Takeaway: Wayfair moving up on short list. ULTA added to Long Bench. Wal-Mart scratching and clawing for every basis point of margin.
Retail Idea List
**Moved Wayfair higher on our list of Core Shorts as conviction grows.
**Added ULTA to Long Bench. We were involved on the short side over a year ago as more of a tactical trade. But we're diving deep into the underlying long-term drivers now. Stay tuned.
WMT - Wal-Mart confirmed Friday it is eliminating 450 positions within its Arkansas HQ. This represents a 2.5% headcount reduction at the home office.
2015 has been less than a banner year for WMT. For starters the stock is down 24% YTD as the company took one on the chin as it invested in both its people and e-comm capabilities. The new minimum wage standard at $9.00 alone will cost the company $0.24 (up from the original guidance of $0.20) add on top of that investments in e-comm and Fx pressure and we get to an earnings growth rate for the year of -10% at the mid-point of the guide.
We've seen Walmart try to offset these costs over the past year by renegotiating terms with its vendors (not once but twice), cutting some 24hr locations, and reducing employee hours. Now its going after its headcount at HQ. The 2.5% reduction is just a drop in the bucket compared to the 13% cut TGT announced earlier this year. But, its pretty obvious that WMT is scratching and clawing for every bps of margin. That's bad news for the rest of retail.
SPLS - Staples announces it will not be open on Thanksgiving Day stating it want to allow customers, and employees to spend time with their families. Staples stores had been open the prior two Thanksgivings.
US Justice department is launching a new strategy to deal with counterfeit goods and cyber attacks. Plan to include working with third party marketplaces and providing funding to local law enforcement in key jurisdictions.
W - Wayfair entering into agreement to have Alliance Data provide its private label credit card services.
HBC - Simon Property & Hudson's Bay JV closed on acquisition of GALERIA Kaufhof properties.
APP - American Apparel files Chapter 11 bankruptcy. It reached an agreement with 95% of its secured lenders to implement a pre-arranged financial restructuring.
H&M - H&M's first store in India sees impressive turnout for the opening. Store is 25,000 SqFt in New Delhi's Citywalk mall.
Takeaway: Risk came home last week as what had been fears primarily around Chinese contagion became fears of a domestic slowdown.
Last week, what had been predominantly an international risk focus became a global one with the slowdown in China converging with an especially soft U.S. jobs report for September. We've been flagging in our weekly initial jobless claims note that the US economy is late cycle. The September NFP report obviously raises the stakes.
Beyond the weak U.S. jobs report, the latest Chinese PMI reading showed the fastest deterioration since March 2009 and Japanese industrial production fell short of expectations last week. In response, CDS spreads widened globally and high yield credit deteriorated further with the YTM rising by 51 bps to 8.16% - the highest level since 2012 - while the 10-year Treasury yield came in sharply. #Risk-Off
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Negative / 1 of 12 improved / 8 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged
1. U.S. Financial CDS – Swaps widened for 20 out of 27 domestic financial institutions as the jobs report came in at a disappointing 142k jobs added in September. Meanwhile, the challenges continue to mount for Sallie Mae (SLM) as the CDS blew out by a further +105 bps to 732 bps, coinciding with the CFPB announcing it will explore new regulations for student loan servicers.
Tightened the most WoW: ALL, CB, ACE
Widened the most WoW: MS, C, LNC
Tightened the most WoW: CB, ALL, ACE
Widened the most MoM: SLM, LNC, MMC
2. European Financial CDS – Swaps mostly widened in Europe last week with the average move at 5 bps.
3. Asian Financial CDS – Asian CDS widened across the board last week. Fanning the flames was a Chinese PMI reading showing the fastest deterioration since March 2009 and Japanese industrial production falling short of expectations.
4. Sovereign CDS – Sovereign swaps were mixed over last week. Portuguese sovereign swaps tightened the most, by -5 bps to 174, while Japanese swaps widened the most, by +5 bps to 46.
5. Emerging Market Sovereign CDS – Brazilian swaps tightened an impressive -41 bps W/W to 447 bps, but outside of Brazil most of the EM space saw swaps widen.
6. High Yield (YTM) Monitor – High Yield rates rose 51 bps last week, ending the week at 8.16% versus 7.65% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 18.0 points last week, ending at 1839.
8. TED Spread Monitor – The TED spread fell 2 basis points last week, ending the week at 33 bps this week versus last week’s print of 34 bps.
