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On Fox Business: The Global Growth Slowdown Threat

On Fox Business’ Mornings with Maria, Hedgeye CEO Keith McCullough discusses Q3 U.S. GDP, slowing global growth and the ramifications of radically divergent monetary policy around the world with Cumberland Advisors CIO David Kotok and Vining Sparks’ Craig Dismuke.


The Bearish Case Against Healthcare


In this excerpt of RTA Live, Hedgeye CEO Keith McCullough takes a rapid fire selection of subscriber questions about healthcare stocks and articulates the bearish case for the sector.


Subscribe to Real-Time Alerts today for access to this and all other episodes. 


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Client Talking Points


Expectations for liftoff have creeped right back into the equation. The bid yield of December Fed funds futures is higher than it’s been since before the September meeting at 22.5 bps. In addition to the risk the Fed hikes into a late cycle slowdown, the risk to consensus positioning is that it looks similar to late August. If the hawkish tone over the last month was a de-facto tightening, no hike would be the catalyst for an un-winding of deflationary consensus positioning in FX and commodities. That’s a policy risk within our deflationary Q4 view.      


Brent crude oil up nearly +2% on news of Turkey downing a Russian fighter jet near the Syrian border. Turkish officials reported having warned the plane to exit Turkish airspace nearly 10 times in the five minutes preceding the strike. Russian officials may or may not react in kind, but the country's benchmark RTSI Cash Index is down over -3% (leading declines in the Emerging World) and signaling an escalation in the conflict emanating from the Middle East. Can the the U.S. economy handle the 1-2 punch of a #StrongDollar tightening cycle that has been bearish for manufacturing, exports and corporate profits AND rising fuel prices that is bearish for the consumer?


The German IFO business survey showed month-over-month improvement in November (Expectations rose for a 3rd straight month to 104.7 vs 103.9 in the prior month). Meanwhile, the ECB’s Executive Board member Sabine Lautenschlaeger said that the central bank shouldn’t undertake any further monetary stimulus measures for now, saying that “data in the last few weeks indicate that the euro-area economy has so far shown itself to be resistant to uncertainty in the global economy.”  Lautenschlaeger’s views are clearly divergent from those of ECB head Mario Draghi who is supportive of increased QE to support ailing growth and inflation. We reiterate our #EuropeSlowing theme and expect the 12/3 ECB meeting to be a catalyst for Draghi to signal additional supportive measures for the region. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MCD is reducing G&A by $500 billion compared to the $300 million target announced in May the vast majority of which they expect to realize by the end of 2017.


Expectations going forward are for system sales to grow faster than G&A. The incremental savings are primarily derived from savings coming from a more heavily franchised and less G&A intensive structure; streamlining of corporate and former Area of the World organizations and realizing greater efficiencies through the global business services platform. The G&A savings represent roughly a 20% reduction off of the G&A 2015 base of $2.6 billion.


Another big shift is that MCD is now aiming to refranchise 4,000 restaurants by the end of 2018, with mostly all of them to take place in the high-growth and foundational segments.


Below are two callouts from this Thursday's Willams-Sonoma (WSM) third quarter earnings print as it relates to Restoration Hardware (RH). RH will report earnings in early December.


West Elm – i.e. the only concept within the WSM family of brands that is growing square footage put up a 15.7% comp in the quarter which equated to a 40bps acceleration on a 2yr basis sequentially. The concept has always been a good bellwether for RH from a directional standpoint. The consumer/concept are much different. West Elm productivity is in the $800/sq.ft. range compared to RH at $3,300 (inclusive of e-comm) in the same size box. But it’s the only concept growing square footage. We are modeling a divergence in 3Q15 as RH pushed its growth into 2H from 1H with the release of two new concepts this Fall (Modern and Teen).

GM – was down 110bps in the quarter, with merch margins relatively flat offset by dilution from International franchise growth and increased shipping expense as WSM continues to iron out its inventory position from the West Coast port contract dispute. It's important to mention the contract dispute because it was resolved nine months ago (and yet the company still talks about it). On the shipping front, new rate hikes at FedEx and UPS haven’t hit the P&L, so this was all self-inflicted. Each of the negative drivers on the GM line appear to be unique to WSM and shouldn’t be contagious to a name like RH. 


The long bond position is taking some heat with the rate hike fears, but that’s why you’re short JNK on the other side of it. Deflation and increasing rate hike expectations are the nemesis of poor credit. As mentioned last week, it’s called spread risk, and this leverage is fueled by low rate policy.


Since the Fed turned hawkish, bonds are down, rates have risen, and deflation has re-commenced. Admittedly, long-term treasuries haven’t worked. TLT is down -2.0% over the last month; BUT, if you’ve followed us with our short JNK call, that’s down -3.4%.

Three for the Road


$CMG claims to be the first non-GMO restaurant but the @NonGMOProject (the gold standard) does not recognize them as non-GMO! #problems



The less men think, the more they talk.

