Stock Report: Utilities Select Sector SPDR (XLU)

Takeaway: We added XLU to Investing Ideas on the long side on 1/08.

Stock Report: Utilities Select Sector SPDR (XLU) - HE XLU table 1 11 16


For new subscribers unfamiliar with our macro team's process, we have a battle-tested approach on which asset classes outperform beta given our proprietary view on both growth and inflation. Our loudest call right now remains positioning for #SlowerForLonger (growth) as the steady stream of #SuperLateCycle economic data continues to manifest itself.


That’s our edge – an empirically-tested model for front-running the second derivative of growth, inflation, and policy. Once we know whether or not growth and inflation are accelerating or decelerating, we have a back-tested, tactical strategy for which asset classes outperform in a given environment.


Make no mistake. Our #SlowerForLonger call still fits our team's macro view. As a consequence, we are sticking with #LowerForLonger on interest rates and higher Utilities (XLU) multiples.   




Factor exposure is very important to us, especially when volatility is in a bullish TREND set-up and small cap, illiquid stocks continue to underperform. Here's another way to look at it:



+ Illiquidity

+ Too many hedge funds chasing performance...

= #Pain


Unlike the holiday season squeeze in everything we don’t like, continuing to short small cap, volatile stocks and buying less volatile utilities has been an alpha-generating strategy so far in 2016:


  • High-beta stocks lost another -8.9% last week (-17.6% in the last 6 months)
  • Small cap stocks lost another -6.9% last week (-17.3% in the last 6 months)




To be clear, we don’t expect our non-consensus #SuperLateCycle and #SlowerForLonger call to end without a recession. While the exact timing of when a recession will ultimately commence is always difficult to nail-down, we are arguably already in an industrial recession (cyclicals peaked in rate-of-change terms in late 2014), as late-cycle things like employment and corporate profits peak ~3-9 months after that.


The bottom line here? We continue to expect utilities to outperform the broader market given this current environment.    


Stock Report: Utilities Select Sector SPDR (XLU) - HE XLU chart 1 11 16

Cartoon of the Day: Good News, Bad News

Cartoon of the Day: Good News, Bad News - Fed cartoon 01.11.2015


One of the biggest risks to financial markets right now is believing the Fed's economic forecast.

IN THE NEWS: Barron's On Hedgeye Restaurants Analyst Howard Penney's Short Chipotle Call | $CMG

Takeaway: Tempted to nibble on shares of beaten down Chipotle? You may want to reconsider says Howard Penney.

Over the weekend, Barron's Senior Editor Vito Racanelli dug deep into Hedgeye Restaurants analyst Howard Penney's call to short Chipotle (CMG). Shares are down 45% from its all-time high.


IN THE NEWS: Barron's On Hedgeye Restaurants Analyst Howard Penney's Short Chipotle Call | $CMG - chipotle barron s


As Racanelli writes:


"... The Denver-based chain faces a long road to regain investor trust. That’s the view of Howard Penney, an industry analyst with decades of experience at Hedgeye Risk Management, an independent research firm. He has been spot on since he turned skeptical on Oct. 19, 2015.


Is Chipotle now a cheap stock, given its heretofore 20% revenue and 30% EPS growth over the past seven years? Penney remains bearish."


In the story, Penney walks through his five stage life-cycle restaurant guide for investors tempted by Chipotle’s 45% decline.


"... Eventually, management psychology will signal a bottom in the stock price, he says. In stage No. 5, management decides to close stores, slow growth, and stop discounting to improve profitability. That’s the time to buy, says Penney, who has a $275 price target on Chipotle, down another 33%. He bases that on a still rich P/E of 27 times his estimate of $10 a share this year."


IN THE NEWS: Barron's On Hedgeye Restaurants Analyst Howard Penney's Short Chipotle Call | $CMG - chipotle cartoon


Bottom line according to Penney: We're a long ways off from Stage 5. Don't buy the dip. 

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Got Risk? TED Spread Doubles In Past Month

Market risk is rising.


Our Financials analysts Josh Steiner and Jonathan Casteleyn highlighted this morning that the TED spread, the 3 month US Treasury Yield minus 3 month LIBOR (a proxy for risk), has nearly doubled in the past month or so.


Got Risk? TED Spread Doubles In Past Month - ted spread


The TED Spread is just one more market measure confirming our thinking about rising risk and volatility. Our macro team recently pointed out in our Q1 2016 Macro themes deck that a bear market for equities could be in the offing.


To be clear, the TED spread is still well below 2011 levels and pales by comparison to the jarring spike seen during the throes of the financial crisis. As Hedgeye CEO Keith McCullough points out, "Don't think about risk in terms of absolutes - rate of change is what matters most."


