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Cartoon of the Day: Loves Me... Loves Me Not

Cartoon of the Day: Loves Me... Loves Me Not - rate hike cartoon 11.17.2015


"... Remember that if/when the Fed pivots back to dovish from pretend-hawkish, they have to tell the American People why they are doing that," wrote Hedgeye CEO Keith McCullough in today's Early Look. "Say it with me now – Super #LateCycle Growth Slowing…"




Takeaway: We hosted a one hour call this morning introducing our bearish thesis on PRA Group (PRAA). Links to the deck and replay are below.

Slides: HERE

Call: HERE





  • Supply/Demand Headwinds: The market for buying defaulted receivables is especially unfavorable. Demand for paper has exceeded supply for a few years now, mirroring the environment last seen from 2005-2007 when shares of PRAA tumbled ~70%.
  • Growing Debt: Leverage at the company has risen quickly in the wake of the Activ deal.  
  • Insiders Dumping: Widespread insider selling suggests that insiders see similar intermediate/longer-term headwinds.
  • History's Guide: Our analysis of the interplay between labor markets, terminal IRRs and pre-tax margins will shed light on what to expect fundamentally from a timing standpoint.
  • Regulatory Pressure: The CFPB is expected to set new rules for debt collectors in 2016.
  • Current Value Unsustainable: The ERC less cost to collect and taxes is currently ~$400mn below the net debt of the company.


Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike

Takeaway: We don’t put much stock in Old Wall’s Fed predictions.

BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - consenseless  2


More data. More bad news for Fed-hike prognosticators.


Today, U.S. industrial production year-over-year slowed again to the lowest reading of 2015. Here’s analysis and a chart from Hedgeye CEO Keith McCullough:


“With Industrial Production only 0.3% y/y now (lowest reading of 2015 - see red circles) we’re entering the next leg down of the cycle = Industrial/Cyclical Recession. Don’t forget that growth is reported y/y and the toughest compares were in NOV/DEC of 2014 (see green circle). Things should slow faster in the coming months.”


click image to enlarge.

BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - industrial production


That’s just the latest underwhelming economic reading. Don't forget New York Fed president Bill Dudley's recent concern that inflation is running “well below our 2 percent objective.”


Below are a few more recent economic misses (for those of you keeping score):


BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - miss


So a December rate hike isn’t necessarily such a sure thing. The Fed is 'data dependent.' Remember?


BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - wsj econ survey


And yet, the latest headscratcher from Old Wall is the overwhelming expectation of a December rate hike. If you think their predictive track record matters, think again. Here’s a Wall Street Journal survey of economists:


“There is near-unanimous agreement among private forecasters surveyed that the Federal Reserve will begin raising short-term interest rates next month after holding them near zero for seven years.


About 92% of the business and academic economists polled by The Wall Street Journal in recent days said they expected the Fed to raise its benchmark federal-funds rate at its Dec. 15-16 policy meeting…


In the latest survey, the economists on average estimated the probability of a rate increase next month at 71%, up from 48% a month earlier.”




Now take a second to look at how “well” these same folks have done forecasting the next Fed rate hike. Below is a recap also from WSJ. (Notice the overwhelming consensus, in July and August, that the Fed would hike in September):


BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - econ consensus


No, we don’t put much stock in Old Wall’s predictions.


BREAKING: Wall Street Consenseless Has No Clue About Fed Rate Hike - ex economy

Early Look

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McCullough: Ignore Volume and Volatility At Your Peril


In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why investors need to pay closer attention to volume and volatility.



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


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Builder Confidence | Headfake or Harbinger?

Takeaway: Builder confidence slipped in November from its recent post-crisis high of 65, but remains well below prior cycle highs of 71, 78 and 72.

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.


