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Retail: The Next Chapter ... 11

Takeaway: Three months into 2016 and we're already rivaling Great Recession bankruptcy rates. What say you, Sears?

Editor's Note: Below is an institutional research note written by Hedgeye Retail analysts Brian McGough and Alec Richards. To read more of our Retail team's research ping sales@hedgeye.com.

 

Retail: The Next Chapter ... 11 - retail island 1 14 15

 

It's so easy to succumb to the 'water torture' of Chapter 11 press releases in retail coming from the likes of Sports Authority, Vestis Retail Group (Eastern Mountain Sports, Bob's, and Sports Chalet), and Pacific Sunwear. But it's important to take a step back. Then another. And another. Then, and only then, does the big picture come into focus about the broader economic cycle.

 

Consider this...over the average economic cycle, we see 15 to 25 retail chains go under. Those represent roughly 1% of Retail Sales. Naturally, the filings are not even by year. Sometimes (like when the economy is ripping) there are none. Plenty of profits to go around for even the worst retailers. But some years there's upwards of 15 (Great Recession).

 

In just a little more than three months, we've already seen 4 parent bankruptcies (6 chains) in US Retail. Annualized, that's about 16, or 0.5% of retail. 

 

After an extremely tough winter selling season for shoes and apparel, it's only natural that we'd see this year push the 2016 tallies to a level close to what we saw in the Great Recession.

 

Sears, anyone?

 

Retail: The Next Chapter ... 11 - retail chapter 11


INSTANT INSIGHT: The Key Implications Of Oversold U.S. Dollar

INSTANT INSIGHT: The Key Implications Of Oversold U.S. Dollar - dollar crumbled

 

Below are a number of important callouts this morning to help investors risk manage these manic macro markets.

 

Top of the list? The U.S. Dollar.

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"After falling another -0.4% last week to YTD lows of -4.5%, the US Dollar Index is signaling immediate-term oversold in my model for the first time in April (the 30-day correlation b/t USD and SP500 is -0.90)."

 

U.S. Dollar oversold implications?

 

As McCullough points out in this morning's Early Look, Commodities (CRB Index) have an inverse correlation (30-day duration) of -0.88 vs. the US Dollar, which explains Oil's pop last week:

 

"WTI +8% last week (after falling -7% in the week prior) will be as important to watch as anything US Equity Market Beta this week; risk range is signaling a lower-high of $39.99/barrel as Oil Volatility (OVX) signals a higher-low of 43.14."

 

With the S&P 500 and Commodities inversely correlated to the US Dollar (-0.9), oil and equity investors are clearly begging for a “dovish” Fed.

 

That raises an important question...

 

What actually gets investors paid when the Fed goes dovish and tacitly agrees with our Macro team's U.S. #GrowthSlowing call?

 

Long Bonds (TLT)

(up +9.5% ytd versus +0.2% for S&P 500)

 

 

INSTANT INSIGHT: The Key Implications Of Oversold U.S. Dollar - tlt say cheese


REPLAY | HORSESHOES & HAND GRENADES - 2Q16 OUTLOOK

Takeaway: We hosted a call updating our Housing outlook for 2Q16 on Friday. The deck and call replay can be accessed via the links below.

Slide Deck: CLICK HERE

Audio Link: CLICK HERE

Video Link: CLICK HERE

 

REPLAY | HORSESHOES & HAND GRENADES - 2Q16 OUTLOOK - Bull Grenades

 

KEY DISCUSSION TOPICS: 

  • Fundamental Deceleration: Volume growth is slowing in the new and existing market. Home prices, meanwhile, are in a bitter tug-of-war between lagged demand trends and supply constraints.
  • Supply Side Economics: Supply has emerged as the big conundrum this cycle. Why is it so depressed and what is the outlook for it to change?
  • Seasonality Headwinds: Housing stocks follow a distinct seasonal trading pattern that offers a lot of alpha opportunity; 2Q/3Q are the weakest six month stretch of the year. 
  • San Francisco: A bubble or not? That is the question. We’ll take a deep look at the SF market. 
  • Big City Affordability: One of the more interesting phenomenon is where major metros stand in terms of affordability and what the outlook is for further price appreciation. 
  • Commercial Real Estate: The CRE market has run into some big speedbumps. Will this bleed into the Residential market? 

