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McCullough: I'm More Bullish Than Anyone

Takeaway: The “Reflation” Trade that consensus got sucked into chasing in June/July getting rocked (again) as Global Growth data slows.

I think I’m more bullish than anyone, on bonds – long-term Treasury Bonds, that is.

 

McCullough: I'm More Bullish Than Anyone - Slow growth snails cartoon 07.14.2015

 

It’s simple.

 

#SuperLateCycle is what it is and this morning’s economic data from German ZEW (OCT) slowing to 1.9 from 12.1 to only the second #Deflation (year-over-year negative) print for CPI in the UK since 1960.

 

Check out the chart below.

 

McCullough: I'm More Bullish Than Anyone - z 55 7

 

Or (God forbid), we remember the recent (awful) U.S. jobs report.  It all adds up to a 2.05% 10-year U.S. Treasury and falling.

 

McCullough: I'm More Bullish Than Anyone - z km tweet

 

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Editor's Note: If you're interested in getting a step or two ahead of the consensus herd, we encourage you to take a closer look at our suite of contrarian investment products.


Global Growth Data Slows

Client Talking Points

UST 10YR

We are probably more bullish than anyone, on bonds – long-term Treasury Bonds, that is – and it’s simple; #SuperLateCycle is what it is and this morning’s economic data from the German ZEW Index (OCT) slowing to 1.9 from 12.1 to only the 2nd #Deflation (year-over-year negative) print for CPI in the UK since 1960…and let’s not forget the recent U.S. jobs report. The UST 10YR is now at 2.05% and falling.

REFLATION

Down Dollar, Down Rates is the bull case for Gold – and with the Bond Market closed, we’re getting that and more “reflation” priced in with Oil and Gold +0.6% and +0.8%, respectively this morning. We turned bullish on Gold in August and added it to our Top Macro Ideas in our most recent Q4 Macro Themes presentation.

DAX

The German DAX bounced and failed @Hedgeye resistance, putting the crash right back in play (> 20% decline from April) with the DAX -1.2% this morning after terrible economic data (CPI dead flat at 0.0% and ZEW #slowing). We don’t think ECB President Mario Draghi will allow the EUR/USD to go higher for much longer – so realize what that means on the Down Dollar “reflation” trade.

 

 

**Watch a replay of The Macro Show with Healthcare Sector Head Tom Tobin and analyst Andrew Freedman at 9:00AM ET - CLICK HERE

 

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 31% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
RH

We think that the catalyst calendar is just starting to pick up, and should be the best that Restoration Hardware has seen – perhaps ever. There are two new and significant merchandising initiatives, which are solid on their own. But to pair them with the square footage growth acceleration seems almost like a fantastic coincidence. But it’s not. This has been in the plan all along. There’ll be many more new concepts and classifications – though we’d argue that the company can go deep and add $2bn in revenue with what it has.

 

To be clear, there’s much more to this story than just square footage growth – like the ability to consistently merchandise product people want in quantities they need.  Without the ability to deliver on that requirement, a retailer could have the greatest store in the hottest location with the best demographics, and it will still be nothing but a liability (regardless of how low the rent might be). That’s why square footage growth is grinding to a halt for other U.S. retailers. That’s also why the growth profile at RH is so powerful, and unmatchable by anyone we see in Retail today.

PENN

As we predicted, a rise in September regional revenues would serve as a catalyst for regional gaming stocks, and in particular, Penn National Gaming. For the record, PENN is up +12% since we added it to Investing Ideas back in May, outperforming the S&P 500 which has fallen -5% since then.

 

We believe shares of PENN have a lot more room to run, given its strong performance in key markets like Ohio and its successful opening in Massachusetts.  A handful of states still need to report their September revenue figures, but numbers have been in line with our expectations thus far.

 

PENN will be reporting Q3 earnings on October 22nd.

TLT

Bottom Line: We remain 50% below Bloomberg Consensus on GDP growth. Wall Street, the IMF, World Bank and OECD are all still forecasting global growth of around 3% for 2015.  We reiterate our call for growth to come in at or below half that rate.

 

While most #LateCycle growth expectations in macro markets peaked in April, the US stock market peaked in July as bond yields hit the market with their last head-fake of a “breakout.” That makes this bear market in growth expectations relatively young. With that considered, sit back and relax with your TLT and EDV.

 

Three for the Road

TWEET OF THE DAY

Special Excerpt from Hedgeye’s Q4 Macro Themes Call: #GameOfSlowing https://app.hedgeye.com/insights/46824-special-excerpt-from-hedgeye-s-q4-macro-themes-call-gameofslowing… via @hedgeye

@Hedgeye

QUOTE OF THE DAY

Chaos isn’t a pit. Chaos is a ladder.

Petyr Baelish

STAT OF THE DAY

Athletic footwear spend per capita is highest in the 14-24 and 35-45 year-old demographic annually spending $60 and $71, respectively. 


