M | A Small Taste

Takeaway: A small taste of when the economy really weakens. Numbers still too high. REIT value no longer a crutch. This name can get a lot cheaper.

Conclusion: This might have been the longest Macy’s conference call in over a decade, but from where we sit, the conclusion on the stock is quite simple. Stay away from it. Is it an outright short? Maybe not after today’s steep sell-off. But we think that numbers are too high, even after the company’s guide down. At 10x earnings, 6x EBITDA, and a 9.5% FCF yield, it certainly looks cheap – but it had the same multiples yesterday before the earnings print. At this point, it’s all about earnings, and unfortunately, expectations for next year are high by over 10%. Consider the following:  a) we’re late in an economic cycle, b) the CEO just said it is the worst sales environment in 5-7 years, c) there’s no clear path to recovery (potentially ever), and d) one of the biggest bull cases (REIT) was just blown up. At this point, we think people are probably going to test the low end of the valuation spectrum until they have confidence that numbers have bottomed. For department stores like Macy’s, that’s 7-8x earnings, 4-4.5x EBITDA, and 15%-20% FCF yield. If our model is right, that implies a stock in the high-$20s. This is one we’re going to avoid, and will short on green as we gain confidence in our model.  


There was a lot of information in this print. Let’s focus on the Majors.

1)      Terry Lundgren Saves The Day – Kinda.  Macy’s CEO was on the conference call for the first time since 4Q09 – when he took a victory lap after implementing MyMacy’s as we emerged from the Great Recession. But this guest appearance by the man was anything but a victory lap. It was intended to be a fire retardant. It didn’t work.

2)      This Was All About Being Accountable to Activists. Let’s be clear on why Lundgren was on the call. It was not to discuss weak sales trends, strategic plans or financial results. Karen Hoguet (CFO) is about as savvy as they come, and could easily handle this on her own.  He needed to be on the call to be accountable to all the activist investors who have been in very close contact with Macy’s over the past year about converting into a REIT – something we’ve long viewed as financially and logistically impractical. Management stated as plain as day that Macy’s WILL NOT pursue the REIT strategy. This means if someone is invested in Macy’s for a REIT – and there are plenty who are – they probably need to either exit the position, or morph the thesis to be focused on the base business. But with sales down 5% and inventories up 5%, the company didn’t give a whole lot to get bullish about. Yes, Macy's contracted Tishman Speyer (the partner it used on the Brooklyn store) deal to find strategic/joint venture alternatives for 4 of its Flagship properties with the potential to touch more of the footprint as M rationalizes it's sq. ft. in those doors and attempts to creatively monetize a portion of its 'A' assets. But this is a far cry from monetizing 150mm square feet.

3)      The 5-7 Year Itch. Arguably the most troubling factor from our vantage point is Lundgren said "We believe that the retail industry is going through a tough period that we seem to experience something like this every five to seven years or so, and this one feels familiar in that regard."   He probably did not mean this to sound so dire, and softened it up accordingly after seeing the stock down double digits (his recoil didn’t work). But our concern is that growth is definitely slowing in the broader economy, and it appears to be very late-cycle. But it does not feel like a recession – yet. If Macy’s is putting up numbers like this and making these statements today, what happens when (not if) the US economy contracts again? We certainly don’t want to be there when that happens.

4)      Not a Likely LBO. One investor addressed LBO math in the Q&A. We happen to disagree, in that our model only comes up with a 6.2% ROI. There are actually a few things about the model that we like. a) at a 50% premium to current levels, M could be taken out with only $5.4bn in equity, assuming 50% is funded by Senior Debt and 30% by mortgaging its stores. That also gets us leverage of 3.8x, which actually quite good for such a large deal. The problem is that in order to get a 20%+ return – a level that’s a lot more palatable to us – we need to assume a reacceleration in sales and margins to new peak. In other words, we need to go another 5-years without an economic downturn.


M | A Small Taste - 11 11 2015 M chart1B


M | A Small Taste - 11 11 2015 M chart2

[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again

Takeaway: The shift from active to passive in equities continues to rage and cash balances continue to perk up in 2H15.

