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CALL INVITE | IS CONSENSUS RIGHT ON CHINA?

WATCH THIS PRESENTATION LIVE BELOW


 

This Thursday, July 16th at 1:00PM ET, we invite you to join us live for a conference call on China. Led by senior macro analyst Darius Dale, the call will detail our revised outlook for the Chinese economy, our expectations for monetary and fiscal policy, as well as the associated investment implications.

 

KEY DISCUSSION TOPICS:

  • Correction or Collapse?: Does the recent plunge in Chinese share prices represent an attractive buying opportunity (as several major sell-side and buy-side firms have suggested) or is it a harbinger of another leg down in the Chinese economy and a bearish phase transition across Chinese financial markets?  
  • Asset Class “Re-rotation” Risk: Our analysis is showing nascent signs of recovery throughout China’s real estate market. Will a continued positive inflection bode poorly for Chinese stocks?
  • Renminbi Internationalization Impact: What impact, if any, will China’s push to make the CNY an international reserve currency have on the country’s financial markets and how will the recent crash in Chinese equities impact this drive?

 

CALL DETAILS:

  • U.S. Toll Free:
  • U.S. Toll:
  • Confirmation Number: 13614418
  • Materials: CLICK HERE

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to .

 

Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.

 

Kind regards,

 

The Hedgeye Macro Team

 

CALL INVITE | IS CONSENSUS RIGHT ON CHINA? - 1



Retail Callouts (7/13): Evidence Building Around 2H Margin Pressures

Takeaway: Higher inventories + higher wages + 'free shipping' = lower margins.

Evidence Building Around 2H Margin Pressures

We've been vocal about our view that retail EPS growth will decelerate sharply throughout 2015, and that consensus estimates are largely too high.

 

1) Specifically, inventories are too high -- especially on the softline side of retail -- which creates a bearish gross margin setup into summer.

Retail Callouts (7/13): Evidence Building Around 2H Margin Pressures - 7 13 chart1

 

2) Wage pressure builds materially for the companies that were not proactive enough to announce meaningful pay hikes for employees (like WMT, TGT, TJX, MCD). Remember that Softline retailers (department stores, most notably) flex their employee base by 10-20% around back-to-school, and then buy 20-30% around holiday to satisfy seasonal demand. If you're wondering why we have not seen a wage increase out of KSS, M, or JCP yet, it's because they simply have not felt the pressure yet. We think they'll either have to raise wages or leave revenue on the table in 2H.

Retail Callouts (7/13): Evidence Building Around 2H Margin Pressures - 7 13 chart2

Note that WMT just announced headcount cuts at Sam's. WMT has definitely stepped up its pressure on its vendor base to help pay for its wages for some 500,000 employees, but now it's looking internally as well.

 

3) The third margin pressure, we think, will come from retailers using 'free shipping' as a promotional weapon. Many people are in denial about this, because the companies all say they won't do it. But ultimately, they're going to have to. Retail is headed to a 'free shipping all the time' model. It won't be a linear path, and will take a few years to get there. Also, we could argue that with more full price selling, free shipping could possibly be margin bullish -- but we're a long way off from answering that question. In the interim, in a world where retailers have stretched the calendar for keeping the stores open around the holiday season, they're going to need a new weapon. That's free shipping, and we think we'll see several negative surprises from retailers in 2H.

In fact, just this weekend, WMT announced that it will be taking its free shipping minimum down from $50 to $35 for a minimum of 30 days -- in line with AMZN and 40% higher than TGT. These are the types of offensive moves (in this case, perhaps it's defensive given that it is WMT's answer to Prime Day) we believe we will continue to see as the threshold for free shipping marches closer to $0. That will have big repercussions across the industry as online sales carry a gross margin bps below Brick and Mortar.

Retail Callouts (7/13): Evidence Building Around 2H Margin Pressures - 7 13 chart3

  

WMT - Walmart, Sam's Club expected to make job cuts

(http://www.katv.com/story/29524004/walmart-sams-club-expected-to-make-job-cuts)

 

WMT, AMZN - Walmart launches rival sale to Amazon's Prime Day

(http://www.usatoday.com/story/money/2015/07/13/walmart-sale-against-amazon-prime-day/29973997/)

 

ASNA - Ascena Retail Group, Inc. Provides Updated Fiscal 2015 Financial Outlook

(http://phx.corporate-ir.net/phoenix.zhtml?c=81419&p=irol-newsArticle&ID=2066992)

 

 

OTHER NEWS

 

J. Crew Launching New Division

(http://wwd.com/retail-news/specialty-stores/j-crew-launching-new-division-10182134/)

 

WMT - Walmart Canada looks into possible credit card data breach

(http://www.theglobeandmail.com/report-on-business/walmart-looks-into-possible-credit-card-data-breach/article25422632/)

 

WSM - PBTeen targets Gen Z with ‘awesome’ video campaign

(http://www.chainstoreage.com/article/pbteen-targets-gen-z-%E2%80%98awesome%E2%80%99-video-campaign)

