Keith's Macro Notebook 4/1: Europe | U.S. Dollar | UST 10YR


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

Retail Callouts (4/1): FL, NKE, UA, AdiBok, RH, WMT, SHLD

Takeaway: Nike up to record 73% of FL purchases in 2014. RH expanding its Greenwich footprint. WMT cutting vendors to pay employees.



FL, NKE - Nike % of purchases up to 73% in 2014



Takeaway: Nike purchases increased 500bps from 68% to 73%, the largest bps jump we've seen since 2008 and now sits at the absolute highest level in forever. That doesn't sound like good risk management to us. Because of AdiBok's utter collapse and the absence of a clear cut number #2 in the US market, we don't know that FL has any other option. The best possible environment for an athletic retailer is when the major brands are heavily competing for shelf space. Nike and UA (to a lesser extent) won't have to fight as hard, or spend as much, to get incremental space at FL. Foot Locker wants nothing more than to have a strong staple of contenders looking to take a few points of share. It just doesn't have that luxury.


It's not like Nike and Brand Jordan are the only brands on FL shelves, its that FL's new concepts (House of Hoops, Fly Zone, and Yard Line) are 100% Nike. It's these concepts that FL is looking to for growth in its core business, which means the Nike allocation goes up as remodels continue. We can't say Nike will back away from this strategy because it increases its distribution footprint and showcases its tier 1b product (tier 1a is saved for its own stores and website) with very little cost of capital. But, if there is one company you don't want to be monopolized by it's NKE. Especially as it continues to ramp its own direct business after a multi-year investment cycle.


Lastly on gross margin, over the past 5 years we've seen gross margin head north as Nike percent of purchases has climbed about 1000bps. This seems counter intuitive due to the leverage Nike typically exerts on its partners, but we'd argue that this is due in large part to Nike's ability to drive traffic thus taking the attachment rate higher for things like socks, headwear, etc. But, what happens when there is nothing but Nike to attach to? We think it means FL will see the full brunt of the IMU pressure the company has been calling out.

Retail Callouts (4/1): FL, NKE, UA, AdiBok, RH, WMT, SHLD - 4 1 chart1


RH - Adding 2nd Store In Greenwich Market



Takeaway: Link to full note CLICK HERE


WMT - Wal-Mart Ratchets Up Pressure on Suppliers to Cut Prices



Takeaway: 1) Walmart is cutting vendors again, but this time to pay employees instead of customers. 2)Not good for the rest of retail when the giant starts ratcheting down on suppliers. 3) This is exactly why we won't see commodity deflation (especially cotton) flow through on the P&L. WMT will set the tone and everyone will follow causing the industry to compete the benefit away.









BURL - Burlington Stores, Inc. Announces Secondary Offering of Common Stock



MW - Report: Jos. A. Bank lays off 122 headquarters employees



TGT - Target releases fresh merchandise in rapid-fire 2015 overhaul



LULU - Lululemon Athletica Inc’s new men’s ‘anti-ball crushing’ pants grab media buzz and sales



RL - Ralph Lauren, USPA Continue Legal Squabbling



CBK - Macellum Delivers Letter to the Chairman of Christopher & Banks Corporation



Macerich Rejects Enriched Simon Offer



Torrid opening Chicago flagship; on track to open 60 stores in 2015


Checking In With TACRM

Our Tactical Asset Class Rotation Model (TACRM) remains an invaluable input in our research process. Listed below is a summary of noteworthy observations from the latest refresh (CLICK HERE to download the presentation):


