The Cycle

“Time is like a book. You have a beginning, a middle and an end. It’s just a cycle.”

-Mike Tyson


In 1988, it took Mike Tyson 91 seconds to knock-out Michael Spinks for the Heavyweight Championship of the world. While you may not consider him a thoughtful economist, he is able to explain an economic cycle faster than he could knock out Bernanke.


Before I start calling out Janet Yellen again, I wanted to sincerely thank all of you who tuned into our Q2 Macro Themes Call yesterday. It was, by far, our biggest audience, ever. In a tough business environment like this I don’t take that for granted.


Building a modern model that maps and measures global economies in real-time alongside my teammates has easily been the most rewarding phase of my analyst career. Without your attention, we’d have no one to hold us to account. Thanks for that.


The Cycle - tyson


Back to the Global Macro Grind


First, on Yellen. I couldn’t make this up if I tried, but last night at the International House she explained to Bernanke, Greenspan, and Volcker that a strong US Dollar was a “drag on the economy and consumer spending.”


Ex-her-low-Energy and communication/leadership style (i.e. allowing her regional Fed Presidents to communicate a hawkish policy path and then routinely surprising markets to the dovish side), she’s been in my good books this year. Now she’s not.


It’s as clean cut an absolute fact that a strengthening US Dollar (*rising Purchasing Power for Americans) helped strengthen US consumer spending from 2013-2015, as the sun rising in the East:


  1. US Dollar Index went from $79 at the end of 2012 to $100 in Q1 of 2015
  2. US Consumer Spending (Real PCE Growth) went from 1.6% to 3.3% (y/y) during that same time period
  3. In Q1 of 2016, with the US Dollar dropping -4%, US Consumer Spending has slowed to 2.7% (y/y)


Is a #StrongDollar a drag on commodity and debt addicted cyclical sectors of the US economy? Didn’t Bernanke’s US Dollar Devaluation scheme (capitulating to the 2011 lows) perpetuate a series of illusions of growth (I.e. asset inflations, in Dollars)?


A: Yes and Yes.


Does a #StrongDollar that deflates Wall Street’s asset prices (and puts that incremental margin in the consumer’s pocket instead of a leverage banker’s) equate to a “drag on consumer spending”? Did it under Reagan and Clinton in 1 and 1?


A: C’mon Janet, you’re (allegedly) a lot better than that.


Blame China, The Dollar, and now Europe & Japan. But, whatever you do, do not blame yourselves or #TheCycle.


As Yellen and her colleagues who now read @Hedgeye Macro can see in today’s Chart of The Day (slide 12 of the Q2 Macro Themes deck), #TheCycle is not a mystery. This one has been both obvious and pedestrian in its sequence:


  1. Q2 2014 = Income Growth, Corporate Profits, and S&P 500 Margins #peaked (in rate of change terms)
  2. 1H 2015 = Employment & Consumption Growth, Confidence, Domestic Investment, and Multiples #peaked
  3. Q2/Q3 2015 = US Equities Peaked
  4. Q4 2015 = M&A #Peaked and the #CreditCycle (and market dislocations) began
  5. 1H 2016 = #GrowthSlowing from #TheCycle peak (in rate of change terms) continues


Nope. Not that complicated, is it Mike?


“Not at all bro-heem. Every non-rate of change economist has a plan until they get punched in the face.”

-Michael Gerard Tyson


If Janet wants to try to absolve herself and Ben Bernanke from having nothing to do with a US Dollar appreciating from the post-Nixon 40-year low they perpetuated in 2011 (and all of the commodity, asset, and debt #bubbles embedded therein), fine…


But by the time #TheCycle plays out in full, history will be their judge – not each other.


In other real-time macro and market signaling news, yesterday we saw the SP500 break-down below our long-term TAIL risk level of 2066 again. This came in conjunction with US Equity Volatility (VIX) once again holding long-term TAIL support of 11.73.


Since Yellen seems to be gearing up to go down a path Bernanke didn’t have the spine to mention (he’d NEVER mention USD while is he was devaluing it), the big question I have now is all about what we outlined on yesterday’s call as the #BeliefSystem.