 

UA - Under Armour Seeks to Expand Reach in Sports Bra Space

(http://wwd.com/markets-news/intimates-activewear/under-armour-sports-bra-collection-10181792/)

 

SKX - Skechers’ Mariano Rivera Ad To Air During MLB All-Star Game

(http://footwearnews.com/2015/focus/athletic-outdoor/mariano-rivera-skechers-mlb-all-star-game-43287/)

 

LULU, GPS - YogaSmoga Sees a Well-Balanced Empire

(http://wwd.com/retail-news/specialty-stores/yogasmoga-activewear-growth-10181815/)

 

MIK - Michaels financial future unfolds as big investors exit

(http://www.retailingtoday.com/article/michaels-financial-future-unfolds-big-investors-exit)

 

Search for Ever Cheaper Garment Factories Leads to Africa

(http://www.wsj.com/articles/search-for-ever-cheaper-garment-factories-leads-to-africa-1436347982)

 

Rakuten Buys Fits.me

(http://wwd.com/business-news/mergers-acquisitions/rakuten-buys-fits-me-10183077/)


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

The Euro, Oil and Yields

Client Talking Points

EURO

Keeping this Greek Gong Show together is net bearish for the Euro (booting them and/or any other dysfunctional government is bullish) – that remains our long-term call – as #EuropeSlowing continues 2H 2015, they’ll have to print, bail, print. 

OIL

Follow #Deflation’s correlation risk: Down Euro (-0.7% to $1.10 vs. USD) equals #StrongDollar equals Down Oil (-1.5% with no support for WTI to $49.42) equals Down Gold (-0.6% this am, and breaking back down to bearish TREND @Hedgeye).

YIELDS

Yields, up, pretty much across the board on this (including the periphery – Spain +7 basis points) but the US 10YR is just trading in a tightening risk range; at the low-end of the 10YR range = 2.20%, sell bonds; at the high end of the range = 2.47%, you buy bonds – same with equities; we would fade momentum moves, don’t chase.

 

**The Macro Show - CLICK HERE to watch a replay of today's edition and learn under what scenario Hedgeye CEO Keith McCullough believes the stock market could crash.

Asset Allocation

CASH 52% US EQUITIES 4%
INTL EQUITIES 8% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
KATE

Hedgeye’s Retail Team held a "Flash Call" on Kate Spade recently to address the concerns we’ve been fielding about the brand and company from institutional investors in light of the selloff since the company reported earnings in early May. Here were our conclusions from the call:

  1. Some concerns are valid, some are not.  We’ve had more questions and concerns from investors on KATE over the past two weeks than we’ve had all year. Given the weakness in the stock, we wanted to address these issues.
  2. The business is absolutely on track. Comp trends, ecommerce, and margins look fine from where we sit. The company actually managed to get estimates for the quarter and the year to very achievable levels.
  3. Why no one cares is the bigger question. But new investors largely don’t care, as they perceive “The Space” to be broken, and KATE to be expensive, volatile, and unmodelable. In the end it’s too small for them to ‘have to care’.
  4. 4.       In the end, execution wins. We think that “The Space is Broken” argument is laughable. The softer concerns like disclosure and management stock ownership are more valid. But when all is said and done, watch what they do, not what they say. This stock is flat-out cheap and growing at 50%.
PENN

Gaming, Lodging and Leisure Sector Head Todd Jordan reiterates his team's bullish high-conviction thesis on Penn National Gaming. The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming. Jordan further notes that with more states releasing their June gaming revenues this past week, we feel more confident in our higher than consensus Revenue, EBITDA, and EPS estimates.

TLT

Long-term Treasury rates remain the best proxy for forward-looking growth expectations.

 

We outline three components of secular stagnation below to explain the SAVINGS/INVESTMENT GLUT that is at the heart of the academic argument for current policy measures:

  1. Negative demographic trends globally (decline in population growth and aging population)
  2. Reduced capital intensity in leading industries (think of the capital and labor required to start Facebook over U.S. Steel)
  3. Falling relative prices of capital goods       

Three for the Road

TWEET OF THE DAY

CHINA: +2.4% for the non-halted 1/2 of Chinese stocks, Shanghai Comp still -23.2% mth-over-mth

@KeithMcCullough

QUOTE OF THE DAY

Skill and confidence are an unconquered army.

George Herbert

STAT OF THE DAY

The American Pet Products Association estimates $60.59 billion will be spent on pets in 2015, up about 25% from five years ago.


CHART OF THE DAY: How About That Strong Dollar Deflation?

Editor's Note: This is an excerpt and chart from today's morning strategy note written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe. 

 

...While inverse correlations continue to drive #Deflation in the CRB Index, Oil, and Gold, most of you already know that. The 180-day correlation between USD and Commodities (CRB) is -0.94. The 15-day correlation between USD and Gold is -0.92!

