Correlation Risk

Client Talking Points


The most important move in macro this morning is the EUR/USD retesting of $1.09 on the upside. It’s not only a Pain Trade in FX but it gives both a bid to bombed out Oil/Commodities and an offer to Japanese/European stocks – correlation risk very high.


Both the spot and reference rate for the Yuan are testing 4 year lows making this FX/Correlation Risk all the more relevant. The -$87B draw-down in Chinese FX Reserves was the 3rd largest in 10 years; no bounce for stocks in Shanghai or Hong Kong overnight.


“Ex-Energy”, the S&P 500 was down more than it looked yesterday – Oil & Gas (XOP) was up +0.6% on the day vs. the Transports (IYT) down a big -2.8% - fully loaded with COST inventories +16.5% last night (vs. Sales +1.3%). The U.S. economy is very obviously slowing here in Q4 – the Fed is cutting its GDP forecast as they raise rates.


*Tune into The Macro Show with Macro & Housing Analyst Christian Drake at 9:00AM ET - CLICK HERE

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Company Ticker Sector Duration

Restaurants Sector Head Howard Penney had no material update on McDonald's (MCD) this week. However, here is what Penney wrote around when we added MCD to Investing Ideas. It's worth reiterating our high conviction in the stock:


"We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now." 


"Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."


A lot has happened in 13 weeks... not the least of which is that Restoration Hardware (RH) is underperforming not only the market by 16%, but Retail as well (by 7%) – despite RH being more insulated from some of the issues that are clipping earnings today for retailers more broadly.


Over this time period, however, RH meaningfully accelerated square footage growth, launched two new concepts. Some say it’s bad timing. We disagree. RH is our favorite name in the retail space, and we like it across all three durations. Trade, Trend, and Tail.


On went the game of slowing last week with a little central planning un-secretive sauce. Despite the ECB’s move to cut the deposit rate to -0.30%, Draghi didn’t ring the cowbell loud enough. Meanwhile, Friday’s jobs report might have been just enough for Janet to hike rates into a late cycle slowdown. The consensus long USD crowd was crushed on the ECB news. The dollar lost over 2% on Thursday and rates were pushed higher.


If growth is going to continue to slow, with a rate hike on the horizon, a relative fixed income spread play (long TLT, short JNK) is exactly what you want on.

Three for the Road


$KMI cuts dividend by 74%.  Ahhh this is so bittersweet it hurts



No man was ever wise by chance.



China’s FX reserve balance plunged -$87.2B in NOV (the third-largest decline in at least 10 years) to the lowest absolute level since FEB ‘13.

Tonight | Join Hedgeye For Holiday Cocktails & Appetizers

We hope you can join us tonight at La Biblioteca (622 3rd Avenue at 40th Street – located inside Zengo restaurant) from 5-9pm for some holiday cheer!


Please RSVP to Kerrie at  if you can join.


We look forward to seeing you!


-Your Hedgeye Macro Team


Tonight | Join Hedgeye For Holiday Cocktails & Appetizers - he client holiday party DEC2015


Chipotle Mexican Grill (CMG) remains on our Hedgeye Restaurants Best Ideas list as a SHORT.



Today, Chipotle management spoke at the Bernstein Consumer Summit, in large part about their recent E. coli outbreak and how they plan to reach the other side of it. The hubris that management seemed to display was remarkable, in which they showed little remorse for the victims and turned quickly to how they will build traffic once again. Chipotle is quickly beginning to look just like any other restaurant company. They will no longer be cutting cilantro, tomatoes or lettuce fresh in house as they are labeled high risk items to be infected with E. coli. Additionally, if you didn’t know already, their corn mixture is not fresh; due to a short harvest season they freeze the yearly supply at the end of the summer and thaw it as needed. Management is working to implement changes immediately, no matter what the cost is, which we liked to hear. But this will all come with extra costs, and management openly admitted that although not immediately, they are confident that they have the ability to increase price to offset these costs. CMG would have to take a sizeable price increase to offset added infrastructure investment as well as labor pressure. We don’t think it is possible, the days of CMG’s far above industry average margins will be in the past.


In CMG’s recent release on food safety (click HERE to view), CMG made an interesting comment, it reads, “there are about 48 million cases of food-related illness in the U.S. annually, including 265,000 cases of E. coli.” We read this as, “sorry, but we aren’t the only ones causing people to get sick.” This is just a continuation of the hubris from management in which they believe they are not at fault and somehow better than their competitors who use a similar supply chain as them.


We remain firmly SHORT, as we see downside to the $350-$400 range.



