lottery segment
      • International:  all business conducted outside of North America and Italy 
      • The Italy business unit will operate as it does today. All product development, marketing, manufacturing, and servicing will be supported by North America Lottery and North America Gaming as appropriate.
  • The Corporate Leadership team will be comprised of the following:
    Marco Sala – Chief Executive Officer, International Game Technology PLC
    Renato Ascoli – Chief Executive Officer, North America Gaming/Interactive (DoubleDown Casino)
    Walter Bugno – Chief Executive Officer, International
    Fabio Cairoli – Chief Executive Officer, Italy
    Michael Chambrello – Chief Executive Officer, North America Lottery
    Alberto Fornaro – Executive Vice President and Chief Financial Officer
    Donald R. Sweitzer – Chairman, IGT Corporation (North America) and Senior Public Affairs Advisor
    Robert Vincent – Senior Vice President, Human Resources and Corporate Communications
  • IGT chairman Phil Satre will serve as the new company’s chairman and IGT chief executive Patti Hart will become vice chairman.

Takeaway: Not a lot of senior management from the IGT side. 


Aristocrat -  Video Gaming Technologies (VGT) acquisition has been “highly accretive” to Aristocrat’s U.S. operations, more than tripling U.S. recurring revenue, said Aristocrat’s CEO Jamie Odell.  He added that the group expected increased debt levels associated with the VGT acquisition, as well as “a significant increase in interest costs” over the 2015 fiscal year.



Inbound visa policy - Macau’s Secretary for Social Affairs and Culture Alexis Tam Chon Weng says the Macau government does not wish to reduce the number of mainland visitors coming to Macau. It wishes instead to “improve” the issuance of visas to independent travelers from mainland China under the mainland’s Individual Visit Scheme (IVS), according to a statement from Macau’s Government Information Bureau.


‪Tam on Thursday said the local government would approach the central government in Beijing to discuss how to control the issuance of visas under the IVS policy. Tam admitted that the tourism industry has shown some concern over the government’s plans, but said that the 31 million-plus visitors that came to Macau in 2014 are more than enough.


The Portuguese-language channel of Radio Macau quoted Mr Tam saying that the new policy would have to be introduced “gradually”. He added that in his view a limit around the current 31 million visitors a year “wouldn’t be bad,” Radio Macau reported.


Takeaway:  Tam seems to be backtracking a little bit on his previous comments. However, the casino industry needs growth not a freeze at 31 million visitors.


Russia - The parliament of South Ossetia, which broke away from Georgia in 1990, has passed a law banning all gambling activities on its territory.
The region, which has close ties with Moscow, has ruled all slot machines, sports betting shops and bookmakers’ offices should be closed.


There are all indications now that the first hotel in the Primorye gambling zone will be opened in March, as initially planned. Work on its interior finish began earlier this week. But levels of investment across the zones varies widely.

Primorye officials in January said the region had received pledges of investment for about $2.2 billion.



Gongbei Tunnel - slated for completion in 2016. The construction of one of the main segments of the ‘super project’ Hong Kong-Zhuhai-Macau Bridge – the Gongbei Tunnel – is slated for completion by the end of 2016, according to Xinhua News Agency.


Takeaway:  Build more transportation infrastructure but limit tourists.  Makes sense.  Most of the infrastructure projects have been delayed. Will this one complete on time?


Indiana land bill -  The Indiana House voted (House Bill 1540) in favor to let riverboat casinos move onto land and to allow live dealers at Indiana’s two racinos. However, Gov. Mike Pence has stated that he opposes any expansion of gambling.  Pence added another wrinkle this week when he worked behind-the-scenes to oppose a provision of the bill that would allow live dealers for games like blackjack and poker at racinos in Anderson and Shelbyville.


The state’s current gambling laws allow live table games at riverboat casinos, but only slot machines and electronic games at racinos.

Takeaway: Indiana is facing tremendous competitive pressures and any part of this bill would help.


Olympic betting - Nevada gambling regulators voted Thursday to allow the state’s sports books to offer bets on the Olympics for the first time in years.

It was a move unopposed by anyone in the industry and cheered by the regulators themselves. International sports books in Great Britain, Ireland and Australia and offshore Internet sites already allow such bets.



Hotel developer interest in CBD - Interest has swelled for properties in densely populated urban corridors, whose demand drivers are pushing performance to historic heights. Hotels located in central business districts ended 2014 with higher occupancies (71.8% versus 63.7%), average daily rates ($157.82 versus $110.83) and revenue per available rooms ($113.35 versus $70.62) than their counterparts throughout the rest of the country, according to STR.    


“From an investor perspective, the (real estate investment trusts) and some of the other public companies are generally focused on buying assets in some of those locations. If I’m a developer and I’m going to build a hotel, my universe of potential buyers might be a little bit higher and a little broader if I were to build in an urban location,” said Joel Eisemann, chief development officer of the Americas for InterContinental Hotels Group.



River cruise lines cancel Russia in 2016 -  River cruise lines operating in Russia have announced cancellations and cutbacks for the 2016 river cruise season. AmaWaterways and APT Tours will both suspend operations in Russia in 2016, and APT Tours also has postponed the refurbishment of ms Anastasia -- a new addition to the line's fleet that was set to begin operations in Russia in May 2015.


Takeaway: Will ocean liners follow suit?


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

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