• run with the bulls

    get your first month

    of hedgeye free


Landing On Their Head

“That is why, no matter how desperate the predicament, I’m always straightening my derby hat and fixing my tie – even though I have just landed on my head.”

-Charlie Chaplin


After making up a 7.0 GDP number in Q2, the Chinese have quite publicly landed on their head. And, as you’re all accustomed to by now, the only ideological central-plan for that in this day and age is a currency devaluation.


Must “stimulate” exports, right? Never mind what might happen to all your customers (Singapore, Taiwan, Indonesia – stock markets all -4-6% in the last month) and/or local consumers (less purchasing power) – it’s for The People, right?


Definitely. For sure. Now that most of the majors (Japan, Europe and China) have answered the bell on a global cyclical slowdown meeting their secular (demographic) ones, the only one left to devalue (again) is the USA.

Landing On Their Head - China GDP cartoon 07.16.2015


Back to the Global Macro Grind


If Abenomics (BOJ) + Draghi’s (ECB) “Whatever It Takes” (and almost 600 rate cuts around the world in response to growth and inflation slowing) = US Dollar’s biggest 6-12 month ramp in modern history, what’s China devaluing by 2% going to do?


I don’t know. Do you?


This is where embracing the uncertainty of it all comes into the #process. While the absolute devaluation (to 6.2298 Yuan vs. 6.1192 Yuan) is small (2%), the non-linearity of the move is probably what matters here. The Chinese are panicking.


In addition to the FX moves overnight, this is what Mr. Macro Market told us:


  1. Shanghai Composite down, literally, 1 basis point (-0.01%) on the “news” – nice job dudes
  2. Indonesia and Singapore stock markets were -2.7% and -1.4% on the news, respectively
  3. KOSPI and Taiwan saw their stock markets decline (again) and are -3.6% and -5.8% month-over-month
  4. Oil (WTI) failing to have more than a 1-day bounce, -0.5% to $44.73 (no support to $42.62)
  5. Gold sees some follow through, +0.8% to the top end of my $1080-1118 risk range


Global Rates backed off on the implicitly bearish #ChinaSlowing news too:


  1. US 2yr Treasury Yield backed off the 0.75% level of resistance it has failed at, every time, in 2015
  2. US 10yr Treasury Yield back down to 2.17% and remains bearish TREND @Hedgeye
  3. German 10yr Bund Yield failed at its long-term TAIL risk level of 0.76% and has fallen to 0.66% last
  4. Swiss 10yr Bond Yield has retraced all the way back down to -0.17%
  5. Japanese 10yr Government Bond Yield of 0.39% is -4 and -12 bps lower than where it was 1mth and 1yr ago


In other words, the most fundamental reality in Global Macro today remains the same as it was yesterday. As both Global Growth and “reflation” slows, #Deflation linked assets get cheaper and slow-growth ones (Long Bonds) get more expensive.


As you can see in today’s Chart of The Day (Long-term chart of Global Yields) China telling the “truth” (sort of) by their actions only confirms what long-term investors have had right on growth and inflation for a long time now – the slowing is secular.


As for the US stock market, don’t forget that no “surprise” (non-linear) central-planning move happens in a vacuum. Since yesterday was a “reflation” day, today is most likely going to be a deflation day. What I mean by that is:


  1. Energy Stocks (XLE) bounced +3.2% on Down Dollar yesterday, but remain bearish TREND @Hedgeye
  2. Utilities (XLU) corrected -0.4% on Up Bond Yields yesterday, but remain bullish TREND @Hedgeye


That gave the SP500 its 4th up day in the last 15, but it came on crashing US Equity Volume (Total US Equity Market Volume, including dark pool, was -24% vs. its 1yr average).


Since I covered every short position in Real-Time Alerts on Friday (they all signaled immediate-term oversold), I saw plenty of short selling opportunities yesterday. Given the China news, my 2 favorite SELL signals yesterday were CAT and Industrials (XLI).


If you want to make money in this market, I say you keep moving out there. When someone asked me yesterday what I’ve been doing differently in Real-Time Alerts (24 booked gains in a row), I said I was just seeing the big picture clearly.


