Retail Callouts (5/15): More Inventory = Lower Margin Growth

Takeaway: Dept Store SIGMAs show just how tough the quarterly growth algorithm gets -- starting now.



Department Store SIGMA

Department store results are out -- and the SIGMA comparisons are flat-out ugly. In the SIGMA chart below we plot the incremental move from 4Q to 1Q for each company. While the margin results are often predictable based on easy or tough yy compares, the sales/inventory spread is not. Unfortunately for the department store group, EVERY company printed an erosion in inventories relative to Sales -- with an average decline of 6%. The biggest offenders are JCP and KSS at about 2x the group average. The problem here is that the retail industry in aggregate just put up its last 'easy' quarter before margin compares get very difficult. With a less favorable inventory position, it makes the gross margin setup even more difficult for 2Q. Add on wage pressure that is likely to hit in late summer when retailers hire flex employees for back-to-school, and the potential pressure from 'free shipping' in 4Q, and it tells us that the group is reliant on a significant acceleration in consumer demand to maintain its current growth algorithm. 

Retail Callouts (5/15): More Inventory = Lower Margin Growth - 5 15 chart 1



Retail Callouts (5/15): More Inventory = Lower Margin Growth - 5 15 chart2





TGT - Target sells its office furniture business to Omni Workspace



Schubert Jonckheer & Kolbe LLP Exploring Lawsuit Against Urban Outfitters



TGT - Target to Remove Controversial Shirt After Designer's Copycat Claim Goes Viral



Hicks Lanier to Retire From Board of Directors of Oxford; Tom Chubb Expected to be Named Chairman



South Africa’s Brait Acquires New Look for $1.3 Billion





LEISURE LETTER (5/15/2015)

Tickers:  RCL

headline news  

Skill-based gaming -

  • A bill backed by Nevada’s gambling equipment manufacturers that would allow slot machines to add a skill-based, arcade-style element to the game has been approved by both legislative chambers and awaits the governor’s signature.  AGEM Executive Director Marcus Prater said Gov. Brian Sandoval had expressed early support for the bill as part of his platform to keep Nevada as the hub for the world’s gambling technology.
  • Under the concept, gamblers could play a slot machine with an 88% payback, but the figure could jump to 98% if the player was proficient in a video game skill element that would be part of the bonus round, such as shooting down enemy airplanes or outracing other players in a road race.


Takeaway: This could be a monumental change for the slot industry and for domestic gaming, and the first step starts with Nevada. Generation X and younger do not play slot machines.  This could be the catalyst for video game generations to try slots.


BEE - closed on the sale of the Four Seasons Austin Hotel for $197m (291 guest rooms)

Takeaway: $677k average price per room for this luxury property.


RCL - Royal Caribbean International plans to raise the suggested daily gratuity amount on its cruises from $12 to $12.95 per person. Cruise Critic members also are reporting that Celebrity Cruises will raise its recommended gratuity guidelines.


DIS - After announcing last month that it is launching river cruises through a partnership with AmaWaterways, Adventures by Disney has already added two more departures "due to popularity and mass interest in the program."

Originally, Disney’s tour operator arm said it would offer four sailings along the Danube River during summer 2016, and one holiday-themed sailing in December 2016. There will now be five sailings in the summer, as well as two sailings in December of 2016. The itineraries will travel through Germany, Austria, Slovakia and Hungary.


Takeaway: River cruises are doing well in Europe and will continue to pressure ocean cruise liners there.


Hotel price peak - hotel prices in the U.S. were just 1% point short of their pre-recession peak, according to Moody’s/RCA Commercial Property Price Indices (CPPI) report, indicating that values can’t go much further.  Moody’s reported that hotel prices rose by 33% over the past 12 months, as property fundamentals improved and more and more investors flooded into the sector. 




China April new yuan loans CNY707.9B vs consensus CNY950B and CNY1.180T in March

  • Loan growth +14.1% y/y vs +14.0% in March
  • Deposits +9.7% y/y vs +10.1% in February
  • Total social financing CNY1.05T and CNY1.18T in February
  • M0 +3.7% y/y vs +6.2% in February
  • M1 +3.7% y/y vs +6.1% in February
  • M2 +10.1% y/y vs consensus +11.9% and +11.6% in February

Takeaway: Weak loan data for April. Bad for the VIP business in Macau.


