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We remain negative on the Macau stocks but tactically we’d like to see a relief rally before re-shorting.  The Galaxy Phase 2 opening could actually provide a little bit of a catalyst – it won’t be awful and but investor sentiment is awful ahead of this period of capacity increases.  We’re projecting some market growth from the expansion but most of the business generated at Phase 2 should come from the other properties.  For 2015/2016 we remain most concerned with the trends in base mass, which we believe are markedly worse than anticipated by the Street.


Please see our detailed note:


The Macro Show Replay | May 26, 2015


CHART OF THE DAY: Newsflash ... The Fed is Not Going to “Raise Rates” On This

Editor's Note: Below is an excerpt and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe. 


CHART OF THE DAY: Newsflash ... The Fed is Not Going to “Raise Rates” On This - 5Y BE CoD


...Contextualized this way, the present (being YTD) is less than 6 months old. If you pull back your time-series #history to 1 year, obviously most of these “inflation” barometers have plummeted.


Five year breakevens is a fair way to consider inflation expectations, and while it’s true that those are +11 basis points for the current quarter, they are -32 basis points year-over-year. Newsflash: the Fed is not going to “raise rates” on that...


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Dollar vs. Inflation

“I started to establish the present and the present moved on.”

-Wallace Stegner


I love spending long weekends with my family. I hope you had a great one with yours. Welcome back.


This weekend I took some time to review what I’ve organized as the un-read section of my library and I found a book that I’ve been wanting to read for a long time – Wallace Stegner’s 1972 Pulitzer Prize Winner, Angle of Repose.


In some ways I find Stegner to be like Hemingway. He’s of the same era; he writes from a historian’s perspective; and he keeps his short stories within a story concise and to the point. These are all writing attributes I aspire to achieve someday. Until then, I evolve.


Back to the Global Macro Grind


When considering the non-linearity of Global Macro markets, isn’t Stegner’s aforementioned quote the truth? Just as Bloomberg writes a headline about FX “volatility expected to reverse direction”, it breaks out this morning. Again, welcome back.


Before I get into the #behavioral side of this foreign currency move (Japanese Yen -1.1% this a.m. to fresh YTD lows), it’s always critical to review the #history of market moves, so that we can attempt to establish context:


  1. In “front-loading” QE, Eurocrats devalued the Euro by -3.8% last week, taking it down -9% vs USD YTD
  2. After 6 weeks of pervasive weakness, the US Dollar Index spiked on that, closing the week +3.1% at +6.4% YTD
  3. The Japanese Yen, which had been doing nothing for months, finally broke down, dropping -1.8% on the week

Dollar vs. Inflation - burning euro cartoon 05.01.2015 

That’s why another drop in the Yen this morning matters. Not only did it break immediate-term TRADE support last week, fortifying our long-term bearish TAIL risk view, but now it’s testing a break-down to lower-lows, -2.5% YTD.


Now, since I’m bearish on the US Dollar into this week’s GDP report (Friday) and next week’s jobs report for June (then the Fed meeting on June 17th), these Euro and Yen moves are going to present opportunities on the long side of commodities.


If you didn’t know that the USD impacts commodity #deflations and reflations (or whatever consensus is whining about right now on “inflation” coming back at sub $60 Oil and 1.68% 5yr US break-evens), now you know.


With USD having a -0.90 inverse correlation to the CRB Index (30-day duration) here’s what everything Commodities did last week:


  1. CRB Commodities Index -2.5% = -1.9% YTD
  2. Oil (WTI) -1.4% to $59.72 = +6.2% YTD
  3. Gold -1.7% to $1204 = +1.6% YTD
  4. Copper -3.9% to $2.81 = -0.5%
  5. Energy Stocks (XLE) -0.6% = +1.3% YTD


Contextualized this way, the present (being YTD) is less than 6 months old. If you pull back your time-series #history to 1 year, obviously most of these “inflation” barometers have plummeted.


Five year breakevens is a fair way to consider inflation expectations, and while it’s true that those are +11 basis points for the current quarter, they are -32 basis points year-over-year. Newsflash: the Fed is not going to “raise rates” on that.


Longer-term, what does the world want – a stronger or weaker Dollar?


  1. If you’re a European stock market bull, you want #StrongDollar, Burning Euro
  2. If you’re an Emerging Markets bull, you want #WeakDollar, Recovering EM Currencies
  3. If you’re a non-Wall St American, you want a #StrongDollar, Rising Purchasing Power


That’s what macro markets reminded you of on last week’s #StrongDollar move:


  1. European Stocks (EuroStoxx 600 and German DAX) +2.8% and +3.2% to +19% and +20.5% YTD, respectively
  2. EM Latin American Stocks (MSCI Index) -5.5%  to -4.2% YTD
  3. Russell 2000 +0.7% to +3.9% YTD with the almighty Dow DOWN -0.2% on the week


Yep, the Russell is basically a US domestic revenue index whereas both the Dow and SP500 are increasingly proxies for international earnings. That’s why the Russell rocks during #StrongDollar periods (see our 2013 US #GrowthAccelerating theme for details).


That’s also why the US Sector Style  (equities) outperformance last week was very much what it was prior to the recent US Dollar correction. US Consumer Discretionary (XLY) loves #StrongDollar whereas the global Industrials (XLI) loathe it.


Love it or loathe it, US Dollar #history has been established. And it’s my job to write about its policy risks for both the short and long-term. While it’s true that, in the long-run, Keynes is right (we’ll all be “dead”), the present moves on.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.97-2.24%

SPX 2108-2144
Nikkei 192
USD 94.51-96.85
EUR/USD 1.09-1.15
YEN 120.32-123.04
Oil (WTI) 57.31-61.68

Gold 1190-1230


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


***Click here to watch The Macro Show live at 8:30am.

Dollar vs. Inflation - 5Y BE CoD

May 26, 2015

May 26, 2015 - HE DTR 5 26 15



HedgeyeRetail: I Got An Idea

Takeaway: Here’s a brief summary on our Longs and Shorts. We have another dozen names on our bench, and about 20 in the vetting stage. Stay tuned.




