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What Gold and Bond Prices Say About a December Rate Hike

 

During this brief excerpt from The Macro Show this morning, Hedgeye commodities analyst Ben Ryan and CEO Keith McCullough weigh in with their thoughts on current market signals and what they portend from the Fed.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

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Recession Coming? McCullough and Hilsenrath Square Off

In a spirited economic debate on Fox Business' Mornings With Maria today, Hedgeye CEO Keith McCullough and Wall Street Journal Chief Economics Correspondent Jon Hilsenrath discuss whether the U.S. is headed toward recession.

 

Click HERE to watch.

Recession Coming? McCullough and Hilsenrath Square Off - 11 2 2015 keith fox


Retail Callouts (11/2): Retail Idea List, Labor Market Tightening, COLM, M, TGT, WMT, KSS

Takeaway: COLM Added to Short Bench. Holiday hiring runs into tight labor market.

Hedgeye Retail Idea List

Retail Callouts (11/2): Retail Idea List, Labor Market Tightening, COLM, M, TGT, WMT, KSS - 11 2 2015 chart1

 

This Week's Changes

Columbia Sportswear: Added to Short Bench. It's admittedly early to short COLM, especially in light of such healthy sales, inventory and margin trends that COLM reported last week. But...the company benefitted from two extreme winters, and the likelihood of a third is slim. Management says it does not need one. But with inventories already elevated in the channel, and with the likelihood of so many consumers already having stocked up on boots and puffy jackets in the past two years, we think order trends are more likely than not to slow (or margins weaken -- or both). As a kicker, the company has seen notable success with its boot/wedge business. We actually did not know that this was a 'thing', but by the sound of management on the conference call, they did not either. This will be a tough business for COLM to anniversary in another nine months. So all-in, it's early to short this one. But at 21x earnings and near 10-year trough short interest, we think this one is definitely bench-worthy.

Retail Callouts (11/2): Retail Idea List, Labor Market Tightening, COLM, M, TGT, WMT, KSS - 10 30 15 Chart3

 

M, TGT, WMT, KSS - Several retailers including Macy's, Target, and Toys R Us noting labor market tightness.  The companies are taking steps such as increasing hours of current employees, and offering higher pay to attract seasonal employees.

(http://www.wsj.com/articles/retailers-work-harder-to-lure-holiday-employees-1446424171)

A 5.2% unemployment rate and the largest retailer in the space taking up the ante chip on wages for entry level employees to the tune of $5400 = a difficult labor market anyway you slice it. So many retailers seem to have blown this off thinking that it’s really not a big deal, but rather a WMT PR stunt that won’t affect them. It may be a stunt, but when the biggest retailer in the world raises the minimum wage to $10.00, it is a big deal for everybody. We’ve heard half a dozen CEO’s say “We already pay above minimum wage, so it’s not a big deal.”  Or in Kohls’ case, “Our employees love to work, so we don’t have to pay them more.”  We understand that the companies can’t negotiate wage increases with employees through Wall-Street conference calls. But there will be an impact to almost everyone who sells to the low/mid-level consumer. That's kicked into high gear in October as retailers prepare for Holiday.

 

AMZN - Amazon announces Black Friday deals from now until Dec 22nd.  Prime members to have exclusive early access to more than 30,000 lightning deals.

(http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2104921)

 

AMZN - Amazon ending Amazon local and Amazon Payments card reader services.

(http://www.ecommercebytes.com/cab/abn/y15/m11/i02/s03)

 

ETH - Ethan Allen reports record orders for month of October 2015, notes impact of shift in sale calendar.

(http://phx.corporate-ir.net/phoenix.zhtml?c=81552&p=irol-newsArticle&ID=2105025)

 

WBA, RAD - Walgreens to divest upwards of 1000 stores as part of Rite Aid acquisition.  Walgreens operates 8173 stores while Rite Aid has 4561 stores.

(http://www.chainstoreage.com/article/wba-divest-many-1000-stores-secure-rite-aid-deal-approval)

 

CVS - Omnicare was served with an administrative subpoena by the DEA. The subpoena seeks documents related to controlled substance policies, procedures, and practices at eight pharmacy locations from May 2012 to present.

(http://www.sec.gov/Archives/edgar/data/64803/000006480315000064/cvs20150930-10q.htm)

 

Fendi Unveils New Store Concept in Miami

(http://wwd.com/business-news/retail/fendi-new-miami-store-concept-10271334/)

 


investing ideas

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MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH

Takeaway: Investors continue to weigh easy monetary policy against concerns about slowing growth.

 MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM11 2

 

Key Takeaway:

Easy central bank policy continued to help offset economic growth concerns last week. While U.S. third-quarter GDP came in at a low 1.5%, it only added to investor optimism about the Federal Reserve keeping rates near zero. Investor reaction was such that the TED spread fell an impressive -7 bps to 25. Additionally, Chinese bank CDS continued to tighten while the Chinese interbank rate dropped another -11 bps following the PBOC announcing it would cut rates and reserve requirements. This was in spite of the slowest GDP growth since the financial crisis. Our warning of caution: growth is slowing.