Baron Montesquieu


The NTF estimates that in 2013, more than 240.0 million turkeys were raised, more than 200 million were consumed in the U.S. According to the NTF 46 million of those turkeys were eaten at Thanksgiving, 22 million at Christmas and 19 million at Easter.

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Please join us on Thursday, December 3rd at 11:00AM EST, for our Thought Leader call with Rick Berman.  On the call we will be discussing a number of important topics facing the restaurant industry, from labor issues, to the potential for increased restrictions on alcohol consumption at restaurants.  In addition, Rick will talk about the Center for Consumer Freedom and the number of issues they have with Chipotle.  The Center for Consumer Freedom has been very critical of Chipotle advertising message among other issues. 


Here is the link to the center for Consumer Freedom web site - https://www.consumerfreedom.com/

In addition, here is a link to the Chubby Chipotle web site - http://www.chubbychipotle.com/


We will provide more detail about the call early next week.


Rick Berman Bio

Rick Berman is President of Berman and Company, a Washington, DC-based public affairs firm specializing in research, communications, and creative advertising.


Berman has founded several leading nonprofit organizations known for their fact-based research and their aggressive communications campaigns.


A long-time consumer advocate, Rick champions individual responsibility and common sense policy. He believes that democracies require an informed public on all sides.


Berman was previously employed as Executive Vice President of Public Affairs at the Pillsbury Restaurant Group, where he was responsible for the government relations programs of all restaurant operations. He was also a labor lawyer at the United States Chamber of Commerce, the Dana Corporation, and the Bethlehem Steel Corporation.


Rick Berman has testified on numerous occasions before committees of the various state legislatures, the U.S. Senate and the U.S. House of Representatives. The Hill, a popular Washington, DC newspaper has named him a “Star Rainmaker” on Capitol Hill. Rick has appeared on all the major broadcast and cable television networks, and has organized national coalitions to address a wide variety of issues.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw






CHART OF THE DAY: A Granular Look At Existing Home Sales


CHART OF THE DAY: A Granular Look At Existing Home Sales - EL 11 24


Below is a brief excerpt and chart from today's Early Look written by Hedgeye US Macro analyst Christian Drake. Click here to subscribe.


"... Existing Home Sales: EHS declined -3.4% MoM – predictably recoupling to the Trend in Pending Home Sales. Recall, pending home sales = contract signings while existing home sales = closings so Pending sales effectively signals existing sales a month in advance. There are a couple notables. First, inventory held below the traditional balanced market level of 6-months for a 38th consecutive month as continued supply tightness remains supportive of price trends. Second, in contrast to the headline decline in sales, sales to 1st-time buyers rose +3.2% MoM and accelerated +220bps sequentially to +11% year-over-year in October." 



Death Star

“Why would we spend countless taxpayer dollars on a Death Star with a fundamental flaw that can be exploited by a one-man starship?”

- Paul Shawcross, Official White House response to “Construct a Death Star by 2016” Petition


Multiple times over the last decade, a perturbed American populous has locked arms and garnered large scale petition support for the full prohibition of Di-hydrogen Monoxide. 


This noxious compound is a main component of acid rain, may cause severe burns, is found in tumors, causes electrical failures, is involved in the distribution of deadly pesticides and can be acutely deadly if inhaled. 


Thousands of people, numerous times over, have been compelled to pen their signature in full support of completely banning its use.


You, of course, may know this compound by its more colloquial name of H2O …or, water.  


Back to the Global Macro Grind ….


Of course, tens of thousands have officially supported the Resource Procurement and Construction of a Death Star (HERE) and hundreds of thousands have joined the “Deport Justin Bieber” chorus (HERE), so all hope may not be lost for #WeThePeople (note: If a petition gets at least 25K signatures, the administration will publish an official response …the “Janet Yellen for Fed Chair” petition garnered 327 signatures).


Death Star - start wars cartoon


Outside of being generally awesome, Death Stars (i.e. Tech innovation) anchor an ongoing obstacle for Macrophiles.


If I made two computers this year instead of one, how much more output did I produce?


Not hard arithmetic - particularly if those computers are roughly the same in design, construction and functional capacity. 


Now, suppose my new computer is 60% faster than the one I bought last year … or maybe 50% faster if I’m on the road … or maybe 200% faster under a different set of location and task-specific conditions. Oh and my computer is actually my phone … and I’m producing this Early Look on it while checking the status of my amazon order and walking to get a coffee. 


How much more welfare or utility did that technological advancement create?   


How does one translate that rapidly evolving innovation and quality advancement into GDP equivalents or accurately capture the impact to productivity? 


That, in summary, is the measurement challenge faced by economists and government statisticians as our economy has evolved from producing discrete, tangible industrial output to decidedly less-tangible innovation focused on quality improvement. 


Larry Summers addressed the mismeasurement topic in a recent address to the Peterson Institute. He contextualizes the considerations in largely layman friendly format HERE if you’re interested. 