As most of you know, 16 years of risk managing markets doesn’t always go this smoothly. But when it does, and we’re not consensus, it sure beats landing on my head.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.25%

SPX 2076-2118
USD 96.35-98.46
Oil (WTI) 42.62-46.19

Gold 1080-1118


Best of luck out there today,


Keith R. McCullough
Chief Executive Officer


Landing On Their Head - Chart of the Day

The Macro Show Replay | August 11, 2015


August 11, 2015

August 11, 2015 - Slide1



August 11, 2015 - Slide2

August 11, 2015 - Slide3

August 11, 2015 - Slide4



August 11, 2015 - Slide5

August 11, 2015 - Slide6 

August 11, 2015 - Slide7

August 11, 2015 - Slide8

August 11, 2015 - Slide9

August 11, 2015 - Slide10

August 11, 2015 - Slide11
August 11, 2015 - Slide12

August 11, 2015 - Slide13

HIBB | The Beginning of the End?

Takeaway: We have a hard time modeling a scenario where HIBB does not get cut in half. $1.50 in EPS vs Street at $3.85. Still one of our top 3 shorts.

HIBB, one of our top Retail Shorts, preannounced a miss after the close. There’s a number of things that concern us.

1) Comps came in at -1.1% for the quarter. The company was +low double digits through the first 21 days of May. That suggests that June and July were horrible.

2) This is the first time in 23 quarters where the 2-year comp trend for HIBB went negative.

3)  Even worse is that management notes ‘underlying business softness’ as one of the factors. That’s actually pretty unusual for HIBB. Whether business is good or bad, the company usually has a firm grasp on what’s driving its sales. This time, there’s a notable lack of rationale or understanding for such a significant turn in trends.

4) There was also no guidance provided beyond the quarter. In the past, HIBB would usually provide a full-year update as well.

5) Our sense on this is that HIBB is feeling the brunt of why we’re bearish…

a) It has no e-commerce business, and that’s where the incremental growth in the industry is coming from. Simply put, HIBB is finally starting to lose share to dot.com.
b) It is feeling the pain of overlap with Dick’s, Academy, and Sports Authority as HIBB grows outside of the Bible Belt (bad idea) and as those other retailers grow in HIBB’s home turf.

6) Nike is absolutely killing it just about everywhere in the US -- except at Hibbett? That makes zero sense to us as Nike is about 60% of Hibbett’s footwear wall.

7) The question for us at this point is whether this turn of events will finally cause HIBB to accelerate its decision to start up an e-commerce business.

a) If the answer is Yes, then we think there’ll be about a 3-5 point hit in margins for 2-years before we see any notable revenue benefit.
b) It the answer is no, then expect continued ‘unexpected’ top line weakness and earnings misses.


From where we sit, both outcomes are bad. But knowing this management team, we think they need to get one or two more black eyes before stepping up and making the big investment in e-comm. 


Either way, we think that the end-game is margins getting cut in half, and about $1.50 in earnings in three years. That’s a pretty massive statement given that the consensus is at $3.85. What kind of multiple do you put on a name with shrinking earnings and 60% downside to consensus? Even if we generously say 15x a trough-ish EPS number, we’re talking about a $22 stock. The stock is trading after-hours at $43. If you’re tempted to cover – don’t.



July Restaurant Sales and Employment Trends

Black Box Sales, Traffic

Black Box released same-restaurant sales and traffic estimates for the month of July last week that showed decelerating growth versus a strong performance in the month of June. Same-restaurant sales grew to +1.6% down 50 basis points (bps) sequentially, but up 110bps YoY and same-restaurant traffic decreased -1.2%, an 30bps sequential improvement, and up 50 bps YoY.

July Restaurant Sales and Employment Trends - CHART 1

July Restaurant Sales and Employment Trends - CHART 2


Restaurant price increases are beginning to taper off, after the nearly 12-months of increases. Not surprising after the last three months of flat price increases (~+3%), traffic has started to accelerate slightly.  As you can see from the chart below, there is still a clear divergence between the operators taking price and a decline in traffic. In July there was a continuation of the uptick in traffic we saw in June, this trend bodes well for the industry, although we are still skeptical it will last long term.

