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RTA Live: December 7, 2015

 


Monday Mashup

Monday Mashup - CHART 1

 

We are adding Dave & Buster’s Entertainment (PLAY) to the Hedgeye Restaurants SHORT bench. Over the coming weeks we will walk through our fundamental thesis on why we are BEARISH on PLAY.

 

RECENT NOTES

12/6/15 CMG | STARTING TO COME CLEAN

12/1/15 DFRG | HEADED NORTH

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

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow outperformed the XLY, last week, which was down -0.3%. Top performers on a relative basis from casual dining were DFRG and BWLD posting increases of +2.2% and +1.1%, respectively, while YUM and PNRA led the quick service group this week up +4.7% and +2.3%, 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

 

COMMODITIES

Monday Mashup - CHART 12

Monday Mashup - CHART 13

Monday Mashup - CHART 14

Monday Mashup - CHART 15

Monday Mashup - CHART 16

Monday Mashup - CHART 17

Monday Mashup - CHART 18

Monday Mashup - CHART 19

Monday Mashup - CHART 20

 

Keith’s Three Morning Bullets

In rate of change terms, at 1.88% y/y that was the slowest NFP print since the cycle peaked in Q1, but the Fed is going to hike on that:

 

  1. EURO – that’s why I signaled buy USD on last week’s Euro ramp of +2.7% - it’s back down -0.6% this morning to $1.08 and has no immediate-term support to $1.05; the data doesn’t matter to the Fed – the SP500 does
  2. OIL – #StrongDollar (rate hike catalyst DEC 16th) driven #Deflation Risk definitely matters to most asset classes – after a -3.8% decline last week, Oil is down another -1.1% this morning to $39.53 and the Commodities complex remains in crash mode
  3. EM – Japanese Equities +1% on the Dollar Up move overnight – EM Asia continued lower (no likey Up Dollar); Thailand -0.7% (-6.4% in the last month is one of the ugliest); EM (MSCI Index) deflated another -0.9% last wk to -14.3% YTD

 

SPX immediate-term risk range = 2057-2112; UST 10yr Yield 2.19-2.33%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

12/6/15 NUS | DIGGING A DEEPER HOLE

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!

 

SECTOR PERFORMANCE

Food and organic stocks that we follow underperformed the XLP last week. The XLP was up +1.0% last week, the top performers on a relative basis from our list was Hormel (HRL) and Lifeway (LWAY) posting increases of +2.5% and +1.0%, respectively. The worst performing companies on a relative basis on our list were Amira Natural Foods (ANFI) and Flowers Foods (FLO), which were down -22.6% and -8.1%, 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

In rate of change terms, at 1.88% y/y that was the slowest NFP print since the cycle peaked in Q1, but the Fed is going to hike on that:

 

  1. EURO – that’s why I signaled buy USD on last week’s Euro ramp of +2.7% - it’s back down -0.6% this morning to $1.08 and has no immediate-term support to $1.05; the data doesn’t matter to the Fed – the SP500 does
  2. OIL – #StrongDollar (rate hike catalyst DEC 16th) driven #Deflation Risk definitely matters to most asset classes – after a -3.8% decline last week, Oil is down another -1.1% this morning to $39.53 and the Commodities complex remains in crash mode
  3. EM – Japanese Equities +1% on the Dollar Up move overnight – EM Asia continued lower (no likey Up Dollar); Thailand -0.7% (-6.4% in the last month is one of the ugliest); EM (MSCI Index) deflated another -0.9% last wk to -14.3% YTD

 

SPX immediate-term risk range = 2057-2112; UST 10yr Yield 2.19-2.33%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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Retail Callouts (12/7) | KSS Credit Income

Takeaway: KSS Credit Income = The only number we really care about from 10Q. Poses significant risk to earnings, transcending the credit cycle.

KSS - Credit Income

Kohl's released its 10-Q after the close on Friday, giving us a look at the only number we really care about -- KSS' Credit Income -- which is up only $2mm over last year and is leveling off on the margin. We outlined in a note on 11/10 (KSS | Here’s Why KSS Is Expensive) why this line item transcends the credit cycle, and poses significant risk for KSS earnings -- even if top line growth stays in tact. The crux is that KSS is more fully-penetrated in its core customer than perhaps any other major retailer at 75%. Credit Card companies will no longer underwrite KSS' growth into an incrementally more marginal consumer base, so KSS is going solo with it's own rewards program. Our research shows that this is leading to cannibalization in credit income growth, which should result in significant SG&A deleverage in the model. By 2018, we've got KSS clocking in at $3.00, less than half of the Street at $6.25.

Retail Callouts (12/7)  |  KSS Credit Income - 12 7 2015 chart1

 

 

RH - The Next Disruptor: Restoration Hardware Entering Fashion Business

(http://wwd.com/retail-news/specialty-stores/restoration-hardware-fashion-clothing-gary-friedman-10289027/)

 

AMZN - Amazon Buys Semi-Truck Fleet to Shuttle Inventory

(http://blogs.wsj.com/digits/2015/12/04/amazon-buys-semi-truck-fleet-to-deliver-packages/)

 

TGT - Target and ABC team up for some magical marketing around Mary Poppins

(http://www.retailingtoday.com/article/target-and-worlds-favorite-nanny-team-some-magical-marketing)

 

WSM - Founder Of Williams-Sonoma Dies At Age 100

(http://www.forbes.com/sites/kathleenkusek/2015/12/05/founder-of-williams-sonoma-dead-at-100/)

 

WMT - Wal-Mart Sues Puerto Rico Over ‘Astonishing’ Tax Increases

(http://www.bloomberg.com/news/articles/2015-12-05/wal-mart-sues-puerto-rico-over-astonishing-tax-increases)

 

ETSY - Etsy Bug Results in Late Payments to Sellers

(http://www.ecommercebytes.com/cab/abn/y15/m12/i07/s01)

 

M - Bloomingdale’s to Add PHM Saints Pères Shops

(http://wwd.com/menswear-news/retail-business/bloomingdales-phm-saints-peres-pierre-henri-mattout-kevin-harter-pop-up10290138-10290138/)

 

J.Crew names Michael J. Nicholson as president, COO and CFO

(http://www.chainstoreage.com/article/woes-persist-jcrew-names-retail-vet-cfo-and-president)

 


MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE?

