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CHART OF THE DAY: Deflation Expectations (They're Rising Again)

Editor's Note: This is a chart and brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information and how you can subscribe.


...Yep. That’s kind of a depressing note to kick off another week in a world that continues to be dominated by both #LateCycle growth slowing and #Deflation. But it is what it is. Hope is not a risk management process.


Post Friday’s US jobs report, I still think the Federal Reserve risks being THE catalyst for a curve flattening (recession). If they’re hostage to a political calendar and raise rates during a cyclical and secular slowdown, that is...


CHART OF THE DAY: Deflation Expectations (They're Rising Again) - Chart of the Day

Hostage To A Hike?

“Their waiting blurred the calendar.”

-Wallace Stegner


Life, like economies, can be cyclical. Then there’s the secular stuff that just won’t go away. As Stegner wrote in The Angle of Repose, we can be “imprisoned” by our circumstances, “vacillating between hope and disappointment.” (pg 437)


Yep. That’s kind of a depressing note to kick off another week in a world that continues to be dominated by both #LateCycle growth slowing and #Deflation. But it is what it is. Hope is not a risk management process.


Post Friday’s US jobs report, I still think the Federal Reserve risks being THE catalyst for a curve flattening (recession). If they’re hostage to a political calendar and raise rates during a cyclical and secular slowdown, that is.

Hostage To A Hike? - Fed cartoon 01.28.2015


Back to the Global Macro Grind


Cyclically, both non-farm and private payrolls slowed sequentially and in year-over-year rate of change terms in July. I still think the cycle peak for US employment was in Q1. It’s now Q3, and counting. Given July’s #Deflations, Q3 is shaping up slower than Q2.


On the jobs data, rates were down (10yr UST Yield 2.16% = Long-term Treasuries + Utilities (XLU) up). I guess some (especially Long Bond Bears) were surprised by that move. No one should be – the Bernanke/Yellen Fed has never tightened during a slowdown.


That certainly doesn’t mean Yellen can’t pull a 2011-style Trichet (former ECB czar) and just “do it, because it’s time.” That would sadden me as I was genuinely starting to think that she and her colleagues are “data dependent.”


For those of you who still pay attention to both the data and how macro markets are interpreting it, here’s what happened in FICC (Fixed Income, Currencies, Commodities) last week, within the context of the last 3 months:


  1. FX (wk-over-wk): Canadian Dollar -0.4%, Brazil’s Real -2.5%, Russia’s Ruble -3.6%
  2. FX (in the last 3 months): Canadian Dollar -7.7%, Brazil’s Real -13.8%, Russia’s Ruble -21.5%
  3. Commodities (CRB Index) down another -2.1% wk-over-wk, deflating -12.6% in the last 3 months
  4. Oil (WTI) #deflated another -6.7% wk-over-wk, crashing -27.8% in the last 3 months
  5. Copper dropped another -1.3% wk-over-wk, moving into crash mode, -20.1% in the last 3 months
  6. Break-evens (5yr UST) down another 11 basis pts wk-over-wk and -39bps in the last 3 months to 1.29%


And sure, the Fed can start to ignore all of the deflationary expectations and data inasmuch as they want to hope for magical wage inflations and capex cycles, but that’s precisely THE risk. They haven’t communicated changing that data dependent mandate, yet.


Mr. Macro Market’s read-through to Global Equity markets was as plainly obvious as it was to the US Equity market:


  1. Energy Stocks (XLE) led losers, closing down another -3.4% on the week, taking 3-month deflation to -16.7%
  2. Basic Material Stocks (XLB) dropped another -1.6% on the week, taking 3-month deflation to -10.9%
  3. Emerging Market Stocks (MSCI) fell another -1.8% on the week, taking 3-month deflation to -13.6%
  4. EM Latin American Stocks (MSCI) lost another -4.2% on the week, taking 3-month deflation to -18.0%
  5. Brazil’s Stock market (Bovespa) dropped another -4.5% on the week, taking 3-month deflation to -14.7%
  6. Utilities (XLU) appreciated +0.9% on the week, taking the 3-month gain to +1.5%


All the while, our favorite Global Equity market (see Q3 Macro Themes deck - Japan’s Nikkei) added another +0.7% of absolute weekly performance, taking its 3-month appreciation to +7.4%. There’s always a bull market somewhere!


The thing about Japan is that central-planners there have vacillated “between hope and disappointment” (for 20 years) before finally accepting that they have nothing sustainable that would deliver their people the threat of a “hike.”


Well, to be fair, even though some of the un-elected at the Fed might like to think so, we aren’t “their people.” We are simply The People who will be hostage to a hike. Best of luck to all my friends in Texas and in the Dakotas on that front.


US stocks obviously get this. Signaling immediate-term TRADE oversold on Friday, they’ve been down for 11 of the last 14 days and the Russell 2000 is in the midst of a -6.9% correction (vs. SP500 -2.5% from its YTD high and the Dow now -2.5% for 2015 YTD).