To summarize, the mismeasurement implication flow goes something like this:


Measured Productivity over the last decade plus has been slow => but what if we’re mis-measuring output => productivity growth (& real GDP) may actually be higher => but if productivity and real GDP is understated, it’s likely that inflation is overstated => which means that (core) inflation has really been running <1% => and if the true underlying inflation rate has been understated (& barely positive in recent years) then:


1. Per capita GDP and Income levels have not been as stagnant as official measures suggest;

2. Real Interest Rates are actually higher than policy makers believe and;

3. A sustained attempt at interest rate normalization becomes an increasingly dubious and injudicious policy course.


I happen to agree with Summers that its overwhelmingly likely that we are mismeasuring the magnitude of quality improvements and, by extension, the level of productivity growth. 


It’s also important to remember that mismeasurement only presents a problem if the error is accelerating or getting worse over-time. Does the nature of our evolving economy present compelling evidence supporting a view that the measurement problem could, in fact, be worsening?


I lean toward “yes” but I’m open to other thoughtful perspectives.  


In other mismeasurement news, the changing structure and/or mismeasurement of corporate income may help to explain another macro issue of growing consternation – Inequality.   


In a recent paper (HERE), Treasury Department and NBER researchers analyzed the rising prevalence of “Pass-Through” business entities. Pass-through business entities, such as partnerships, are structured in such a way that income “passes through” the business and is reported on the individuals’/partners’ tax returns instead of at the business level. 


The major findings of the analysis were as follows:


  1. Relative to traditional business income, pass-through business income is substantially more concentrated among high-earners.
  2. The average federal income tax rate on U.S. pass-through business income is 19%—much lower than the average rate on traditional corporations.
  3. Thirty percent of the income earned by partnerships—the largest pass-through form—cannot be traced unambiguously to identifiable, ultimate owners.


Again, to summarize the income inequality implication flow:


~55% of Business Income now goes through pass-through entities vs. ~20% in 1980 => 69% of pass-through income is earned by individuals in the top 1% (vs ~45% for traditional C-Corp businesses) => Tax rates on pass-through business income are significantly lower than traditional corporate tax rates => Thus, not only is the income more unequally distributed, it’s also taxed at a lower rate … further, the distribution is significantly less transparent as both the source and destination of ~30% of partnership income cannot be uniquely linked using conventional administrative tax data.


The researchers estimate the 2011 impact to tax revenue to be at least $100B. In any case, shifting corporate structures and rising convolution and opaqueness appear to be a real contributing factor in the ongoing rise in income inequality. 


While they don’t offer a solution, the analysis is important as untangling the “why” of rising income inequality has been as elusive as fabricating a fix.


Output mis-measurement and inequality are real and important macro considerations, but they’re not particularly investible across most relevant durations. 


Here’s your rundown of this week in domestic macro: 


Existing Home Sales: EHS declined -3.4% MoM – predictably recoupling to the Trend in Pending Home Sales. Recall, pending home sales = contract signings while existing home sales = closings so Pending sales effectively signals existing sales a month in advance. There are a couple notables. First, inventory held below the traditional balanced market level of 6-months for a 38th consecutive month as continued supply tightness remains supportive of price trends. Second, in contrast to the headline decline in sales, sales to 1st-time buyers rose +3.2% MoM and accelerated +220bps sequentially to +11% year-over-year in October. 


Corporate Profits: Both Aggregate Corporate Profits and S&P500 Margins peaked in late 2014 and with earnings down -4.5% in 3Q15 and projected to decline further in 4Q15 the trend in profitability should remain in backslide.    


Income & Spending: Income and Spending in October will be “good” as the strong October employment report was just sufficient to maintain a flattish trend in aggregate income growth. However, the slope of both the income and consumption lines will hold negative as we lap peak payroll gains recorded in 2H14.   


Initial Jobless Claims: Initial Jobless Claims continue to tread at trough levels although the trend in energy states has been worsening in recent weeks.  Inflections in initial claims have been one the most consistent lead indicators for the cycle and year-over-year improvement continues to converge towards zero as the level of claims backs up off of the low but remains around its frictional floor of ~300K. Seasonal distortions and holiday related noise will convolute a clean reading of the underlying trend in separations for most of the rest of the current year. 


My cousin is in charge of toy creation and production for the Star Wars franchise. I actually have a real light saber straight from Spielberg. If the Death Star actually gets commissioned (Trump?), #IKnowAGuy


In the meantime, Hedgeye’s own Keith McCullough, aka Broda, aka Darth Fader, will be fading consensus and channeling the Macro Force all morning on both Fox Biz and The Hedgeye Macro Show. Tune in. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.18-2.34%

SPX 2022-2107

VIX 14.31-20.46
USD 98.55-100.18
Oil (WTI) 39.32-43.75

Gold 1060-1089

Have a great holiday.


Christian B. Drake

U.S. Macro Analyst


Death Star - EL 11 24

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