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Where The Winds Blow

“One ship drives East and another drives West

With the self-same winds that blow.

‘Tis the set of sails

And not the gales

Which tells us the way to go.”

-Ella Wheeler Wilcox

 

That’s how David McCullough introduces Chapter 3 of The Wright Brothers as he tells the story of the boys moving East (from Ohio) toward the Outer Banks of the Carolinas. We should all be thankful that they took the risk and made that trip.

 

Whether you’re headed toward Kitty Hawk, North Carolina this week or just staying close to home, the Hedgeye team and I want to wish you a very peaceful and happy Thanksgiving.

 

With a record 94 million Americans not in the US labor force and approximately 46 million people on food-stamps, I’m quite humbled by the blessed life my family and firm is living. I can never say thank you enough. Our collective responsibility remains being the change we all want to see in this world.

 

Where The Winds Blow - turkey

 

Back to the Global Macro Grind

 

While I’d like nothing more than to write about the prospects of US #GrowthAccelerating (like I did around this time in 2012), I don’t like to write fiction on economic matters. While hope often gives us the wonderful gift of life, it is not a risk management process.

 

Sadly, going into this Thanksgiving break, the US economy was dealt two of the Top 3 leading indicators for a US Recession yesterday:

 

  1. US Corporate Profits breaking down below their 12-month trailing average
  2. US Consumer Confidence rolling off its multi-year cycle peak

 

As you can see in the Chart of The Day, Consumer Confidence peaked in Q1 of 2015 in conjunction with:

 

  1. US Consumption Growth (Real PCE Growth) peaking at 3.3% year-over-year in Q1 of 2015
  2. Non-Farm Payroll Growth peaking at +2.3% year-over-year in Q1 of 2015

 

Unless you think it’s the 1990s (newsflash: it’s not), US Consumer Confidence always puts in a cycle peak in the 100-110 range, right before a US recession. Yesterday’s reading of 90.4 for November dropped almost 10% from 99.1 in October.

 

On the corporate profit cycle side, yesterday’s year-over-year #GrowthSlowing US GDP report had the following two realities:

 

  1. US GDP slowed to 2.2% year-over-year growth (that’s the lowest of the year)
  2. US Corporate Profits slowed to -3.2% year-over-year growth (that’s the lowest of the year)

 

Yep. Simply following the rate of change in a sine curve, it is. Don’t let someone who is in the business of writing reasons to always be bullish obfuscate the simple reality that US GDP growth went from 1 to 2 to 3% year-over-year into the cycle peak (Q1)…

 

And is in the midst of slowing from 3 to 2 to 1% here in Q4 of 2015.

*sine curve math wizards note: after 1% comes 0%

 

Unless, of course, “it’s different this time”, profits slowing to negative year-over-year growth is a leading indicator for people losing their jobs and becoming less confident. Of the 500 companies in the S&P, 490 have now reported an aggregate Q3 earnings decline of -4.4%.

 

Now if you’re still not aware of the #LateCycle call on both US employment and consumption growth – but still data mining for a 9-month lag chart of a PMI to bottom, the US Market PMI reading of 52.6 in NOV slowed vs. the head-fake-counter-TREND-bounce to 54.1 in OCT.

 

In other reality-check news:

 

  1. Last night, Argentina told the world that its central bank has “no Dollars left…”
  2. Chinese (and American) Corporate Bond Spreads continue to widen here in November
  3. Copper continues to crash (-30% YTD)
  4. US Treasury Yield Spread continues to compress (-6 basis points this week to +129bps 10s/2s)
  5. Japan announced they’re going to hand out 30,000 Yen to 100 million low-income people

 

To put the latest Japanese social plan in context, since a Yen isn’t what it used to be, 30,000 Yens = $245 US Dollars. So it will take roughly 300 billion Burning Yens to fund that.

 

If the US Federal Reserve didn’t do QE and just wrote checks to impoverished Americans like Japan has resorted to doing (post QE failing), at least we’d have a better conscience about the fact that it was QE’s asset price inflation that hurt the many, in lieu of paying the few.

