prev

USD, Gold and SPY

Client Talking Points

USD

Looks like the most expedited part of the “Dovish Fed” pivot got priced in, so be careful with the “reflation” trades (Oil & Gas stocks +3% yesterday) as USD holds its AUG support level of 93.40 (USD Index) and EUR/USD backs off at 1.14.

GOLD

Pre the recent U.S. jobs miss, our pivot was A) not to be short commodities and B) be long Gold – that’s signaling immediate-term TRADE overbought (because USD and rates are signaling oversold with 3-month Treasuries yielding negative -0.1%).

SPY

What happens when 10,000 hedge funds are using the same hedge? Looking forward to seeing how many shorts covered when we get the CFTC data today; sentiment at 15-16 VIX is off-side to the bullish side again; no resistance for VIX to 24-28 and/or support for SPX to 1965, then 1917 – Financials (XLF) our fav sector short right now vs. Utilities (XLU) long.

 

**Watch a replay of The Macro Show with Restaurants & Consumer Staples analyst Howard Penney - CLICK HERE

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 30% 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

We remain the most bullish house on Wall st, on the Long Bond

@KeithMcCullough

QUOTE OF THE DAY

People are illogical, unreasonable, and self-centered. Love them anyway.

-Kent M. Keith

STAT OF THE DAY

Alcohol cost $77 billion in impaired productivity at work in 2010, according to the CDC's breakdown published in the American Journal of Preventive Health.


EVENT: internet BEST IDEAS Quarterly Update

Takeaway: Please join us for our call Tuesday, Oct 20th at 1:00pm EDT. Dialing instructions will be published Tuesday morning.

We will be hosting our quarterly INTERNET BEST IDEAS Update Call next Tuesday.  We will be reviewing the major themes and incremental developments to our Best Idea Short theses (YELP, P), our Best Idea Long thesis on LNKD, as well as our Short thesis on TWTR.  The emphasis of this call will be to outline our view over various durations (particularly 2016) as well as the upcoming catalyst calendar; identifying the major risks and catalysts to each position over the near-to-intermediate term. 

 

Join us for our call Tuesday, Oct 20th at 1:00pm EDT.  Dialing instructions will be published Tuesday morning. 

 

 

KEY TOPICS WILL INCLUDE

  • LNKD: Sheepish guidance ≠ deteriorating fundamentals; why LNKD is poised to breakout from major 1H15 investments (not Lynda).
  • P: Model can’t handle much more than a best case scenario under Web IV; why the worst-case is more likely.
  • YELP: Model is broken, but street now understands that; what we’ll be monitoring to assess the short from here.
  • TWTR: Aggressive monetization tactics creating structural headwinds; why there is at least one more leg down to the short.

 

Hesham Shaaban, CFA

@HedgeyeInternet 


The Macro Show Replay | October 16, 2015

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

October 16, 2015

October 16, 2015 - Slide1

 

BULLISH TRENDS

October 16, 2015 - Slide2

October 16, 2015 - Slide3

October 16, 2015 - Slide4

 

 

BEARISH TRENDS

October 16, 2015 - Slide5

October 16, 2015 - Slide6

October 16, 2015 - Slide7

October 16, 2015 - Slide8

October 16, 2015 - Slide9

October 16, 2015 - Slide10


CHART OF THE DAY: Overly Bullish Retail Growth Expectations

Editor's Note: Below is a chart and brief excerpt from today's Early Look written by Hedgeye U.S. Macro Analyst Christian Drake. Click here for more information on how to subscribe. 

 

CHART OF THE DAY: Overly Bullish Retail Growth Expectations  - WMT CoD2

 

Retail growth expectations are overly bullish.  The Chart of the Day says it all…it shows the consensus EPS growth rate for a basket of bellwether names in the retail sector. After bottoming in FY15 (WMT FY16) consensus has numbers accelerating to 10% and 12% in FY16 and FY17 respectively. Compare that to WMT guiding to -10% in its FY16 (calendar ‘15), -9% at the midpoint of the guide in FY17 (calendar ’16), and flat in FY 18 (calendar ’17). Bottom line…either WMT sandbagged, or growth for others will come down. Such a significant gap has not sustained itself for any more than a few quarters.


Quinoa Probabilities

"Being unemployed has really helped to lower my carbon footprint."

- Comedic tree-hugging enthusiast 

 

I couldn’t remember the meaning of the word ‘spendthrift’ until I was probably 21 yrs. old.  It’s one of those anti-onomatopoeia words that means the exact opposite of what it sounds like. 

 

How about its venerable cousin of the same ilk, #gainsay … any convicted guesses on that bad boy?

 

And since its Friday, let’s up the investment irrelevancy another notch:  

 

Write this word down, show it to the person next to you and tell them to pronounce it: Quinoa

 

(for reference, it’s: keen-wah)

 

If it’s the 1st time they’ve seen it = 99.9% chance they get it wrong.

 

Co-worker bike to the office this morning wearing a hemp jumpsuit and leaving early for an Earth Day planning committee meeting?   …. No worries, still 50/50 chance they get it wrong.

 

Take some of those TLT gains and see if anyone is willing to take the other side of a virgin Quinoa pronunciation bet. 

  

Drinks on you tonight!

 

Quinoa Probabilities - Euro cartoon 05.18.2015

 

Back to the Global Macro Grind ….

 

If it’s the 1st time your favorite policy maker has seen a global balance sheet recession characterized by global overleverage, oversupply and negative global consumption demographic trends = 99% chance they don’t get the sustainable real growth Rx correct. 