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


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MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE

Takeaway: Credit risk flashed warning signals with rising CDS spreads in the U.S., Europe, and Asia.

 

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM11

 

Key Takeaway:

Credit risk continued to flash warning signals last week with financial CDS spreads widening across the board in the U.S., Europe, and Asia. U.S. money center bank swaps were notably higher with Citigroup, Morgan Stanley, and Bank of America all seeing swaps up +5% week-over-week. German banks also flashed hard with Deutsche swaps up +7.7% and the rest of the group up over +5.0% on average. Italian lenders really gapped up with UniCredit and Intesa CDS up +13.6% and 11.0% respectively.

 

Our heatmap below is more negative than positive on the short and intermediate term and mixed on the long term.


Current Financial Sector Ideas:


MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 13 improved / 3 out of 13 worsened / 9 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 6 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM15

 

1. U.S. Financial CDS – Swaps widened for 10 out of 27 domestic financial institutions. Even with Fed minutes showing officials reluctant to raise rates, the median swap rose by 6 bps to 105.

Tightened the most WoW: HIG, MTG, PRU
Widened the most WoW: C, MS, BAC
Tightened the most WoW: LNC, AIG, HIG
Widened the most MoM: JPM, WFC, C

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM1

 

2. European Financial CDS – Financial swaps mostly widened in Europe last week. The median swap widened by 9 bps to 134.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM2

 

3. Asian Financial CDS – Swaps for Asian financial institutions mostly widened last week, led by Mizuho Corporate Bank in Japan which widened by 13 bps to 110. Meanwhile, all three Indian bank CDS tightened.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM17

 

4. Sovereign CDS – Sovereign Swaps were mixed over last week. At the extremes, Portuguese swaps tightened by -9 bps to 258 while Italian swaps widened by 11 bps to 136.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM18

 

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Brazilian sovereign swaps widened the most, by 26 bps to 390.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM16

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 1 bps last week, ending the week at 7.93% versus 7.92% the prior week.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 8.0 points last week, ending at 1858.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 40 bps.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM7

9. CRB Commodity Price Index – The CRB index was unchanged week over week at 171. As compared with the prior month, commodity prices have decreased -1.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 3 basis points last week, ending the week at 1.98% versus last week’s print of 2.01%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM10

12. Chinese Steel – Steel prices in China rose 5.5% last week, or 137 yuan/ton, to 2623 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,274 billion Yuan as of Dec 31, 2015, which is up +51% year-over-year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly. 

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM4

14. 2-10 Spread – Last week the 2-10 spread tightened to 102 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM13

15. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread was unchanged at 41 bps.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


CHART OF THE DAY | Style Factors: What Is (& Isn't) Working In 2016

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.

 

"... Yep. Wall Street is as long “reflation” (Oil and Gold on an absolute basis, and SPY on a relatively less net short basis) as it has been all year long and still fighting the wall of worry on our Long Bond Bull.

 

The 10yr US Treasury Yield dropped another 5 basis points (down -55 bps YTD) last week to 1.72% and continues to signal what US Equity’s top performing Style Factor (Low Beta Stocks = +7.5% YTD vs High Beta -3.0%) does…"

 

CHART OF THE DAY | Style Factors: What Is (& Isn't) Working In 2016 - 04.11.16 chart


Keep Going

“Don’t watch the clock; do what it does – keep going.”

-Sam Levenson

 

My family felt bad watching Jordan Spieth melt-down at The Masters yesterday – until he made it clear that he didn’t feel bad for himself. The 22 year-old from Dallas, Texas acted like a 40 year-old man in defeat. No excuses. Just a big lesson learned.

 

Q: How do you go from birdying the last 4 holes on the front 9 (with the lead in the last round of a Major) to going bogey, bogey, quadruple-bogey? A: You lay off the ball, just a little, in trying to protect what seemed like an unsurmountable lead.

 

Do you ever lay off your game? Do ever veer from your #process? These are easy mistakes to make. We all make them. What’s hard is staying focused and disciplined during the clutch parts of the game. For macro markets, that time is now.

