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McGough: Retail Looks Risky, But If I Had to Own Two Stocks…| $XRT

 

In this brief excerpt of The Macro Show this morning, Hedgeye Retail analyst Brian McGough discusses underappreciated risks lurking in retail right now. He also answers a subscriber’s question about which stocks he would own despite his current apprehension of the sector. 

 

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

 

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INSTANT INSIGHT: Strong Dollar Will Keep Fed Guessing

Takeaway: The dollar's strength continues to crush commodities.

INSTANT INSIGHT: Strong Dollar Will Keep Fed Guessing  - strong dollar

 

"The Euro was down another -0.5% last week (-12.4% YTD vs USD) and down again this morning as the USD Index ramps above 100," writes Hedgeye CEO Keith McCullough in a note to subscribers this morning. "Commodity markets don’t like this at all. The CRB Index remains in crash mode down -20.1% YTD."

 

Take a look at the ramp up in the U.S. dollar index since mid October.

 

INSTANT INSIGHT: Strong Dollar Will Keep Fed Guessing  - usd2

 

As McCullough notes, the CRB index is getting crushed by the strong dollar move.

 

INSTANT INSIGHT: Strong Dollar Will Keep Fed Guessing  - crb2

 

That's important.

 

By the time we get to Fed head Janet 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.


Monday Mashup

Monday Mashup - CHART 1

 

We added Pinnacle Foods (PF) to our SHORT bench this week. We believe that the acquisition of Boulder Brands will not prove to be as lucrative as management is laying it out to be. We are going to be doing more research into the name over the coming weeks as we solidify our thesis.

 

RECENT NOTES

11/24/15 NUS THOUGHT LEADER AUDIO REPLAY

11/24/15 THOUGHT LEADER CALL MATERIALS | NUS | ON NOTICE

11/18/15 CAG | SMOOTH MOVES

11/13/15 NUS | SHOW ME THE MONEY!

11/13/15 NUS | BLACK BOOK PRESENTATION REPLAY

11/10/15 HAIN | THE COMPETITIVE ISSUES ARE JUST BEGINNING

11/05/15 BDBD | ADDING IT TO THE LONG BENCH

 

SECTOR PERFORMANCE

Food and organic stocks that we follow outperformed the XLP last week. The XLP was up +1.1% last week, the top performers on a relative basis from our list were Amira Natural Foods (ANFI) and Boulder Brands (BDBD) posting increases of +30.9% and +14.4%, respectively. Boulder Brands’ significant increase was due to them entering into an agreement to be acquired by Pinnacle Foods. The worst performing companies on a relative basis on our list were Snyder’s-Lance (LNCE) and Mead Johnson (MJN), which were down -1.7% and -2.0%, respectively.

Monday Mashup - CHART 2

 

XLP VERSUS THE MARKET

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is BULLISH in the TRADE and TREND duration.

Monday Mashup - CHART 4

 

Food and Organic Companies

Monday Mashup - CHART 5

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

Keith’s Three Morning Bullets

Damn the data – it’s all about central planning events this week. Yellen and Draghi have a busy schedule!

 

  1. EURO – down another -0.5% last wk (-12.4% YTD vs USD) and down again this morning as the USD Index ramps > 100; Commodity markets don’t like this at all as the CRB Index remains in crash mode, -20.1% YTD
  2. EM – as long as you only look at the Nasdaq, everything is fine – EM and LATAM stocks deflated another -0.6% and -2.4% respectively last week and EM Asia (Indonesia -2.5% overnight) isn’t responding well to #StrongDollar either
  3. YIELDS – super spike in the short-end (2yr = 0.95%) continues to flatten he curve (10yr minus 2yr testing YTD lows at 128bps wide this am) – so the Fed can tighten into a slow-down and perpetuate the late cycle slow-down by doing so

 

SPX immediate-term risk range = 2045-2109; UST 10yr Yield 2.18-2.28%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING

Takeaway: Risk measures were neutral around the Thanksgiving holiday, although Portugal, Russia, and Turkey experienced some turbulence.

 

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM11

 

Key Takeaway:

Most risk measures were neutral last week. U.S. financial CDS was unchanged at the median as there was little activity around the Thanksgiving holiday, although the TED spread, which tightened by -4 bps, signaled decreasing risk. In developments last week, Portugal's president appointed anti-austerity socialist leader António Costa as prime minister, causing volatility in private and sovereign CDS. Additionally, Russian and Turkish CDS widened, likely due in part to the conflict arising from Turkey downing a Russian jet on November 24. In Asia, risk measures were fairly muted, although Chinese steel prices continued to fall, dropping another -2% last week.

 

Short-term risk measures in our heatmap below are mostly neutral to negative. Intermediate- and long-term measures are mostly negative.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 6 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM15

 

1. U.S. Financial CDS – Swaps widened for 12 out of 27 domestic financial institutions. For the most part, activity was muted in the U.S. around the Thanksgiving holiday. 

Tightened the most WoW: MMC, LNC, ACE
Widened the most WoW: CB, C, BAC
Tightened the most WoW: LNC, MMC, WFC
Widened the most MoM: CB, AXP, AIG

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week. Portugal and Russia were outliers. Portugal's Banco Espirito Santo's swaps widened by 21 bps to 629 as the country's president appointed anti-austerity socialist leader António Costa as prime minister. The widening is interesting because it conflicts with the movement on sovereign Portuguese CDS. The takeaway for Portugal is that, although last week's political development clears up weeks of conflict, it translates to uncertainty and volatility. Russia's Sberbank's CDS widened by 21 bps to 356, likely due in part to concerns over the economic implications of Turkey downing a Russian jet on November 24. 