Builder Confidence | Headfake or Harbinger? - Compendium 111715


Today's Focus: November NAHB HMI (Builder Confidence Survey)

Builder Confidence slipped -3pts in November, dropping for the 1st time in 6-months and retreating off the cycle high of 65 (revised +1pt) recorded in September. Across the sub-indices, Current Sales and 6M Expectations declined -3pts and -5pts, respectively, while Current Traffic rose +1pt sequentially. Regionally: West = +1pt and making a new 120-month high, South = -5pts off 120-mo high recorded last month, Midwest = -1pt MoM, Northeast = flat at 52 and holding at decade highs.


Off The Highs: Given the soft PHS and NHS data for October, it’s not particularly surprising to see Builder Confidence in November retreat moderately off the 10-year high recorded last month.  One month does not a trend make but if October was indeed the peak, it would fall well below the prior cycle highs of 71, 78 and 72.


Builder vs Consumer Confidence:  The pullback in the HMI is in-line with the recent trend in broader measures of consumer confidence which peaked in 1Q15 and have softened since.  Up to now, what has been interesting was the continued momentum in both the headline and forward expectations readings in the HMI, particularly given the tendency for Builder Confidence to lead both Consumer Confidence and broader macro inflections over recent cycles. We discussed this divergence in greater detail in reviewing the October HMI data (HERE).


Headfake or Harbinger | Profiling the Last 2 Cycles:  The HMI progression followed somewhat variant paths during the Tech and Housing bubbles cycles.  We profile each below but there are a few broader takeaways. 


  1. The trend in HMI is a good lead indicator for housing fundamentals and the broader economy and a decent coincident indicator for housing related equities (chart 1 below). 
  2. There are multiple instances in which HMI weakened for 1 or 2 months only to bounce back.  However, successive months of weakness have generally signaled further, ongoing softening (chart 2/3).
  3. Rates:  Rates have been a mitigating-to-primary factor in the HMI-Housing connection.  Inflections in builder confidence and housing/builder performance have occurred alongside changes in the policy rate and flow through shifts in mortgage financing costs (charts 2/3).  


Tech Bubble Cycle (97-03):  HMI peaked at 77/78 in Nov/Dec 1998 and then corrected down to 71 for Feb/Mar/Apr 1999, only to bounce back to 75/77 in May/Jun/July 1999.  The drop in HMI in late 1998 is fairly coincident with both a tightening in policy and the decline in Housing stocks in early 1999 through mid-2000.  However, housing stocks rose steadily from mid-2000 on –  a period which coincided with an ease in rates and a stabilizing of HMI in the 55-63 range (post-9/11, notwithstanding). 


Housing Bubble Cycle (03-08):  In hindsight it was obvious that the June 2005 reading of 72 was the high and it was downhill from there. However, it probably wasn’t clear at that time that things were rolling over (based solely on HMI in isolation) until the 61 print in November 2005, or the 57 print in December 2005.  After tripling over the preceding 2.5yrs, builder stocks peaked in July 2005, well ahead of the broader equity or economic peak but coincident with the turn higher in rates. 


So what do you do with the November data? ….  The short answer is probably ‘not much’ as a single month of data falls in indicator purgatory vis-à-vis a read-through on the Trend.  We will be more concerned if we see a 2nd month of retreat in December and the Fed pulls the normalization trigger into slowing growth.   The rates dynamic and duration sensitivity in equity exposure is more challenging to navigate in the current instance also as we expect a shallow hiking cycle (if any at all) and think a flattening yield curve is more probable than not in the face of a sustained attempt at policy normalization.



Builder Confidence | Headfake or Harbinger? - HMI vs Consumer Confidence


Builder Confidence | Headfake or Harbinger? - HMI Tech Buble Cycle


Builder Confidence | Headfake or Harbinger? - HMI Housing Bubble Cycle


Builder Confidence | Headfake or Harbinger? - NAHB LT


Builder Confidence | Headfake or Harbinger? - NAHB Optimism Spread


Builder Confidence | Headfake or Harbinger? - NAHB Regional


Builder Confidence | Headfake or Harbinger? - NAHB Survey Indicators


Builder Confidence | Headfake or Harbinger? - HMI vs Univ Mich Housing Sentiment



About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.




