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CHART OF THE DAY: The Ultimate #GrowthSlowing Indicator?

 

CHART OF THE DAY: The Ultimate #GrowthSlowing Indicator? - 11.30.15 EL chart

 

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.

 

"... It certainly shouldn’t surprise anyone who is paying attention to both the #GrowthSlowing and credit cycle signals of the bond market. The long-end of the curve is compressing into said “hike” expectations.

 

Here’s how that looks this morning, in bond market terms:

 

  1. Short-term (2yr) Yields spike to 0.95%
  2. Long-term (10yr) Yields don’t budge at 2.23%
  3. Yield Spread (10yr minus 2yr) compresses to +128 basis points, -23 basis points (at the lows) YTD"

Esteemed Authorities

“Clearly those esteemed authorities had been guessing.”

-David McCullough

 

One of the best parts of evolution stories is that eureka moment when someone comes to realize that the received wisdoms of the past are standing in the way of future progress.

 

The aforementioned quote comes from The Wright Brothers when Orville and Wilbur Wright realize “that so many of the long established, supposedly reliable calculations” (on flight from Lilienthal, Langley, etc.)… “had been proven wrong and could no longer be trusted… the accepted tables were, in a word, worthless.” (pg 63)

 

To be fair, I don’t consider ECB, BOJ, Federal Reserve, etc. forecasts worthless (there’s so much money to be made doing the opposite of what their anchoring-linear-forecasts imply). But their calculations do pose systemic threats to worldwide economies.

 

Esteemed Authorities - Central banker cartoon 03.03.2015

 

Back to the Global Macro Grind

 

For your friends who are still only staring at the “Dow” (in daily fantasy points) as a proxy for what “the market” is doing, there’s absolutely nothing to worry about. The Dow, bro, is only -0.1% YTD.

 

Then there are those of us who have embraced not only the non-linearity of a dynamic ecosystem like the Global Economy, but the interconnected and sometimes correlating style factors within macro markets (including Currencies, Commodities, Countries).

 

On that score, last week signaled more of our 18 month old call on the mother of all economic risks – #Deflation. And before I drip on why deflation morphs into a risk to the Fed’s serially overoptimistic growth forecasts, here’s what happened in Global Macro last week:

 

  1. US Dollar Index ramped > 100, closing up another +0.5% on the week to +10.9% YTD
  2. Euros dropped another -0.5% (vs. USD) on the week, taking its YTD devaluation to -12.4%
  3. Canadians lost another -0.2% of their currency’s purchasing power, taking the CAN$ to -13.1% YTD
  4. Commodities (CRB) remained in #crash mode, falling another -0.3% on the week to -20.1%YTD
  5. Oil’s (WTI) crash/deflation for 2015 dropped another -0.5% on the week to -30.4% YTD
  6. Dr. Copper’s crash/deflation hit new lows intraweek, then bounced to -27.3% YTD

 

I’ll take a breather right there as that’s just a wall of headline foreign currency and commodity market risk factors that every legitimate macro investor should be aware of. If you don’t do macro, it will eventually do you.

 

Moving along to the beloved US Equities side of the market:

 

  1. Healthcare Stocks (XLV) were +0.8% on the week, still beating “the market” (SP500) at +5.4% YTD
  2. Financials (XLF) were down -0.4% on the week, still lagging “the market” at -0.6% YTD

 

Now, as the Fed prepares to raise rates (into worldwide #Deflation and a #LateCycle US economic slow-down), isn’t the ongoing bearish divergence between what the Financials are doing and the Fed’s “supposedly reliable calculations” on GDP interesting?

 

It certainly shouldn’t surprise anyone who is paying attention to both the #GrowthSlowing and credit cycle signals of the bond market. The long-end of the curve is compressing into said “hike” expectations.

 

Here’s how that looks this morning, in bond market terms:

 

  1. Short-term (2yr) Yields spike to 0.95%
  2. Long-term (10yr) Yields don’t budge at 2.23%
  3. Yield Spread (10yr minus 2yr) compresses to +128 basis points, -23 basis points (at the lows) YTD

 

In other words, since the rate of change in the Yield Spread is a far better leading indicator for the expansion/contraction of the economy than some central-planning dude’s forecast, the Global Macro market continues to read the Fed’s forecast (hike) as a risk to the economy.

