The Macro Show Replay | March 3, 2016

CLICK HERE to access the associated slides.



CHART OF THE DAY: Is There A Pick Up In U.S. Real Consumer Spending? No

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


"... 'A pick up in US real consumer spending' – as you can see in the Chart of The Day, everyone and their brother/sister who does macro math should know by now that Real Consumption Growth was great at last year’s cycle peak of 3.32%; in rate of change terms the top is in; saying it’s “picking up” vs. the cycle peak is an obfuscation of the bigger picture."


CHART OF THE DAY: Is There A Pick Up In U.S. Real Consumer Spending? No - 03.03.16 chart

Establishment Economists

“Archaic humans did not initiate any revolutions.”

-Yuval Noah Harari


And archaic economists certainly didn’t initiate an ability to call economic slow-downs, market crashes, or recessions in the last 20 years. As you know, the Federal Reserve hasn’t proactively predicted ANY recessions over that time span, and Old Wall consensus macro missed calling 3 US economic cycle peaks in a row (2000, 2007, and 2015).


Yes, you can become Trump style you-ge! on Wall Street by selling people who are in the business of being long reasons to be bullish. You just need to keep changing the reasons. It’s actually a good business. So is selling porn. As Harari reminds us in Sapiens, “the ability to create an imagined reality out of words enabled large numbers of strangers to cooperate.” (pg 32)


After doing an entire day of meetings with Institutional Investors in New York City yesterday, I realized that the same group of people who dismissed our Industrial #Recession call as “being a small part of the economy” are now hanging their entire bull case on industrials, PMIs, etc. “bottoming.” In other news, Costco (consumption side of the economy) comped 0% in February.


Establishment Economists - 4  growth cartoon 03.02.2016


Back to the Global Macro Grind


“Phew” wrote Nancy Lazar, “the US economy appears to be picking back up.” Thank goodness for that, eh? Let’s pass that note around to all the bottom-up “value” stock pickers who have been getting crushed for the last 3-6 months. They’ll feel relieved.


Was it the new cycle low in US Consumer Confidence of 92.2, a 17-month low in growth in signed contracts for Pending Home Sales, the Markit Services PMI going sub-50 for the 1st time since 2009, or the Russell 2000 crashing in February that revealed that the 70% of the economy that really matters isn’t slowing from its cycle peak?


Just to knock down the pins on our views vs. the same economist who was looking for what “felt” like 4% US GDP growth in 2015, here are my Top 3 rebuttals to her very huge and excellent perma bull research note yesterday:


  1. “A pick up in US real consumer spending” – as you can see in the Chart of The Day, everyone and their brother/sister who does macro math should know by now that Real Consumption Growth was great at last year’s cycle peak of 3.32%; in rate of change terms the top is in; saying it’s “picking up” vs. the cycle peak is an obfuscation of the bigger picture
  2. “A rebound in construction spending” – as you all know (see our bullish research on US Housing for all of 2015), Autos & Housing aren’t “rebounding” – they’re slowing from their 2015 rate of change cycle peaks. For details see YTD returns for fund managers who are levered long GM, Ford, and Housing stocks (or the recent Pending Home Sales report of -1.4% y/y)
  3. “The lagged impact of lower oil prices” – that one is my favorite. Remember that one? Ed & Nancy (different firms now - they broke up) would write that every other week at the all-time #bubble high for US stocks in July of 2015 – “low gas prices” are going to create rainbows and puppy dogs for as far as the eye can see. Isn’t the new bull case “rising gas prices” btw?


Nancy also likes what all #LateCycle labor economists (like Janet Yellen) like to see, which is “solid employment growth” – which, by the way, you always see at the END of a US economic cycle.


Tomorrow, that’s actually the catalyst for the real bulls on Wall Street (the Long Bond and Utilities Bulls) – yet another rate of change slow-down in US Non-Farm Payrolls (NFP) from its FEB 2015 Labor Cycle PEAK of +2.34% growth.


To give Nancy some credit, she did mention that the “foreign backdrop remains a headwind… pulling down Global PMI to 49.8, the lowest level since early 2013.” The problem with that truth is that her partner Francois Trahan has been calling for PMIs to “bottom” globally since US and Japanese Equities peaked in July!


It’s not “mean” to call out Establishment Economists and hold them to account for their research views. God knows, The People can’t afford the Old Wall missing it again. I’d be more than happy to debate any economist in an open forum, anywhere, any time. If we want to evolve as a profession – if we really “want America to be great again” – we really need to have these debates!


Since the best macro exposures you could have been long for the last 2-3 weeks (during the slow-volume squeeze after hedge funds shorted the YTD lows) are precisely the ones that ruined most portfolio returns for the last 6-8 months, I have no doubt that people who are in the business of being bullish are going to be looking for “the economy to be picking up”…


Reality is they aren’t highlighting the most important things at this stage of The Cycle (the profit cycle and the credit cycle). Instead, they’re cherry picking one-off data points that are actually still slowing in trending (year-over-year) rate of change terms.