Retail Callouts (10/13): Free Shipping, Chain Store Sales, KSS, JWN, KATE, KORS, NKE

Takeaway: Free Shipping & Returns as an offensive weapon. Chain store sales trend weak for 6th straight week. LVMH positive comments on Japan.

Free Shipping (Now Returns) As Offensive Weapon

(http://www.wsj.com/articles/more-retailers-offering-free-shipping-on-online-orders-1444402553)

 

49% of retailers are no longer charging for returns and that's a tough price tag to swallow for a lot of companies in this space -- especially those with a small average basket. We think that both sides of the fulfillment of the equation, shipping and returns, for things like apparel/footwear/home décor are headed to 100% free 100% of the time by the end of FY16. That starts this holiday as retailers use 'free shipping' promotions as an offensive weapon. Unfortunately, for almost everybody except the bullet-proof content-owners of the world (i.e. Nike) such a move will be dilutive to margins. Even worse news is that if they don’t play ball, then there’s risk to the top line (i.e. if either KSS or JCP opts-in to the free-shipping game, they both lose). 

 

Here is how the margin math works for 4 retailers at various ends of the department store spectrum. JWN gets up to a 1500bps higher gross margin than KSS on a straight on-line sale, 1300bps in the case of a partial return, and a both sit at a -10% margin on a full return. High end, high ticket, and solid content retailers can play online. Otherwise it's an extremely dilutive channel with even more cost pressure as the free shipping and return threshold move towards $0.

Retail Callouts (10/13): Free Shipping, Chain Store Sales, KSS, JWN, KATE, KORS, NKE  - 10 13 15 chart1

 

ICSC & Redbook - Small pop in the 1yr for ICSC and Redbook comp numbers and 2yr trend line (ICSC only), but on the 3yr which eliminates all noise -- 6th straight week of decelerating comp numbers.

Retail Callouts (10/13): Free Shipping, Chain Store Sales, KSS, JWN, KATE, KORS, NKE  - 10 13 2015 chart2

Retail Callouts (10/13): Free Shipping, Chain Store Sales, KSS, JWN, KATE, KORS, NKE  - 10 13 2015 chart3

 

KATE, KORS, COH, LVMH - LVMH seeing acceleration in business in Japan. Notable for KATE as it laps the sales tax lift from 2014. Japan underperformed company average by 1300bps and 700bps in 1Q and 2Q respectively.  

(http://www.lvmh.com/news-documents/press-releases/q3-2015-revenue/)

 

NKE - Ndamukong Suh says he will be bringing a 'Nike store' to the home town of his alma mater Lincoln, Nebraska.  Store planned to be ~18,000 SqFt in place of the old bookstore.

(http://journalstar.com/business/local/suh-to-bring-nike-store-to-lincoln/article_20860af9-910d-502b-b125-f93a80734e33.html)

 

NKE, UA - Kemba Walker is leaving Under Armour to sign with Jordan.  This is no surprise as his UA contract had expired, and since Walker plays for the team that Jordan owns.

(http://thesource.com/2015/10/11/kemba-walker-leaves-under-armour-for-jordan-brand/)

 

DLTR - Dollar Tree announced plan to rebrand 217 of 222 Deals stores as Dollar Tree stores and the other 5 as Family Dollar stores.

(http://www.dollartreeinfo.com/investors/global/releasedetail.cfm?ReleaseID=936211)

 

KSS - Kohl’s expanding same day delivery service in nine markets, partnering with Deliv.

(http://wwd.com/retail-news/direct-internet-catalogue/kohls-expands-same-day-delivery-10260273/)

 

DKS - Dicks' Sporting Goods set to open 6 stores this month.

(http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=9&id=57878)

 

Facebook Tests A Dedicated Shopping Feed

(http://techcrunch.com/2015/10/12/facebook-commerce-updates/#.2seo6e:gzv7)


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CHART OF THE DAY: #Deflation Risks Remain

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here for more info on how you can subscribe get a step ahead of consensus.  

 

CHART OF THE DAY: #Deflation Risks Remain - z 10.13.15 chart

 

Got, hashtag, #Deflation?

 

Yep, ask the authors of that call when we think the risk doesn’t remain. We’ve been making this call for over 15 months now. Whether it’s signaling an immediate-term TRADE overbought signal within a long-term bearish TAIL risk or updating the data itself, we’ve had your back.

 

  1. Swiss Producer Price (PPI) #Deflation was -6.8% y/y in SEP (yes, that’s why they have negative bond yields)

 

 


Deflation Risks Remain

“Hurting was nothing new to him.”

-Daniel James Brown

 

That was a formative character quote about 1936 Olympic Gold medal winner, Joe Rantz, in an epic story I’ve been reading called The Boys In The Boat. His parents packed up and left him with the family farm when he was only 15 years old. He had no choice but to fend for himself.