CMG has hired Dr. Mansour Samadpour of IEH Laboratories and Consulting Group to revamp their supply chain and ensure the safety of all the food. He was asked to “design a more robust food safety program to ensure the highest level of safety and the best quality of all meals served at Chipotle.” He has set out to add more washing and testing technology at distribution centers as well as shelf life testing to be used in restaurants. Management has also embarked on enhancing internal training to ensure all employees understand the importance of food safety.


On the supplier front, CMG is in the process of working with them to implement more stringent testing so any bad crops are stopped at the source. Additionally, management does not believe there will be any shortages of naturally raised, sustainably sourced or organic products needed for them to operate.


Improving food safety will be a significant investment, food safety is going to be a greater focus for the organization going forward. They are implementing this at such a fast pace they openly admitted they were doing it inefficiently, but they will refine the process after it is executed.  


Management believes that they have pricing power in order to cover these additional costs. They will begin to look at this dynamic closer to 2017, as it would be disingenuous to raise prices immediately following this outbreak.   



Management has spoken with the CDC and the FDA and they said at some point in the future they would declare the restaurants clear of E coli. At that time management plans to market through traditional media, direct mail (BOGO’s), and perform “critically placed interviews,” to say this is over and invite people back in. CMG has conducted research studies specifically regarding this outbreak and they learned that just 57% of CMG customers are aware of this outbreak. They also learned about some lost regular customers due to lack of trust and some new adopters drifting away because they have other options.  No matter how you slice it, the road to recovery for CMG is going to be a long one.



CMG is working to make mobile ordering a bigger part of their business, while they improve the efficiency of their second make line. They are going to be standardizing the process and creating tools to control portions. Online and mobile order customers will no longer be able to provide text commentary, although they will still be able to customize to some degree. Part of the enjoyment of eating at Chipotle is being in line and watching your meal being put together, getting to customize everything as you go down the line. That goes away when you order online. Some customers may not care about that, but as lines become shorter because people realize Chipotle is just as healthy as any other fast food, what will happen then?







Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



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The Real Reason You Should Be Concerned By China’s Recessionary Trade Data

Dominating headlines today was China’s NOV trade data. Import growth, while still in contraction territory, improved sequentially and is now accelerating on a trending basis. Counterbalancing that was continued softness in the rate of Chinese export growth – which was essentially unchanged from OCT – as well as sequentially soft trade balance figures.


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - IMPORTS


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China Exports YoY


Weighing on sentiment was the PBoC’s decision to set the USD/CNY reference rate to the second weakest level since the August 11th devaluation (6.4078 vs. 6.3985 prior). Both the spot and reference rate are now trading at/near ~four-year lows. It didn’t help sentiment that this policy adjustment came in conjunction with data that showed China’s FX reserve balance plunged -$87.2B in NOV (the third-largest decline in at least 10Y) to the lowest absolute level since FEB ‘13.


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China CNY Reference Rate


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China Foreign Exchange Reserves MoM


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China Foreign Exchange Reserves


Despite the aforementioned [marginal] shift in FX policy we continue to believe the CNY is not at risk of a material one-off devaluation. The August devaluation was not intended to promote export growth as bandied about by Western financial media, but rather to correct a longstanding imbalance that had developed between the spot and reference rates. That imbalance remains corrected – for now at least.


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China CNY Reference Rate Spread


The Chinese economy could obviously stand to benefit from a material devaluation of the CNY (CLICK HERE for more details), but instead of incremental sharp devaluation(s), we believe the PBoC is likely to guide the CNY 15-20% lower vs. the USD throughout the next Five-Year Plan.


Investors should expect Beijing to favor stability over destabilizing devaluations that would perpetuate an acceleration of already-rapid capital outflows. NDF spreads – while certainly still pricing in continued weakness in the CNY and CNH over the NTM – would seem to suggest as much.


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China Estimated Capital Flows


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China NDF Spread


We don’t want to belabor our thoughts on the Chinese yuan, which has become one of the top 2-3 topics de jour in our recent client discussions. For our more expansive thoughts on this topic as well as on the Chinese economy in general, please review our 11/19 note titled, “Can Beijing Maintain Exchange Rate Stability Or Is the Chinese Yuan the Next Thai Baht?”.


In short, with key high-frequency growth indicators continuing to consistently come in on the lower end of historical ranges and various measures of inflation continuing to decelerate on both a sequential and trending basis, it only makes sense for Western investors to anticipated increased policy support to combat this #Quad4 setup, at the margins. But with 1Y OIS pricing in a stable outlook for policy rates (-5bps  spread vs. benchmark 7-Day Repo Rate; ~flat over the past 3M) we continue to pound the table on our belief that Beijing will continue to do what we think is necessary per the structural headwinds we’ve identified throughout the Chinese economy – i.e. continue downshift GDP growth in an orderly manner.