With S&P Earnings down -8.2% year-over-year (that’s a non-GAAP number, the real # is down double-digits on a percentage basis), High Yield Spreads > historical mean, and Long-term Bond Yields hovering around all-time lows (1.86% UST 10yr is -41bps YTD), the most forward looking and accurate economist I know (Mr. Market) still sides with my team - not Nancy, Ed, and Francois.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.65-1.87%


VIX 16.99-24.13
EUR/USD 1.08-1.12
Oil (WTI) 28.93-35.66


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Establishment Economists - 03.03.16 chart

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Cartoon of the Day: A Growth Fairy Tale

Cartoon of the Day: A Growth Fairy Tale - 4  growth cartoon 03.02.2016


The truth can be a tough pill to swallow.

JT Taylor: An Analysis of Super Tuesday & The Republican Hopefuls

Takeaway: What to watch on the election 2016 campaign trail.

Below is a brief excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning.



JT Taylor: An Analysis of Super Tuesday & The Republican Hopefuls - trump deal with it


He's now won in the South, in the West, and the Northeast -- even notching a major 30-point win in MA.  While the Republican establishment weeps, gnashes its teeth, and plots to deny him the nomination, the Clinton campaign is licking its chops at the chance to turn the general election into a referendum on blustering billionaire. There are only two viable scenarios now where Trump is denied the nomination:


  1. The first starts with John Kasich and Marco Rubio joining Ted Cruz in winning their respective home states, and locking up enough delegates to force a contested convention in July.
  2. The other is if the anti-Trump forces unite around a single candidate (again, quickly) and the nomination comes down to a true two-man race.


Neither is likely to happen anytime soon. 



JT Taylor: An Analysis of Super Tuesday & The Republican Hopefuls - marco rubio 22



Rubio barely dodged an ugly "winless" label with a sole victory in MN, but suffered a severe blow last night after finishing below the 20 percent threshold in AL, TX and VT, missing out on any delegates in those states.


Kasich was the spoiler in VA, where Rubio came within 30,000 votes of beating Trump while Kasich snapped up nearly 100,000 voters in the state, crushing his chances of pulling off an upset.


As if the stakes for FL weren't high enough already -- Rubio's last, best hope is that he gets an endorsement from Jeb Bush before the FL primary, and it helps him to close the gap with Trump in his home state. That is, unless rumors that sitting FL Governor Rick Scott will endorse Trump become reality. Rubio will trudge onward for the same reason the party establishment hasn't totally given in yet -- if surrender means death, then there's no incentive to surrender.  


Amusing that he said Cruz had a bad night after winning three states... 



JT Taylor: An Analysis of Super Tuesday & The Republican Hopefuls - ted cruz 22


The biggest delegate prize of the race so far went for the home state Senator, along with OK and AK. Cruz's path forward from here looks bleak however -- he doesn't have much to stand on after Trump dominated evangelical voters across the Southern states, handily defeating him in AR, AL, GA, and TN -- which were touted as Cruz's southern firewall.


The math for Cruz (read: we're mostly shifting to northern primaries shortly) simply doesn't add up unless Kasich, Carson, and Rubio drop out and he becomes the party's sole anti-Trump standard bearer.


Again, not likely.

The Bull Case For Kate Spade | $KATE

Takeaway: A rare ‘bulletproof’ quarter for KATE – numbers and communication. Our thesis is playing out, and we’re sticking with it as a Best Idea.

Editor's Note: Below is a brief excerpt from an institutional research note on Kate Spade (KATE) along with some related tweets by our Retail analysts Brian McGough and Alec Richards. To access our analyst research ping


The Bull Case For Kate Spade | $KATE - kate spade

KATE | Best Comp in Retail (Again)




In January of last year, we issued a note stating that ‘KATE Put Up the Best Comp in Retail’. Roughly a year later, we’re saying the same exact thing.


Sure, a 14% number this year might not seem eye-popping, but...


  1. It went up against an incredibly difficult 28% in 4Q14, and;
  2. Virtually every company in the space has sharply decelerated since last year.


KATE is leading, again. This is a rarity for us to say, but the quarter, and the conference call were both bulletproof, at least based on the standards KATE has set in the past.



We’re not making any meaningful changes to our model, as our thesis is unchanged, and the story is progressing as expected. We like the fact that the company is starting to talk about (gasp!) E-P-S as a financial metric. That’s been our contention for the past six months, that an actual earnings base after seven years of losses would give investors a more tangible valuation metric, as opposed to the ‘adjusted EBITDA’ numbers that no one really trusts anyway.



The current 25x p/e on this year's numbers might seem like a stretch. But the earnings growth rate for the next three years is 40-50%. Using a multiple with a 50% discount to growth in 2017, we get to a $40 stock.



We don’t want to get greedy with a high-beta, high-multiple stock in this tape where its style factors are so clearly out of favor. But when all is said and done, we think the company will continue to execute, and valuation will prove supportive for this stock to work.

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