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Takeaway: Claims are behaving as we expected with the year-over-year change trending towards zero and energy states worsening on the margin.



As we come to the end of '15, jobless claims both in aggregate and for the energy states separately, are behaving as we have modeled.  Year-over-year improvement continues to converge towards zero as the level of claims backs up off of the low but remains within its frictional floor below 330k (for 21 months now). We continue to point out that the last three cycles saw claims sit below 330k for 24, 45 and 31 months before the economy entered recession, putting us 12 months from the 33-month average.


Additionally, energy state claims are worsening versus the country as a whole as many energy companies are set to experience the pain of their price hedges rolling off around year-end. The spread between those two indexed series in our chart below has widened for 10 weeks in a row. That includes the most recent week, ending November 7, when the spread widened from 28 to 31. 




The Data

Initial jobless claims fell 5k to 271k from 276k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3k WoW to 270.75k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.7% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.0%
























Yield Spreads

The 2-10 spread fell -8 basis points WoW to 140 bps. 4Q15TD, the 2-10 spread is averaging 143 bps, which is lower by -10 bps relative to 3Q15.






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


What If Consensus Is ‘Dead Wrong’ on Economic Growth And We’re Right?


In this excerpt from The Macro Show this morning, Hedgeye Macro analyst Darius Dale responds to a subscriber’s question about the stock market hitting new highs yesterday on the possibility of a Fed rate hike. He also explains the danger in believing the Fed and Old Wall’s rosy economic forecasts.  



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


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McCullough: 'The Data Is Unequivocally Bearish'

In a spirited debate on Fox Business' Mornings With Maria today, Hedgeye CEO Keith McCullough and Recon Capital’s Kevin Kelly square off on Fed policy, McDonald’s and whether the U.S. is headed for a recession in 2016. 


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ICI Fund Flow Survey | Barbelling

Takeaway: Investors allocated +$5.9B more to equity than bonds last week and also defensively shored up +$12B in cash.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending November 11th, investors tip toed out into equities and shored up cash, contributing +$3.1 billion to total equity products (mutual funds and ETFs) while withdrawing -$2.8 billion from total bond proxies (mutual funds and ETFs). Within equities, investors continued to pull capital from active domestic mutual funds, withdrawing -$2.4 billion last week which have now amounted to a total drawdown of -$139.9 billion so far in 2015 (the worst start to a year for domestic equity funds in all ICI data). Meanwhile, investors also shored up +$12 billion of cash in money market funds, continuing the trend of inflows in the second half of 2015. This brings cumulative 4Q15TD money market flows to +$45 billion, following the 3Q15 inflow of +$54 billion. 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 improvements in the business for '16/'17.


ICI Fund Flow Survey | Barbelling - ICI1 2


In the most recent 5-day period ending November 11th, total equity mutual funds put up net outflows of -$1.3 billion, trailing the year-to-date weekly average outflow of -$701 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$1.1 billion and domestic stock fund withdrawals of -$2.4 billion. International equity funds have had positive flows in 45 of the last 52 weeks while domestic equity funds have had only 8 weeks of positive flows over the same time period.


Fixed income mutual funds put up net outflows of -$686 million, trailing the year-to-date weekly average inflow of +$230 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$314 million and taxable bond funds withdrawals of -$1.0 billion.


Equity ETFs had net subscriptions of +$4.4 billion, outpacing the year-to-date weekly average inflow of +$2.2 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$2.1 billion, trailing the year-to-date weekly average inflow of +$1.1 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:


ICI Fund Flow Survey | Barbelling - ICI2


ICI Fund Flow Survey | Barbelling - ICI3


ICI Fund Flow Survey | Barbelling - ICI4


ICI Fund Flow Survey | Barbelling - ICI5


ICI Fund Flow Survey | Barbelling - 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.


ICI Fund Flow Survey | Barbelling - ICI12


ICI Fund Flow Survey | Barbelling - ICI13


ICI Fund Flow Survey | Barbelling - ICI14


ICI Fund Flow Survey | Barbelling - ICI15


ICI Fund Flow Survey | Barbelling - 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:


ICI Fund Flow Survey | Barbelling - eq


ICI Fund Flow Survey | Barbelling - 2 ICI8

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the industrials XLI and utilities XLU ETFs experienced significant outflows of -$707 million or -10% and -$514 million or -8%, respectively.


ICI Fund Flow Survey | Barbelling - ICI9 2

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.


ICI Fund Flow Survey | Barbelling - 2 ICI17


ICI Fund Flow Survey | Barbelling - 2 ICI18

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$5.9 billion spread for the week (+$3.1 billion of total equity inflow net of the -$2.8 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$922 million (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.)


ICI Fund Flow Survey | Barbelling - 2 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:


ICI Fund Flow Survey | Barbelling - ICI11 

Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA

How Bad Is It?