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM2

 

3. Asian Financial CDS – Swaps in the Asian region mostly widened last week, although only moderately with a 1 bps median change.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Spanish sovereign swaps tightened the most, by -5 bps to 83. In contrast to Portugal's Banco Espirito Santo's swaps widening, the country's sovereign CDS tightened by -4 bps following anti-austerity socialist leader António Costa's appointment as prime minister.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM18

 

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM3

 

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Brazilian sovereign swaps widened the most, by 31 bps to 427. Additionally, Russian and Turkish swaps widened by 15 bps to 268 and by 16 bps to 257, likely in part due to the conflict arising from Turkey downing a Russian jet on November 24.


MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM16

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 12 bps last week, ending the week at 7.94% versus 7.82% the prior week.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 4.0 points last week, ending at 1828.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM6

8. TED Spread Monitor  – The TED spread fell 4 basis points last week, ending the week at 24 bps this week versus last week’s print of 28 bps.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM7

9. CRB Commodity Price Index – The CRB index fell -0.2%, ending the week at 183 versus 184 the prior week. As compared with the prior month, commodity prices have decreased -6.3%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 17 bps.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was flat at 1.79% last week. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM10

12. Chinese Steel – Steel prices in China fell 2.0% last week, or 42 yuan/ton, to 2017 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 130 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.1% upside to TRADE resistance and 1.3% downside to TRADE support.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Retail Callouts (11/30) | What To Own/Short Into Holiday

Takeaway: We’re net sellers of Retail, this is bigger than weather/holiday. Hedgeye Retail Idea List.

SELL RETAIL | THIS IS BIGGER THAN HOLIDAY

 

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.

To see our full note from yesterday CLICK HERE

 

Hedgeye Retail Idea List

Retail Callouts (11/30)  |  What To Own/Short Into Holiday - 11 30 2015 chart1

 

SPLS, ODP - Regulators prepare blocking Staples-Office Depot merger

(http://nypost.com/2015/11/29/regulators-eye-blocking-staples-office-depot-6b-merger/)

Our Take: Blocking this merger is ridiculous. The 'space' is so loosely defined. There's nothing you can buy in a Staples/Office Depot that you can't buy in Wal-Mart, Target, CVS or even your average local supermarket.

 

NRF’s 2015 Thanksgiving weekend survey, including the spending amount, are not comparable to last year’s survey as the methodology has changed.

(https://nrf.com/media/press-releases/thanksgiving-weekend-shopping-brings-big-store-and-online-crowds-according-nrf)

Our Take: How convenient that the survey methodology for the NRF -- the Retail Industry's lobbying group -- changed at the same time results for the average retailer are well below plan.  This is akin to a company that misses a quarter and changes disclosure to mask the real underlying trends.

 

AMZN - Amazon shows off future drone delivery service in ad

(http://www.marketingweek.com/2015/11/30/amazon-shows-off-future-drone-delivery-service-in-ad-starring-jeremy-clarkson/)

Our Take: Many people still consider this concept to be ridiculous, but we'll rarely bet against Bezos. Consumer buy-in is critical with this delivery service, and with Wal-Mart hot on its tail in testing its own concept, we're glad to see AMZN lead the way.

 

Neiman Marcus web site suffers outages on Friday and Saturday

(http://fortune.com/2015/11/28/neiman-marcus-ecommerce-2/)

 

ZQK - Quiksilver Employee Incentive Plan Gets Pushback

(http://wwd.com/business-news/legal/quiksilver-incentive-plan-gets-pushback-10286702/)

 

EBAY - Brief Outage Strikes PayPal Ahead of Cyber Monday

(http://www.ecommercebytes.com/cab/abn/y15/m11/i30/s01)


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

11/24/15 INVITE | THOUGHT LEADER CALL | RICK BERMAN ON CHIPOTLE AND OTHER INDUSTRY ISSUES

11/23/15 Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities)

11/23/15 CMG | SHORT THE FUNDAMENTALS

11/20/15 WEN | REMOVING THE SHORT | GOING LONG

11/20/15 ZOES | ALL IS WELL IN THE KITCHEN

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow widely outperformed the XLY, last week, which was up 1.5%. Top performers on a relative basis from casual dining were FRGI and CHUY posting increases of +10.8% and +9.1%, respectively, while ARCO and HABT led the quick service group this week up +18.8% and +9.2%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3

 

XLY VERSUS THE MARKET

Monday Mashup - CHART 4

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks BULLISH from a TRADE and TREND perspective, TREND support is 78.42.

Monday Mashup - CHART 5

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 9

Monday Mashup - CHART 10

Monday Mashup - CHART 11

 

Keith’s Three Morning Bullets

Damn the data – it’s all about central planning events this week. Yellen and Draghi have a busy schedule!

 

  1. EURO – down another -0.5% last wk (-12.4% YTD vs USD) and down again this morning as the USD Index ramps > 100; Commodity markets don’t like this at all as the CRB Index remains in crash mode, -20.1% YTD
  2. EM – as long as you only look at the Nasdaq, everything is fine – EM and LATAM stocks deflated another -0.6% and -2.4% respectively last week and EM Asia (Indonesia -2.5% overnight) isn’t responding well to #StrongDollar either
  3. YIELDS – super spike in the short-end (2yr = 0.95%) continues to flatten he curve (10yr minus 2yr testing YTD lows at 128bps wide this am) – so the Fed can tighten into a slow-down and perpetuate the late cycle slow-down by doing so

 

SPX immediate-term risk range = 2045-2109; UST 10yr Yield 2.18-2.28%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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