 

“Each evening (eating by himself at the head of a table in an empty house) Rantz noted with mounting satisfaction that there were fewer boys making the climb. And he noted something else. The first to drop out had been the boys with impeccably creased trousers…” (pg 51)

 

While I didn’t live during the depression, I did leave home when I was 16 years old. My teammates and I have a DNA that will not fade when we have conviction in something we see that others don’t. Both #Deflation and #GrowthSlowing risks remain. Tell the Establishment we said so.

Deflation Risks Remain - Deflation cartoon 12.29.2014

 

Back to the Global Macro Grind

 

Got, hashtag, #Deflation?

 

Yep, ask the authors of that call when we think the risk doesn’t remain. We’ve been making this call for over 15 months now. Whether it’s signaling an immediate-term TRADE overbought signal within a long-term bearish TAIL risk or updating the data itself, we’ve had your back.

 

Away from China’s Imports (one of the few #s they can’t make up) crashing -20.4% y/y in SEP:

 

  1. Swiss Producer Price (PPI) #Deflation was -6.8% y/y in SEP (yes, that’s why they have negative bond yields)
  2. German Econ Sentiment (ZEW index) slowed to 1.9 in OCT vs 12.1 last (= fresh #SuperLateCycle lows)
  3. UK Producer Prices dropped -1.8% y/y and CPI showed only its 2nd NEGATIVE reading (y/y) since 1960

 

I know. I know. My Canadian buddy, Francois – who has been saying “don’t pay so much attention to the data” (after telling clients to chase “reflation” and global demand “bottoming” in July) reiterates not to be so data driven. Great.

 

How about being market driven? After yet another “reflation” rally to lower-highs last week:

 

  1. Oil (WTI) got smoked for a -5% loss yesterday and, despite last week’s +9% gain, is -15% in the last 3 months
  2. Energy Stocks (XOP) were down -4% at one point in the day and remain the worst sector to have been long in 2015
  3. Emerging Markets (still in crash mode) are leading on the downside (again) this morning with Indonesia -3.2% overnight

 

But, if we don’t pay attention to the data or market prices, we can pretty much tell ourselves whatever we want, eh? Not @Hedgeye. We aren’t the boys with the creased trousers trying to sell the perma bull.

 

What’s really interesting about the perma bull on growth and inflation “bottoming” isn’t so much that the growth bulls didn’t call for a slowdown to begin with, it’s that they’re way more bullish than the slow-moving-economists at the Fed, ECB, BOJ, etc.

 

Check out these comments from linear economists in the last 24 hours (even they get it at this point!):

 

  1. "I view the risks to the economic outlook as tilted to the downside.” –Lael Brainard, Federal Reserve
  2. “We see the possibility of inflation turning negative.” –BOJ Bureucrat
  3. “It will take longer than expected to reach stable inflation.” –Yves Mersch, ECB

 

In other words, forget the perma bulls who are still calling for 3.5-4.0% GDP growth (Nancy Lazar). They aren’t even in the debate at this point. The market’s debate (marked-to-market, every day) is purely about the risks of long-term #Deflation vs. immediate-term #Reflation trades.

 

On US growth, the much more appropriate debate right now is between the Hedgeye low-end scenario of 0.1% Q3 GDP and high-end scenario of 1.5% (SAAR) GDP vs. the Atlanta Fed Tracking model of 1.0%. We’ll get that river card report at the end of the month.

 

In the meantime, we’ll spend our time this week observing the data we’ve already predicted as slowing (10 months ago) like US CPI, PPI, Retail Sales, and Industrial Production (all due to be reported this week).

 

Darius Dale and I will also spend plenty of time debating Institutional Investors on the real-time call they need to make (from here) into the end of 2015 – perversely, will the #SuperLateCycle call itself be the catalyst for Down Dollar asset price reflation?

 

Or will consensus eventually just come to terms with the simple reality that central planners and their cheer-leading economists/strategists cannot CTRL+Print demand?

 

Deflation risks remain because Global #GrowthSlowing does. The hurt remains on those expecting both higher-growth and higher bond yields.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.97-2.12%

SPX 1 (bearish)
EUR/USD 1.11-1.14
Oil (WTI) 46.07-50.60

Gold 1135-1171

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deflation Risks Remain - z 10.13.15 chart


October 13, 2015

October 13, 2015 - Slide1

 

BULLISH TRENDS

October 13, 2015 - Slide2

October 13, 2015 - Slide3

October 13, 2015 - Slide4

 

 

BEARISH TRENDS

October 13, 2015 - Slide5

October 13, 2015 - Slide6

October 13, 2015 - Slide7

October 13, 2015 - Slide8

October 13, 2015 - Slide9

October 13, 2015 - Slide10


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