RH: We’re comfortable owning into earnings in two weeks. We’re ahead of consensus, and the earnings algorithm should show that sales and earnings are accelerating while the broader group is slowing. We should also get some good detail on new categories/concepts, which should fuel growth along with a material square footage ramp in 2H. Still one of the biggest Consumer ideas out there today across durations. We like the fact that there are so many different angles here that are so grossly misunderstood by the investment community. The company will continually innovate, grow, while marginalizing its weaker competitors. We still think that RH being above $200 is more a question of ‘when’ than ‘if’. The story is not linear – no great stories are – and there will be puts and takes by quarter. But this quarter looks good from where we sit.


KATE: Our only concern with KATE is that it trades like something is wrong. But fundamentally, this name checks out.  Comps seem to be accelerating from the (slightly weak) 9% number we saw in 1Q, and are torn as to whether the biggest surprise for people will be the sequential acceleration in the business, or the margin gain from last year. Either way, KATE is one of the few high-growth names that should work while the group faces headwinds.


NKE: We’re well ahead of the Street for the May quarter. It’s important to remember that last quarter when multinationals were dropping like flies due FX headwinds, NKE uncharacteristically came out just fine. The difference between this and prior FX cycles is that now Nike has an e-commerce offset. Dot.com should accelerate by roughly 1,000 bp to 50%+ as its solid momentum comps against an easy May14.  The math here is clear – an incremental sale online not only carries a 20point margin premium to a wholesale sale, but roughly 4x the Gross Margin Dollars. The same dynamic is at play this time, and the next quarter, and the quarter after that…


WWW: We’re comfortable with this one as a sleepy name that has several levers. We think that 1) the PLG brands (40% of the company) are growing outside the US to a far greater extent than is apparent in the GAAP results. That will show to a greater degree in 2H, which should give estimates a lift. Also 2) Merrell (25% of revs) just swapped out its high-profile President, and probably has a free pass for another few quarters while it changes direction. So that’s about 65% of revenue, or 90% of rev that has any element of volatility. Estimates look extremely achievable this year. Also the Street is not accounting for what should be 500bps in financial deleverage. If we don’t see it, it is likely bc WWW goes ahead and does another deal – and it can stomach up to a $1.3bn transaction at current leverage levels. We usually don’t like deals, but in WWW’s case they usually serve as a positive catalyst.



KSS:  Even after the recent drop, we still think KSS is a solid short. Expectations are too high in sales and gross margins and cash flow, and too low in SG&A. Wage pressure will build for KSS this summer (lowest paying in the industry) when it flexes its workforce for seasonal employees – then again around holiday. We also think that there’s meaningful risk to KSS’ credit card income (25% of total EBIT) – even in a very healthy credit environment – due to the flawed nature of how the new rewards program intersects with KSS Credit Card. Consensus estimates are marching to $6.00, while we think they’re headed to $3.00.


HIBB: We think that HIBB is one of the most structurally challenged retailers out there. Top line trends are decelerating, costs are accelerating, and capital requirements are going nowhere but up. Any form of growth from here on out – in existing stores, new stores, and online, will all come at an incrementally lower margin. Numbers in the current year are coming down, but we think next year’s earnings are too high by 40%. Still one of our top shorts following the 1Q print.


FL: There’s no debating the strength of the quarter on Friday, with 2% sales growth leveraging to 18% growth in EPS. But virtually every penny of the EPS upside came from lower SG&A – in fact, Gross Profit was only up 3.7%.  SG&A was down 2.8% vs last year, and came in at 18% of revenue. For the record, it is almost impossible to find a small-format retailer with SG&A below 20% of sales, and FL is sitting at 18%. This is also notable in that FL recently noted that its SG&A goal is 18-19% of sales. The point is…it’s pretty much there.  Remember that this company’s RNOA went from 5% to 28% over six years as it pulled capital out of the model (closing stores/repositioning banners) while boosting productivity and margins to all time highs. At the same time, it’s percent of sales from Nike (traffic driver) went up by 2,500bps to 72% of COGS – and near 80% of sales.  That’s not going any higher. FL’s answer is to become a unit growth story once again and sustain a mid-single digit comp while maintaining the leanest cost structure out of any retailer around. And for all that, the stock is trading at 16x forward earnings – an all-time high. The ‘going private’ angle here is moot given its high Nike exposure. Lastly, the stock is having more muted reactions to good news. 


TGT: Out of any idea on our list, this is the one we struggle with the most. On one hand, with the Canada disposal out of the way, there are no more quick and easy fixes for new CEO Cornell to improve profitability. He’s stuck with the result of an extremely poor decision making process by his predecessor that left the company in such bad shape that going to Canada actually seemed like a good idea in the first place. We think that the company needs to materially step up investment to set TGT on a growth trajectory – basically putting the brand once again on offense. That would likely take margins – and potentially sales – lower before they ultimately head much higher. But we can’t shake the Bull Case, which is that Cornell will make subtle tweaks to the model that will be enough to keep earnings slowly grinding higher – without implementing major change that will hurt the stock over the near-term.  We’re going to continue to wait and see into 2H, as we think that the significant EPS deceleration in the group plus increased cost pressure (labor and margins) will step up materially. Risk to TGT in that environment is to the downside.  


HedgeyeRetail: I Got An Idea - 5 26 idea list