Takeaway: Barring an asteroid strike this week, we'll finally get an answer on whether the US has a net positive or negative 1-year static gap.

 

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM11

 

 

Key Takeaway:

Risk measures were mixed last week with our summary table below now showing an even balance of improving/worsening factors over the intermediate term. On a short-term basis, the skew is more favorable at 5 to 1.

Clearly, the main event is the long-awaited liftoff by the Fed, catalyzed by Friday's nominally better than expected NFP report. There's some worthwhile debate over whether This Time Is Different on this rate hike, i.e. after so many years of Zero has the country moved to a position of net asset sensitivity or are we still net liabilty sensitive as we have been throughout cycles past. We know banks are asset sensitive (see Call Reports) as are savers, but will longer-term credit demand wane by enough to offset the benefits? Obviously this depends in large part on what happens to the curve. We remain of the view that the curve will flatten as it did from mid-2004 to mid-2006 when the Fed tightened 17 consecutive times raising the Fed Funds rate from 1.00% to 5.25%. During that period of tightening the 30-YR Fixed Rate Mortgage ended about where it started, at ~6%.  

Areas of ongoing weakness include Chinese Steel (down another 2.7% on the week and -8.8% on the month), which is still our proxy for China's economy. Also, high yield and levered loans continue to sell off, driven at least partially by the weakness in the energy segment of the market. High yield YTM has backed up 53 bps on the month now, to 7.95%. 

 


Current Ideas:


MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 5 of 12 improved / 5 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM15

 

1. U.S. Financial CDS – Swaps tightened for 15 out of 27 domestic financial institutions on Friday's employment report, which came in better than expected with 211k jobs added.

Tightened the most WoW: ACE, ALL, CB
Widened the most/ tightened the least WoW: WFC, SLM, SLM
Tightened the most WoW: LNC, ACE, MMC
Widened the most MoM: CB, AXP, PRU

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week despite the ECB's stimulus announcement falling short of expectations.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM2

 

3. Asian Financial CDS  Two of three Chinese bank swaps tightened following the IMF's decision to make the yuan a lending-reserve currency. Also in India, two of three bank swaps tightened. Indian bank swaps were bolstered when a panel run by the Indian Finance Ministry's chief economic adviser proposed a simple 17% goods and services tax last week.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened significantly more than others, by -11 bps to 176.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM18

 

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM3

 

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week given the threat of a U.S. Fed rate hike. Brazilian sovereign swaps widened the most, by 19 bps to 446.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM16

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 1 bps last week, ending the week at 7.95% versus 7.94% the prior week.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 2.0 points last week, ending at 1826.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 25 bps.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM7

9. CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 183 versus 186 the prior week. As compared with the prior month, commodity prices have decreased -4.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - 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 tightened by 6 bps to 10 bps.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged over last week, ending the week at 1.79%. 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 | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM10

12. Chinese Steel – Steel prices in China fell 2.7% last week, or 54 yuan/ton, to 1963 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 | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 133 bps, 3 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.1% upside to TRADE resistance and 2.2% downside to TRADE support.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


CRASH: Strong Dollar Deflation Continues To Crush Commodities

Takeaway: Fed perpetuated deflation hits oil and other commodities hard.

CRASH: Strong Dollar Deflation Continues To Crush Commodities - Oil cartoon 11.20.2015

 

It's a central planner's world and we're all just living in it. 

 

In a note to subscribers this morning, Hedgeye CEO Keith McCullough highlighted how the much telegraphed Fed rate hike is impacting global financial markets. In particular, McCullough singled out last week's gyrations in the U.S. dollar as a developing market trend to keep an eye on: 

 

"In rate of change terms, at 1.88% year-over-year that was the slowest Non-Farm Payroll print since the cycle peaked in Q1 2015, but the Fed is going to hike on that.

 

That’s why we signaled buy USD on last week’s Euro ramp of +2.7%. The Euro is back down -0.6% this morning to $1.08 and has no immediate-term support to $1.05; the data doesn’t matter to the Fed – the S&P 500 does."

 

CRASH: Strong Dollar Deflation Continues To Crush Commodities - dollar strong

 

That's important because (in related news) the strengthening U.S. dollar is ripping through oil markets:

 

"#StrongDollar (rate hike catalyst DEC 16th) driven #Deflation Risk definitely matters to most asset classes – after a -3.8% decline last week, Oil is down another -1.1% this morning to $39.53 and the Commodities complex remains in crash mode."

 

CRASH: Strong Dollar Deflation Continues To Crush Commodities - wti oil

 

That's just one example of how a stronger dollar continues to take its toll on commodity prices. (Note: Commodities (CRB Index) were unable to bounce on a Down USD week and remain in crash mode -20.3% YTD.)


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