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CHART OF THE DAY: Digging Into The Worst Jobless Claims Report Since 2012

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.

 

"... On that last point (#EmploymentSlowing), while the Old Wall was staring at the trees yesterday (‘omg, omg – what did Dudley say’), we were the only firm to write a research note contextualizing the worst US Jobless Claims report since 2012.

 

At +2% year-over-year, the latest non-seasonally adjusted (NSA) jobless claims report was the first year-over-year acceleration to positive since 2012. Prior to 2012, you’d have to go back to 2007 to find the last time claims were rising."

 

CHART OF THE DAY: Digging Into The Worst Jobless Claims Report Since 2012  - 05.20.16 Chart


Beating Negative

“Cash is an easy way to defeat negative interest rates.”

-Jim Rickards

 

I don’t know about you, but I value my hard earned cash, big time.

 

When you think about the implications of the following pattern: #GrowthSlowing => Currency Devaluation (dovish monetary policy response) => and falling and/or negative interest rates … it’s not that hard to understand why you’d be overweight cash, positive absolute return holdings, and safe yielding assets.

 

In a nutshell, that’s The Bull Case for being long what I am long personally: Cash, Long-term Bonds, Municipal Bonds, Extended Duration Bonds, Utilities, and Gold (+ Real Estate + Hedgeye Equity + NHL Equity, and private stuff!).

 

Beating Negative - Cheap cartoon 05.16.2016

 

Back to the Global Macro Grind

 

You see, I’m not in the business of marketing the perma bull on “but it’s cheap.” That mediocre man’s excuse almost always aligns with one very basic reality: being long and wrong something that isn’t going up. I want to own things that get more expensive.

 

I know this might be way out there in an environment where many consensus portfolios are having a hard time Beating Negative, but when I think about building my personal net wealth I think:

 

  1. Don’t lose the money I have
  2. Try to earn a positive risk-adjusted return on the money I invest

 

I know. The first thing a reasonably good storytelling high-net worth broker is going to say back to someone like me on something like that is “but inflation is rising, Keith – you need to put your cash to work.”

 

My reply: growth is slowing faster than inflation is rising. And, in the intermediate to long-term, GROWTH slowing at an accelerating rate, trumps (pardon the pun) inflation rising at a decelerating rate.

 

That’s why I have a 49% position in Cash and 91% of my max asset allocation in Fixed Income right now. On this week’s redo of “oh, rates are gonna rip” that’s blown Long Bond Bears up for almost a year now, I was able to buy more TLT (on red).

 

What’s the catalyst for rates to stop rising at the 6th lower-high since I’ve been making this call (July 2015)?

 

  1. #TheCycle (economic, profit, and credit cycles all slowing now, at the same time)
  2. #LateCycle US Consumption Growth slowing from its 1H 2015 cycle peak
  3. #LateCycle US Employment Growth slowing from its 1H 2015 peak

 

On that last point (#EmploymentSlowing), while the Old Wall was staring at the trees yesterday (‘omg, omg – what did Dudley say’), we were the only firm to write a research note contextualizing the worst US Jobless Claims report since 2012.

 

At +2% year-over-year, the latest non-seasonally adjusted (NSA) jobless claims report was the first year-over-year acceleration to positive since 2012. Prior to 2012, you’d have to go back to 2007 to find the last time claims were rising.

 

Yes, we get it. Initial claims are still at a “low level” (hint: they ALWAYS are at the END of #TheCycle), but RATE of CHANGE is what matters most in macro. Most of our long-standing subscribers (thanking all of you, again, btw) get that.

 

Here are some more questions to consider when you try seeing the forest instead of the daily trading trees:

 

  1. Does #EmploymentSlowing data qualify as the “data” Yellen is dependent on?
  2. Do the 2 worst (April NFP and this week’s claims) employment reports SINCE the Fed Minutes matter?
  3. In addition to employment, isn’t the Fed more SP500 Dependent than they are concerned about inflation?

 

On SPY Dependence, I highly suggest you don’t forget that the recent Fed Minutes (that consensus macro tourists are hyperventilating about) came before the SP500 dropped for 4 straight weeks (intraday yesterday was a 4 week low).

 

Perversely, this is why I’m at my most “invested” position of 2016. Basically, because I am so bullish on #GrowthSlowing I believe the Fed is going to have to agree with Hedgeye on that (again) by the time they waive their magical market wand in June.