  • At the primary asset class level:
    • Investors continue to reduce their marginal exposure to every primary asset class except DM Equities. (slide 10)
    • For Commodities in particular, investors continue to reduce their marginal exposure at an accelerating rate. (slides 8 and 10)
    • That said, however, the rotation out of EM Equities and FX has clearly stabilized. (slide 8)
    • In fact, EM Equities is currently the asset class with the highest degree of factor exposures exhibiting positive VWAP momentum across multiple durations. The rally in Chinese equities is largely responsible for this. (slide 7)
    • Investors’ marginal exposure to DM Equities is especially crowded – in the 98th percentile of all readings on a TTM basis and in the 87th percentile of all readings since the start of 2008. (slides 9 and 10)
    • Investors are reducing their exposure to Cash – which is comprised solely of the USD and the VIX – at an accelerating rate, as well. (slides 8 and 10)
    • It would appear a wide-ranging fear of an unwind of consensus positioning (i.e. long USD, long European Equities, short Treasury Bonds, short Commodities and short EM) is driving the aforementioned broad de-risking.
    • We aren’t yet of the view that such an unwind will occur in the near term. That said, however, it’s also not at all difficult to connect the dots on that occurrence given our intermediate-term outlook for U.S. growth and the Fed’s likely response to that.
    • Per Keith's commentary this AM: “Counter-TREND moves have sucked a lot of people in and ripped them the other way, fast… so we just need to be patient until TREND signals confirm [any nascent] phase transitions.”
  • At the individual factor exposure level:
    • Commodities, FX and EM Equities continue to dominate the list of exposures exhibiting the largest degree of negative VWAP momentum across multiple durations. (slide 5)
      • It’s worth noting that the velocity of the downtrends across the preponderance of FX exposures in this list is clearly decelerating. That is bullish, on the margin. (slide 5)
    • DM Equities and Chinese Equities dominate the list of exposures exhibiting the largest degree of positive VWAP momentum across multiple durations. (slide 5)
      • It’s worth noting that the velocity of the uptrends across each of the Chinese Equity exposures in this list is clearly accelerating. That is an especially bullish signal. (slide 5)
    • Within the U.S. Equity Market:
      • There is a clear divergence in momentum within the Size and Economic Cycle style factors. Recall that TACRM tracks 47 unique sector and style factor exposures within the domestic equity market in order to formulate a robust mosaic of market color.
      • With respect to Size:
        • Eight of the ten exposures exhibiting the largest degree of negative VWAP momentum across multiple durations are large-cap equities: IYT, XLB, OEF, XLI, XLU, XLK, IEZ and IWD. (slide 6)
        • Three of the ten exposures exhibiting the largest degree of positive VWAP momentum across multiple durations are small-cap equities: IWO, IWM and IWM. (slide 6)
      • With respect to the Economic Cycle:
        • That Transports (IYT), Industrials (XLI) and Tech (XLK) are among the eight factor exposures exhibiting the largest degree of negative VWAP momentum across multiple durations, while Retailers (XRT) and Homebuilders (ITB) are the top two  factor exposures exhibiting the largest degree of positive VWAP momentum across multiple durations speaks volumes to the divergence between souring late-cycle data (e.g. CapEx and Industrial Production) and firming early-cycle data (e.g. Consumption and Housing) that we continue to highlight. (slide 6)


In the context of the continued uptrend in cross-asset volatility (GFSI) – as well as the uptrend in the volatility of volatility (VVIX) – we hope you find these quant signals helpful in your risk management process. As always, feel free to ping us with questions.


Checking In With TACRM - 1


Best of luck out there,




Darius Dale


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LEISURE LETTER (04/01/2015)



NAGAWORLD- GGR at its Phnom Penh resort NagaWorld rose 48 % YoY in Q1 2015. Gross revenue from the VIP segment doubled, to US$65.5 million, from nearly US$32.6 million in Q1 2014. In the VIP segment, NagaWorld’s rolling chip turnover for Q1 2015 jumped 70% to nearly US$1.70 billion 


Takeaway: Great results from Nagaworld. Some formerly Macau VIP customers seem to be playing there.


IGT/GTECH - has met all conditions for merger with IGT. The combined company IGT will start trading on NYSE on April 7. Last day of trading in Borsa Italiana of GTECH shares will be on April 2.


Konami - expects the delisting of its ADS from NYSE to become effective April 24.


SGMS - announced that Santa Casa da Misericordia deLisboa ("SCML" or "the Lottery"), the operator of the Portuguese State Lottery, reported record instant game sales in 2014, up 18% YoY. The trend has continued in 2015 with instant game sales exhibiting an unprecedented year-over-year increase of more than 35% thus far.


Company signed a two-year contract in February 2014 to provide instant games and related services to SCML. Scientific Games became the sole supplier of the Lottery's instant games. 