Joshua Steiner, CFA


Christian B. Drake


Hipster Retailer + Earnings Slowdown = Pizza?

Hipster Retailer + Earnings Slowdown = Pizza? - urban pizza shirt


In what we view to be one of the most ridiculous “strategic” moves by a retailer in over 20 years, Urban Outfitters (URBN) has announced the acquisition of the Vetri Family group, which owns a handful of Italian food restaurants. The deal was justifiably lampooned in the media as an odd departure for a retailer, known primarily for pandering to the young, hipster crowd.


After looking at Urban Outfitters’ horrible third quarter earnings, the rationale became a bit clearer. Management is at the end of its rope and looking for ways to improve its core (slowing) business. 


Hipster Retailer + Earnings Slowdown = Pizza? - urban wondering


Investors aren’t pleased.


Urban Outfitters’ stock is getting crushed this week, falling 20%. It’s clear to us, if Urban is looking for a panacea to unlock future growth, this clearly isn’t it.


Here’s why.


This is an extremely small deal. Vetri owns just nine Italian food restaurants located primarily in southern Philadelphia. That could help explain why Wall Street analysts didn’t even question the deal. Of the twenty-six questions asked during the third quarter earnings call, not one of the 11 participating analysts asked about the Vetri transaction.


That’s troubling, though, given the significant slowdown in Urban’s business. The company has now missed sales expectations for the third quarter in a row. So, with the Vetri acquisition, Urban is obviously stretching for growth opportunities.


Hipster Retailer + Earnings Slowdown = Pizza? - urban pizza rest


The slowdown in shopper traffic has hurt other retailers too. In the past week, Macy’s (M), Kohl’s (KSS) and Nordstrom (JMN) all saw their stocks slide between 4% and 24% on lackluster retail sales data. It’s perhaps the clearest indication yet of a #LateCycle slowdown in consumer spending.


That said, Urban Outfitters has fallen harder. And faster. The stock is down 55% from its March high. Make no mistake. Even with the drawdown, the stock still isn’t a bargain and we still have lots of questions.


Hipster Retailer + Earnings Slowdown = Pizza? - urban chart



What's the real addressable market for each concept? How has the competitive landscape changed? And how much capital is needed to capture that growth? All in, there's no reason to think that those high-teens EBIT margins of old are 'owed' to URBN.


This might be the new normal. At least, that's what we're going with until our research changes.


But let’s parse the new Vetri “opportunity” a bit. Yes, Urban Outfitters’ target demographic might be a 25-year old consumer. Yes, 25-year old consumers might like pizza. But that doesn’t mean that URBN has earned the right to get into the pizza business.


Consider the pure logistical aspect of pivoting from owning pure retail stores to some retail-restaurant hybrid. We’re talking about a completely different level of operating scrutiny in the restaurant business, with food preparation, employee training, and FDA oversight. For starters, Urban Outfitters currently doesn’t have to monitor whether or not its employees wash their hands after leaving the restroom. Simply put, this is a fundamentally different model than anything URBN operates today.


There’s also a problem with searching for growth in an industry that is clearly declining. On the third quarter conference call, we found this comment from Urban Outfitters CEO Richard Hayne particularly odd:


“Spending on casual dining is expanding rapidly, and thus, we believe there is tremendous opportunity to expand the Pizzeria Vetri concept.”


As our Restaurants analyst Howard Penney pointed out, following the Vetri acquisition news, casual dining traffic and sales are “in a secular decline and not growing.”


click the image below to enlarge. 

Hipster Retailer + Earnings Slowdown = Pizza? - urban howard chart


Are we making a mountain out of a molehill? We don’t think so. The mountain is already there, and it’s causing what has been a very well-managed company to look far outside its core.