Editor's Note: This is a complimentary research note which was originally published November 5, 2015 by our Financials team. If you would like more info on how you can access our institutional research please email



Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending October 28th, investors flocked to equity ETFs inserting +$9.5 billion in passive stock products, the third largest weekly contribution this year. Conversely, active equity mutual funds continue to be the source of funds, with another -$2.8 billion being redeemed from all U.S. stock fund managers. This shift from active to passive has been rolling for almost a decade now however with still over $7 trillion in active equity mutual funds versus $1.6 trillion in U.S. equity listed ETFs, there is still plenty of market share to be gained. The chart below outlines that the -$595 billion in redemptions in U.S. mutual funds since 2007 has resulted in +$855 billion in new inflow into all passive products (index mutual funds and ETFs). This trend has continued throughout 2015 with a -$125 billion redemption in active U.S. mutual funds versus the +$88 billion subscription to U.S. ETFs. We recommend a short position in shares of T. Rowe Price as a way to express this ongoing shift (see our TROW reports).


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - top chart 


Cash continues to build on the sidelines as well as of the most recent survey with another +18 billion recorded by ICI in cash products as of October 28th. Money funds have now brought in +$48 billion in the fourth quarter to date, following a $67 billion build in the third quarter. In addition, the news of Bank of America transferring its +$80 billion money fund portfolio to BlackRock could be a trend to come as banking organizations start to move pools of assets that trigger capital charges under forming rule sets. We continue to like the cash management space and out of favor Federated Investors (see our FII report) on a combination of positive balance builds and profitability inprovements in the business for '16/'17.



[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI1


In the most recent 5-day period ending October 28th, total equity mutual funds put up net outflows of -$2.7 billion, trailing the year-to-date weekly average outflow of -$412 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$62 million and domestic stock fund withdrawals of -$2.8 billion. International equity funds have had positive flows in 46 of the last 52 weeks while domestic equity funds have had only 9 weeks of positive flows over the same time period.


Fixed income mutual funds put up net inflows of +$3.9 billion, outpacing the year-to-date weekly average inflow of +$201 million and the 2014 average inflow of +$926 million. The inflow was composed of tax-free or municipal bond funds contributions of +$1.2 billion and taxable bond funds contributions of +$2.7 billion.


Equity ETFs had net subscriptions of +$9.5 billion, outpacing the year-to-date weekly average inflow of +$2.1 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$917 million, trailing the year-to-date weekly average inflow of +$1.2 billion and the 2014 average inflow of +$1.0 billion.


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.

Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI2


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI3


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI4


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI5


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI6

Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI12


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI13


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI14


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI15


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI16

Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI7


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI8

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the healthcare XLV ETF took in +6% or +$757 million in contributions. The energy XLE on the other hand lost -4% or -$477 million.


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI9

Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI17


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI18

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$2.0 billion spread for the week (+$6.8 billion of total equity inflow net of the +$4.8 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.4 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI10


The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


[UNLOCKED] Fund Flows | Passive is Massive and Cash is Becoming King Again - ICI11 

BREAKING RISK: Fed Prez John Williams Sees 'Very Strong Case' For Rate Hike

BREAKING RISK: Fed Prez John Williams Sees 'Very Strong Case' For Rate Hike - rate hike cartoon 11.05.2015


Wondering about a December Fed rate hike? The latest news comes from San Francisco Fed president John Williams who told USA Today in an interview Tuesday that there is a “very strong case” for a rate hike this year “assuming the data are consistent with those [conditions].” That's an important caveat.


BREAKING RISK: Fed Prez John Williams Sees 'Very Strong Case' For Rate Hike - bs


Once again, it’s the pesky data that could screw everything up for rate-hike prognosticators. And the parlor game goes on...


In good faith and as part of our daily process here at Hedgeye, yesterday, CEO Keith McCullough went hunting for so-called economic “green shoots,” those bright spots in the daily data that might support a perma-bull equity thesis. In short, he couldn’t find much. But he did see a number of red flags.


To be clear, we remain very concerned that the Fed will, in fact, be hiking interest rates into an economic slowdown.

BREAKING RISK: Fed Prez John Williams Sees 'Very Strong Case' For Rate Hike - fed 70  of time


Earlier today, McCullough isolated one key data point flashing green, but it’s actually another notch in favor of the bears.