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China Economic Summary


Shifting the discussion back to the title of this note, China’s NOV trade data is confirmatory of a core belief we have at Hedgeye: global growth continues to decelerate on a trending basis, which implies that it did not bottom in OCT like some of our competitors claim it has.


I personally don’t know how one can look at the following chart of global export growth (IMF data through 3Q) or the following chart of export growth trends across each of the G20 economies and say that global growth has “bottomed”.  Admittedly, I’m never in competition for being the smartest guy in the room when Keith and I visit with clients, but still…


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - IMF World Exports


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - EXPORTS


Surely the key risk to the reflationist view is that global demand growth just never shows up. That is certainly is what is being implied by the current rate of global export growth. Per the following reasonably tight correlation, it is reasonable to expect that global growth decelerated to somewhere around flat YoY in 3Q15.


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - World Exports vs. World GDP


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - World Exports vs. World GDP 2


Admittedly, however, there is upside to that forecast given the relative resilience of the U.S. consumer, but as we highlighted in our 11/25 note titled, “Can’t Sneak #GrowthSlowing Past the Goalie”, the NTM outlook for real PCE growth in the U.S. is as dour as it has been at any point in time since late-2007.


If the domestic consumption growth finally folds like manufacturing, exports, capex and corporate profits all have before it, a global recession in 2016 is not at all out of the realm of possibly given the current state of international economic affairs.


The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - 12 8 2015 3 47 40 PM

Source: Bloomberg L.P.


Given the recent strength in domestic auto sales, it may be worth adding General Motors (GM) to your “FANG” screen. A quantitative breakdown in those stocks would likely be a harbinger of that the proverbial “music” has officially stopped.


Have a great evening,




Darius Dale


Cartoon of the Day: Meanwhile On Skid Row...

Cartoon of the Day: Meanwhile On Skid Row... - Oil cartoon 12.08.2015


Oil (WTI) smoked for another -5.9% drop yesterday and -0.27% today, taking its epic deflation to -43.3% year-over-year.


We are moving United Natural Foods (UNFI) to the Hedgeye Consumer Staples LONG bench.



We have ridden the wave on this name, going long at ~$49 (Black Book HERE) up to ~$55, and now down sharply to ~$37. We will be the first ones to admit that we did not time this trade correctly, misjudging the Whole Foods (WFM) effect, the overall natural and organic category going more mainstream, and the slowing center of store. At ~$49 UNFI was trading at 2008 recession levels, what we called a “generational opportunity,” at the time that was an accurate portrayal. Markets change, and we have to change with them. One may ask; why aren’t you moving it to the SHORT side? If it wasn’t a generational opportunity at $49, we definitely believe it is below $37, but we need to see a few things play out before gaining confidence in the long-term trajectory of UNFI.    

  1. Fill newly added capacity
  2. Grow within current stores
  3. Win new contracts
  4. Acquire fresh food assets

UNFI is still a great company, with a solid management team. The market is changing around them; natural and organic is now mainstream and available in more locations besides just the natural channel (WFM) and the center of store is struggling as consumer reach for more fresh items. UNFI must learn to change with this market and we are confident they are working towards that. They still maintain one of the largest portfolios of natural and organic products and provide a differentiated, value-add service that their customers appreciate and need. Bottom line is that the TAIL story is still in tacked, but there will be some near term turbulence as we are seeing today.  



For all intents and purposes this was an ugly quarter, one that included a top and bottom line miss, with a full year 2016 guide down.  Net sales for 1Q16 were $2.08 billion versus consensus estimates of $2.09 billion. Operating income decreased 7.7% YoY to $53.9 million, this also missed consensus expectations of $60.5 million, was heavily impacted by a $2.8 million restructuring charge related to the loss of the Albertsons contract. Adjusted diluted EPS for the quarter was $0.63, coming short of consensus estimates of $0.68 by $0.05.



Management appeared especially cautious on the call, as they called 2016 a transitional year for the company. They continuously pointed out the competitive nature of the industry, and the troubles with the center of store. Management appeared wary of top line growth as they reposition the business to appeal to current consumer trends of fresh, perimeter food items and ethnic gourmet.


Management guided the full year down, revenue is now expected to be in the range of $8.4 to $8.6 billion versus previously announced guidance of $8.5 to $8.7 billion. Earnings per diluted share are now expected to be $2.73 to $2.84 versus previously announced guidance of $2.80 to $2.93.


Please call or e-mail with any questions.


Howard Penney

Managing Director



Shayne Laidlaw




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