Since targeting weaker currencies and lower-yields (in many cases negative yields) has absolutely crushed Europe and Japan this year, what happens to the USA if and when Janet goes there? What happens to bank earnings, credit, and lending capacity?


Give it time. It’s like a book. And, sadly for these central-market-planners, we’ve reached the beginning of the end.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.68-1.79%

SPX 2025-2059
RUT 1069-1106

VIX 14.08-19.22
USD 94.01-95.79
YEN 108.06-111.68
Oil (WTI) 35.05-39.88


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Cycle - 04.08.16 chart

McMonigle: What Lies Ahead For OPEC and Oil Prices


Potomac Energy Policy analyst Joe McMonigle discusses his expectations on an OPEC/Russia production freeze and the outlook for oil prices with Hedgeye Macro analyst Ben Ryan.

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Cartoon of the Day: A Crude Joke

Cartoon of the Day: A Crude Joke - Oil cartoon 04.07.2016


No follow through on yesterday's 5.1% pop in oil prices. WTI back down today. 

Stock Report: Hanes Brands (HBI)

Takeaway: We added HBI to Investing Ideas on the short side on 3/31.

Stock Report: Hanes Brands (HBI) - HE HBI table 4 7 16



We added HBI to Investing Ideas as a short on 3/31/16. We don’t like the Brands, don’t like Management, and don’t like the Company, but that alone is no reason to short a Stock. What is, however, is the fact that we think earnings and margins are at peak. We’re 7% below consensus this year, -20% in ’17, -30% in ‘18, and -40% by year 3. Some argue that stock seems cheap today at a mid-teens multiple and 5% FCF Yield – though we really don’t follow that logic.


Once the dust clears from the acquisitions, special charges, and cotton prices normalize from the 7-year low, we think we’ll be looking at lower multiples on lower earnings and cash flow. A low double-digit multiple on our numbers gets us to a high-teen stock. Perhaps management agrees, especially CEO Noll who has cut his stake in half over four months.


HBI should release 1Q16 results around the 21st of April. This is not intended to be a call on the quarter, as it’s more of a margin and growth story that has run its course.  For the most part, we expect earnings to be roughly in line with the Street this quarter. But unless HBI guides down, this might be the last beat/in-line quarter for a while.




After reporting weak revenue growth in 4Q15, HBI's stock price crashed 19% in 2 days. The stock has since rallied back 17% in line with the broader retail sector (XRT), yet the fundamental issues have not changed. Organic (core) growth slowed 800bps in 4Q, and organic compares are harder in 1Q and 3Q with 3Q being the toughest organic growth compare in over 2.5 years. 


In addition, 1Q is the last quarter of top line help from the Knights Apparel acquisition in early April of 2015. The margin tailwind from cotton hitting 7 year lows is waning as much of the cheaper input costs have worked through the supply chain. Lastly, the sales to inventory spread sits at the worst level seen since 4Q11.


The risk over the trend duration is the announcement of new accretive acquisitions that will be followed by restructuring charges. That could cloak the slowdown in the underlying business, much like the Champion Europe acquisition announced this morning. 




Here are some longer-looking factors to consider…


1) Why? Can someone, ANYONE, explain to us why HBI has operating margins of 15%? That’s demonstrably higher than the following companies – UA, RL, PVH, GES, CRI, ANF, KATE, and yes – even NKE. It’s also well above its key retailers (WMT, TGT, KSS, JCP, AMZN).


Why should a company whose primary brand sells through mass channels and department stores have higher margins than the best brands in the business? As hard as we try, we cannot figure it out aside from over-earning due to a 7-year trough in cotton prices and the temporary benefit of being a serial acquirer and restructurer of companies in an effort to grow away from its core.


2) Let’s consider how the margin structure changed at HBI over the past 4-years. Cotton peaked in the market at about $2.00 in 2011, which ultimately flowed through and hit HBI’s margins in 2012. That was when the stock was at a split-adjusted $5. Overly penalized, for sure.


But we’d argue we are seeing the inverse today. Since the precipitous decline in cotton to the $0.57 level, HBI recouped seven (7) full points in Gross Margin. Over the same time period, how much did the company see flow through to EBIT margin? Seven. Ordinarily, we’d like to see a company invest more of the upside.