 

Given investors' positive reaction to central bank policy, our heatmap below is predominantly green for both the short and intermediate terms. Long-term readings are mixed.

Current Ideas:


MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Positive / 7 of 12 improved / 2 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

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM15 2

 

1. U.S. Financial CDS – Swaps tightened for 13 out of 27 domestic financial institutions. Reaction was positive to the Federal Reserve's announcement that it would keep rates near zero and the subsequent low GDP reading of 1.5% with the median CDS spread tightening from 78 to 76 bps.

Tightened the most WoW: MMC, MBI, AXP
Widened the most WoW: CB, ACE, AIG
Tightened the most WoW: MMC, TRV, ALL
Widened the most MoM: CB, RDN, GNW

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM1

 

2. European Financial CDS – Swaps mostly widened in Europe last week, although the movement was muted. The median spread held steady at 75 bps.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM2

 

3. Asian Financial CDS Chinese financial swaps continued to tighten, following the PBOC's decision to cut interest rates and reserve requirements in the prior week.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. However, Portuguese swaps widened as the country's prime minister was sworn in for a second term as the head of a minority government that is expected to last less than two weeks given challenges from the socialist majority.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM18

 

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM3

 

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week; Brazilian swaps, however, backed off -15 bps from their recent highs.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM16

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM20

6. High Yield (YTM) Monitor – High Yield rates were unchanged, ending the week at 7.39%.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 3.0 points last week, ending at 1846.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM6

8. TED Spread Monitor  – The TED spread fell 7 basis points last week, ending the week at 25 bps this week versus last week’s print of 32 bps.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM7

9. CRB Commodity Price Index – The CRB index was unchanged, ending the week at 196. As compared with the prior month, commodity prices have increased 0.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM8

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 12 bps.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 11 basis points last week, ending the week at 1.80% 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.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM10

12. Chinese Steel – Steel prices in China rose 0.6% last week, or 12 yuan/ton, to 2150 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 142 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.1% upside to TRADE resistance and 2.8% downside to TRADE support.

MONDAY MORNING RISK MONITOR | EASY MONEY VS SLOWING GROWTH - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


CAG | CLEANING HOUSE

ConAgra (CAG) is on our Hedgeye Consumer Staples Best Ideas list as a LONG.  

 

Treehouse Foods announced today that they have signed a definitive agreement to buy ConAgra’s Private Label food business for $2.7bn. Although the effort to sell the business was widely known, the price that CAG would eventually receive was a cause for concern. This price was obviously plenty to please investors as the stock is up approximately ~5% in premarket trading at the time of this note. Selling Private Brands is an important step in the right direction for CAG, as they work to right size their portfolio. Getting rid of the Private Brands business will allow their team to focus on branded foods, which carry a much higher margin.

 

CAG will be divesting the vast majority of their private brands business, only retaining certain operations that are directly tied with their branded business. With the $2.7bn CAG will use the majority of it to pay down debt. Additionally, following the transaction, CAG expects to have a capital loss carryforward of approximately $4.2bn with an approximate tax value of $1.6bn. This can be used to offset potential future capital gains over the next five years.

 

With the dead weight detached and a lower debt profile CAG is going to be on the hunt for an acquisition. With the lessons they learned on the failed acquisition of Private Brands, they will be smarter and more calculated on their next move. Will they decide to stick to the frozen aisle and acquire within their domain, or venture out and get into the popular world of snacking? There are plenty of possible acquisitions within both aisles and we look forward to seeing where they go next.

 

HISTORICAL NOTES

CAG | IN THE BEGINNING

CAG | GOING LONG

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Earnings Scorecard: Not Good

Reality check. As Hedgeye CEO Keith McCullough pointed out this morning, 341 of 500 S&P companies have reported Q3 Earnings– sales are -5.5% and earnings -3.9%.

 

Earnings Scorecard: Not Good - 11 2 2015 EPS scorecard

 

In our view, this increasingly sour earnings data is further evidence that we are in the midst of a corporate profit recession and further confirmation of our macro thesis #SlowerForLonger (growth). 

 

Earnings Scorecard: Not Good - 11 2 2015 Recession

 

In related news, McCullough is watching the Russell 2000 as a proxy for slowing U.S. growth. Here's what he had to say in a note to subscribers from earlier this morning:

 

“Stocks are up' if you back out the 2000 stocks in the Russell which dropped another -0.4% last week to -3.6% YTD (in the Russell 3000, 62% of stocks are still -20-25% from their #bubble peaks) – reminds us of October 2007."

 

In closing, equity market bulls may want to consider the tweet below from Macro analyst Darius Dale:

 

Earnings Scorecard: Not Good - 11 2 2015 Darius earnings


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