 

Keep Going - growth  cartoon 04.05.2016

 

Back to the Global Macro Grind

 

That’s right Earnings Season fans, it’s game time. Alcoa (AA) will kick things off tonight, followed by Jamie Dimon’s JP Morgan (JPM) on Wednesday. All the while, you’ll get PPI, CPI, Retail Sales, and Industrial Production reports for the month of March.

 

Three weeks ago (after the slow-volume squeeze off those epic FEB lows), was it time to layoff the bear case for the US economic and profit cycle slowing? Or was it time to get back in the go-zone and start shorting High Beta stocks again?

 

With the US Dollar down another -0.4% last week to new YTD lows of -4.5%, was it time to “buy reflation because global growth has bottomed” or is it time to get long #StrongDollar and short Commodities again?

 

What does the signal (process) say?

 

  1. US Dollar immediate-term TRADE oversold within a bullish long-term TAIL setup (93.12 TAIL support)
  2. Oil (WTI) immediate-term TRADE overbought post a +8.0% weekly ramp (following a -6.9% weekly decline!)
  3. Gold immediate-term TRADE overbought after another +1.7% gain last week to +17.2% YTD

 

Whether you are a Gold Bull right now or not (I am, from a price), the overbought signal is the signal inasmuch as the immediate-term TRADE overbought signal in the Japanese Yen vs. the US Dollar is obvious.

 

So, you might cover some Japanese Equity Shorts on that. The Nikkei was down another -2.1% last week to -16.9% YTD. No one ever went broke booking gains. Oh, and smile when you make birdies like that!

 

Generally speaking, staying away from Global Equities from those March highs has been a good call. US Equities have been down for 2 of the last 3 weeks as both European and Japanese stocks continue to crash from their 2015 cycle highs:

 

  1. Argentina -7.3% last week to +4.7% YTD
  2. Emerging Markets (MSCI) -1.1% last week to +2.9% YTD
  3. SP500 -1.2% last week to +0.2% YTD
  4. Nasdaq -1.3% last week to -3.1% YTD
  5. Russell 2000 -1.8% last week to -3.4% YTD
  6. EuroStoxx 600 -0.4% last week to -9.3% YTD
  7. German DAX -1.8% last week to -10.4% YTD
  8. Italy’s MIB Index -1.5% last week to -18.3% YTD

 

In other words, the closer your country’s stock market has been to Down Dollar (EM and Commodities), the less-bad bogey golf you’ve been playing. If you want to be playing with the lead (birdies and pars), it’s been all about the Long Bond, baby!

 

Since we like the initial phase of Argentina’s political turnaround story (Kirchner corruption out, Macri in), I could definitely get interested in buying their stock market if it has more down weeks like it did last week. An Up Dollar will most likely do that.

 

In addition to Commodities (CRB Index) having an inverse correlation (30-day duration) of -0.88 vs. the US Dollar, it’s important to realize that the SP500 now has a -0.90 correlation on that same duration. They’re both begging for a “dovish” Fed.

 

It’s also interesting to note where, from a sentiment perspective, Consensus Macro futures and options positioning is. Here’s the latest CFTC non-commercial net positioning:

 

  1. SP500 (index + Emini) +29,272 LONGER last week to -103,123 net SHORT = +0.39x 1yr z-score
  2. 10YR Treasury -67,397 SHORTER last week to -85,976 net SHORT = -1.02 1yr z-score
  3. Gold steadily high at +163,589 net LONG contracts = +2.17x 1yr z-score

 

Yep. Wall Street is as long “reflation” (Oil and Gold on an absolute basis, and SPY on a relatively less net short basis) as it has been all year long and still fighting the wall of worry on our Long Bond Bull.

 

The 10yr US Treasury Yield dropped another 5 basis points (down -55 bps YTD) last week to 1.72% and continues to signal what US Equity’s top performing Style Factor (Low Beta Stocks = +7.5% YTD vs High Beta -3.0%) does…

 

Don’t argue with the clock on #TheCycle; do what it does – and keep going with your #GrowthSlowing positioning.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.67-1.82%

SPX 2027-2059
RUT 1080-1107

NASDAQ 4

Nikkei 15190-16229

DAX 9
USD 94.04-95.19
YEN 107.39-110.98
Oil (WTI) 35.16-39.99

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Keep Going - 04.11.16 chart


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