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Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

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Daily Market Data Dump: Monday - equity markets 5 23

 

Daily Market Data Dump: Monday - sector performance 5 23

 

Daily Market Data Dump: Monday - volume 5 23

 

Daily Market Data Dump: Monday - rates and spreads 5 23


CHART OF THE DAY: Consensus Macro Positioning Vs. Hedgeye's Macro View

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.

 

"Another reason not to worry (be happy) if you have Hedgeye’s macro view, is that the crowd still doesn’t agree with us. Here’s what Consensus Macro positioning looks like from a CFTC futures and options perspective:

  1. SP500 (Index + E-mini) net LONG position of +9,630 contracts = +1.83x 1YR z-score
  2. Crude Oil net LONG position of +408,569 contracts = +1.93x 1YR z-score
  3. 10YR Treasury net SHORT position of -131,565 contracts = -2.33x 1YR z-score

For those of you who are new to following us, we measure current macro positioning across multiple durations relative to where the positioning has been in the past. Anything plus or minus 2x tends to be a great contrarian indicator."

 

CHART OF THE DAY: Consensus Macro Positioning Vs. Hedgeye's Macro View - 05.23.16 chart


Long Bond Bears

“Our greatest glory is not in never failing, but in rising up every time we fall.”

-Long Bond Bears

 

Actually, Ralph Waldo Emerson wrote that. But for this morning’s note I thought I’d borrow it for the Long Bond Bears. They’ve failed since #TheCycle peaked in July of 2015. Despite the perceived glory in “calling the top”, shorting long-term Treasuries because they’re “expensive” has been a costly mistake.

 

As all long-term cycle investors know, “expensive” gets more expensive as GDP growth slows and asset allocators seek exposures that get them paid during the down-cycle. Put another way, there’s a premium valuation assigned to the return of capital when returns on capital are falling.

 

One of the most expensive major macro securities in world history (Japanese Government Bonds) hasn’t paid the bears for decades. Despite all the glory of living life as a central planner, their policy to “stimulate growth” with negative rates has failed too.

 

Long Bond Bears - negative interest rate cartoon 04.21.2016

 

Back to the Global Macro Grind

 

Taking a breather from the battle between #Reflation and #Deflation (in Dollars), last week’s biggest moves in macro were driven by what I think was another head-fake for rates rising:

 

  1. US Treasury 2YR Yield popped +13 basis points on the week to 0.88% (still down -17 basis points YTD)
  2. US Treasury 10YR Yield rose +15 basis points on the week to 1.85% (still down -42 basis points YTD)
  3. Utilities (XLU) corrected -2.2% on the week to +11.6% YTD
  4. REITS (MSCI) fell -2.7%  on the week to +2.8% YTD
  5. Consumer Staples (XLP) dropped -2.0% on the week to +3.3% YTD

 

From a US Equity Style Factor perspective, you can see the impact of Rates Rising last week as well:

 

  1. High Yield Stocks lost -0.2% on the week to +2.2% YTD
  2. Low Yield Stocks gained +1.3% on the week to +0.6% YTD

*Mean Performance of the Top Quartile vs. Bottom Quartile of SP500 companies

 

In other words, last week provided one of the few major 2016 buying opportunities in what we call a counter-TREND move in rate sensitive macro exposures.

 

And you thought I wasn’t bullish? I’m super bullish on #GrowthSlowing. There’s always a bull market somewhere!

 

Another reason not to worry (be happy) if you have Hedgeye’s macro view, is that the crowd still doesn’t agree with us. Here’s what Consensus Macro positioning looks like from a CFTC futures and options perspective:

 

  1. SP500 (Index + E-mini) net LONG position of +9,630 contracts = +1.83x 1YR z-score
  2. Crude Oil net LONG position of +408,569 contracts = +1.93x 1YR z-score
  3. 10YR Treasury net SHORT position of -131,565 contracts = -2.33x 1YR z-score

 

For those of you who are new to following us, we measure current macro positioning across multiple durations relative to where the positioning has been in the past. Anything plus or minus 2x tends to be a great contrarian indicator.

 

While it’s amazing to watch, I still can’t for the life of me believe that consensus is this complacent about US GDP #GrowthSlowing. If you thought GDP was going to be 2-2.5% in Q2, you’d probably chase US Equity Beta and short bonds.

 

If, however, you have our Wall Street low forecast of sub 1% US GDP for Q2, you’d:

 

A) Buy Long-term Bonds, Utilities, REITS, and Staples

B) Short High Beta, Small Caps, and Financials

 

So let’s do more of that this week ahead of #TheCycle growth slowing reports for both Durable Goods (Thursday) and GDP (Friday).