 

No, that doesn’t mean I am buying #LateCycle S&P Sectors like Consumer Discretionary, Tech, and Financials. It means I bought more of A) what’s been working and B) what worked yesterday. In a down tape, my “expensive” Utilities (XLU) closed +1.0% at +11.3% YTD.

 

On the Cash position, my friend Jim Rickards does a good job explaining why people like me still like it:

 

“There are many good, legitimate reasons to hold cash. You might have a cash business. You might want to have cash for emergencies. If you live where I do, on the East Coast, we’re vulnerable to hurricanes and nor’easters that can knock out power for days or weeks…” (The New Bull Case For Gold, pg 141)

 

Unlike many people I compete with in giving you risk managed advice, I have a cash business where I personally back the firm’s line of credit. I have to meet payroll for 70 employees, bi-monthly. And I will not get bailed out if I slow and/or fail.

 

Unlike running a central bank, that’s the real world of running a business. I deal with cash-in vs. cash-out. And if I don’t beat a negative return on my invested capital, I will go away.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.68-1.88%

SPX 2029-2058
RUT 1082-1110
USD 93.36-95.65
YEN 107.77-110.62
Oil (WTI) 44.82-50.43

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Beating Negative - 05.20.16 Chart


USD Overbought

Client Talking Points

USD

To be clear, that means we’re down to 49% Cash! And that’s mainly because the USD is signaling immediate-term TRADE overbought, so many of the #Reflation trades signaled immediate-term TRADE oversold this week (i.e. buy/cover signals).

GOLD

Dollar Down, Rates Down is the other big reason for the setup (i.e. we can be long the Long Bond, Utilities, Gold, etc. in that scenario); Gold’s immediate-term risk range = $1250-1280, so not a ton of upside from here but we’ll take what we can get.

FINANCIALS

Not to be confused with a growth accelerating setup, both the employment data (jobless claims UP +2.2% year-over-year yesterday – first time positive year-over-year has happened since 2012) and Janet Yellen are your friend on Down Rates from here – keeping the Financials as our favorite Sector Style on the short side vs. long Utilities (XLU) which acted great yesterday +1% to +11.3% year-to-date.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/19/16 51% 5% 0% 8% 30% 6%
5/20/16 49% 6% 0% 10% 30% 5%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/19/16 51% 15% 0% 24% 91% 18%
5/20/16 49% 18% 0% 30% 91% 15%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) remains our favorite sector on the long side as Financials (XLF) remains our favorite sector on the short side. Current global macro positioning is squarely behind a continuation in the reflation trade as evidenced by commodity leveraged credit spreads, global macro futures and options positioning, and forward-looking volatility expectations. Global macro futures and options positioning show a market that is leaning long of commodities and short of U.S. dollars. Corporate credit as a % of GDP remains at cycle highs, capital markets activity has dried up significantly, and credit extension is tightening nationwide according the most recent Fed Senior Loan Officer survey.

MCD

For some perspective on the Macro environment and why we favor companies like McDonald's (MCD), here's an excerpt from the Early Look written by Hedgeye CEO Keith McCullough:

 

Taking a step back, don’t forget where US Consumers (70% of GDP) were at this time last year:

 

  • US Employment Growth (NFP) was putting in a cycle peak
  • US Consumer Confidence was putting in a cycle peak
  • US Consumption Growth was putting in a cycle peak

 

Peak. Peak. #Peak!

 

And what happens when you start to lap the cycle peak? Well, instead of crappy Baby Boom capacity putting up mediocre (barely positive) same store sales at the peak, they look even crappier on the back side of the cycle."

 

That's why we like large-cap, low-beta, liquid companies like McDonald's in this tumultuous market environment. Case in point, earlier in the week, MCD hit an all-time high. Since we added the company to Investing Ideas, it is up almost 30%.

 

Stick with it. Restaurants analyst Howard Penney reiterates his "road to $150" call, implyling more than 15% upside from here.

TLT

Credit markets are one of the major beneficiaries (maybe the largest) of the reflation trade since February. While yield spread compression has been a positive for Long Bonds (TLT, ZROZ), a perceived monetary policy shift and a collapse in bond market volatility expectations have been a positive for Junk Bonds (JNK), but we don’t expect it to continue.