As we all await the blurring September “rate hike” calendar, the question remains, however: does the Fed get it?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.14-2.25%

SPX 2067-2096
RUT 1199-1227
Nikkei 209
EUR/USD 1.08-1.10
Oil (WTI) 42.89-46.41


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Hostage To A Hike? - Chart of the Day

The Macro Show Replay | August 10, 2015


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Monday Mashup

Monday Mashup - CHART 1





8/6/15 WEN | Performing Well for Now





Friday, August 7

NDLS | Downgraded to neutral from overweight at Piper Jaffray, target cut to $12 from $19


Thursday, August 6

MCD | Announced the cut of 225 jobs, as part of previously announced $300mm cost saving initiative. We expect to see more of these announcements come out over the coming months (click here for article)

MCD | Expanding table service to the UK market (click here for article)

WEN | Upgraded to overweight from neutral at JP Morgan, target is $12


Wednesday, August 5

WEN | Reported 2Q15 EPS of $0.08 versus consensus estimates of $0.09 (click here for press release)


Tuesday, August 4

BLMN | Reported 2Q15 results, posting EPS of $0.28 beating consensus of $0.27. (click here for press release)

CHUY | Reported 2Q15 results, reported EPS of $0.32 beating consensus of $0.25. (click here for press release)


Monday, August 3

JMBA | Entered into a 25 unit development agreement in Manhattan and Long Island markets (click here for article)

DPZ | Opened its 12,000th store in the world, in Oklahoma City (click here for article)



Casual dining and quick service stocks, averaged out to matching the XLY last week. The XLY was down -2.4%, top performers from casual dining were CHUY and DENN posting an increase of 14.9% and 8.0%, respectively, while TAST and SHAK led the quick service pack up 15.0% and 7.7%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3



From a quantitative perspective, the XLY looks bearish from a TRADE perspective, but bullish in the TREND duration.

Monday Mashup - CHART 4



Monday Mashup - CHART 5

Monday Mashup - CHART 6



Monday Mashup - CHART 7

Monday Mashup - CHART 8

August 10, 2015

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Stock Report: Restoration Hardware (RH)

Takeaway: We added Restoration Hardware (RH) to Investing Ideas on Friday, August 7th.

Stock Report: Restoration Hardware (RH) - HE RH table 8 9 15


We believe that RH is to the Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market. 


There Are Several Points People Are Missing

While some people clearly pick up on some of the more positive aspects to the story, we think people are missing the synergistic affect of the following…

  1. RH is the only retailer of size that is materially accelerating square footage growth to over 30% -- after seven years of right-sizing (ie shrinking) its store base.
  2. It is taking up the size of its stores from an average of 8,000 square feet to about 40,000+ for its new stores – and productivity rates on these new assets are headed higher. In the old stores, RH could only show 10% of its assortment, while in the newer format stores, the company is showcasing better than 75%. Consumers can’t (and don’t) buy what they don’t see.
  3. Our research shows that there are 19 markets where RH does currently not have a presence where it could (and should) add new stores. That’s meaningful off a base of only 80 stores. More importantly, there are 50 stores in the fleet that could be upgraded by more that 30,000 square feet each (ie tripled in size).
  4. In addition to the real estate play, RH is rolling out new categories that should accelerate its share gain in this Home Furnishing space. Most people have heard about RH Modern (launches in about four weeks), but what they don’t know is the unique infrastructure RH has that allows it to profitably scale with its vendor base to keep product flowing into new categories and classifications consistently.
  5. Lastly, the margin story here is explosive. Margins are sitting below 10% today, and we think they will be above 16% in 3 years. The key reason is the expense leverage on these new properties – which is live nothing we’ve ever seen (ie pay only 10% more for square footage that’s 300% larger). In addition, the company does not have to proportionately grow its sourcing organization with the growth in its store base OR its category expansion. 


INTERMEDIATE TERM (TREND) (the next 3 months or more)

The key risk here is that this story is so explosive and game-changing, which means that it will change rather significantly quarter to quarter. The vision is the same. But the opportunities to get there will change. Not only are we OK with that, but we applaud it. Consumer tastes and shopping patterns are a moving target. And although Home Furnishings is one of the more stable parts of retail, the fact is it will always be volatile. For example, the company planned to enter the Kitchens business 1.5 years ago. That’s still a possibility, but there are a few other businesses that were pulled ahead as more commercial opportunities based on where the dice have landed with consumers.



LONG-TERM (TAIL) (the next 3 years or less)

RH is the preeminent brand in the space, and sets/leads consumer style trends/wants/needs but with very little fashion risk. Importantly, we think that RH is in second inning of a game that ultimately may prove to be a double header. We believe the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we’re getting to a stock in excess of $300.



Stock Report: Restoration Hardware (RH) - RH Chart

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