Santa Casa da Misericordia de Lisboais currently ranked in the top four lotteries in Europefor instant game per capita sales (La Fleur's 2015 World Lottery Almanac).


Blackstone - will acquire three large hotels from a consortium led by Paulson & Co. for US$1.2 billion, according to a Wall Street Journal report. While the deal has not been confirmed by either party, people familiar with the matter said the hotels in the deal are the Ritz-Carlton and JW Marriott in Orlando, Florida, and the JW Marriott in Scottsdale, Arizona. The hotels combined have more than 2,500 rooms, about 472,000 square feet (43,850 square meters) of meeting space and 54 holes of golf on 800 acres (324 hectares).


Starwood Capital - sold the Ace Hotel in London for 150 million pounds. The sale includes the 258-bedroom hotel as well as the Miranda nightclub and the popular Hoi Polloi restaurant. It was sold by Starwood Capital Group to a company called Limulus which was advised by the Deerbrook Group. The deal comes nearly three years after Starwood bought the property out of an administration led by Ireland's National Asset Management Agency.


Takeaway: This luxury boutique property in hot London was sold for average ~US$860k per key.


CCL - Passengers have been stuck onboard P&O Oriana, as it has been unable to dock at Southampton due to strong winds.  Those due to board today have been told they can board from noon tomorrow and have been offered a 50% refund off a future cruise. The 1,000 passengers who traveled to Southampton have been put up in hotels and given dinner by P&O Cruises.



MSC Cruises - is returning to the UK next year with a short series of ex-UK sailings from Southampton. The line will base Fantasia-class ship MSC Splendida in Southampton for six sailings, having pulled out of the UK market this year.



Macau GGR -  March GGR as published by DICJ totaled HKD 20.861 bn (MOP 21.487 bn), down by 39.39% YoY.  

Takeaway: As expected


Graftbuster - Huang Shuxian, minister of supervision and a deputy chief of the Central Commission for Discipline Inspection, said on Monday he hoped to "pragmatically cooperate with Macau's Commission Against Corruption to strengthen the tracking down of fugitives and proceeds".  The remark was made during a meeting in Beijing with the Macau commission's director, Andre Cheong Weng-chon, days after the launch of Operation Skynet, the mainland's international manhunt for fugitive corrupt officials.



New construction safety rules - Macau is drafting new construction safety rules, officials said, after several workers died this month at casino sites amid a building boom in the world's largest gambling hub. The Labour Affairs Bureau of the southern Chinese territory said the new regulations would be submitted to the government this year. They would include a revision of existing occupation and laws to "safeguard workplaces for all workers".



Ohio bill would cut promotional expenses - Republican senators on Tuesday accused casinos and “racinos” of shortchanging schools and local governments by $165 million since 2012 by deducting promotional credits from their revenue before taxes. 


Coley, joined by Republican Sens. Dave Burke of Marysville and Bob Peterson of Sabina, seeks to overturn a law signed by Gov. John Kasich in July 2011 that approved promotional gaming credits -- part of an agreement Kasich worked out with casino operators in which they agreed to pay the state an additional $110 million over 10 years.


Under that 2011 agreement, if promotional credits are made taxable, casino operators Penn National and Rock Ohio Caesars could cease making payments to the state on the $110 million.


“It is a big deal,” Sen. Bill Coley (R., West Chester) said. “This month, March, 2015, Ohio casinos and racinos have surpassed $500 million in promotional gaming credits. A half a billion dollars has been given out in the short time that we’ve had gaming in the state of Ohio as promotional gaming credit.”


Mr. Coley’s bill would limit promotional credits to $5 million per casino a year.


Takeaway: This is a negative for PENN if Coley gets his way. We will keep an eye on his bill. 


Cash handouts - Secretary for Economy and Finance, Lionel Leong acknowledged that the value of cash handouts might be “adjusted” in 2016, depending on Macau’s economic outlook and the government’s budget. He told lawmakers that, “cash handouts depend on MSAR’s financial situation,” before adding that, “we are still estimating the amount that will be given in 2016, taking into consideration our budget. There’s a possibility that the cash handout might be a smaller amount than in 2015.”


This year, each permanent resident will be granted a cash handout of MOP9,000 and temporary residents will receive a smaller handout of MOP5,400. 



