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Keith's Macro Notebook 4/14: Greece | Volume | Deflation

 

Hedgeye Director of Research Daryl Jones shares the top three things in CEO Keith McCullough's macro notebook this morning.


Greece, Germany and China

Client Talking Points

GREECE

There is increased speculation that the Greek government may default. The Greek Prime Minister’s office adamantly denied that it would pursue the strategy of defaulting on its debt. There are however, several leaks to major newspapers that Greek negotiations are not working out and that there is real potential of a default. Greece currently has more than 315 billion in Euro denominated debt outstanding. 

GERMANY

The German finance ministry upped their outlook for growth in 2016 to 1.6% from 1.5% in 2015.  We are holding an institutional conference call today at 11:00AM ET to detail why we still like Germany equities on the long side. CLICK HERE to watch a short segment in which Hedgeye's Director of Research, Daryl Jones, highlights the key points of our bullish thesis on German stocks ahead of today's call.

CHINA

China's GDP appears poised to miss expectations and debt is set to accelerate.  On the Chinese debt front there are actually two important points to highlight A) margin debt in China, when adjusting for the relative size of the markets, is double that of the NYSE; and B) leverage for Chinese companies is at the highest level since 2004 and debt relative to assets is that the highest level since 2007.

 

Asset Allocation

CASH 33% US EQUITIES 12%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 32% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
MTW

Manitowoc  (MTW) is splitting the business into two companies. While the crane business receives the most attention in part due to its cyclicality and because they are well, more noticeable, Manitowoc’s other business, Foodservice equipment, is the larger of the two in terms of operating income (60% vs. 40% for Cranes). Several indicators are pointing towards upward momentum for MTW’s Foodservice business. Restaurant same store sales have benefitted since the drop in oil prices. Furthermore, an indicator by the National Restaurant Association, RPI Capital Expenditures Index, has surged recently in part due to lower fuel prices driving restaurant traffic and restaurant owners’ outlook.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. The housing data was again strong in the latest week with Pending Home Sales, HPI and Purchase Demand all accelerating to close out March. Pending Home Sales rose +3.1% sequentially in February with signed contract activity up a remarkable +12% YoY, taking the index to a new 19-month high. Mortgage Purchase Applications – the most real-time, high frequency housing demand indicator - 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. HPI: The Case-Shiller 20-city series showed home prices grew +4.6% year-over-year in January.  A stabilization/inflection in home price growth is important as housing related equity performance tracks the slope of home price growth strongly.

TLT

It was another week of declining long-term yields getting you paid on the long-side of Low-volatility Long Bonds (TLT). To reiterate our view over the longer-term, we pin a good chance the U.S. Dollar will reach new highs ($120 anyone?) with the probably of long-term Treasury yields reaching all-time lows very much in play.

Three for the Road

TWEET OF THE DAY

LIVE Healthcare Q&A w/@HedgeyeHC + @HedgeyeHIT 4/14 @ 1PM ET $ATHN $HOLX $HCA $MDSO Click here. It's free: https://app.hedgeye.com/insights/43490-q-a-with-hedgeye-healthcare-sector-head-tom-tobin

@Hedgeye

QUOTE OF THE DAY

I am a slow walker, but I never walk back.

Abraham Lincoln

STAT OF THE DAY

The number of golfers in the U.S. has declined by 5mm, or 16%, in the past six years. On the flip side, the number of rounds per player is up 12% to 19 rounds per year over that same period.


MACAU WEEKLY - STILL DETERIORATING

Takeaway: We remain negative on Macau as grind mass could be the next pressure point. Lowering our April forecast

CALL TO ACTION

Another weak week in Macau – reducing April GGR forecast.  April on track to represent the 11th straight month of deteriorating sequential gaming volumes, seasonally adjusted.

 

No change to our negative investment thesis. Street GGR forecasts have come down and are not far from ours (HE estimate at -25% for 2015). However, we fear the Street is underestimating the grind Mass revenue deterioration which will adversely impact margins. Moreover, the Mass reinvestment rate may be ticking up, another pressure point on margins. Consensus EBITDA estimates remain well above Hedgeye.

 

 

Please click on the link to see our detailed note: 

 

http://docs.hedgeye.com/HE_Macau_4.14.15.pdf


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CHART OF THE DAY: Calm Before the Market Storm? | $VIX

CHART OF THE DAY: Calm Before the Market Storm? | $VIX - 04.14.15 Chart

 

Editor's Note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye Director of Research Daryl Jones. Click here to learn more/subscribe.