As Keith likes to say, "Risk happens slowly at first, then all at once."


* * *


To read our Financials and Macro team's non-consensus institutional research ping

HedgeyeRetail (1/11) | KSS - More Likely to Shrink Than Be Sold

Takeaway: KSS hiring a banker because it has to - not because it needs help with all the inbound requests. Selling KSS one of the hardest jobs around.

KSS - Kohl’s More Likely to Shrink Than be Sold



First of all, if anybody was wondering why KSS outperformed its peer group by 9% for the year-to-date, now you know. Presumably, the Board and the potential Bankers are the only ones who knew about this (as it should be), but it appears that someone leaked something. A lot of something.


Nonetheless, we should be clear about something. KSS is not looking for strategic alternatives because its 'Greatness Agenda' is over-delivering on value creation. Quite the opposite. We think that this business model is terminal, and just maybe management is starting to catch wind.


If KSS were to close half of its stores, and cut the size of the remaining stores in half -- we don't think that the consumer would really care. This is a business that was built upon shopping by convenience -- i.e. going to a local strip mall for mediocre brands (10-15 min drive) instead of driving to a regional mall (20-30 min drive). Unfortunately, there's a new alternative to the regional mall -- it's called the Internet. KSS can't win that battle.


This strategy, which actually worked well for about 20 years (1) is also part of the structural reason why KSS does not have real-estate optionality like Macy's or Dillard's. KSS is almost entirely based in strip malls, and they are simply a dime a dozen. 20 years ago, there were about 2,500 such strip malls. Now there's closer to 7,100. But the regional mall count, on the flip side, has remained fairly constant over time at 1,100. That means that the value per square foot of Regional Mall space has gone higher, while strip malls has been flat to lower as more properties were built. Too many people who claim that KSS has real-estate optionality simply don't understand this dynamic.


We're at $3.70 in the coming year vs the Street at $4.60, and we think that the company will never earn over $4.00 again. Ultimately, our numbers head below $3.00, while the Street's are headed above $6.00.


The biggest delta in our thesis from consensus is our view that the company has literally run out of customers (our math suggests that KSS already landed 75% of people that could be KSS customers). This is manifesting itself in declining traffic, risky promotional strategies that meaningfully put at risk the company's credit income . The key there is that this risk holds even if we don't see the credit environment roll over. If the credit environment goes bad, then we think that KSS earnings goes closer to a buck -- again, the Street is at $6.00+. For our full thesis see note link here: KSS | Here’s Why KSS Is Expensive


This company is hiring a banker because it has to -- not because it needs help with all the inbound requests. Selling this company is one of the hardest jobs around.

HedgeyeRetail (1/11)  |  KSS - More Likely to Shrink Than Be Sold - kss chart5 11 10


M - Activist Investor Starboard Urges Macy’s to Strike Real-Estate Deals



AMZN - Amazon’s full acquisition of a French package-delivery company, expected soon, would make it a direct competitor of delivery titans such as UPS and FedEx



DLTR - Family Dollar CEO Howard R. Levine is stepping down as an officer of the company following the integration of Family Dollar



UA - Under Armour is undertaking an ambitious effort to provide extremely personalized health and fitness coaching, assisted by IBM



ANF - Abercrombie & Fitch Enters Dubai With Massive Flagship Store



NKE, Adibok - The 25 Most Resold Sneakers of 2015

HedgeyeRetail (1/11)  |  KSS - More Likely to Shrink Than Be Sold - 1 11 2016 chart1



WMT - Wal-Mart’s Mexican Subsidiary Sees Sales Jump



INSTANT INSIGHT | Russell 2000, China & Financials

INSTANT INSIGHT | Russell 2000, China & Financials   - China cartoon 01.07.2016


So, Chinese stocks made lower-lows overnight, closing down another -5.3%. Meanwhile, the Russell 2000 is down -19.2% since July.


No worries. Right?


Earnings season starts this week with JPMorgan (JPM) reporting this Thursday. There’s no irony that the Financials (XLF) -7.3% were one of the worst S&P Sector exposures last week; with both #Deflation and a #Recession in Industrial/Cyclical terms, long-term yields fall, no matter what the omnipotent central planners at the Fed think they can do.


INSTANT INSIGHT | Russell 2000, China & Financials   - xlf


If you thought that cyclical "PMIs bottomed" when the employment/consumption/profit cycle peaked (at the end of Q2 2015), and you bought the Financials on that, you’re down -13.6% since the July high.



Beats being long Apple from there (down -26.5% since S&P 500 top)!