Singapore new private homes sales jump 83% in April - Data from the Urban Redevelopment Authority (URA) on Friday (May 15) showed developers sold 1,124 housing units last month - well above the 613 units sold in March and 390 units in February. April's sales were the highest since May 2014, when developers sold 1,488 units.


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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This note was originally published at 8am on May 01, 2015 for Hedgeye subscribers.

“What I do have are a very particular set of skills.”

-Liam Neeson, Taken


Officially, the Taken film franchise is a trilogy. The 1st installment was a deservedly acclaimed action-suspense juggernaut with Liam Neeson launching what has been affectionately dubbed the “geri-action” star genre.


Unofficially, there are probably more like 6-10 Taken movies.  The high concept mystery-action airplane drama, Non-Stop, was essentially Taken on a plane.  The survival thriller The Grey was basically Taken in the woods, and the 2011 psycho-drama Unknown was more or less Taken with amnesia.  I’m sure there are others.  


The industry, I suppose, is simply supplying to the emergent demand and Neeson, after decades in the business, is simply capitalizing on an unlikely late career renaissance.  

Taken - DRAKE   LIAM


Back to the Global Macro Grind...

  • Fed is overoptimistic on growth forecast à dots get pushed out
  • Domestic and global growth (& inflation) disappoint à yields = lower for longer
  • 1st qtr GDP shows residual seasonality  à balance of year is better but full year shows we’re a 2% +/- economy. 
  • The U.S. decouples à ….until it doesn’t


If you feel like you've seen this Macro movie before, you’re not mis-Taken.


A  fascinating and sometimes confounding aspect of being a living participant in a Keynesian Eco Carnivale is that, at times, it’s difficult to tell which way is up.


In the Chart of the Day below, we annotate the latest household Income and Spending numbers for March released yesterday.  


Generally, our Macro-for-Dummies/Lazy’s color-coding protocol follows a green = good, red = bad convention.  Over the last couple quarters, however, I’ve struggled with what colors to use to characterize the existent income and spending dynamics.


Income ↑, Savings ↑, Spending ↓:  In recent months, aggregate wage and disposable income growth has been accelerating alongside a commensurate rise in the savings rate to multi-year highs.  The net of those dynamics has been further middling in aggregate consumption.    In other words,  while the capacity for consumption growth has improved alongside accelerating income, the ongoing rise in the savings rate has muted the translation to actual household spending growth. 


Is this good or bad?


In a Keynesian framework, total spending is paramount and the dearth of demand should be construed as a negative immediate-term development.  At the same time, however, it’s difficult to characterize accelerating income growth, a rising savings rate and moderate credit growth alongside increased investment as a fundamentally negative development for the populous balance sheet or the prospective durability of the expansion. 


How did spending and Income close out 1Q?


Income ↓, Savings ↓, Spending ↑:  The savings rate saw its largest sequential drop in a year in March and spending grew at a premium to income for the first time in 8-months while aggregate disposable and salary and wage income growth moderated for a 2nd month.   Inflation-adjusted disposable income actually declined -0.2% on the month while, on the spending side, a strong rebound in durables consumption growth buttressed headline spending against sequential softness in Services consumption and a modest gain in non-durables.  


There a few takeaways from the March numbers:

  1. Income:  the sequential deceleration in aggregate income growth wasn’t particularly surprising given the soft NFP number for March and the large contribution to personal income from dividends recorded in February.
  2. The Thaw:  the increase in spending and decline in savings lends (some) support to the view that the pace of domestic consumerism was stymied by unusually severe weather.   The re-acceleration in auto sales in March and marked rebound in housing activity in March/April are also supportive of the deferred consumption narrative.
  3. Inflation:  Core PCE inflation – the Fed’s preferred measure – accelerated modestly for a second month to +1.34% YoY in March.  The core PCE and CPI figures along with similar readings out of the billion prices index, a moderation in the $USD’s ascent, the counter-trend move in oil prices and the ramp in breakevens/inflation expectations, should buoy the Fed’s rhetorical expectation for stable to improving price trends. Also, the ECI data (note: the ECI data is a more comprehensive measure of employee compensation as it includes both wage income and benefits) for 1Q released yesterday showed employing compensation rising +0.7% in 1Q  and growing at the fastest pace in the current cycle.  This is a mixed bag.  For the Fed it augers (eventual) upside for consumer prices.  For many businesses, the prospect of accelerating inflation in the largest input cost in the face of a flat to decelerating topline probably does not augur upside in capex or profitability. 
  4. The Bounce:  Residual seasonality, weather, port-shutdowns, strong dollar, flagging export demand, and the cratering in energy sector investment have all been trotted out – with some justification – as a conspiratory cocktail of collective drag on economic activity in 1Q.  The traversing or moderation in each of those factors – and the now easy comp – should support a rebound in reported growth in 2Q.  Will the rebound be similar in magnitude to that observed in 2014?  Perhaps, but the early evidence isn’t particularly inspiring. 