 

Aside from January 2nd, yesterday had the lowest volume in U.S. equity markets for the year. Was it complacency? The calm before the storm?  Or, was it simply a non-event and just a quiet day in the markets?

 

...Those questions will largely be answered in hindsight for most stock market operators. But in the meantime, keeping our eyes on the minefield ahead is as important as it has ever been in the last five or more years. As the Chart of the Day below shows, volatility can and will pick up dramatically.

 


All Quiet?

“It is very queer that the unhappiness of the world is so often brought on by small men.”

-Erich Maria Remarque, “All Quiet on the Western Front”

 

Aside from January 2nd, yesterday had the lowest volume in U.S. equity markets for the year. Was it complacency? The calm before the storm?  Or, was it simply a non-event and just a quiet day in the markets?

 

At the start of this note, we used a quote from the classic World War I novel, “All Quiet on the Western Front” written by German World War I veteran Erich Remarque. Far be it from us to compare stock market operating to operating in the brutal trenches of World War I, but certainly many of us do feel like we are getting up and going into battle every morning, even if in an obviously more figurative and proverbial sense.

 

So, as you dug into your Bloomberg and Excel trenches yesterday, how did you interpret the almost 11% ramp in equity volatility?  Is it possible that the world’s omnipotent central bankers are Remarque’s “small men”? Is it possible that in their attempt to manage the global economy, they will ultimately lead to its demise?

 

Those questions will largely be answered in hindsight for most stock market operators. But in the meantime, keeping our eyes on the minefield ahead is as important as it has ever been in the last five or more years. As the Chart of the Day below shows, volatility can and will pick up dramatically.

 

All Quiet? - z45

 

Back to the Global Macro Grind...

 

Right now, “quiet” is the best euphemism for the morning news in  global macro markets.  Probably the most disconcerting news(at least for those of us who hope for continued stock market complacency) is coming out of Greece.  Rumors are now running rampant that Greece may default on its debt if it can’t reach a deal with its main creditors (read: the Troika) by the end of the month.

 

Now to be fair, the Greek Prime Minister’s office adamantly denied that it would pursue the strategy of defaulting on its debt.  Conversely, the IMF, who is a key creditor, seems to be leaking to every major newspaper that Greek negotiations are not working out and that there is real potential of a default.   So, what is the truth in this Greek tragedy of a negotiation?

 

Like most negotiations led by bureaucrats, discerning the reality versus negotiation posturing is difficult at best.   Certainly, the markets do not seem overly concerned about adverse outcomes.   This is a bit surprising given how heated the rhetoric has become combined with the fact that Greece has more than 315 billion in Euro denominated debt outstanding. 

 

Currently, about 78% of that debt is owned by the Troika – EU owns 61%, ECB owns 8%, and the IMF owns 9%.  Perhaps they are comfortable that a Greek default will have no systematic effects.  (Of course, many said the same about Lehman Brothers, when those negotiations failed.)  Certainly for the Greek government though, there is no going back after a default.  As IMF Managing Director Christine Lagarde very accurately stated:

 

“Defaulting, restructuring, changing the terms has consequences on the signature and the confidence in the signature.”

 

Inasmuch as the outlook for Greece is bleak and the consequences for a Greek default are real, in much of Europe things actually appear to be getting better on the margin.  Later today at 11am (ping for details), we will be walking through the case to remain bullish on Germany.

 

The German finance ministry bolstered this case, albeit marginally, when they upped their outlook for growth in 2016 to 1.6% from 1.5% in 2015.  At the same time, they emphasized that overall government debt to GDP should fall to around 70%.  Clearly, those aren’t GDP growth rates that get any of us overly excited. But much like a company, we do like the set-up of a country that can beat top line expectations.

 

China, on the other hand, seems to be faced with the opposite scenario of German.  GDP appears poised to miss expectations and debt is set to accelerate.  On the Chinese debt front there are actually two important points to highlight:

 

  1. According to a Bloomberg report, margin debt in China, when adjusting for the relative size of the markets, is double that of the NYSE.   With the Shanghai Composite trading at 20x earnings and GDP slowing, that is a tad disconcerting; and
  2. According to a BofA index, leverage for Chines companies is at the highest level since 2004 and debt relative to assets is that the highest level since 2007.

By any measure, that is a lot of speculative debt for a country whose growth is slowing.

 

So, even if things are all quiet on the Western front, they may not be on the Eastern economic front in Asia for long.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.85-1.98%

RUT 1
VIX 13.03-16.08
USD 98.62-100.19
EUR/USD 1.05-1.07
Oil (WTI) 47.65-53.98 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

All Quiet? - 04.14.15 Chart


Retail Callouts (4/14): WWW, AdiBok, Chain Store Sales, AMZN, EBAY

Takeaway: WWW Q1 online trends very strong. New adidas boot is "lightest ever". Chain store sales and ChannelAdvisor comps.