They’ll say they ‘innovate to elevate’. But we’ll bet there’s a direct flow through in margin downside if either a) cotton prices head higher, or b) if Wal-Mart and Target decide that HBI is making too much money. 


3) Buying at the Top? HBI is buying back so much stock while margins are at all-time peaks (and management is selling) comes across as flat-out reckless. In fairness to HBI management, we see this behavior from most major consumer companies – they buy stock when they CAN and not when they SHOULD. This is not unlike Target, which is taking the incremental $1.2bn it gained from its pharmacy business and using it to buy back shares at $80. Our sense is that it will come back to haunt them if we’re right on earnings and this stock is in the high teens.


4) Acquisition Behavior Bothers Us. This company has acquired an average of a company a year for 5-years for a total of $1.5bn. It’s also taken $546mm in restructuring charges, or 25% of non-GAAP EBIT, since 2013 when HBI started its recent streak of acquisitions with Maidenform in October 2013.


5) As hard as the company might try, HBI cannot simply grow online. If there was only one statistic we could see for a consumer brand to gauge the health of its business, it would be the direct to consumer (DTC) sales of its product. DTC sales at HBI, however, have shrunk as a percent of sales over the past 5 years from 9.5% to 6.8%. We’ve never seen a company do that before.


Our sense is that WMT, TGT, the Department Stores, and Dollar Stores all would react severely if HBI tried to go direct. And yes, we understand that WMT and AMZN sell Hanesbrands online, which counts as a wholesale sale on the P&L but shows up online. It does not matter. Margins are better for a direct sale full-stop.


We refuse to accept the premise that underwear is not a category that lends itself to online sales. Tell that to Tommy John, Lululemon, and Under Armour, who all have 30-40%+ online businesses and are charging $30-$40 per pair (not package), and they can hardly keep them in stock.


It’s abundantly clear where the trend is going – and HBI can innovate all it wants, but it’s likely not going to be a player in this premium game.


6) When management buys a share of stock, we’ll step back and question our logic (though we’ve done that a few times already). We have seen an absolutely massive degree of selling from the management team over the past year – see CEO Rich Noll’s selling activity below. Specifically, he has sold $85mm in stock over the past 14 months, most of that +/- $2 of where it is trading today. Last time Noll's ownership % was this low (0.2%) was in January 2010.


Stock Report: Hanes Brands (HBI) - 4 7 16 hbi


Stock Report: Hanes Brands (HBI) - HE HBI chart 4 7 16


Earlier today the Hedgeye Macro Team, led by CEO Keith McCullough, hosted its quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 2Q16 and the associated investment implications.


CLICK HERE to watch a replay of today's presentation.




For the audio replay CLICK HERE

For the video replay CLICK HERE 

To access the presentation materials CLICK HERE





#TheCycle:  With the recessionary industrial data ongoing, employment, income and consumption growth decelerating, corporate profits facing a 3rd quarter of negative growth and Commercial and Industrial  credit tightening, the domestic economic, profit and credit cycles are all past peak and continue to traverse their downslope.  We’ll update our cycle view and detail why growth slowing  – and its associated allocations – remains the call as the U.S. economy faces its toughest GDP comp of the cycle in 2Q16. 


#BeliefSystem:  The notion that central bankers are increasingly pushing on a string is being progressively priced into global financial markets – with one lone holdout: U.S. equities. While we admire the blind faith of domestic stock market operators in Yellen’s ability to keep “the game” going, we are keen to cite specific risks that marginally dovish policy in the U.S. will fail to overcome the depths of the domestic economic, credit and corporate profit cycles.


#DemographyDebates:  We’re entering an election season that could hugely impact markets – and probably not in a good way!  What’s the impact of a Clinton or Trump victory and how will market practitioners react?  We’ll also discuss housing and the impact of millennials and immigrants in shifting demand.  Finally, we’ll exam a recurring theme of U.S. growth slowing – what’s under the hood for earnings and inflation expectations in 2016?


-The Hedgeye Macro Team

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