9. CRB Commodity Price Index – The CRB index rose 0.9%, ending the week at 194 versus 192 the prior week. As compared with the prior month, commodity prices have decreased -1.3%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 8 basis points last week, ending the week at 1.99% versus last week’s print of 1.91%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China fell 0.5% last week, or 10 yuan/ton, to 2187 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread tightened to 141 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 2.9% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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"...While I’m sure the Old Wall storytelling will be epic this morning on “why the jobs number wasn’t that bad” … and “stocks closed up on the day… the bottom is in…”, blah blah blah… allow me to re-interrupt with economic cycle-reality ... The jobs number sucked… and labor data will continue to suck into year-end."
“Without labor, nothing prospers.”
Tragedy comes from the Greek word tragoidia. “It is a form of drama based on human suffering that invokes in its audience an accompanying catharsis (or pleasure) in the viewing.” (Wikipedia)
Sound like the US jobs market? Thankfully, I don’t need to channel my inner Greek Tragedian anymore to make a call that US Employment is A) #LateCycle and B) #Slowing. That’s now marked-to-market, in US Treasury Yield terms.
Both September Non-Farm Payrolls (NFP) and Private Payrolls (PP) slowed to their weakest rate-of-change growth rate of 2015. If your bottom-up work showed that August was slowing. Well done. They revised AUG to the lowest nominal NFP gain of the year too.
Back to the Global Macro Grind…
While I’m sure the Old Wall storytelling will be epic this morning on “why the jobs number wasn’t that bad” … and “stocks closed up on the day… the bottom is in…”, blah blah blah… allow me to re-interrupt with economic cycle-reality:
- The jobs number sucked… and labor data will continue to suck into year-end
- Both the US Dollar and Rates hit oversold lows Friday morning (yes, markets discount pending news)
- After signaling immediate-term TRADE oversold, stocks got squeezed off those morning lows too
Sucked? Yes. See our Chart of The Day:
- SEP Non-Farm Payrolls slowed to 1.97% year-over-year vs. the cycle peak of 2.34% in FEB
- SEP #Slowing = 7th straight month of slowing and < 2% growth for the 1st time in 13 months
- NFPs of 136k and 142k (AUG and SEP, respectively) have crashed -32% from the NOV peak of 423k
Btw, if they didn’t suck, you wouldn’t have seen a re-test of the YTD lows for the SP500 (Friday pre 10AM) as the 10yr yield dove to 1.93%... But, but, but… if only everyone would have been positioned for this 3-6 months ago.
“So”, let’s take a step back and review what really happened week-over-week, within the context of the last 6 months:
- US Dollar Index -0.4% week-over-week and -1.6% in the last 6 months
- SP500 +1.0% week-over-week and -5.6% in the last 6 months
- Russell 2000 -0.8% week-over-week and -12.6% in the last 6 months
Oh, wow, Russell down with the US Dollar and US economy slowing. Imagine that. Over 80% of the Russell’s revenues are tethered to US domestic revenue expectations (*note: not “China”).
And on Down Dollar, Down Rates (2yr = 0.57%, 10yr 1.99%) – here’s how they achieved that SPY Up, Russell Down score:
- Basic Materials (XLB) +2.9% week-over-week (even though still -15.5% in the last 6 months)
- Energy Stocks (XLE) +2.5% week-over-week (even though still -17.8% in the last 6 months)
- Financials (XLF) -0.5% week-over-week, despite the “up tape” on Friday…
*note: more US domestic Financials exposure in the Russell than in the SP500
In other words, as #LateCycle growth expectations slow, Dollar Down = “reflation” of crashing prices and Rates Down = Financials Down. It’s really not that complicated. If you extend the analysis to International Equities:
- Dollar Down = Euro Up +0.2% wk-over-wk, and German DAX -1.4% on the wk (crashing -20.2% in the last 6 months)
- Dollar Down = Latam MSCI Equities +0.9% wk-over-wk (inline w/ SPY) but crashing -25% in the last 6 months
- Dollar Down = Brazilian Stocks (Bovespa) +4.7% wk-over-wk but still -11.6% in the last 6 months
Yeah. Dollar Down on Super #LateCycle US growth slowing is sweet. It stops things from crashing vs. #StrongDollar, and beats up on the things everyone who thought it was “mid-cycle slowdown” is long of!
Post the US equity market squeeze, the best news for High Beta, Small Cap, US Equity Bears (ugly style factors) is that Consensus Macro hedge funds that shorted low (after being levered long higher) covered some of those hedges Friday afternoon.
The net SHORT position (CFTC non-commercial) in SP500 Index + Emini futures and options contracts moved from a YTD highs in the 2 weeks prior to -194,392 (that’s almost 32,000 contracts of less bearish positioning, week-over-week).
While the politicized and alleged US “labor market strength” remains a great tragedy in American storytelling, it will be interesting to see how fund manager performance problems morph from begging for a “rate hike” to cheering on more easing.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.94-2.09%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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