COMPANY HIGHLIGHTS

 

WWW - Q1 Online Traffic Strong

 

Takeaway: Here are 3 charts that look at the online traffic trends for 3 of WWW's biggest brands: Sperry, Merrell, and Saucony. We've been cataloging this data for close to two years for 250 brands and retailers. And, this is the first time we've seen WWW firing on all cylinders. With 3 of the most meaningful needle movers in the company's 14 brand portfolio registering a traffic rank up 30%+ YY. Traffic rank is a calculation of both unique visitation and page visits/user that denotes the relative performance of a site compared to the internet in aggregate.

 

Online is still a tiny piece of the WWW pie, only about 4% of total sales, but when we synched the quarterly traffic trends with the aggregate sales growth in the quarter for each brand  (at the bottom of each chart) the trend has been spot on with the slope of the traffic rank line.

 

WWW is investing heavily in this channel for good reason as it will carry the bulk of the growth (at least in the athletic portion) for the next 6 years. If WWW can execute here, that's upside to the international opportunity as the company continues to scale its PLG brands onto its Global infrastructure.

 

Retail Callouts (4/14): WWW, AdiBok, Chain Store Sales, AMZN, EBAY - 4 14 chart1

Retail Callouts (4/14): WWW, AdiBok, Chain Store Sales, AMZN, EBAY - 4 14 chart2

Retail Callouts (4/14): WWW, AdiBok, Chain Store Sales, AMZN, EBAY - 4 14 chart3

 

 

AdiBok - adidas Launch the Lightest Football Boot Ever

(http://news.adidas.com/GLOBAL/Latest-News/adidas-Launch-the-Lightest-Football-Boot-Ever/s/8a8dacaf-a112-4283-a0c5-9161d9b71f75)

 

Takeaway: These very well could be the best soccer boots on the planet. But, we couldn't help making the connection between Adi's 'lighter and faster' claims and the old PF Flyers. The fact that it's the lightest boot on the market may help with the run faster claims.

Retail Callouts (4/14): WWW, AdiBok, Chain Store Sales, AMZN, EBAY - 4 14 chart7

 

Chain Store Sales

Takeaway: This is the first really solid number we've seen reported by ICSC in 2015 to date. With numbers up on a 1yr, 2yr, and 3yr basis. The 2yr number at 3.1% was the best reading we've seen against tougher compares that started in the first week of April.

Retail Callouts (4/14): WWW, AdiBok, Chain Store Sales, AMZN, EBAY - 4 14 chart5

Retail Callouts (4/14): WWW, AdiBok, Chain Store Sales, AMZN, EBAY - 4 14 chart6

 

 

OTHER NEWS

 

EBAY, AMZN - March Acceleration for both AMZN and EBAY in ChannelAdvisor Comps

Retail Callouts (4/14): WWW, AdiBok, Chain Store Sales, AMZN, EBAY - 4 14 chart4

 

BBY - Best Buy Announces Retirement of Board Chairman, Hatim Tyabji, Names Hubert Joly as Chairman & CEO

(http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=irol-newsArticle&ID=2034554)

 

ASOMF - ASOS Board Change

http://otp.investis.com/generic/regulatory-story.aspx?cid=497&newsid=504933

 

AMZN - Amazon, HarperCollins Reach Multiyear Publishing Deal

(http://www.wsj.com/articles/amazon-harpercollins-reach-multiyear-publishing-deal-1428971720)

 

TGT - Target Appoints Veteran Grocery Leader, Anne Dament, to Drive Food Reinvention

(http://pressroom.target.com/news/target-appoints-veteran-grocery-leader-anne-dament-to-drive-food-reinvention)

 

PLCE - The Children’s Place Rejects Activists’ Board Nominations

(http://wwd.com/retail-news/financial/the-childrens-place-responds-to-activists-board-nominations-10110741/)

 

SPLS, SHLD - Sears board member new addition at Staples

(http://www.retailingtoday.com/article/sears-board-member-new-addition-staples)

 

Academy does deal with Cardinals

(http://www.retailingtoday.com/article/academy-does-deal-cardinals)

 

WMT - Walton family to sell part of Wal-Mart stake

(http://www.chainstoreage.com/article/walton-family-sell-part-wal-mart-stake)

 

Stuart Weitzman names president, global retail

(http://www.chainstoreage.com/article/stuart-weitzman-names-president-global-retail)

 


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