NJ lottery - NJ Treasurer Andrew Sidamo-Eristoff says the Christie administration has lowered its revenue expectations for the state lottery in fiscal year 2015, which ends on June 30.  He did not say specifically how much the expected revenue dropped but attributed the decrease to industry-wide trends.


State documents show that initial revenue forecasts projected $1.037 billion in revenue for the current fiscal year, but Christie’s 2016 proposal reflected lower receipts at $955 million.


Sidamon-Eristoff says the lottery, which Christie privatized in 2013, is facing increasing competition from other games and that there are demographic shifts affecting customers’ behavior.

Takeaway: Not surprising given the string of disappointing tax receipt #s recently from the NJ state lottery. NJ lottery is run by Northstar New Jersey (consortium with SGMS/GTECH/OMERS).


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.

RH – Growing the Greenwich Footprint

Takeaway: Proof that 22k sqft Greenwich store is too small. Will likely see fewer Legacy Store closures as RH continues category expansion.

This is the first time we've seen RH swap out a Legacy Store for a Design Gallery in a market and then supplement the new footprint with an additional concept -- in this case it's Baby & Child. Our analysis suggests that the Greenwich market could support a 65k sq. ft. store assuming 10% market share in 2018 and $1200/sq. ft. in productivity. Meaning the current 22k sq. ft. store, while in a great location, and significant ROI, could and should arguably be much bigger versus how it exists today in order to capture the market opportunity and properly display the company's expanding category portfolio.


Instead of swapping out the door (which has extremely favorable rent economics -- especially given the prime location) for a bigger footprint, like we saw in West Hollywood and will see in Houston, RH is adding square footage across the street. The new door at 4,800 sq. ft. is taking over vacated space by Gap Kids (the Legacy Store the company closed last year was 5,500 sq. ft.)


More than anything, we think this is a very bullish statement on the success of the Greenwich market. The company would not be opening a Baby & Child concept unless the Design Gallery was crushing it in year 1. Between Baby & Child, 2 new pending concepts (which could merit their own doors), and the addition of Kitchens still TBD we think we'll see a lot more of this. As in, Legacy Store closures as new Design Galleries open up will be lower than most expect.


Source: (

Europe, US Dollar, UST 10YR

Client Talking Points


German data remains good enough to keep the mainstream bulled up on European central planning (German PMI 52.8 MAR vs 52.4 last) and French/Greek data continues to suck enough to beget more begging for more #cowbell – 1-2 day corrections in everything European Equities and Sov Bonds, then straight back up (Denmark +31.7% year-to-date).

US Dollar

Buying the counter-TREND 2 week selloff in USD and shorting everything Commodity #Deflation getting you paid (again); that said, at $98.50 USD Index it’s signaling immediate-term TRADE overbought, so from a trading perspective we would book some gains here in, currencies, commodities, and commodity stocks.


The UST 10YR remains to be the best way to be long both Global #Deflation and #GrowthSlowing – 1.92% on the UST 10YR with immediate-term support down at 1.85% and no intermediate-term support to the all-time lows.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Manitowoc  (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. Recent nonresidential and nonbuilding construction data remains firm for 2015, which suggests that MTW’s crane sales should see a pickup in the first half of the year. The Architecture Billings Index (a survey of architects) typically leads nonresidential and residential construction spending by approximately 9-12 months. More importantly, the ABI Index leads MTW Crane Orders by 2 quarters.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007.  We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather. 


While labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market.  All else equal, we’d view improving demand as a net positive.  On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.



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. Most of the #Deflation trades bounced to something less-than-terrible (both absolute and relative) for 2015, whereas the real alpha trending in macro markets continues to play to the lower-rates-for-longer camp’s advantage.

Three for the Road


You don't want to blow up your April, on the 1st day of April



"If you ain't first, you're last!"

-Ricky Bobby


Housing: Purchase Activity rose +5.7% WoW on the back of last week’s +4.9% advance and accelerated to +7.6% on a year-over-year basis.   On a quarterly basis, purchase demand in 1Q15 is up +6.4% sequentially +2.2% YoY, marking the first quarter of positive growth since 3Q13. 

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