 

With growth continuing to slow alongside consensus positioning broadly, downside deflation risk is on the table. As we’ve highlighted on a daily basis, consumption growth and labor market growth peaked in Q1 2015 and both are slowing alongside a continued corporate profits slowdown. This mix:

  • Smells like incremental deflation on the margin;
  • Is a huge risk for high yield credit (JNK);

 

Did we mention TLT and ZROZ were up 4.4% and 2.1% respectively last week? Not bad with U.S. #GrowthSlowing.

Three for the Road

TWEET OF THE DAY

(VIDEO 2 MIN) McCullough: History Is An Important Guide To Mr. Market https://app.hedgeye.com/insights/51063-mccullough-history-is-an-important-guide-to-mr-market… via @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

Be who you are and say what you feel, because those who mind don’t matter and those who matter don’t mind.

Dr. Seuss

STAT OF THE DAY

For the 24th consecutive year, the most popular breed of dog in the United States is the Labrador retriever, according to rankings released by the American Kennel Club.


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Cartoon of the Day: Whole Lotta Bull

Cartoon of the Day: Whole Lotta Bull - Usidedown bull 05.19.2016

 

The S&P 500 is flat year-to-date. That explains a lot. "There's so much whining out there... Stop it. And start winning," Hedgeye CEO Keith McCullough wrote today. In other words, get long our favorite Macro Ideas... Long Bonds (TLT), Utilities (XLU), and Gold (GLD).


DKS | We’re SO Close To Going Long

Takeaway: It’s really really hard to be bearish on DKS here. Too many things can go its way in what we’d call a ‘double transition year’.

We never bought the ‘best house on a bad street’ argument with DKS. It was a bad Street then, and it’s a bad street now.  The difference, is that competitors are dropping faster than our Presidential candidates’ credibility. With the outright failure of Sports Authority (Leonard Greene dropping all support), as well as Eastern Mountain Sports and Sports Chalet, we’re looking at a 6.8% capacity reduction in Sporting Goods Retail brick & mortar. That’s 20mm feet (accurately outlined by DKS) of a sub-sector of retail that has 295mm square feet of space.

 

The fact that these companies went under is no revelation – we’ve all known that for a while -- so there’s no reason to make noise about it today.  There are only three major new-ish pieces of information. Two are bullish for DKS. The third is a push.  

 

1) Game, Set and Match – Ed Stack. I am so rarely impressed by a management team’s poise and thought process around a given strategic initiative. Make no mistake, TSA going Ch11 is absolutely a strategic initiative for DKS rather than a lucky coin flip, and it has been for a lot longer than most people think. This team is as prepared for both the initial promotional hit and the ensuing market share gain as any retailer I’ve seen. More than Kohl’s was with JC Penney, more than Best Buy was with Circuit, and more than Bed, Bath & Beyond was with Linens ‘n Things. Actually, we could make a rather strong argument that the bigger company in each of these categories actually put the smaller/weaker one away –Dick’s and Sports Authority included.  The punchline is that DKS has every hair on TSA’s head numbered. And one thing we like about Ed Stack & Co is that they think big…they think five years out…and they don’t care if they miss a quarter or two in order to achieve these much grander goals of wealth creation.   This is like the opposite of what we’re seeing out of Target right now.

2) Vendors Are Helping. There’s no doubt in my mind that the vendors, especially Nike, UnderArmour and Adidas, are helping Dick’s out. Ed Stack absolutely played this down on the conference call in answer to what was a very fair question. But the vendors would throw a fit if Stack commented on this – especially in detail – so he just dodged it. Is Dick’s getting better product? Yes. You have not seen it yet, but you will. Is Dick’s getting a better price on existing product? Probably not. But is likely to get better terms on it, which will help its cash conversion cycle. The fact that Brands are growing faster with their own Direct business is irrelevant. They need at least one strong National retailer in this space.  In the end, this is a win/win for DKS.

3) That InterWeb Thing. We know the geographic overlap between DKS/TSA. Over 200 TSA stores within 5 miles of a Dick’s store, and 350 stores within 10 miles of a Dick’s. But there’s a region that we care about a lot more than So Cal or Texas. It’s this thing called the Internet – we heard a nasty rumor that a lot of business is conducted there.  DKS e-commerce business grew at 15% this quarter, which is ‘respectable’ but not admirable. Will we see a pick up when it takes over full operation of its site in January? Yes, almost certainly. But while it does, there are two important trends we watch – it’s online competitive overlap with TSA – and importantly, the same metric for DKS/AMZN.