Here’s a chart of the strengthening dollar:


BREAKING RISK: Fed Prez John Williams Sees 'Very Strong Case' For Rate Hike - dollar greenshoot


... And McCullough’s analysis in a note to subscribers earlier this morning:


“Relentless USD strength as my Berkeley boy Williams (San Fran Fed) hits USA Today with the ‘recent data supports a rate hike’ – I guess he missed all the industrial/cyclical, ISM, and GDP data, but raising rates into #LateCycle slow-down is mucho deflationary for many asset prices – DEC 4th US Jobs Report up next.”


On the USA Today Williams interview news, commodities, like Copper, continued #Crashing.


Check out Oil prices too…


BREAKING RISK: Fed Prez John Williams Sees 'Very Strong Case' For Rate Hike - oil crash


If you're concerned about #Deflation, like we are, it's all a bit disconcerting.


But never mind all that, says Fed president Williams. More *deep* analysis from Williams:


"I don't see much evidence of fragility or lack of momentum…At some point, just the improvement in the economy with the passage of time starts to outweigh some of the concerns of potential risk."


Stop right there. On Williams' point about “the passage of time,” remember that the current U.S. economic expansion has stretched 78 months. Our analysis of a century of economic cycles shows that the mean duration is 59 months. So with all due respect Mr. Williams, the current expansion is getting long in the tooth.


But go ahead raise rates into the slowdown. We'll see what happens...


BREAKING RISK: Fed Prez John Williams Sees 'Very Strong Case' For Rate Hike - mccullough recession

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.

McCullough: Why You Can’t Trust U.S. Jobs Numbers

In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough answers a subscriber’s question on whether he has any issues with the reported jobs numbers. And, according to McCullough, “the real risk has to do with the Federal Reserve’s forecast, and their anchoring of this entire edifice of policy rate hike expectations on the most late-cycle of economic indicators, which is employment.”




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


Subscribe to Hedgeye on YouTube for all of our free video content.

Purchase Apps | Autumn Drift

Takeaway: Purchase Applications were an uneventful +0.1% WoW, extending the post-TRID streak of underwhelming activity to 4-weeks.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


Purchase Apps | Autumn Drift - Compendium 111115


The modest southward drift in Purchase Activity to close out October persisted to start November.  Headline Mortgage Applications dropped -1.3% week-over-week as Purchase Activity rose +0.1% and refi activity retreated -2.2% alongside the largest weekly backup in rates since early June.


Purchase Demand declined -0.1% week-over-week, leaving the index flat at 190 to start November - at current levels, November is tracking at the lowest level since March (1st chart below).    On a year-over-year basis, Purchase Demand decelerated -120 bps to +18.1% with activity currently tracking -1.3% QoQ. 


Rates on the 30Y FRM contract rose +11bps sequentially to 4.12% - marking the highest level in 3-months as the bond market bid both the long and short end higher in the wake of the strong October Employment report.   At current levels, rates are now north of the 2015 average of 4.02% but remain below the 4.35% average for 2014.  


In short, mortgaged purchase activity continued to underwhelm for a fourth week following TRID Implementation in early October.  Looking out the next couple weeks, we expect largely trend consistent prints out of Starts/HMI while re-convergence to PHS suggests negative growth in Existing Sales in October (reported 11/23) and potential further softening (TRID-vacuum) in reported PHS/NHS data for October – see our recent note, Catalysts & Cross Currents | Contextualizing the Recent Housing Data, for further detail and context.  


Purchase Apps | Autumn Drift - Purchase monthly


Purchase Apps | Autumn Drift - Purchase YoY


Purchase Apps | Autumn Drift - Purchase 2013vs14v15


Purchase Apps | Autumn Drift - Purchase Index   YoY Qtrly


Purchase Apps | Autumn Drift - 30Y FRM


Purchase Apps | Autumn Drift - Purchase LT


About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake


The Dance with Deflation

“Yes my life is better left to chance,

I could have missed the pain but I’d have had to miss the dance.”

-Garth Brooks


Back when Keith, our President Michael Blum, and I were undergrads at Yale, we used to sing Garth Brooks tunes late into the night over a keg of warm beer.  Things were much simpler on college campuses back then.  In fact, I’m not even sure we dressed up for Halloween.


The most recent controversy on the grounds of our alma mater has gained national attention.  Inasmuch as I can discern, the debate is over whether Halloween costumes are offensive or are examples of free speech.  Also, whether the proverbial, and literal, adults in the room have any right to comment on any of this or should be focused on creating “safe places.”  Heady issues to be sure.