 

Oh, and on the said “data dependence” of the Federal Reserve, they’ll get both a PMI reading out of Chicago this morning and an ISM reading for November tomorrow. Last month’s super slow ISM reading of 50.5 wasn’t cited by anyone at the Fed, or our competition.

 

But does the data really matter? Nope. Yellen’s speech at the central-planning (economics) club of Washington on Wednesday does. And so will Mario Draghi’s central market planning event on Thursday morning (ECB meeting).

 

By the time we get to Yellen’s testimony in front of the “Joint Economic Committee” (JEC) in Washington on Thursday, more #StrongDollar Deflation will still have our esteemed authorities guessing.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.18-2.28%

SPX 2045-2109

NASDAQ 5034-5181
USD 99.19-100.29
Oil (WTI) 40.55-43.26
Copper 1.98-2.11

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Esteemed Authorities - 11.30.15 EL chart


The Macro Show Replay | November 30, 2015

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

November 30, 2015

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.28 2.18 2.22
SPX
S&P 500
2,045 2,109 2,090
RUT
Russell 2000
1,143 1,209 1,202
COMPQ
NASDAQ Composite
5,034 5,181 5,127
NIKK
Nikkei 225 Index
19,321 20,041 19,883
DAX
German DAX Composite
10,880 11,377 11,293
VIX
Volatility Index
13.99 19.01 15.12
DXY
U.S. Dollar Index
99.19 100.29 100.07
EURUSD
Euro
1.05 1.07 1.06
USDJPY
Japanese Yen
122.19 123.68 122.82
WTIC
Light Crude Oil Spot Price
40.55 43.26 41.77
NATGAS
Natural Gas Spot Price
2.20 2.39 2.23
GOLD
Gold Spot Price
1,050 1,075 1,056
COPPER
Copper Spot Price
1.98 2.11 2.05
AAPL
Apple Inc.
112 120 117
AMZN
Amazon.com Inc.
640 688 673
PCLN
Priceline.com Inc.
1,213 1,295 1,244
VRX
Valeant Pharmaceuticals International, Inc.
67.52 96.70 87.09
DIS
Walt Disney Co.
114 118 115
MCD
McDonald's Corp.
111 116 114

 

 


SELL RETAIL | THIS IS BIGGER THAN HOLIDAY

Takeaway: Expectations imply 4Q malaise is purely weather, and that we snap back in 1Q. That’s an extremely reckless approach - one we’d short against

Conclusion: We’re happy to get into the debate about how crowded the parking lot was at the mall this weekend, but it’s nowhere near as relevant as the current profitability growth trajectory for Retail, and the consensus expectations for the group as we head into 2016. The good news is that 4Q sales estimates look only slightly high. The bad news is that margins expectations are still 50-100bps high for the group. The worse news is that the Street’s numbers are banking on a recovery in growth and margin starting in 1Q16. In other words, it’s chalking up this ‘thing’ retailers are feeling now as exactly what management teams want us all to believe – while they cross their fingers, hope and pray that the economy is not really slowing.  The group might be viewed as damaged goods in this market, but keep in mind that it’s only down 4.3% for the YTD vs a 1.5% gain for the market – not a big difference. It’s trading at 18-19x earnings, and has short interest that is disproportionately low for an economy that is #LateCycle. We’re net sellers of Retail.

SHORTS: FL, KSS, HIBB, TIF, TGT, W, WSM, HBI, COLM, LULU, GPS, M

LONGS: RH, KATE, NKE, PIR, RL, DKS

 

FULL DETAILS

We’re going to let #WallStreet1.0 debate the success of the start of the holiday season based on things like how long the lines were at the Gap, counting shopping bags and empty parking spaces, or how long it took to get a Chick-fil-A at the food court.  But I think most of us would agree that basing one’s view on a small handful of stores is a pretty useless exercise given that there are about 1,100 regional malls and 7,100 shopping centers in the US, which combined account for $5.3 trillion annually, $2.5 trillion in discretionary spending -- nearly $300bn of that falls in the month of December alone. Yes, there are always data points and anecdotes that might ultimately prove to be representative of the whole, but from our perspective, you overwhelmingly need to go big picture in looking at the next few months.  That picture, unfortunately, is not a good one.  

