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CHART OF THE DAY: #SuperLateCycle Reality, Meet Mr. Market

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe. 

 

"... The “market” may not be down huge (yet), but if you’re long mainline USA Retailers like Wal-Mart (WMT), Kohl’s (KSS), and Macy’s (M), you are! That’s the thing about telling people stories about the “market” – there’s this thing called what you own within the market.

 

Macy’s (M) was down -14% yesterday after veteran CEO Terry Lundgren explained the concept of “tough comps” (at the end of a 6-7 year cycle) to everyone who was begging for him to “spin” into a REIT."

 

CHART OF THE DAY: #SuperLateCycle Reality, Meet Mr. Market - 11.12.15 EL chart

 

 


Consumer Slowing Stories

“We learn best through stories.”

-Jon Gordon

 

That’s a great quote from an inspirational book called The Carpenter. It comes to mind this morning after we sat down with one of 2015’s best performing hedge fund managers (in Texas) yesterday.

 

He started our meeting with, “tell me a story – how does this play out from here.” So, I told the man a story. And he liked it.

 

Not everyone likes the cyclical story about both US employment and consumption being classic #LateCycle. Consensus preferred the fictional tale that “low gas prices are bullish” for everything Ex-Energy. But the truthful story paid off (again) in spades.

Consumer Slowing Stories - Yellen cartoon 11.11.2015

 

Back to the Global Macro Grind

 

I know. I know. It’s different this time and while US Retail Sales have been slowing in rate of change terms since the cycle peak (NOV 2014 US Retail Sales +4.7% y/y), as long as you own Amazon at 996x trailing earnings and shorted everything else, you’re crushing it.

 

Here are your morning scores, in US Retail Sector ETF (XRT) terms:

  1. XRT is down -11.2% since we introduced it on the bear side in our #ConsumerCycle Slowing deck (July 2015)
  2. XRT is down -7.2% YTD vs. “the market isn’t down huge” narrative

The “market” may not be down huge (yet), but if you’re long mainline USA Retailers like Wal-Mart (WMT), Kohl’s (KSS), and Macy’s (M), you are! That’s the thing about telling people stories about the “market” – there’s this thing called what you own within the market.

 

Macy’s (M) was down -14% yesterday after veteran CEO Terry Lundgren explained the concept of “tough comps” (at the end of a 6-7 year cycle) to everyone who was begging for him to “spin” into a REIT.

 

He, like Hedgeye’s founder (me), models the forward outlook using the base effect of the prior comparative (comps) sales period. If you have a better way to front-run rising probabilities of accelerations or decelerations in a business, let me know.

 

We model the US economy the exact same way.

 

So, Mucker, tell me a story about what happens from here, in US economic terms:

  1. US Employment Growth (non-farm payrolls) peaked in Q1 of 2015 and will continue to slow through at least Q2 of 2016
  2. US Consumption Growth (Real PCE) peaked in Q1 of 2015 and will continue to slow through at least Q2 of 2016
  3. US Profit Cycle Growth (SP500 Earnings) peaked in Q2 of 2015 and will continue to slow through at least Q2 of 2016

And since both the Federal Reserve and the Old Wall consensus storytelling (that has been wrong all year long on both #GrowthSlowing and #Deflation) is calling for the opposite of the aforementioned 3 chapters, we have one heck of an opportunity to earn our 2 & $29.95/mth.

 

But, if we continue to be right on the timing of it all:

  1. Couldn’t the “market” go up as the Fed has to ease on that?
  2. Wouldn’t bad (slowing) news be “good” (because everything is always good)?
  3. What happens when bad is breaking bad (see AUG-SEP 2015 for details)?

So many questions. So many stories to tell at every turn.

 

Catalysts?

  1. DEC 3rd ECB meeting where Draghi doubles down on devaluation? (that’s deflationary in USD terms)
  2. DEC 4th US Jobs report where the Fed is going to have to day trade Fed fund futures within a 20-90% range (probability of hike)
  3. DEC 16th Fed Meeting – to hike, or not to hike, into #Deflation Risk and an economic slow-down, remains The Question

In other words, between now and the 1st week of December, you can either trade the chop or bang your head against the wall. You can tell yourself whatever you want, really. But, in the end, both the US economic data and companies have to report #SuperLateCycle realities.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research view in brackets):

 

UST 10yr Yield 2.09-2.38% (bearish)

SPX 2054-2093 (bearish)
RUT 1160--1204 (bearish)

NASDAQ 4 (bullish)

Nikkei 180 (bullish)

DAX 101 (neutral)

VIX 14.17-18.83 (bullish)
USD 98.05-100.23 (bullish)
EUR/USD 1.06-1.08 (bearish)
YEN 121.33-123.99 (bearish)
Oil (WTI) 42.07-45.37 (bearish)

Nat Gas 2.19-2.39 (bearish)

Gold 1065-1105 (bearish)
Copper 2.16-2.27 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Consumer Slowing Stories - 11.12.15 EL chart


JACK | THE SHARKS ARE CIRCLING

Jack in the Box (JACK) is on our Hedgeye Restaurants Best Ideas list as a SHORT.

