"While I didn’t live during the depression, I did leave home when I was 16 years old," wrote Hedgeye CEO Keith McCullough in today's Early Look. "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."
a must-see live + interactive segment with tom tobin
Hedgeye Healthcare analysts Tom Tobin and Andrew Freedman will deliver a preview to their Healthcare Themes call being held this Friday at 1:00pm ET (ping firstname.lastname@example.org for access).
Key topics include:
- Healthcare's relative performance ... will it continue?
- Their position monitor which showcases all their best ideas
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.
#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.
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.
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Client Talking Points
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.
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.
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.
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Top Long Ideas
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.
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.
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
QUOTE OF THE DAY
Chaos isn’t a pit. Chaos is a ladder.
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.
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
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.
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.
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.
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.
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.
DLTR - Dollar Tree announced plan to rebrand 217 of 222 Deals stores as Dollar Tree stores and the other 5 as Family Dollar stores.
KSS - Kohl’s expanding same day delivery service in nine markets, partnering with Deliv.
DKS - Dicks' Sporting Goods set to open 6 stores this month.
Facebook Tests A Dedicated Shopping Feed
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.
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.
- Swiss Producer Price (PPI) #Deflation was -6.8% y/y in SEP (yes, that’s why they have negative bond yields)
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