Cartoon of the Day: Return Policy?

Cartoon of the Day: Return Policy? - rate hike cartoon 12.30.2015


"The probability of a recession continues to rise as we head into 2016," Hedgeye CEO Keith McCullough wrote earlier today in a note to subscribers. "If the Fed keeps tightening into the slow-down, they’ll perpetuate it."


Takeaway: Existing home sales volume is stalling as a dearth of supply coupled with reduced investor demand offset growing 1st time buyer activity.

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.


PHS | PAST PEAK? - Compendium 123015


Today’s Focus: November Pending Home Sales & October Case-Shiller

Pending Home Sales declined -0.9% in November against upwardly revised October estimates while accelerating +110bps sequentially to +5.1% YoY (NSA).  While year-over-year growth accelerated against modestly easier comps (a dynamic that should persist next month), total signed contract activity recorded a 6th month of retreat off the May 2015 cycle peak.   


Perhaps the obvious question is whether May did, indeed, reflect the peak in activity in the current cycle.  From a rate-of-change perspective, sales growth in the existing market is very likely past peak – growth in 2015 benefited from both easy comps and mean reversion upside as demand in 2014 was down significantly and total sales volumes still had upside back to long-term historical averages.  Both of those dynamics are now rearview. 


While construction in the New Home market continues to hold significant upside to normalized levels of activity, on an absolute basis, higher highs in sales volumes in the existing market will require further normalization in entry level demand and some measure of supply-side support.  Growth in first-time buyer demand has been growing +12.2% YTD and we’d need to see a similar pace of demand recovery continue out of that cohort (along with ~static investor demand) to drive EHS back above 6.0MM Units.


On the pricing side, the Case-Shiller HPI data for October released yesterday confirmed the multi-month acceleration trend observed across all three primary price indices (CoreLogic, FHFA, Case-Shiller).  Tight Supply and Trailing demand trends should continue to support HPI over the nearer term and serve as a modest tailwind for housing related equities.  Price-Supply-Demand dynamics in the existing market remain delicate as rising prices help to improve the position of underwater and low-equity owners (with positive flow through to supply) while further challenging affordability for marginal buyers on housing’s bottom rung.  











PHS | PAST PEAK? - PHS Index   YoY SA From Trough




PHS | PAST PEAK? - HPI 3 Series


PHS | PAST PEAK? - Case Shiller 20 City   National TTM


PHS | PAST PEAK? - Case Shiller YoY vs MoM Scatter




About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.



The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.



About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.


Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.



Joshua Steiner, CFA


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Call Invite | Q1 2016 Macro Themes Conference Call (1/5/16 at 1:00PM ET)

We will be hosting our highly-anticipated Quarterly Macro Themes conference call on Tuesday, January 5th at 1:00PM ET. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.






  • U.S. #Recession?: Industrial activity and corporate profitability are already trending at recessionary levels. Meanwhile, domestic employment, consumption and income growth are all past peak and policy-driven deflationary pressures should persist in perpetuating soft external demand, EM distress, weak import pricing, HY credit risk and further flagging in corporate capex. We’ll contextualize the current macro data and handicap the probability of recession as the late-cycle U.S. economy traverses its steepest GDP base effects of the cycle.
  • #CreditCycle: An extended breakout in corporate credit spreads has preceded recessionary periods in prior cycles, and since we introduced our deflation theme in 2H14, both high yield and investment grade spreads have marched higher off all-time lows in cross-asset volatility and all-time highs in corporate credit outstanding. In effect, we are loudly reiterating our call that the unwind of ZIRP and QE will continue to deflate the easy money credit boom it fabricated in the form of continued recessionary earnings growth as the business cycle gets dangerously long in the tooth.
  • #CurrencyWar: Historically, Fed tightening cycles, #LateCycle slowdowns and #Quad3 outcomes have all been independently been bearish for the USD. As such, our expectation for a continuation of #StrongDollar commodity and asset price deflation appears misguided in the context of our dour fundamental outlook for the U.S. economy. That said, however, currencies cannot be analyzed in isolation and our proprietary analysis of the world’s top-10 economies renders the [dollar-bullish] global monetary policy divergence theme we authored well intact.




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Retail Callouts (12/30): Online Returns, Hong Kong Tourism, KATE, KSS, TGT, M, JCP, JWN

Takeaway: Online returns, another cost for retailers to absorb. Hong Kong traffic slows, little KATE exposure.

KSS, TGT, M, JCP, JWN - Online spending up, returns up = another cost for retailers to absorb



Merchandise returns are expected to increase 8% to $62bil over the months of November and December, and that makes sense. As online spending takes a bigger chunk of the spending pie, returns should follow in step.

With 80% of retailers offering free shipping on returns, that's a tough price tag to swallow for a lot of companies in this space -- especially those with a small average basket. We think that both sides of the fulfillment equation, shipping and returns, for things like apparel/footwear/home décor are headed to 100% free 100% of the time by the end of FY16. That started this holiday as retailers used 'free shipping' promotions as an offensive weapon (TGT, KSS, WSM, etc). Unfortunately, for almost everybody except the bullet-proof content-owners of the world (i.e. Nike), such a move will be dilutive to margins to the tune of bps. Even worse news is that if they don’t play ball, there’s risk to the top line (i.e. if either KSS or JCP opts in to the free shipping game, they both lose).