 

JACK reports 4Q15 earnings after market close on November 17th followed by a call on the 18th at 11:30am ET, we are staying SHORT into the print.

 

 

HEDGEYE OPINION

The world is constantly changing. This fact is very apparent in the food space, where consumers can’t make up their mind about what or where to eat their next meal/snack. Hence the need for a quality media plan, coupled with a differentiated experience to drive people to your restaurant versus the other dozen on the same road.

 

Per Restaurant Research, October TV airings momentum diverged, with QSR picking-up momentum while FSR continued to slow.

 

10 national chains increased the number of TV airings by more than +33% y/y including: +120% Arby's (brisket & steak sandwiches), +78% Taco Bell (breakfast & The Boss Wrap), +61% Chick-fil-A ("Eat Mor Chikin" Campaign/Original Chicken Sandwich), +61% Ruby Tuesday's (Garden Bar Lunch Combos Under $10), and +58% Papa John's (Players' Choice Lg. Pizzas $12).

 

Five chains decreased the number of TV airings by more than -33% including: -61% Red Robin, -56% Jack in the Box, -51% Dunkin' Donuts, -41% Buffalo Wild Wings and -41% Cracker Barrel.

 

Given what RRGB, DNKN and BWLD said about October and the market reaction they received, we suspect JACK will say October is soft/choppy as well.

 

CONSENSUS EXPECTATIONS ARE TOO HIGH

On the Jack in the Box stores specifically, consensus estimates are calling for them to post a same-stores sales growth number of 5.7% versus 3.1% a year prior, a 260bps increase. On a two-year trend basis this represents a 40bps sequential slowdown to 4.4%. It is unrealistic to think a company playing in an increasingly competitive market with declining advertising spending is going to see differentiated growth that outpaces the competition.

JACK | THE SHARKS ARE CIRCLING - CHART 1 Replace

 

Moving onto Qdoba, which was highlighted in our recent BURRITO TRACKER, is looking destined for disappointment. All of our Macro Monitor data sets are headed south, and with correlations in the past looking good, we have to stick to our guns on this one. Chipotle suffered during their 3Q15 which they reported a couple of weeks ago, and given their 0.71 correlation to each other it appears that Qdoba is headed in the same direction.

JACK | THE SHARKS ARE CIRCLING - CHART 2

JACK | THE SHARKS ARE CIRCLING - CHART 3

 

 

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 


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November 12, 2015

We've made some updates and enhancements to Daily Trading Ranges. You'll now receive risk ranges for 20 tickers each day -  the last five of which will be determined by what's flashing on Keith's screen and by what names you're asking about. Contact support@hedgeye.com if you have any questions or feedback.

 

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INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.38 2.09 2.32
SPX
S&P 500
2,054 2,093 2,075
RUT
Russell 2000
1,160 1,204 1,178
COMPQ
NASDAQ Composite
4,999 5,111 5,067
NIKK
Nikkei 225 Index
18,996 19,930 19,691
DAX
German DAX Composite
10,588 11,001 10,908
VIX
Volatility Index
14.17 18.83 16.06
DXY
U.S. Dollar Index
98.05 100.23 99.16
EURUSD
Euro
1.06 1.08 1.07
USDJPY
Japanese Yen
121.33 123.99 122.85
WTIC
Light Crude Oil Spot Price
42.07 45.37 43.07
NATGAS
Natural Gas Spot Price
2.19 2.39 2.27
GOLD
Gold Spot Price
1,065 1,105 1,086
COPPER
Copper Spot Price
2.16 2.27 2.22
AAPL
Apple Inc.
115 120 116
PCLN
Priceline.com Inc.
1,279 1,371 1,330
VRX
Valeant Pharmaceuticals International, Inc.
71.06 92.69 78.90
BABA
Alibaba Group Holding Ltd.
77.98 83.29 79.85
M
Macy's Inc.
38.91 45.27 40.44
KSS
Kohl's Corp.
41.22 46.12 43.16

 

 


The Macro Show Replay | November 12, 2015

 

 


Cartoon of the Day: Get a Second Opinion

Cartoon of the Day: Get a Second Opinion - Yellen cartoon 11.11.2015

 

"The Fed's 'forecast' is wrong 70% of the time," Hedgeye CEO Keith McCullough wrote earlier today. "They are the new market risk."  


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