 

Granted, and as our visual macro distillation jedi Bob Rich illustrates above, when the available tool set is limited, sometimes it doesn’t matter what the question is.  If all you have is a hammer, everything looks like a nail and all that ….

 

Fed policy doctrine says that the outside lag on policy is something on the order of 6-18 months.  In other words, because a variable lag exists between the time policy is implemented and the time its impact flows through the real economy, the Fed’s forecast for growth and inflation 2-6 quarters out should dictate policy action today.

 

Here there are two (major) problems:

 

1.    Data Dependence:  For a self-described Data Dependent Fed, this represents a fundamental conflict.  Policy action can’t be simultaneously dependent on reported data (which, itself, is 1-3 months old) and also on a variant forward projection of how the data will have evolved 0.5-1.5 years from now.

2.   Serial Over-optimism:  Forecast risk has been real and serially biased towards overestimation alongside a persistent expectation for a return to “trend-line” growth.  On average, Fed forecasts have overestimated growth by ~100bps every year over the last half-decade. With GDP averaging just 2% over the same period, that magnitude of over-optimism is not insignificant.      

 

Now, with the Fed again grazing blissfully in the panglossian forecasting fields in 2015, the domestic data train continues to onboard negative second derivative trends.

 

As review, from a rate-of-change perspective, we are past peak across the following:

 

·         Payroll Growth:  Peaked in Feb at +2.34% YoY.  While past peak employment growth doesn’t herald an imminent recession, it does consistently typify an expansion in its twilight.

 

·        Consumption Growth: Household Spending growth peaked in 1Q15.  Consumption Comps get more difficult from here and, while reported growth will again be “good” on an absolute basis in 3Q, the slope of the line will be negative.  With credit growth still muted, consumption growth is all about income trends and the accelerating growth in aggregate personal and salary and wage income over the last two years has supported an improving capacity for household spending.  With lower growth in aggregate hours and flat earnings growth (remember: aggregate income is simply a function of # of people working * hours worked per week * earnings per hour) in August and September, income growth is flirting with a negative inflection as well. 

 

·         Confidence:  Consumer Confidence (University of Michigan) peaked in 1H15.  Unsurprisingly, confidence and real per capita income move concurrently.  If income trends flag, a recovery to new highs in confidence becomes increasingly improbable. 


·         Profitability:  Corporate profitability across both the S&P500 and the national aggregate has crested and moved past peak. 

 

Indeed, as the market cap collapse in WMT signaled earlier this week, the profitability cratering observed across the energy and industrial complex is conspicuously creeping its way into the retail space.  

 

Our Retail Sector Head, Brian McGough, aptly contextualized the Walmart release and the broader readthrough to retail in an institutional note on Wednesday.  Since I remain perma-bearish on wheel re-creation, here’s an unedited reprint of the highlights:

 

1) WMT set the bar so low with its guidance today that we have to wonder how the rest of retail is not quaking in its boots. The mid-point of the guide implies that earnings will be off 10% this year and another 6-12% in FY 17 AND we won’t see 2015 earnings levels again until at least FY19. If anyone is questioning what end of the economic cycle we’re in, it’s not the end you give a kiss at bedtime. While a struggling WMT is a terrible barometer for all of retail, it’s even more troubling when you consider what WMT is investing in. Wages and Price. That will be a significant headwind on the gross margin and cost side. Any peers (ranging from TGT to CVS to COST to KSS to Albertson’s [winner of “most poorly timed IPO of the decade”]) who think they can sidestep this reality are delusional. 

 

2) Wages – by the end of FY17 WMT will have invested $2.7bn or $5,400 per each of its 500,000 eligible US employees. It will account for -4.5% to -9% of EPS change in FY17 or 75% of the aggregate earnings decrease. That type of deleverage for a company like WMT who in the US employs 1.4mm workers and accounts for 16.5% of workers in the Food & Beverage, Health/Personal Care, Clothing, and General Merch categories that’s a game changer. Anyone who has not proactively managed their expense line will have a tough time. It’s a good thing for KSS that it does not have to pay higher wages because it’s employees love to come to work (that statement will come back to haunt CEO Mansell). 

 

3) Retail growth expectations are overly bullish.  The Chart of the Day below says it all…it shows the consensus EPS growth rate for a basket of bellwether names in the retail sector. After bottoming in FY15 (WMT FY16) consensus has numbers accelerating to 10% and 12% in FY16 and FY17 respectively. Compare that to WMT guiding to -10% in its FY16 (calendar ‘15), -9% at the midpoint of the guide in FY17 (calendar ’16), and flat in FY 18 (calendar ’17). Bottom line…either WMT sandbagged, or growth for others will come down. Such a significant gap has not sustained itself for any more than a few quarters.

 

Dost thou gainsay the acceleration in retail spendthriftery?

 

Reality, Rates & Rhetorical Questions: How many times has the Fed raised rates into a slowdown and with headline inflation at +0.0%?  … what’s that quinoa pronunciation success rate, again?

 

Could inflation percolate as we lap the energy collapse comps and a weaker dollar drive price inflation in things priced in dollars?

 

Sure, but the internals driving that reflation are delusory (remember why the dollar is weaker).  It’s akin to a drop in the labor force driving the unemployment rate lower.  The positive headline is simply an antithetical symptom of the underlying reality.  

 

Keith has been harping on this point but it bears harping as it’s about as unambiguous a Macro market signal as it gets:  Down Dollar + Down Rates ≠ Growth Accelerating. 

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.96-2.06%

SPX 1
RUT 1108--1177
DAX 96

VIX 15.51-22.44

 

Prepare. Perform. Prevail.

 

Christian B. Drake

U.S. Macro Analyst

 

Quinoa Probabilities - WMT CoD2


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next