BREAKING: #Deflation Confounds Fed's 'Transitory' Storytelling

BREAKING: #Deflation Confounds Fed's 'Transitory' Storytelling - Deaflation cartoon 12.09.2015


Wall Street is finally waking up to our view on #Deflation. (That call is now 18-months old.) Not by choice, of course, they had to wake up... deflation is pervasive.


Hedgeye CEO Keith McCullough ran through some of the deflationary data in a note to subscribers earlier this morning:


"The 19 Commodity CRB Index hit a fresh 2015 low of 174 (-24.3% YTD) yesterday, so you’re going to see one of the many dead-cats that have bounced this morning- WTI led that, +1.8% yesterday and +0.5% this am w/ a risk range of $34.05-38.15."


Here's the chart...


BREAKING: #Deflation Confounds Fed's 'Transitory' Storytelling - CRB index twitter 

The Fed calls these falling prices "transitory." Transitory? Don't forget that the Fed's forecasts are wrong around 70% of the time.


Deflation proof? Take a look at the 0.0% CPI month-over-month print this morning. That didn't come as a big shocker to our macro team. We'll see whether deflation proves transitory or not.

Retail Callouts (12/15): Retail Idea List, Primark, KSS, Gilt

Takeaway: Hedgeye Retail Idea List. Keep an eye on Primark. KSS open 170 hours straight. HBC's Gilt deal not transformative.

Hedgeye Retail Idea List

Retail Callouts (12/15): Retail Idea List, Primark, KSS, Gilt - 12 15 2015 chart1


Primark - Can Cool Clothes Get Any Cheaper Than This?


Here's one of the better articles we've read about Primark. There's not a whole lot of info in this article that we don't already know. But if you are interested, long or short, in any company that has anything to do with designing, marketing, manufacturing or retailing apparel, footwear and accessories in the US (or globally, for that matter), you pretty much have to read this. How can you NOT keep a constant eye on what will likely prove to be the most deflationary force in softline retail in the next economic cycle?


KSS - To open for 170 Straight Hours up from 100 hours last year


Our take: We still don't get why KSS keeps its doors open 24hrs a day leading up to the Christmas holiday. For a company that openly admits that it has a problem a) getting people through the turnstiles, b) selling items in categories that people actually want to buy, and c) keeping e-comm from cannibalizing in-store sales, it doesn't seem to make a whole lot of sense to stay open for 170 hours straight. This is the 3rd year now that KSS has kept the doors open all night, starting on the 20th in 2013, 19th in 2014, and the 17th in 2015. Plus it added a whole host of Door Buster deals on the 19th, as if retail needed another dose of Black Fridayesque deals. Allowing a person to shop at 3am (and paying store labor 3x wages for shift differential) is simply not a value driving strategy.


Gilt, HBC - In Proposed Sale to Saks Fifth Avenue Owner, Gilt Groupe’s Value Is Slashed


Our take: HBC taking a page out of the JWN playbook with this proposed acquisition of Gilt Groupe. One thing that has become abundantly clear is that the flash sale model isn't scalable when it can only offer 25 units of a specific product. Maybe the combination of Off 5th inventory will help to alleviate that issue, but there is also the secular trend away from Flash Sales to consider. But at 0.4x ev/sales, it seems like HBC should be able to get some value out of the name brand. But this would by no means be a transformative deal that would launch HBC's on-line platform into the 21st Century.


TUES - Tuesday Morning Corporation Announces The Appointment Of Steven R. Becker As CEO



MW - Moody’s revised its ratings outlook for Men’s Wearhouse to negative from stable.



Ayr to Spin Off From Bonobos



No surprise, Mobile traffic up this Holiday season.

Retail Callouts (12/15): Retail Idea List, Primark, KSS, Gilt - 12 15 2015 chart2


Toys ‘R’ Us - New Strategy 'Full and Chunky'. Sounds like a great margin strategy.



UPS, FDX, AMZN - Holiday Online Orders Taking Longer



VFC - The North Face uses artificial intelligence to engage with customers



Neiman Marcus hit by department store slump




CHART OF THE DAY: Watch Out, Recession Risk Rising

Editor's Note: Below is an excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe.


"... This, of course, will be the 1st time the Fed raises rates into Corporate Profits #Slowing (math people: rate of change) since 1967. And while the punditry on “it’s only 25 beeps” was loud in October, most of that complacency has turned into economic concern." 


CHART OF THE DAY: Watch Out, Recession Risk Rising - 12.15.15 EL chart

Dovish Pig Hike

“It takes courage to be a pig.”