 

In contrast, management teams have been generally upbeat with Black Friday press releases (especially Kohl’s, Wal-Mart, Target). But make no mistake, the CEOs were not talking to us with their bullish statements. They were talking to consumers and more importantly, to employees. They have no choice but to be very upbeat, get their salesforce jazzed up in the process, and sit and hope that things play out in their favor. Even this week, when we inevitably get negative datapoints on sales versus last year, the press releases will contain verbiage intended to keep hope alive that business will pick up materially throughout December – the elevated levels of inventory are banking on it.

 

If there are any numbers we come remotely close to trusting about the weekend, they’re online sales growth numbers given by the sources below. All in, it suggests that sales growth slightly accelerated vs last year on Thanksgiving, but growth was lower on BF vs last year. The numbers are hardly consistent, but we’ve found that all four in concert have been a good directional indicator as to how things are going. If we had to believe just one of the sources, it’d be IBM, which has been closer to the mark in the past with its reporting.

 

SELL RETAIL | THIS IS BIGGER THAN HOLIDAY - Online sales 2015

 

FINANCIAL TRAJECTORY IS NOT LOOKING GOOD

But the real thing we care about is the financial trajectory in aggregate for the group, which we aggregate below. We have eight historical quarters of sales, margins, earnings, working capital and capex, along with quarterly consensus estimates through mid 2016.

 

Sales and Margins: The good news is that consensus is looking for just 1.2% sales growth in 4Q (ending Jan). It happens to be on top of a very solid 6.8% sales growth number last year – but at least the Street seems to have done the math right with 4Q revanue estimates.  On the flip side, the Street is looking for revenue growth to pop back up to a 3-4% rate in 1H16. That’s not eggregious, but its more aggressive than we see in 4Q.

 

Margins: Margin expectations look too high. While 80bp below last year, the Street’s 4Q margin target (columns in the chart below) looks too high. It represents a 100bp sequential increase, which simply does not seem plausible given the inventory overhang. Etimates also assume that we’re back to flat yy by 2Q, which also seems very aggressive. In other words, the street is treating this slowdown as a weather event – and nothing more. If the economy is actually weakning, which we think it is, then sales will come down, and margins will come off materially.

SELL RETAIL | THIS IS BIGGER THAN HOLIDAY - Q Playbook 1

 

 

EPS: Third quarter EPS declined by 1.9% for the group. The good news is that 4Q estimates call for a similar decline. We think it will be worse than that, but perhaps not terribly. The risk, however, is that growth expectations pop back up to mid-single digits rather quickly after 4Q. As noted in the Sales/Margin discussion, we need to assume a rock solid economy for this to happen.

SELL RETAIL | THIS IS BIGGER THAN HOLIDAY - Q Playbook 2

 

Capex: has been quite stable for the past two years at a fairly low rate of 3.8% of sales. That said, we’re hard pressed to find a retailer that is not increasing its planned rate next year as it invests more in e-commerce. We stress ‘planned rate’ because the dollars are in motion, but if the sales level comes in weak, which happens commonly when we’re late in a cycle, then the rate goes up materially.

SELL RETAIL | THIS IS BIGGER THAN HOLIDAY - Q Playbook 3

 

SIGMA: In looking at the triangulation of sales, inventories and margins (SIGMA) the group has the unfortunate distinction of being in the lower left hand quadrant for the second consecutive quarter. That means inventories are growing faster than sales, and margins are down. The only thing we could realistically see at this point is a defensive move to clear inventories, which would mean another leg down in margins. We see that often at the company level, but it’s rare to see an entire group of companies move in concert to clear inventory. Realistically, we’re looking at a negative 2-3 quarter event.

SELL RETAIL | THIS IS BIGGER THAN HOLIDAY - industry sigma q


The Week Ahead

The Economic Data calendar for the week of the 30th of November through the 4th of December is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

The Week Ahead - 11.27.15 Week Ahead


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