Since we tend to stay away from both social and political opinions at Hedgeye, we will stick with that path on this controversy as well.  We should submit, though, that this episode does offer an interesting , albeit anecdotal, view into the mind of the Millennial.


Speaking of which, we are pleased to have Neil Howe, the man who actually coined the term “Millennial,” speaking  next week at Macrocrosm: The Dock Debates, our first conference.  On the topic of demographics, we asked Neil to discuss the impact that the super-connected 75+ million Milllenials will have on the upcoming Presidential election.


As it relates to the Yale “controversy,” Neil had this to write:


“When it comes to controlling misbehavior, Millennials insist that the institution step in with rules where earlier generations (Xers, Boomers) would have pushed peer pressure or peer-on-peer intervention. In the "Animal House" era, you *never* punished a jerk by going to the dean--you did it yourself, when the dean wasn't looking!”




Please email if you’d like to reserve a spot for the conference as we expect to be at full capacity by the end of the week.  Full details on Macrocosm (full lineup of speakers, topics, etc) can be found here.


The Dance with Deflation - z macrocosm


Back to the Global Macro Grind...


Inasmuch as college administrators are doing the dance with Millennials, the more interesting dance for those of us with an interest in the real economy is the dance with deflation.  Part of our macro team is in Texas this week meeting with prospects and clients and of course experiencing the epicenter of energy deflation.


Interestingly, Texas has so far largely shaken off the impact of substantially lower oil prices on employment.  Other than March of this year, in which Texas lost 24,500 jobs, the state has continued to add employees.  This is a much better scenario then when WTI was at the same level in 2009 and Texas lost almost 340,000 jobs that year.


The bigger challenge for Texas is related to the government’s budget.  With WTI -1.1% this morning to $43.02, the 4.6% tax the state imposes on the value of all oil produced in the state is not going to add up to much this year.  As a result, there is no question that Texas will be running a budget deficit for the forseeable future.  And an even greater likelihood is that a Fed interest rate hike pushes Texas (and other oil producing areas) into recession.


North of the border, Canada is faring much worse.  In Alberta, the "Texas of Canada," it is expected that 185,000 oil and gas jobs will be lost in 2015.  This is a substantial number of jobs to lose on Alberta’s population base of only 4.2 million.  In aggregate, Canada employs 720,000 people in the oil & gas industry with a full 2/3 located in Alberta.  The loss of these jobs has had a broad impact on Canada. Since 2014, Alberta was responsible for 90% of the new jobs created in Canada.


Unlike Texas and the United States, this Dance with Deflation has already impacted Canada.  After two quarters of negative growth, Canada is officially in a recession.  As a result, the Canadian central bank has cut rates twice this year.  The next shoe to fall in Canada is likely to be deflating residential real estate prices.  


To add fuel to the fire, the newly elected Canadian Prime Minister has pledged to raise taxes on those making over $200,000 per year.  This move is only likely to accelerate home price declines in markets like Calgary, Toronto, and Vancouver. 


Nonetheless, Canadian housing cheerleaders point to the fact that home prices nationally were up 6.1% in September.  To a point, this is fair.  So far, the Canadian housing market has shrugged off the recession.  But economic gravity will eventually prevail and while the Canadian central bank will do everything it can to protect home prices.  This is all likely to end very poorly for the Loonie and Canadian banks.


On the topic of commodities and deflation, Hedgeye is launching its new "Materials" sector tomorrow November 12th at 1:00pm led by two stalwarts of our research team Jay Van Sciver and Ben Ryan.  Their initial presentation will be on gold and their proprietary supply and demand model will attempt to answer this question:


“Gold prices in dollars have declined since 2011, despite two incremental rounds of quantitative easing and perpetual zero interest rates.  US long bonds have performed well in a similar environment.  What are the gold bugs missing?“


Before signing off today on this Veteran’s Day, I wanted to salute the men and women in uniform.  We all thank you.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.09-2.38%

SPX 2055-2094

VIX 13.74-18.87 
USD 98.15-99.98 
Oil (WTI) 43.02-45.73 

Gold 1069-1113 

AAPL 116-123 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research 


The Dance with Deflation - zz COD