-Stan Druckenmiller


That’s one of the best money manager one-liners of all-time. It probably makes the linear-econ-academic types cringe. I like that too. Per a more polite economist, Lasse Heje Pedersen, in Efficiently Inefficient:


“Others go for a more diversified and risk managed approach, arguing instead that bulls get rich. Bears get rich. But pigs get slaughtered.” In his interview with George Soros (Druckenmiller’s former partner), Soros “explained that he too puts significant emphasis on risk management but he feels that one should go for the jugular in rare cases…” (Pedersen, pg 12)


If the Federal Reserve was running a hedge fund, and they’re so convicted in the idea that #Deflation is “transitory” and the US economy isn’t slowing, why not go for the jugular tomorrow and raise rates by 50 basis points?


Dovish Pig Hike - deflation 500 pound gorilla

Click here to join Hedgeye CEO Keith McCullough live on The Macro Show at 9am. 


Back to the Global Macro Grind


Are you kidding me – 50 beeps? “How about an 1/8th of a point, Keith?” Or “what if the Fed raises by 25 beeps and signals they could start cutting rates after that?” Or “what if they don’t raise at all?”


That’s my inbox.


Post the Russell 2000 falling to -7.5% YTD (and -13.9% since July) yesterday, not one email (and believe me, I get a ton of them) is asking me about the upside in rate policy right now. They already tried the Ex-Energy, Ex-Credit, Ex-2000 Stocks thing. And it didn’t work. So, finally, for the 1st time this year… (drumroll)… every question is about the downside.


So, wouldn’t a Dovish Pig Hike be bullish?


Bullish – you know, as in ramp the “reflation” trade one more time into “year-end” baby! If Janet just goes back to what she really is (The Mother of All Doves), why can’t we have a Santa Rally? Why not? Pretty please. Do it for the kids!


After risk managing the last 2 US economic cycle tops:


  1. 1
  2. 2007-2008


I have no doubt in my mind that the Old Wall can drum up a new narrative on why US stocks can never go down. If you follow this morning’s macro message in the US Equity futures, it goes something like this:


  1. Dollar Down on a Dovish Hike
  2. Oil up another +0.5% “off the lows” (post a +1.8% bounce yesterday)
  3. Higher Gas Prices To Stimulate the US Consumer


Oh stop, Keith. Ok. I will. Because the storytelling at this point has reached the level of one of these (fictional) "Choose Your Own Adventure" books I used to read as a kid. “If you’d like to call rate hikes bullish, go to page 67 – if you’d like to call a rate-hike-reversal to dovish, go back to page 12.”


This, of course, will be the 1st time the Fed raises rates into Corporate Profits #Slowing (math people: rate of change) since 1967. And while the punditry on “it’s only 25 beeps” was loud in October, most of that complacency has turned into economic concern.


On the intimate relationship the profit cycle has with the economic cycle, my friend (former JP Morgan Strategist) Doug Cliggott wrote to me last week that we got “bad, bad data this week”:


“Profits of non-financial corporations were down -5% vs. Q3.2014, and their debts were up +7% vs. Q3.2014.  This 1200 bps gap between debt growth and profit growth is the widest we have seen since 2007.  As we talked about in September -- bad things tend to happen when debt growth is a lot faster than earnings.


The Fed data also show a violent {75%} slowdown in Q3 net share buybacks. That no doubt played a central role in the equity downdraft during Q3 ... a huge buyer went away.


My guess is this is a central theme for 2016 -- contracting corporate profits and much weaker cash flows mean very low share buyback volumes compared with the past four or five years. So U.S. equities will be "missing" a big buyer with no obvious, or less-than-obvious, cast of characters standing in the wings to step in and take their place.”


By the “data”, Doug was referring to the Q3 2015 Flow of Funds data (i.e. the Fed’s data!).


While it’ll take courage to do the Dovish Pig Hike thing tomorrow (i.e. the most dovish rate hike in US history), don’t doubt that Yellen will opt for that. All the while, keep on doubting that central planners can’t bend and smooth economic gravity anyway.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.33%

SPX 2003-2048
RUT 1101--1154

VIX 18.71-24.86
USD 96.60-99.64
Oil (WTI) 34.05-38.15


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Dovish Pig Hike - 12.15.15 EL chart

The Macro Show Replay | December 15, 2015


December 15, 2015

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.33 2.13 2.23
S&P 500
2,003 2,048 2,021
Russell 2000
1,101 1,154 1,115
NASDAQ Composite
4,902 5,043 4,952
Nikkei 225 Index
18,505 19,390 18,883
German DAX Composite
10,099 10,668 10,139
Volatility Index
18.71 24.86 22.73
U.S. Dollar Index
96.60 99.64 97.65
1.05 1.11 1.10
Japanese Yen
120.22 122.29 121.01
Light Crude Oil Spot Price
34.05 38.15 36.27
Natural Gas Spot Price
1.85 2.06 1.90
Gold Spot Price
1,050 1,080 1,059
Copper Spot Price
2.02 2.12 2.11
Apple Inc.
111 116 112
642 668 657
Alphabet Inc.
746 784 762
Facebook Inc.
102 107 104
Valeant Pharmaceuticals, Inc.
89.53 99.38 94.14
Kinder Morgan Inc.
13.23 17.66 16.00



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