July Restaurant Sales and Employment Trends - CHART 3


Knapp July Sales Trends

Knapp reported that comparable restaurant sales in July 2015 were +0.5% for same-store sales and -1.1% for guest counts.  July comparable restaurant sales represent a sequential slowdown of -100bps, while traffic is flat sequentially for the month.  On a 2-year basis, sales decelerated to -0.3% and traffic matched June’s 2-year average, down -2.1%. 


Employment Growth Slowing

The month of July was a mixed bag of results for employment. We saw the second month in a row of sequential employment declines for the 25-34 YOA cohort, and a -42bps YoY decline in the 20-24 YOA cohort. The 55-64 YOA cohort led the growth in the month, up 2.52% YoY, and 31bps sequentially. The downward trend is concerning, especially given that a large portion of the growth is in the 55-64 YOA cohort, with a considerable amount of that employment being part time.



July Employment Growth Data:

  • 20-24 YOA +0.65% YoY; -41.9 bps sequentially
  • 25-34 YOA +2.31% YoY; -24.9 bps sequentially
  • 35-44 YOA +1.30% YoY; +25.9 bps sequentially
  • 45-54 YOA -0.19% YoY; +16.2 bps sequentially
  • 55-64 YOA +2.52% YoY; +31.0 bps sequentially


July Restaurant Sales and Employment Trends - CHART 4


Thoughts from our macro team on July Employment

  • Payrolls | Best Before the Crest:   NFP and private payrolls slowed both sequentially and in rate of change terms.  May/June get a net positive revision of +14K.   While moving past peak rate-of-change in payroll growth does not herald an imminent roll in the eco cycle, the reality is that we’re late cycle in the current expansion and the labor party is always best before the crest.    
  • Unemployment Rate | Less Bad:  The Unemployment Rate was flat sequentially at +5.3% but the internals were largely positive as the participation rate held steady and the labor force rose with the chg in employment > chg in unemployed.  The U-6 rate (underemployment rate) dropped a tick to 10.4% with PT involuntary workers declining -180K.  
  • Wages |  Up … But Not Really:   Both Total Private & Nonsupervisory Worker wage growth accelerated sequentially but the gain just represents more oscillation above & below middling.  Not what Team Janet wants to see although they’ve been making an attempt at quasi-marginalizing the trend in wage growth on policy decisions (see March Speech to review that commentary) 
  • Hours Worked | Prepare the Punditry:    This will probably be the favorite pundit talking point – and with some justification.  Average weekly hours worked rose by a tenth to 34.6hrs; the first increase in 5-months.   Income = Hours worked * earnings per hour, so why a longer average work week is good for aggregate incomes is straightforward (& that lowly tenth adds up to something material when applied across an employment base of 142MM).  Further, people working more hours is tantamount to more workers working the same hours – a concept termed “Job Equivalence” or “Labor Usage”  - so you’ll hear the case made that the +215K NFP gain is equivalent to something like a ~350K gain when factoring in the increase in hours worked and taking a job equivalence perspective of the data.  
  • Income | Wages Weak, Income ↑:  In a Keynesian economy, spending is king and the capacity for consumption flows from changes in the aggregate consumer P&L.  One could take two, somewhat divergent, views of this morning’s wage & income data:
    • Wage Growth:  Private hourly Wage growth at 2.1% YoY was better sequentially but below estimates for +2.3% and does nothing to offset the disappointment from the slowdown reported in the ECI last week.  Policy makers disappointment extends yet another month as wage inflation remains in RoC purgatory. 
    • Aggregate Income Growth: On net, the July data will be good for the aggregate income figures when they are reported for July.  Again, the math is trivial:  Flat Employment Gains + ↑Hours + ↑Wage growth = ↑ Aggregate DPI/Salary & Wage growth.  In short, the aggregate consumer P&L improvement will remain ongoing with the savings rate remaining the swing factor for actual HH spending growth.    



Cartoon of the Day: Land of the ______ Sun

Cartoon of the Day: Land of the ______ Sun - Japan cartoon 08.10.2015

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.