Client Talking Points


Headline Hijinks yesterday as neither the notable decline in Housing Starts nor the remarkable rise in Purchase Applications were as they appeared.  While Total Housing Starts declined -11%, single-family construction activity dipped just -2.4% off of cycle highs, single-family permits made a new 8-year high and the rise in multi-family permits suggests the decline in multi-family starts (-25% MoM) which weighed on the headline in October will reverse. The +12% week-over-week rise in Mortgage Purchase Applications, meanwhile, was the product of statistical adjustment noise in the holiday week (Veteran’s Day) and some measure of purchase pull-forward alongside rising rates.  Looking to next week, we expect a sequential decline in EHS as existing sales play catch-up to the trend in Pending Sales.


Fresh cycle lows in copper and iron ore are not a good sign for global growth… How bad is it? The China Iron & Steel Association said it expects steel output to drop -2.9% in 2016. That’s not a small inflection considering China’s mills produce half of global output. Former chief economist of Rio Tinto had this to say about continuing deflationary headwinds: “There’s about 300MM tons (~40% of Chinese production) of surplus capacity (in steel refining) that needs to not just be shut down, it needs to be bulldozed.” The deflation continues..


Shanghai and Shenzhen closed up 1.4% and 3.1%, respectively, on the heels of a solid handoff from a strong U.S. close. Economic fundamentals continue to take a back seat in China with the unofficial MNI PMI reading slipping to 49.9 in NOVT from 55.6 in OCT. This is in line with crashing rail freight traffic growth and is also corroborated by a sequential slippage in the growth rates of industrial production, fixed assets investment, foreign direct investment, total social financing, as well as various measures of supply and demand in the Chinese property market in the month of OCT. Offsetting these “downside pressures” – which President Xi reiterated yesterday – is a sharp reversal of capital outflows that coincided with the IMF’s tacit decision to include the CNY in its vaunted SDR basket. Moreover, Beijing has taken to capital controls to help it accomplish its goal of exchange rate stability. While capital controls have rarely – if ever – been proven successful at staving off long-term currency depreciations, they can and will continue to be a short-sellers worst nightmare from the perspective of the consensus short on the Chinese yuan. Specifically, the PBoC’s verbal guidance to onshore banks to cull their offshore lending practices has made it more expensive than ever to borrow and sell short the yuan. The “Bejing Put” remains the #1 reason we aren’t in the Chanos camp on China; Chinese official can and will do what the half to do to ensure a relatively stable downshift in growth – if there even is such a thing.


**Watch The Macro Show replay - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Restaurants Sector Head Howard Penney attended MCD's investor meeting in New York City early last week. His takeaway from the meeting was that it was "very very bullish" for investors. Expectations were high, but CEO Steve Easterbrook came to NYC with big changes which have ultimately exceeded those expectations. "The big smile on Steve Easterbrook's face when talking about the current quarter was very telling," Penney writes. "He could not hide the enthusiasm." MCD increased the dollar value returned to shareholders by $10 billion. Penney and his team still see +30% upside from here.


Restoration Hardware (RH) shares got caught up in the tumultuous selloff of other high-end retailers. But we're still bullish on RH. Here's why. RH Tampa has just opened. That makes 4 new Full Line Design Galleries in 90 days. And all will be open before the start of holiday shopping season and just in time to house the new product lines RH Modern and Teen. Add up the four stores and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage.


When all is said and done, we still think this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115, but rather is it going to $200 or $300? We’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end.


It was a nasty end to the week for the “growth is back” bulls. It was an equally nasty end to the week in equity markets. The S&P 500 was “going to all-time highs” Tuesday before retreating over 3% from Wednesday to Friday.


With continued data-driven confirmation that growth is slowing:

  • PPI (producer price index) printed -1.6% Y/Y for October
  • On a m/m basis, PPI declined -0.4% 
  • Declines in the energy component certainly bring the index lower, but PPI ex. Food and energy only printed +0.1% Y/Y which is ugly

Three for the Road


Rubio Versus The Fed https://app.hedgeye.com/insights/47625-rubio-versus-the-fed… via @hedgeye cc @KeithMcCullough #MarcoRubio #economy #Fed #Yellen



The wise man should be prepared for everything that does not lie within his control.



North Dakota’s portion of the Bakken produced 1.11 million barrels a day in September, down 1.1% from the same month a year ago, according to state data. Drillers have been forced to idle 67% of the rigs that were in the region last year.

FL | High Water Mark

Takeaway: This might not be the quarter to bet big on FL to miss. But estimates for the next 3 years need to come down – a lot.

Conclusion: We remain confident that Foot Locker will prove to be one of the best multi-year shorts in retail. The company is likely to earn about $4.20 this year, which we think will prove to be the high water mark in this economic cycle. We think that emerging competition from its top vendor, Nike (≈80% of sales), will stifle growth, and leave the company with an earnings annuity somewhere around $3.50-$3.75 per share. Is that worth $61? Not a chance. Not for a company that is Nike’s best off-balance sheet asset. And definitely not when the Street is in the stratosphere approaching $6.00 in EPS (#NoWay).


