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Should You Stay Away From U.S. Equities?

 

In this excerpt from today's edition of The Macro Show, Hedgeye CEO Keith McCullough responds to a subscriber’s question wondering whether they should steer clear of the U.S. stock market.

 

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Retail Callouts (9/22): TIF, De Beers, Retail Sales Trends

Takeaway: 1) De Beers 2 Negative Comments On Diamond Demand in Past Month - Staying short TIF. 2) Weekly Retail Sales still trending South.

TIF - De Beers 2 Negative Comments On Diamond Demand in Past Month

De Beers has made two moves over the past month that are extremely bearish for the diamond market and diamond demand more generally.  First the company announced that it would be cutting rough diamond prices by up to 9% in the face of weak demand. And just yesterday De Beers committed to pumping marketing dollars into China to attract gift givers in the 18-29 demo and pump up its penetration in 3rd and 4th tier cities. The largest diamond producer in the world cutting prices and spending up to attract consumers in 3rd/4th tier cities is hardly comforting.

For TIF --  Asia Pacific as a whole makes up 25% of TIF's revenue, China holds ~10% of the company's global store base, and its exposure to the PRC consumer is even higher when you factor in tourism spend. Yes, TIF is at a higher end of the scale than De Beers, but when a company with 50% market share of the total sales volume shows cracks, it’s tough to argue that it won’t reverberate through the entire industry. Especially when you consider the fact that diamond jewelry as a % sales at TIF is at all-time highs.

We went negative on TIF a month ago and while numbers for next year have come down by 5% from $4.78 to $4.55 since the last print, we still think this a good short. The reality with this company is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks. We’re staying short this one.

(http://www.bloomberg.com/news/articles/2015-09-22/de-beers-pushes-gift-giving-to-arrest-china-s-diamonds-slowdown)

Retail Callouts (9/22): TIF, De Beers, Retail Sales Trends - 9 22 chart1

 

The downward trend in the ICSC and Redbook sales indexes shows no sign of abating.

Retail Callouts (9/22): TIF, De Beers, Retail Sales Trends - 9 22 chart2

Retail Callouts (9/22): TIF, De Beers, Retail Sales Trends - 9 22 chart3

 

SPLS, ODP - NY Post reporting that the Staples - Office Depot merger may be stopped the FTC's Deborah Feinstein.  The Post also ran an article cautioning FTC approval on the deal back in June.

(http://nypost.com/2015/09/21/staples-office-depot-11-3b-merger-may-not-happen-ftc/)

(http://nypost.com/2015/06/24/staples-merger-unlikely-after-judge-blocks-syscous-foods-union/)

 

NKE - Nike unveiled an expanded eyewear collection in collaboration with Kevin Durant.  Glasses start at $200 for adults and $140 for kids.

(http://footwearnews.com/2015/influencers/athletic-outdoor/kevin-durant-eyewear-kd8-nike-152958/)

 

OLLI - Ollie's Names Robert N. Fisch, CEO of rue21, to board of directors, expanding the board from 6 to 7.

(http://investors.ollies.us/phoenix.zhtml?c=254045&p=irol-newsArticle&ID=2089069)

 

SHLD, AMZN - Sears hires new president of fulfillment Girish Lakshman, who has 15 years of experience with Amazon.

(http://searsholdings.mediaroom.com/index.php?s=16310&item=137389)

 

SPWH - Sportsman's Warehouse making 6.25mm share offering, value of ~$88mm as of yesterday's close.

(http://www.sec.gov/Archives/edgar/data/1132105/000119312515324432/d54747d424b5.htm)

 

GCO - Genesco Board authorized a $100mm in stock repurchase, replacing ~$15mm remaining on prior $75mm 2013 authorization.

(http://phx.corporate-ir.net/mobile.view?c=75042&v=203&d=1&id=2089257)

 

PLCE - The Children's Place is amending its current credit agreement to extend the term until September 2020 and increase the revolving credit limit from $200 million to $250 million. (http://www.sec.gov/Archives/edgar/data/1041859/000114420415055829/v420679_8k.htm)


The Macro Show Replay | September 22, 2015

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

CHART OF THE DAY: We Continue To Be On The Other Side Of The Bundesbank

Editor's Note: The chart and excerpt below are from this morning's Early Look which was written by Hedgeye analyst Matt Hedrick. Click here for more information on how you can subscribe.

 

...While the Bundesbank’s recent monthly report highlights a few shoots of positive economic indicators in Germany, we continue to be on the other side, signaling declines in rate of changes terms of our high frequency gauges, with our proprietary GIP (growth, inflation, policy) model signaling that Germany will enter the ugly Quad 3 in 4Q15, equating to growth slowing as reported inflation accelerates (or stagflation).

 

CHART OF THE DAY: We Continue To Be On The Other Side Of The Bundesbank - z cod hed GERMANY

 


Catching a Break?

“We Europeans should remember well that Europe is a continent where nearly everyone has at one time been a refugee. Our common history is marked by millions of Europeans fleeing from religious or political persecution, from war, dictatorship, or oppression.”

-Jean-Claude Juncker

 

Juncker, President of the European Commission, made this remark in his 2015 State of the Union address titled “Time for Honesty, Unity and Solidarity”, which he delivered at the European Parliament on September 9th, 2015. In recent days Juncker’s Commission has put forward a proposal to resettle 120,000 asylum seekers, which will be evaluated by the EU ministers beginning today.

 

Clearly Juncker and his Eurocrat colleagues are at a huge crossroads on the region’s next policy move to deal with the mass influx of refugees (and migrants) seeking shelter in Europe.  Data suggests that since the beginning of the year, nearly 500,000 people have made their way to Europe, the majority fleeing war and terror in Syria, Libya and Eritrea, and landing in the highest concentrations in the member states of Greece, Hungary, and Italy. (For perspective Turkey, Jordan and Lebanon are hosting over 4 million Syrian refugees).

