Deflation: Who Warned You First?

Behold the beauty of the timestamp below.


During the September 18, 2014 broadcast of The Macro ShowHedgeye CEO Keith McCullough warned about ... (drumroll please) slowing global growth, deflation and the effects of a strengthening U.S. Dollar.


Check out this 2-minute clip.



Retail Callouts (12/1): TGT Site Issues & KSS Online Stats, Cyber Monday

Takeaway: Target website crashes again, while WMT plans another 1.1bn e-com investment next year. KSS Thanksgiving Week Stats - High Y2Y Usage.

TGT - Target website crashes again. WMT investing $1.1bn in e-comm. How much does TGT need to spend to catch up?


Our Take: This is the 2nd time this year that TGT experienced website outages. The good news is that traffic volume was the highest the company has seen all year by a factor of 2x, driven by a 15% off all website purchases promotion amongst other Cyber Monday deals. The bad news -- TGT online sales account for only ~3% of the annual sales volume and the company is looking to grow this channel at a 40% CAGR over the long term (something it's been unable to do in year 1). It's pretty obvious that TGT, who has been the perennial laggard in this channel ever since it took it's business in house from AMZN in 2011, needs to invest in the backend in order to grow this channel, which in our mind means margins are going down. That won't be cheap especially in light of the $1.1bn WMT has already committed to spending next year.


KSS - Thanksgiving Week Stats - High Y2Y Usage


Our Take: These stats are important, though there is no historical context to contextualize the numbers that KSS released yesterday, but here are a few of the key ones.

1) 600 million page views over the 7 day period through Thanksgiving, Black Friday and the Holiday weekend. Based on other streams of data we know the total visitor count was ~61mm consumers calculated using 10 page/visits per user. That means the conversion rate was less than 5%.

2) We know the bargain hunting/price sensitive customer shops on Black Friday, which is especially the case at KSS. That, we'd argue, explains the high Y2Y ratio. Especially given the fact that Y2Y shoppers were given 20% off entire purchase coupons and free shipping over $25 (usual shipping discount is $75).

3) Non-credit sales have outcomped credit sales in 2 of the past 3 quarters (no disclosure on last call), which is notable in that the Y2Y rewards program was in year one of its nationwide rollout. Credit has carried the comp for the past 5 years plus as the program went from 50% of sales to 60% keeping SG&A artificially low. Based on the 70% Y2Y usage stats during Thanksgiving week, we'd expect to see some credit cannibalization as shoppers double up on points using the rewards program 20% discount and cash back offers, etc. on National credit cards instead of the KSS card.


Cyber Monday Results:

Retail Callouts (12/1): TGT Site Issues & KSS Online Stats, Cyber Monday  - 12 1 2015 chart1 D


B&M Store Sales Fell 4.7% Over Thanksgiving Weekend As Traffic Continued to Decline



AMZN - Devices sales strong over Black Friday Weekend

Fire tablet sales this holiday shopping weekend up more than 3x year over year

Amazon Fire TV sales on Amazon this weekend up more than 6x year over year



UA -  Navy unveils new uniforms and custom helmets for each position


Retail Callouts (12/1): TGT Site Issues & KSS Online Stats, Cyber Monday  - 12 1 2015 chart2

Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway)

Takeaway: For the record, we're not getting bullish (on growth) anytime soon.

Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ISM blast off


An already tough year for Wall Street's U.S. economic bulls just got tougher. The steady stream of poor (recessionary?) economic data continues to come in. 


Here's what you need to know right now.


Earlier this morning on The Macro Show, Hedgeye CEO Keith McCullough cited “the most important chart” to look at today highlighting the fits and starts in the 10-year Treasury this year.


Here’s the chart and an abridged transcript of McCullough’s insights:


Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ism 10yr


“… Coming out of the spring time, the Fed says ‘We’re seeing greenshoots. We’re going to raise rates.’ The green line goes all the way up to 2.5% and a bunch of hedge fund managers start talk about the 10 year going to 3%.


Then, on economic data slowing well through August and September, the 10-year proceeds to go back to 2%. But, in October, the data bounces and the 10-year goes up. The Fed says ‘O my god, we’ve got to raise rates.’


Ever since the data has slowed so the arrow goes back down again.


If we were to pull back this chart you would further in time you would see lower highs from a longer term perspective. So, again, the Fed is fighting economic gravity and October was a head-fake.”


What does this mean for investors today?


“What the Federal Reserve is trying to do now is get the red line to go back into green line. That has been very unnatural for the market.


So that’s basically what’s happened in the past two weeks. The 10s and 2s spread has compressed, which means the long end of curve is compressing relative to short end. Essentially, the Fed goes to raise rates and the short end goes up but the long end says I don’t like this, the economic data is bad.”