But as we know, multi-year stories are not linear. We’ve been asked many times this week what we’d do ahead of the print. First and foremost, we’re confident enough in our long term short call that we’d definitely have at least a partial position into the event. Keeping in mind, however, that the stock is off 27% since the Sept peak. Short interest has climbed to 10%, Nike got public about its DTC goals (i.e. compete with its wholesalers), SKX, DKS, FINL have blown up, and it’s pretty clear that inventories are high in the channel.  The P&L will have to show meaningful signs of stress in order to get paid tomorrow. Betting on that does not seem like good risk management to us.


But despite this quarter probably being a push, it’s really important to remember that consensus estimates in years one through three are high by $1-$2 per share. That ties into historical context. How many times did people say “damn, I missed my shot” as FL went from $5 to $10. Missed it. Then again when it went to $25. Missed it. $25 to $50. Missed. $50 to $75. Same…


We’re confident that people will be inversely ‘Missing It’ on the way down.


So our positioning into the numbers: We’re short it. On a good print, which is very possible, we get much heavier. On a bad print, we also get heavier.




Revenue: Comp expectations for the quarter sit at 6.3% which assumes a 170bps sequential deceleration in the underlying trend. Because FL reports a constant currency comp, Fx isn’t an issue. Category softness during 3Q earnings season to date has been focused primarily in sports apparel which is more levered to weather patterns and mid-tier athletic footwear (i.e. Skechers and Merrell). Apparel and accessories represent just 20% of FL’s mix (compared to DKS at 36%). And, the likes of SKX and Merrell don’t have shelf space at FL. Top line strength is directly dependent on the strength of the basketball and to a lesser extent running categories which have been running in the double digits for each of the past eight quarters for basketball, and five for running. We think this trend slows -- and not because we’re making ‘the tough comp’ or ‘top of the sneaker cycle’ call. The crux of it is that FL has taken NKE as a percent of sales from 50% to nearly 80% over the past 8 years, and we think that Nike is going to add $10bn in e-commerce sales in five years (blowing away it’s $7bn goal). And, we’ve started to see an inflection in the e-comm trends with NKE showing considerable strength over the past quarter as FL and DKS weakened considerably. We saw that reflected in the 3Q print out of DKS earlier this week when the company posted the lowest e-comm growth rate at 18% since 3Q11. Based on what we see, FL looks just as bad.

FL |  High Water Mark - FL DKS NKE


Gross Margin: FL is sitting a peak gross margins, as the company has been able to offset Fx dilution with better markdowns and leverage on the occupancy line due to mid-to-high single digit comps. At 33.4% on a TTM basis FL sits just 10bps shy from the low end of its 2020 guidance which called for GM to be in a range of 33.5%-34%. In contextualizing this across the broader space, here are a few things to keep in mind. a) On its last call NKE cited high inventories in the US channel that would persist for at least another two quarters, something we haven’t heard out of the company in over a decade. b) UA is sitting on elevated footwear inventories that are one of the biggest drivers of the -100bps GM guidance for the 4th quarter. c) SKX called out a stuffed wholesale channel and as a result saw the sales to inventory spread fall to -11% from +6% in the third quarter. d) That’s evidenced by the -8% sales to inventory at FINL and -6% sales to inventory spread at DKS, add to that the fact that DSW just bit the bullet and took down 4Q numbers by 67% due in part to weak sell throughs and the need to balance on-hand inventories. Each data point alone isn’t a smoking gun, but the broader context paints a bearish picture for #FootwearRetail1.0 -- where FL is the biggest player.


SG&A: Fx has been a considerable tailwind for the past four quarters as the SG&A benefit from Fx exposure has more than offset the gross margin pressure. We’ve seen the spread between reported and constant currency SG&A widen as far as eight percentage points. The company starts to lap that benefit in 3Q15, and then in a big way in starting in 4Q15. FL needs low single digit comps to leverage on the expense line. That equates to a lot of leverage when the company is comping in the HSD range, but on the margin as comps slow to the mid to low single digits the flow through doesn’t look as appealing. The company is within spitting distance of its long-term SG&A targets of 18%-19% and sits at the low end of any specialty retailer we can find. For a name just off peak multiples with comps slowing as it turns from a square footage consolidator into a square footage grower, that doesn’t add up to an accelerating EPS growth rate.

FL |  High Water Mark - 11 19 FL SG A


Expectations: Sentiment for FL is at 5 year lows with short interest as a % of the float marching from 7% to 10% since mid-October. Since the company reported earnings in mid-August the stock is off 15% vs. the RTH at -1%. But, that hasn’t been reflected in the consensus numbers where comps and earnings estimates have marched up by 20 bps and $0.01, respectively. There has been a lot of bad news in athletic/footwear land from the likes of SKX, DKS, FINL, BGFV, etc. when coupled with the price action in FL leads us to believe that expectations for tomorrow’s print are well in check on the comp side of the equation (a number FL has beat in 19 of the last 20 quarters).

FL |  High Water Mark - 11 19 FL Sent

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.