 

One aspect that’s striking about this refugee crisis is its parallels to the concurrent Eurozone debt crisis.  Note the media’s darling word choice, ‘crisis’.  By definition, crisis has a connation of a “short term or sudden event”, yet it has been anything but— Greece’s first crisis started way back in 2010! 

 

But getting beyond the language choice, I suspect that Europe’s refugee crisis will be far from short term or sudden in nature.  In fact, I think the resettling of refugees stands to have a very long tail, one that could have very disparate outcomes, and financially may pose far greater risk than the Eurozone debt crisis.

 

Again and again we’ve witnessed the Eurozone and EU’s major challenge as a “union” incapable of effective coordination and implementation of policy given the uneven nature (political, economic, and cultural) of member states. The Czech government has already notified Brussels that it believes compulsory quotas are illegal.  And so even in a best case scenario in which Eurocrats agree to sign on a dotted line on how many refugees they’ll be willing to take on, then what happens with the refugees?

 

If we take Germany as an example, the longer term prospects may not look so favorable.  There, Chancellor Angela Merkel has been very vocal on her country’s willingness to take on refugees, even boosting the number of asylum seekers to 800,000 (or about 0.9% of the population) this year and 500,0000 a year for a foreseeable future.

 

Yet if we rewind the clock back to 2010, this is the same Merkel who very adamantly stated that multiculturalism (where Germans live side-by-side with immigrants) is a failed project.  Specifically, she was referencing the inability of Turks to integrate with Germans, and vice-versa.  The Turks were originally recruited as guest workers (Gastarbeiter) in the 1960s and 1970s to help rebuild the country following the war. History shows that many of those Turks didn’t return home and had children in Germany, contributing to Germany’s Muslim population that represents ~ 5.4% of the country today (2009 est.). [For perspective, Muslims make up ~ 0.9% of the U.S. population (2010 est.)].

 

So multiculturalism is dead?  Well then what’s the plan to integrate these Syrians into Germany, so that they are a benefit and not a tax to the society, to the economy?  If there’s no integration, is there really any hope that these immigrants can support Germany’s generous welfare system – or at least replace Germany’s aging and declining population?

 

Let’s hope this time is different, that European heads of state take the time to address the longer term solutions for asylum seekers; simply signing on the dotted line will doom the region to repeat past integration failures.  

 

Back to the Global Macro Grind

 

Notably tomorrow, ECB President Mario Draghi will stand before the European Economic Affairs Committee in its quarterly monetary meeting to discuss the state of the Eurozone.

 

While we don’t have a crystal ball, we think it’s well worth pointing out that this presents Mr. Draghi yet another large stage to make a “splash” should he so choose.

 

We continue to point out that European equities have been bombed out (the German DAX is down over -20% since April = crash), in-line with our 3Q15 Macro Theme of #EuropeSlowing.  At the meeting, we wouldn’t be surprised to see Draghi 1) talk down the euro (in the near past, European equity markets have acted favorably to a weak EUR/USD – Germany in particular with 46.5% of the economy levered to exports – and 2) suggest more QE may be in the pipe (an increase in monthly purchases above the original target of €60B/month).

 

Catching a Break? - down DAX cartoon 09.21.2015

 

While the Bundesbank’s recent monthly report highlights a few shoots of positive economic indicators in Germany, we continue to be on the other side, signaling declines in rate of changes terms of our high frequency gauges, with our proprietary GIP (growth, inflation, policy) model signaling that Germany will enter the ugly Quad 3 in 4Q15, equating to growth slowing as reported inflation accelerates (or stagflation).

 

Can Draghi be the market’s elixir to tone down the European equity market volatility? 

 

While we’re not throwing the chips in on German equities, on Friday (9/18) we signaled to buy German bonds via the etf BUNL. If Germany has to do what Japan did, QE forever, we like buying bunds on any/all pullbacks!

 

Our immediate-term Global Macro Risk Ranges are now:

 

DAX 9611-10107

SPX 1

UST 10yr Yield 2.11-2.21%
EUR/USD 1.10-1.14
YEN 118.78-121.76
Oil (WTI) 43.28-47.93 

 

Catching a Break? - z cod hed GERMANY 


CALL INVITE: TODAY 2PM - TIME TO CHECK BACK IN TO HOTEL STOCKS?

HEDGEYE HOTEL CALL:  TIME TO CHECK BACK IN TO HOTEL STOCKS?

 

Watch the replay of this presentation below.

 

 

Please join us next week for a conference call and video outlining our investment thesis on the lodging sector.

 

Call Details:  

Today, September 22nd at 2pm.  Attendance on this call is limited.  Please contact sales@hedgeye.com for details.

 

Relevant Tickers:

H, HLT, HOT, HST, MAR, WYN, RHP

 

Discussion Points:

  • Results of our comprehensive meeting planner survey
  • Franchise segment study 
    • Who's benefiting from higher franchise rates?
    • Which are the strongest franchise brands?
  • How should we read into the recent RevPAR softness?
  • Q3 earnings preview and 2015/2016 outlook
  • Quarter to date RevPAR tracker for each company
  • Potential for Q4 RevPAR acceleration
  • Our view on the lodging cycle
  • Macro variables driving RevPAR performance
  • Statistical relationship of occupancy, ADR, RevPAR to stock prices:  when do we buy and sell 'em and where are we now?
  • Exposure to energy markets
  • Which companies are best positioned with our near and long term outlook?
  • Does a REIT spin make sense for HLT?

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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