Retailers, Draghi and #Deflation

Client Talking Points


Smoked by Macy’s CEO talking about that darn #ConsumerCycle slowing theme we’ve been hammering on since July – XRT (our preferred way to be short U.S. Retailers in size) is down -11.2% since the July 15th consumption cycle top and down -7.2% year-to-date.


After suggesting #Deflation wasn’t a risk and European growth was “encouraging”, our man Mario (ECB President Mario Draghi) pivots to “downside risks are now clearly visible … and inflation dynamics have weakened.” Finally, some #truth – don’t forget that Down Euro = #Deflation via Strong USD.


Just an awful November for whoever bought into the “reflation” thing that our competition has been pitching since July. The CRB Index was down another -0.6% yesterday, testing the lows as Copper blows through the lows to $2.18 and levered Energy stocks move down -4% on the day.


**Tune into The Macro Show with Macro analysts Christian Drake and Ben Ryan at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Post earnings, the next catalyst for McDonald’s (MCD) is going to be next week's November 10th analyst meeting. The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT.


Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.


Restoration Hardware (RH) hit all-time highs this week, but this story is far from over. We think RH will earn close to $11 per share in 3 years, which compares to the consensus estimate of just over $6. We estimate that the stock is worth $300.


The square footage component is well known, but we think people are missing…

  1. The productivity and market share that we’re likely to see from each new store,
  2. How scalable this business model is without commensurate capital investment,
  3. The leverage we’re likely to see is below-market real-estate deals being struck today and that should begin to impact the P&L. 

Current policy makers remain fixated on the jobs market, and this Friday’s report was good on the surface. Here’s the rundown:

  • The U.S. added +271K to non-Farm payrolls in October which blew out the expectation for +185K additions (last month’s awful print was revised even lower to +137K additions). Remember that the estimates are useless as the number is near impossible to predict. Keep that in mind.
  • Unemployment Rate moved lower to 5.0% for October from 5.1% in September
  • Wage growth was a positive surprise as Avg. hourly earnings printed a +2.5% growth rate for October vs. an expectation of +2.3%. The growth rate in September was +2.2%

So, again, on the surface it was a positive report. However, as we’ve emphasized, consumption and labor market strength are staples of an economy that is late cycle.

Growth continues to slow, and a rate hike has the potential to pull-forward a recession and flatten the yield curve. In the event this happens, you’ll be happy you held onto your long-bond position. If you haven’t bought into the #slower-for-longer view, the market is giving you the chance to buy bonds at another lower high… For the 5th time this year.

Three for the Road


Shhh! Macys CEO Just Hinted At Recession | $M… via @HedgeyeRetail @KeithMcCullough #Macys … via @KeithMcCullough #markets $SPY #earnings



You cannot plough a field by turning it over in your mind.

Author Unknown


Wal-Mart is projecting that its earnings may fall by as much as 12% during the next fiscal year.

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.



  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,



Keith R. McCullough
Chief Executive Officer


Consumer Slowing Stories - 11.12.15 EL chart

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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.




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.



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.



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.






Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw




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 if you have any questions or feedback.


  • Bullish Trend
  • Bearish Trend
  • Neutral

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



The Macro Show Replay | November 12, 2015



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%