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Cartoon of the Day: A Crude Reality

Cartoon of the Day: A Crude Reality  - oil cartoon 12.14.2015


"After crashing another -11.6% to -41.1% year-to-date last week, Oil starts the week up 1.97%," Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier today. 


Make no mistake. #Deflation Risk is still present.


Is Old Wall Warming Up To Our Late-Cycle Call?

Takeaway: We reiterate our call on deflation and growth slowing.

The Wall Street Journal published an interesting story written by Jon Hilsenrath this morning. Apparently, 58% of WSJ surveyed economists now think it is "likely" that within five years, short-term interest rates will be right back at zero. 


Is Old Wall Warming Up To Our Late-Cycle Call? - WSJ article


Here's the gist of it from Hilsenrath:


"Any number of factors could force the Fed to reverse course and cut rates all over again: a shock to the U.S. economy from abroad, persistently low inflation, some new financial bubble bursting and slamming the economy, or lost momentum in a business cycle which, at 78 months, is already longer than 29 of the 33 expansions the U.S. economy has experienced since 1854..."


Is Old Wall Warming Up To Our Late-Cycle Call? - wsj survey


Nothing new to us here.


In our 73-page Q4 Macro Themes presentation (published in October), we called out the simple fact that the current economic expansion was getting long in the tooth:


Click image to enlarge.

Is Old Wall Warming Up To Our Late-Cycle Call? - macro themes dek cycles  


Hilsenrath continues:


"Among the worries of private economists is that no other central bank in the advanced world that has raised rates since the 2007-09 crisis has been able to sustain them at a higher level."


Economists should be concerned. The latest round of U.S. economic data is "unequivocally bearish." Below is a video of our outspoken CEO Keith McCullough on Fox Business just before Thanksgiving discussing whether the U.S. is headed for recession in 2016.


Indeed, Old Wall economists have been slow on the uptake all year. Evidence? Our #Deflation call (now 18 months old) is a commonplace argument now, following the precipitous crash in commodities.


We continue to think that economists under-appreciate our #GrowthSlowing call (from Q3 2014). Then again, maybe some of them are finally wising up... 


Interestingly, one of the economists surveyed by the Wall Street Journal made the astute observation, as summarized by Hilsenrath, that the "U.S. expansion is now at an advanced stage and consumers have satisfied pent-up demand for cars and other durable goods."


"I call it late-cycle," the economist said. Sound familar? Thanks for coming out. We called out the "Late-Cycle" nature of the U.S. economy back in July. 


Still, what the WSJ surveyed economists seem to miss, even with this seemingly shocking revelation about U.S. growth, is that by raising interest rates the Fed might actually perpetuate an economic slowdown.


Is Old Wall Warming Up To Our Late-Cycle Call? - darius bingo


Our good friend and best-selling author Jim Rickards points out the Fed's nonsensical rationale for raising rates now:


Is Old Wall Warming Up To Our Late-Cycle Call? - rickards

Why Raising Rates (Even One Basis Point) Right Now Is a Really Bad Idea


During this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why even a miniscule interest rate hike by the Fed would be a big mistake.


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


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McCullough: The (Ugly) Outlook For Junk Bonds Gets Uglier | $JNK

On Fox Business' Mornings with Maria, Hedgeye CEO Keith McCullough discussed the recent reverberations rocking junk bonds and why the Fed is "culpable" for investors chasing high yield. The outlook, according to McCullough, doesn't look much better from here. 

Investors Search For Santa Claus In Vain

On The Macro Show this morning, Hedgeye CEO Keith McCullough observed that during last week's market rout — the S&P was down -3.8% — volume spiked as equity markets continued to make lower highs. That's a tenuous setup, at best, for equity market perma-bulls as we head into 2016:


"There was a very obvious breakout in volatility on Friday as deflation risk continues to manifest itself in the face of growth slowing.


Investors Search For Santa Claus In Vain - vol


Interestingly, but not surprisingly, volume spiked on Friday. I’ve been waiting for a big flush, down move because we’ve only had three big up moves in the past 26 days of trading. In fact, there have been just eight up days in the last 26. Those up days came after terrorist events and with relatively low volume.


What this visual tells you [see chart below] is that volatility was up 19% versus the 1-month average. So here was the huge spike in volume on the down move.


Investors Search For Santa Claus In Vain - volume


In other news, small caps continue to be an absolutely atrocious thing to hold long. The Russell was down 5.1% last week and is down 7% year-to-date. That’s not a good year. So don’t believe anybody that is looking for a Santa Claus rally because the S&P 500, for December, is not saying ‘Ho Ho Ho.’ It's down 3.5% for the month to date.


Investors Search For Santa Claus In Vain - sector


Now, talking about sectors, Consumer Staples is the only one that looks good from a trade and trend perspective. Meanwhile, just one of the many, many, many signals that confirms growth is slowing, consumer discretionary broke down pretty hard last week, alongside the financials. For any of your friends who were long financials in advance of a Fed rate hike, Merry Christmas. The sector is down 5.2% for the year to date.


And yet there are still people out there looking for Santa Claus and PMIs to bottom. This will be fun to watch. For anyone on top of economic reality, you know you don’t have to just sit back and buy stocks into year end. There are plenty of better ways to spend your holiday."


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KATE | Flash Sale Changeup

Takeaway: Addition of a Flash Sale may cause some near-term noise. But revenue drivers are in place as we turn the calendar forward to 2016.

KATE ran a one day Flash Sale over the weekend offering up to 75% off items. It's not a huge change in promotional posture -- the company ran a Theme Sale Gifts $99 and Under last year, and a Flash Sale at this same time in 2013. But it tells us a few things…


1) KATE has been in 'Flash Sale pruning mode' now for the better part of 1-year. At the end of 3Q the company had run 5 Flash Sales vs. 8 in 2014. Quarter to date the count is now up to 3 vs. 2 in 4Q14, and 3 in 4Q13. To date the company has stuck to plan in an effort to promote quality of sale events, but it makes us wonder if KATE management is staring at the 28% comp it put up in 4Q14 and promoting to drive the top line.

KATE | Flash Sale Changeup - 12 14 kate chart1


2) Flash Sales for KATE are gross margin accretive. That's counterintuitive, we know, but because the products are specially made for this channel it's actually a positive gross margin event, assuming of course that there isn't a whole lot of full price merchandise being discounted in order to clear up the balance sheet, which we don’t think is the case.


3) We think that KATE has done an exceptional job year to date cleaning up its distribution and sales posture in both the company owned and wholesale channel. The company is starting to lap those changes now, and 2016 should see a similar amount of events when compared to 2015, i.e. no more top line headwind. That coupled with the two handfuls of licenses launched in 2015/launching in 2016 and International distribution/JV agreements equals a lot of tailwinds in 2016.


4) If there is any red flag for us from the addition of this Flash Sale it is the quarter to date e-commerce trends. Last year the company put up a mid-40's e-comm comp (assuming a 20% e-comm weighting). We saw the YY change in Traffic Rank, which takes into account page visits per user and unique visits vs. the internet in aggregate, inflect negative in late November. There are still plenty of drivers on the comp side (especially with the addition of the Juicy outlet door conversions which are worth a couple hundred bps to comp) that we are not overly concerned with the quarter that will close at the end of December.


KATE | Flash Sale Changeup - 12 14 kate chart2

KATE | Flash Sale Changeup - 12 14 kate chart3

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