 

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

 

UST 10yr Yield 2.18-2.30% (neutral)

SPX 2020-2109 (neutral)
RUT 1139--1193 (bearish)

NASDAQ 4 (bullish)

Nikkei 199 (bullish)

DAX 101 (bullish)

VIX 14.66-20.47 (bullish)
USD 98.81-100.19 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 122.04-123.73 (bearish)
Oil (WTI) 40.05-43.56 (bearish)

Nat Gas 2.15-2.35 (bearish)

Gold 1060-1085 (bearish)
Copper 1.98-2.09 (bearish)

 

Best of luck out there today and Happy Thanksgiving,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Where The Winds Blow - 11.25.15 EL chart


USD, Europe and Yield Curve

Client Talking Points

USD

Another strong bounce-back morning for the greenback (+0.4% vs. the Euro) is taking the commodity crash right back to the woodshed. Oil is down -1.5% post yesterday’s +2.8% bounce (which helped Energy stocks lead the U.S. equity rally off the lows intraday) - #Deflation Risk = ON.

EUROPE

European stocks closed weak yesterday, so you’re seeing the EuroStoxx play catchup with the U.S. intraday geo-risk bounce this morning – although Spain and Greece -0.6% vs. France +1.3%, so there are divergences as Spanish PPI (producer price) #Deflation was -3.5% OCT (and will be worse in NOV).

CURVE

The yield curve continues to compress as the U.S. economic data slows (Corporate profits -3.2% Q3 and Consumer Confidence tanked to 90.4). This week the 10s/2s spread has compressed another 6 basis points to +129 basis points as credit trades like 1,000 pounds of stale pumpkin in a 100lb bag.

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 69% US EQUITIES 3%
INTL EQUITIES 4% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

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.

RH

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. 

TLT

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

TWEET OF THE DAY

**NEW VIDEO (1:46 min)

The Bearish Case Against Healthcare https://app.hedgeye.com/insights/47686-the-bearish-case-against-healthcare?type=video… via @KeithMcCullough $XLV

@Hedgeye

QUOTE OF THE DAY

Thoughts rule the world.

Ralph Waldo Emerson

STAT OF THE DAY

51% of Americans believe it is the responsibility of the federal government to ensure all Americans have health insurance coverage, this is the first time in 7 years that a majority of Americans say the government is responsible for making sure all citizens have health insurance.


November 24, 2015

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.30 2.18 2.24
SPX
S&P 500
2,020 2,109 2,089
RUT
Russell 2000
1,139 1,193 1,188
COMPQ
NASDAQ Composite
4,955 5,165 5,102
NIKK
Nikkei 225 Index
19,489 20,019 19,924
DAX
German DAX Composite
10,768 11,241 10,933
VIX
Volatility Index
14.66 20.47 15.93
DXY
U.S. Dollar Index
98.81 100.19 99.59
EURUSD
Euro
1.05 1.08 1.06
USDJPY
Japanese Yen
122.04 123.73 122.56
WTIC
Light Crude Oil Spot Price
40.05 43.56 42.65
NATGAS
Natural Gas Spot Price
2.15 2.35 2.31
GOLD
Gold Spot Price
1,060 1,085 1,074
COPPER
Copper Spot Price
1.98 2.09 2.03
AAPL
Apple Inc.
112 120 118
AMZN
Amazon.com Inc
635 685 671
PCLN
Priceline.com Inc.
1,224 1,302 1,240
VRX
Valeant Pharmaceuticals International, Inc.
65.60 94.39 87.45
BABA
Alibaba Group Holding Ltd.
75.43 81.99 80.86
HPQ
Hewlett-Packard Co.
12.55 14.69 14.64

 

 


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FII: Adding Federated Investors to Investing Ideas (Long Side)

Takeaway: We are adding Federated Investors (FII) to Investing Ideas.

Editor's Note: Our Financials analyst Jonathan Casteleyn will send subscribers a full research report next week explaining our bullish thesis on the stock. In the meantime, below is a note written by Hedgeye CEO Keith McCullough this afternoon.

 

FII: Adding Federated Investors to Investing Ideas (Long Side) - f xx

 

While US Equities continue their daily debate as to whether or not they are doing to be "down" for 2015 (the Russell 2000 is), one very obvious TREND has emerged from a fund flow perspective - Cash Is King.

 

One way to invest in the market share gains of Money Market Funds (vs. US domestic equity mutual funds) is long Federated Investors. Our analyst, Jonathan Casteleyn continues to think this is a misunderstood story.