What do you do with these divergent macro vectors from an investment standpoint?  Probably not a whole lot until we get the employment river card next Friday.  


While we like to think we have a “particular set of skills”, the expectation for 20-20 macro forecasting vision is quixotic.  As Keith highlighted yesterday, sometimes the cacophony of macro crosscurrents breeds confusion more than high probability opportunity….and “going to cash beats confusion.”


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.86-2.08%

SPX 2075-2106
VIX 13.03-14.99
USD 94.32-97.46

Oil (WTI) 53.38-59.93

Gold 1169-1204 


Sunny & 70’s on tap for the Northeast.  Enjoy the weekend.


Christian B. Drake 

U.S. Macro Analyst


Click image to enlarge. 


Equities and Bond Yields

Client Talking Points


Bank of Japan (BOJ) Governor Kuroda was up all night talking and talking about his central planning and while he didn’t do anything, JGBs (10yr) did – they are down 5 basis points to -0.39% (their biggest move higher in a month); the Yen is down -0.4% vs USD. And the Nikkei likes this, up +0.8% to +13.9% year-to-date (of the majors, Nikkei looks better than both the DAX and S&P 500 right now).


Global Yields are down -3-5 basis points this morning; the UST 10YR is -4 basis points at 2.19% (which is right around where it started the year – fun trip); immediate-term risk range is still very wide at 1.95-2.31%; that’s a leading indicator for more bond market volatility. 

S&P 500

All-time closing high of 2121 yesterday for the S&P 500 and while we certainly didn’t call for that, that doesn’t mean we don’t think you keep selling  on green ahead of what we’re expecting to be a volatile/illiquid summer; especially bearish on Consumer stocks – U.S. Retail (XRT) -0.7% on the up day as the consumption data rolls over from #LateCycle highs.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

All-time closing high of 2121 yesterday for the S&P 500 and while we certainly didn’t call for that, that doesn’t mean we don’t think you keep selling  on green ahead of what we’re expecting to be a volatile/illiquid summer; especially bearish on Consumer stocks – U.S. Retail (XRT) -0.7% on the up day as the consumption data rolls over from #LateCycle highs.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. It was a relatively light data week for housing with weekly mortgage application data and the March employment report offering incremental updates on the current state of housing demand.  On the market side, interest rate volatility remained a concern for the public homebuilders but one we believe remains shorter-term in nature absent another expedited, step function increase in interest rates. We think the rate related pressure will be largely transient unless we see a further back-up in mortgage rates on the order of +50-100bps from here – a potentiality we would not view as probable at this point. On the fundamental side, the drumbeat of improvement remains ongoing.


The U.S. dollar has gone on a big reversal since the Fed’s March 18th meeting. Since the meeting, the dollar has moved lower and rates higher. This short-term move in rates has caused confusion with respect to our lower for longer call. Put simply, we have been wrong on the direction of our four macro tickers in the newsletter. A continuation of this trend will force us to re-evaluate the longer term call.


Three for the Road


Japanese Gov Bond Yields (10yr) have their biggest pullback day of the month -5bps = 0.39%



Man is not the creature of circumstances. Circumstances are the creatures of man.

Benjamin Disraeli


A report released today by the Bureau of Justice Statistics (BJS) shows there were 15.1 police officers per 10,000 U.S. residents in 2013 which is down from 15.4 police officers per 10,000 residents in 2007.  

CHART OF THE DAY: U.S. Dollar TREND (3 Months or More) vs. TAIL (3 Years or Less)

Editor's Note: The chart and blurb below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Learn more and subscribe today.


CHART OF THE DAY: U.S. Dollar TREND (3 Months or More) vs. TAIL (3 Years or Less) - z 05.15.15 chart


...Since I write every day, I spend a lot of time trying to contextualize the TRADE (3 weeks or less) within the TREND (3 months or more). But especially during times like these, it’s critical to attempt to have a view of what TRENDs are doing within long-term TAILs....




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