  • DKS/TSA: This is interesting, to me at least. It shows that only 10.5% of Dick’s online customers currently shop online at TSA. It’s less than half the rate we expected to see – particularly given near 50% store overlap within a 5-mile radius.   This rate has been trending down as TSA has weakened. All in, it’s bullish for DKS, as it suggests that it has significant upside as it takes over not only the best stores, but also the online customer relationship. 
  • DKS/AMZN: On the flip side, between 70-80% of DKS customers shop on AMZN. That’s simply mind-blowing.  But we’re ok with that so long as DKS emerges as the best Sporting Goods-Only site and has premium product to Amazon. The only way that happens is if Dick’s maintains strict posturing with its vendors – hopefully without costing DKS much in margin or payment terms.

DKS | We’re SO Close To Going Long - DKS Sports Authority overlap

DKS | We’re SO Close To Going Long - DKS AMZN overlap

 

HERE'S A FEW MORE BASIC CALLOUTS FROM THE PRINT

 

SIGMA Made A Notable Positive Turn

Though it’s still in Quad3, this trajectory is one of the better SIGMAs we’ve seen this earnings season.  Inventory finished up 7% yy with sales up 6%.  This was significantly better on the margin vs Q4 when inventory was up 10% on a +4% sales number.  4Q was impacted by weak cold weather merchandise sales from the mild winter, and the 1Q improvement comes while DKS held onto a large portion of this cold weather inventory to sell in fall 2016.

DKS | We’re SO Close To Going Long - 5 19 2016 chart3

 

Comps Rebound Sequentially

Brick and Mortar comp was negative again for the 7th quarter in a row.  It did however improve on the margin up 360bps sequentially, returning to the rate seen in 3Q.  Perhaps DKS was able to steal some Sports Authority customers with their offer for $20 reward for SA League card members to join Dick's Scorecard. Guidance implies store comp will slow again in 2Q expecting liquidations to result in temporarily lost share.

DKS | We’re SO Close To Going Long - 5 19 2016 chart4

 

e-Commerce Needs a Jumpstart, and is Likely to Get it:

e-Commerce revenue grew 15% in the quarter, at 9.2% of sales.  This was a slight acceleration on a 1 and 2 year basis, but ultimately far below the growth rate we would consider to be healthy for DKS when competitors and key vendors are growing their online banners 30-60%.  When DKS takes its e-commerce business in house in 2017 it needs to see e-commerce growth accelerate materially – tough comps don’t matter.  Otherwise there will have been a lot of wasted investment and asset returns will continue dropping.

DKS | We’re SO Close To Going Long - 5 19 2016 chart5

 

Share Repo at the Peak?

DKS repurchased $50mm worth of stock in 1Q taking share count down 680k sequentially.  The average repo price however, was $46.81… given that the stock barely traded above $47 at all during the quarter, we have to ask why is this so high.  Perhaps there are some limitations for the buyback window, but we hope the DKS treasury department can do better than buying at quarterly highs, 7% above the average daily price.

DKS | We’re SO Close To Going Long - 5 19 2016 chart6

 

New Store Productivity Likely Still Declining

For the first time ever, management did not mention new store productivity on the conference call.  This was perhaps a clever move of using the TSA buzz to start weaning the sell-side off of a metric that is weakening and may never improve again.  Our sense is that internal productivity was sequentially worse, as our model calculation implies.  Gone are the days of straight-lined 90% NSP for the DKS retail model, and we think it could be only 3-4 years before store growth goes negative as the company focuses on growing e-commerce.

DKS | We’re SO Close To Going Long - 5 19 2016 chart7


GLD: Adding Gold to Investing Ideas (Long Side)

Takeaway: We are adding Gold to Investing Ideas today.

Editor's Note: Please note that our Macro team will send out a full report outlining our high-conviction long thesis next week. In the meantime, below is a brief summary of our thesis sent today by Hedgeye CEO Keith McCullough in Real-Time Alerts.

 

GLD: Adding Gold to Investing Ideas (Long Side) - gold bar

 

I was getting a lot of questions on why I wasn't signaling BUY more GLD at higher prices. My answer was that the USD was signaling oversold on the downside and I wanted to wait for an Up Dollar, Down Gold move.

 

Now we have that priced in.

 

What would Gold love? Same thing it always loves - Down Dollar, Down Rates. 

 

That's the call I'm making here.

 

KM


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