 

In the 5-day period ending November 11th, 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. 


Casteleyn continues to like the cash management space and out of favor Federated Investors on a combination of positive balance builds and profitability improvements in the business for '16/'17.

 

Here's a buy signal (on red) with the stock -1.4% today,

 

KM 


Cartoon of the Day: Deflationary Comet?

Cartoon of the Day: Deflationary Comet? - Deflation cartoon 11.24.2015

 

"If the hawkish tone out of the Fed over the last month was a de-facto tightening, no hike would be the catalyst for an unwinding of deflationary consensus positioning in FX and commodities," wrote Hedgeye CEO Keith McCullough in a note to clients earlier this morning. "That’s a policy risk within our deflationary Q4 view."      


Case-Shiller | HPI Acceleration & Key Man Risk

Takeaway: CS HPI registers a 3rd month of acceleration. Secular and cyclical factors continue to constrain supply. Comps steepen for some key cities

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.

 

Case-Shiller |  HPI Acceleration & Key Man Risk - Compendium 112415

 

Today’s Focus: September Case-Shiller HPI 

 

The Data: The Case-Shiller 20-City HPI for August released this morning – which represents average price data over the July-September period – showed home prices rose +0.61% MoM while accelerating +32bps sequentially to +5.45% year-over-year.  On an NSA basis, 18 of 20 cities reported sequential increases while, on an SA basis, 19-cities reported increases.  The gain in September was the largest in 7-months and marked a 3rd consecutive month of acceleration.  Notably, the Case-Shiller National HPI  (which covers all U.S. Census divisions) accelerated for the 7th straight month, accelerating +30bps sequentially to +4.86% YoY.   

 

Inventory ↓, HPI ↑ | As was again highlighted yesterday in the EHS data for October, inventory remains very tight relative to the historical average and should continue to support positive HPI trends.  Improving second derivative price trends have augured outperformance in the housing complex historically as rising prices are margin supportive and help perpetuate the Giffen Good dynamic that characterizes housing demand. 

 

Supply Stagnation:  We reviewed the lead factors underpinning the supply stagnation in housing a few months ago but they are worth a quick recapitulation:

  • Low Rates:  Low rates locked in during the post-crisis period remain a disincentive to selling/moving and an inertial headwind to rising inventory.
  • Demographics:  Top heavy demographics with Boomers (which are a significant % of the homeownership base) entering their peri-retirement period will weigh on housing turnover broadly.  Aging in place remains an emergent trend and moving-out will not become an outsized driver of supply for another decade when the Boomer bulge starts moving beyond 80 YOA. 
  • Equity:  If Boomers are dragging on inventory and Millennial demand is just beginning to percolate,  what’s left?  Mostly Gen X’ers.  Those aged ~35-50 represent a significant source of potential supply in the form of trade-up buying.  A meaningful percentage in this group, however,  remain in negative or near-negative equity positions, serving as weight to both entry level supply and mid/upper market demand. 
  • Credit Box:  Tighter standards for would be purchasers have constricted the mortgage credit box and have dissuaded and/or been prohibitive for low equity homeowners looking to move up the housing ladder.   

The last quick highlight is that the 10 and 20-City Indices carry “key man risk” over the medium-term as index heavyweights such as L.A. (15.2% Weight) and San Francisco (8.4% Weight) and to a lesser extent New York (19.4% Weight) bump up against progressively tougher 1Y and 2Y comps. 

 

In summary, the Case-Shiller HPI continues to track the CoreLogic HPI data on a lag with both series displaying modest acceleration in recent months.  We’re more interested to see the CoreLogic data for October due for release next week.  

 

Case-Shiller |  HPI Acceleration & Key Man Risk - CS HPI 20 City and National YoY

 

Case-Shiller |  HPI Acceleration & Key Man Risk - EHS Months Supply

 

Case-Shiller |  HPI Acceleration & Key Man Risk - CS MoM vs Index Weight

 

Case-Shiller |  HPI Acceleration & Key Man Risk - CS MoM vs YoY Bubble Scatterplot

 

Case-Shiller |  HPI Acceleration & Key Man Risk - Case Shiller HPI MoM

 

Case-Shiller |  HPI Acceleration & Key Man Risk - HPI 3 Series

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


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