Check out the epic spread compression between 10yr and 2yr Treasurys which we’ve dubbed “The Ultimate Growth Slowing Indicator”:


Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - 11.30.15 EL chart


Following today's horrible ISM manufacturing print, the gap between the 10yr and 2yr compressed some more. McCullough called this out on The Macro Show prior to the report’s release.


Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ism tweet


“Today’s ISM number was one of the few numbers, in October, that didn’t bounce. This ISM report is pretty important report because last month it came in at 50.1, one notch away from looking as contractionary as Dr. Copper looks or Emerging Markets, or anything in junk bonds.


All of that stuff still looks about as bad as it did in July. So here’s another opportunity for you to reset yourself and set up for the next 3 month move as opposed to the one month head-fake that we had in October.”


Here’s a brief update McCullough wrote after the ISM report. 


Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ISM


“See the ISM bomb of 48.6? But no worries – if you back out company’s selling prices alongside strong dollar/weak demand deflation, and don’t look at US Retail Sales and/or consumption growth slowing from Q1 cycle peak – all good.”


And then there's this data point doozy from America's top CEOs:


Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ism other


We've been alerting subscribers to U.S. and global #GrowthSlowing for a while now. You won't hear about any of this from Old Wall perma-bulls, or the Fed for that matter.


Fed head Janet Yellen seems hell-bent on raising rates into slowdown.


Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ism tweet breaking



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%


Del Frisco’s Restaurant Group (DFRG) is on the Hedgeye Restaurants Best Ideas list as a LONG.


As we stated on 10/14/15 (NOTE HERE), we believe the worst is behind DFRG, as management is adjusting its operating strategy to improve profitability in 2016. This is partly evidenced by the official closing of their Del Frisco’s Grille in Palm Beach, FL, effective Sunday, November 29. This was a previously announced closure, as the company recorded a $3.3 million impairment charge related to the location. Looking forward, the company will incur one-time lease termination and closing costs during the fourth quarter.


Closing poorly performing stores is a necessary practice for all restaurant companies in order to redeploy capital to higher return locations. Mark Mednansky, CEO of DFRG stated, “we have therefore chosen to take decisive action to close the location so that we can focus on more profitable opportunities. We continue to have complete confidence in the Grille concept and are looking forward to opening new restaurants in carefully selected locations.”


The stock appears to have built in a bottom as it is no longer consistently going down, and it is reacting favorably to slightly good news. We still see an estimated 25% upside in the name as we look into 2016.



Along with the company strategically operating more efficiently, we believe the company will have the benefit of lower beef prices, aiding their commodity basket costs. (LOOMING CRASH IN BEEF)


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw




RTA Live: December 1, 2015



CoreLogic HPI | Why, When, What

Takeaway: October HPI trends - which showed a 3rd month of acceleration - remain a moderate tailwind for the housing complex.

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. 


CoreLogic HPI | Why, When, What - Compendium 120115


Today's Focus: October CoreLogic Home Price Report


WHY: Historically, the 2nd derivative trend in home price growth has shown a strong direct relationship with equity performance across the housing complex and across builders in particular.  A primary reason is that accelerating price growth effectively gets captured in land values, raising the value of lots in inventory with that margin capture dropping through the P&L and augmenting profitability.  


WHEN: After peaking in early 2014, price growth decelerated discretely through 2014 year-end. Along with the tail impact of rising rates (2013 Taper Tantrum) and the Peak in regulatory tightening (QM implementation, Jan 1014), negative price growth trends drove significant underperformance in housing equities through the first 3-quarters of 2014.  Price growth subsequently stabilized and accelerated modestly in 1Q 2015 which, along with positive seasonality and easy volume comps, drove marked outperformance for the group. 


WHAT: As the 1st chart below illustrates, price growth across all three primary HPI series is again showing modest acceleration the last couple/few months – a largely unsurprising development given the ongoing, crawling improvement in demand, continued supply tightness, and prices' lagged relationship with demand.   


From here, it’s more likely we see some stabilization in price trends rather than another iteration of the large-scale inflections (i.e. +/- 15% YoY) that have characterized the post-crisis period to-date but, as it stands, HPI trends remain a moderate tailwind supporting the complex.  


CoreLogic HPI | Why, When, What - HPI 3 Series 2


CoreLogic HPI | Why, When, What - CoreLogic ExDistressed


CoreLogic HPI | Why, When, What - HPI vs ITB



About CoreLogic:

CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic's property information database. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate constant-quality view of pricing trends than basing analysis on all home sales. The CoreLogic HPI covers 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."


Joshua Steiner, CFA


Christian B. Drake

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