Of course, if free shipping is offset by more full-price selling, then this would be a saving grace. Unfortunately, we have yet to see any sign of this.  It could also be made up of more impulse purchases in the online format -- but with the exception of Amazon (the King of the impulse purchase), we've actually seen units per transaction go down for most retailers online.


Here is how the margin math works for 4 retailers at various ends of the department store spectrum. JWN gets up to a 1500bps higher gross margin than KSS on a straight on-line sale, 1300bps in the case of a partial return, and a both sit at a -10% margin on a full return. High end, high ticket, and solid content retailers can play online. Otherwise, it's an extremely dilutive channel with even more cost pressure as the free shipping and return threshold move towards $0.

Machine generated alternative text: KSS TGT TGTw/RC M JWN
Normal Sale
Merch Mgn
GP $
Adjusted Margin
$75.00 $125.00 $176.50 $200.00 $300.00
35% 38% 33% 40% 45%
$26.25 $47.50 $58.25 $80.00 $135.00
$7.50 $10.00 $10.00 $13.00 $16.00
$18.75 $37.50 $48.25 $67.00 $119.00
Margin %
25.0% 30.0% 27.3% 33.5% 39.7%
Partial Return
Reversed Profit
Adjusted Margin
$37.50 $62.50 $88.25 $100.00 $150.00
$0.00 $0.00 $10.00 $13.00 $16.00
$13.13 $23.75 $29.12 $40.00 $67.50
$5.63 $13.75 $9.12 $14.00 $35.50
Margin %
15.0% 22.0% 10.3% 14.0% 23.7%
Full Return
Full Return
Merch Profit
Adjusted Margin
$75.00 $125.00 $176.50 $200.00 $300.00
$7.50 $10.00 $20.00 $26.00 $32.00
$0.00 $0.00 $0.00 $0.00 $0.00
-$7.50 -$10.00 -$20.00 -$26.00 -$32.00
Margin %
-10.0% -8.0% -11.3% -13.0% -10.7%

Retail Callouts (12/30): Online Returns, Hong Kong Tourism, KATE, KSS, TGT, M, JCP, JWN - 12 30 2015 Ecomm Math


KATE - Hong Kong traffic slows, KATE little exposure



These Hong Kong tourism numbers are just flat out bad. But as it relates to KATE, the company limited its exposure to the region when it converted its 8 doors into a JV earlier this year. Not that the company was overly exposed to the region in the first place -- at most Hong Kong was a $20mm business for KATE (the combination of Hong Kong, Macau, and Taiwan = $34mm in 2014).

To put it into context, KATE has just 3.5% of the handbag and accessories market compared to COH at 12.5% and KORS at 9%. And the company is just in the beginning stages of growing its global footprint, expanding into new categories (mostly through licenses), and converting its share of voice into a higher share of wallet. Macro matters, but we think there are enough growth vehicles and market share opportunities for KATE to continue to drive the topline, which it has proven it is capable of doing despite serious concerns over the ‘space’.

Retail Callouts (12/30): Online Returns, Hong Kong Tourism, KATE, KSS, TGT, M, JCP, JWN - 12 30 2015 kate chart


Etsy Acknowledges Photo Bug on Mobile App



BBY - Fraudulent holiday returns hurt retailers

Retailers estimate that 3.5 percent of their holiday returns this year will be fraudulent, up slightly from the estimated 3 percent reported last year, according to the NRF.



FDX, UPS - Study: FedEx beats UPS in on-time deliveries

FedEx met holiday delivery guarantees 97.8% of the time in 2015, an improvement from 97.3% in 2014 and 95.4% in 2013.

UPS came in at a 95.5% success rate this year down from 98.1% in 2014 but was better than 93.9% in 2013.



ADS - Adidas CFO says investors are not pushing for Reebok sale, Taylormade decision expected in Q1



GME - GameStop Says We're No RadioShack as Investors' Doubts Increase



AMZN -  Amazon has been operating secret flights carrying thousands of packages in and out of the UK for the past six weeks as it trials setting up its own air freight business


INSTANT INSIGHT | No-Volume "Rallies," #Oil, and the Russell 2000

Takeaway: All is not well out there. Keep your head up.

INSTANT INSIGHT | No-Volume "Rallies," #Oil, and the Russell 2000 - emperors trading volume


You gotta love these no-volume paintings of the year-end tape – yesterday was the 15th up day in the last 37 for the S&P 500.


Here are the facts about the year-end "rally." Total US Equity Market Volume (including dark pool) was down -16% and -18% vs. their 1-month and 1-year averages on yesterday’s +1% SPY day.


Meanwhile, the liquidity trap in small caps (and Russell) remains obvious, looking nothing like the headline level of the S&P 500. Remember, the Russell 2000 is still in correction territory from its June high. 


INSTANT INSIGHT | No-Volume "Rallies," #Oil, and the Russell 2000 - rut


In other crashing markets news, it took Russian equities all of a month to join the Russell's correction club.



INSTANT INSIGHT | No-Volume "Rallies," #Oil, and the Russell 2000 - russia


The story for Russian equities is all about oil. 


This week, Oil has had a textbook crash, bounce, fade move in what so many pundits have hoped for in 2015 – I think they call (ed) it “reflation” – but #Deflation is still winning with WTI -2.7% after failing at the top end of the $34.83-38.29 risk range. 


INSTANT INSIGHT | No-Volume "Rallies," #Oil, and the Russell 2000 - Oil cartoon 12.28.2015

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