 

CHART OF THE DAY: How About That Strong Dollar Deflation? - z 07.13.15 Chart


Blank Cartridges

“The West was not built with blank cartridges.”

-Wallace Stegner

 

That’s another beauty of an American one-liner from 1972 Pulitzer Prize winner, Angle of Repose. I’m in the old West this morning (Denver) where the homeless population is booming.

 

Overseas, the Chinese have manufactured a 3-day rally out of 1,045 halts and the Greeks have saved themselves from themselves again. It looks like we’re going to have one more centrally planned stock market rally to sell into as a result.

 

With Global Equity Volatility breaking out to the upside and Global #GrowthSlowing, it will be fascinating to watch how the mainstream media reads Down Euro = Down Oil this morning. Storytelling sucks when supply is up and demand is falling.

Blank Cartridges - Oil cartoon 04.17.2015

 

Back to the Global Macro Grind

 

Apologies for sounding a little moody this morning. Denver is two hours behind my risk management clock and I had a pot-smoking room service lady deliver my coffee 40 minutes late. Wow was that weird.

 

To review where Global Macro markets are vs. where they came from last week:

 

  1. The Euro was actually up +0.4% on the week to $1.12, and has back off hard this morning to $1.10 (bearish TREND)
  2. #StrongDollar held flat last week at $96.01 on the US Dollar Index =+6.4% YTD (bullish TREND @Hedgeye)
  3. Japanese Yen was flat wk-over-wk and weakened today, driving our bullish TREND Nikkei +1.6% overnight
  4. Commodities (CRB Index) deflated another -2.8% last week and are down again this morning (bearish TREND)
  5. Oil (WTI) got smoked -7.4% last week and is down another -1.5% on #StrongDollar deflation today (bearish TREND)
  6. Gold deflated another -0.5% last week, is down -0.6% this morning, and is now back to bearish TREND @Hedgeye

 

Yep, I’ll go all macro on you without hitting on stocks and bonds first. Imagine that – our government PIG (Policy, Inflation, Growth) model is the tail wagging the Global Macro dog. I’m cutting our net asset allocation to Commodities back to 0%.

 

While inverse correlations continue to drive #Deflation in the CRB Index, Oil, and Gold, most of you already know that. The 180-day correlation between USD and Commodities (CRB) is -0.94. The 15-day correlation between USD and Gold is -0.92!

 

What you might not know (because its new) is that shorter-term inverse correlations (meaning that when the USD goes up, these things go down) between #StrongDollar and US Equities are picking up again. Here’s what I mean by that:

 

  1. SP500 correlation to USD on a 15-day basis = -0.56
  2. SP500 correlation to USD on a 30-day basis = -0.43

 

That matters because, for a long-time, the US stock market told you that it was ok with #StrongDollar, Down Oil Tax Cut, etc. (the 180-day correlation between SP500 and USD = +0.49). What’s changing on the margin always matters.

 

Put another way, if you’re like me, betting on:

 

  1. #EuropeSlowing driving more Greek-type gong shows (they just wanted vaca, this will be back in the Fall)
  2. And Down Euro due to more bailouts, Draghi cowbell, etc…

 

You should be betting on #StrongDollar Deflation. For the last month, Global Macro market risk has.

 

Putting things in perspective (multi-factor, multi-duration analysis) is always critical when the central planners are celebrating their latest market plan. Using last week’s closing prices, this is what markets have priced in using 1-month as a duration:

 

  1. US Dollar Index +1.5% month-over-month
  2. Euro -1.4% month-over-month
  3. Commodities (CRB Index) -4.4% month-over-month
  4. Copper -7.8% month-over-month
  5. Oil (WTI) -14.7% month-over-month
  6. Canadian Dollar -3.2% month-over-month
  7. Russian Stocks -5.6% month-over-month
  8. Emerging Market Stocks (MSCI Index) -4.6% month-over-month
  9. European Stocks (EuroStoxx600) +0.5% month-over-month
  10. US 10yr Bond Yield -9 basis points, month-over-month

 

Taking a step back to a month ago, Mr. Macro Market was pretty efficient in pricing in:

 

  1. Down Euro and relative bailout (reflation) of European Equities
  2. #StrongDollar Deflation’s return to everything linked to inflation expectations
  3. Less volatility in a range bound US Treasury market

 

Since you might be asking yourself what to do with Treasuries when yields trade toward the top-end of the 2.20-2.47% risk range, you buy. Because the non-emotional risk manager in you sold some bonds at the low-end of the yield range last week.

 

Lower your stress. Lower your beta. Rinse & Repeat. Without growth accelerating, the central planners in China and Europe will not win this war. The battle of your every market day is to keep in perspective that they are firing on blank cartridges.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.20-2.47%

SPX 2043-2090
VIX 14.90-20.34
USD 95.58-97.66
EUR/USD 1.09-1.12
Oil (WTI) 49.42-53.83

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Blank Cartridges - z 07.13.15 Chart


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