 

The other not so funny thing that happened on the way to the risk management forum last week was that the US Dollar Index had its 3rd straight up week, closing +0.8% on the US Dollar Index, holding comfortably above long-term TAIL support of 92-93.

 

As macro tourists were hyperventilating about the prospects of a “rate hike”, the consensus that “Global Demand has bottomed” met its maker in #StrongDollar terms:

 

  1. Emerging Market Stocks (MSCI) dropped back into the red for 2016, -1.8% to -1.5% YTD
  2. Chinese Stocks (Shanghai Comp) were down another -0.1% on the week to -20.1% YTD
  3. Dr. Copper deflated another -0.9% on the week to -4.3% YTD

 

Dollar Up, Rates Down? Yep.

 

That’s what happens when the rate of change of both growth and inflation are slowing. In our GIP (Growth, Inflation, Policy) model, we call it #Quad4. There may be no Old Wall glory in it, but it’s the ultra-bull case for Long Bond Bulls.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.68-1.87%

SPX 2029-2066
RUT 1089-1129
USD 93.70-95.65
Copper 2.02-2.10

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Long Bond Bears - 05.23.16 chart


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Correlation Risk

Client Talking Points

UST 10YR

Most things macro (last week) queued off of what we think was another head-fake in rate hike risk. The UST 10YR Yield being up +15 basis points week-over-week was a counter TREND move to 1.90% which has since pulled all the way back to 1.82% this morning, flattening the Yield Spread to yet another year-to-date low of +94 basis points wide (10s/2s), which is an explicitly bearish GDP growth signal.

OIL

It dislocated from the Correlation Trade last week (USD +0.8%, Gold -1.5%, WTI +3.5%), but is correcting -1.1% this morning (Iran Supply comments) back below $48 with an immediate-term risk range of $45.07-50.53.

FINANCIALS

Teetering on implosion (Equities) again as USD signals immediate-term TRADE overbought vs. Euro at $1.11-1.12; Italy’s stock market is a bloody mess, -1.5% (leading losers), taking its crash to -26% since this time last year; NIRP doesn’t work.

 

*Tune into The Macro Show with Darius Dale and Ben Ryan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/22/16 49% 6% 0% 10% 30% 5%
5/23/16 50% 6% 0% 8% 30% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/22/16 49% 18% 0% 30% 91% 15%
5/23/16 50% 18% 0% 24% 91% 18%
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
GLD

When Janet does have to acknowledge the deterioration in U.S. growth, we expect the policy shift to be dollar bearish on the margin. And, to the contrary, if the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway. And there’s nothing Gold (GLD) likes more than a falling dollar and falling interest rates which is why we added it to the long-side of Investing Ideas this week. Remember, this is the same week various Fed members were in public calling for a rate hike with the worst jobless claims print since 2012. #GoodLuck.

MCD

McDonald's (MCD) continues to evolve. The company's latest step is testing never frozen burgers at 14 units in the Dallas, TX area. This initiative could give them the ability to compete with better burger concepts such as Shake Shack, In-N-Out and Five Guys.

 

Meanwhile, there has been chatter about the lack of identity for their value platform in 2Q16. MCD is truly still in the testing phase as to what their national value message will be. We can appreciate the fact that they are testing multiple formats before fully committing.

 

In the meantime, the tailwind from all-day breakfast will continue to propel growth going forward, until lapping this initiative in 4Q16. We continue to favor MCD as one of the best LONGs in the market right now, due to actual growth and style factors that are friendly in volatile markets.

TLT

If you haven’t yet, you got another chance to buy long-term Treasuries at lower highs this week. If you’re already long of Long Bonds (TLT, ZROZ), stick with it. None of the relevant data released this past week suggests that growth could inflect and trend positive:

  • Thursday’s Jobless Claims Report was the worst print, in Y/Y rate of change terms, since 2012, and it was the fourth consecutive week of increasing jobless claims
  • Industrial Production declined -1.1% Y/Y for April, marking the 8th consecutive month of Y/Y contraction: #IndustrialRecession

Tying together a continued deceleration in growth with policy expectations, the most important callout is that our expectation for growth in Q2 is well below consensus and Fed expectations (which have been horribly inaccurate). 

Three for the Road

TWEET OF THE DAY

REPLAY | "About Everything" w/ Demographer @HoweGeneration

#Millennials: Are We There Yet?

https://app.hedgeye.com/insights/51101-live-about-everything-q-a-12-30-pm-et-with-demography-sector-head-ne

@Hedgeye

QUOTE OF THE DAY

Thousands of candles can be lighted from a single candle, and the life of the candle will not be shortened. Happiness never decreases by being shared.

Buddha

STAT OF THE DAY

U.S. Credit card debt is set to hit $1.0 trillion this year, the highest level since 2008.


The Macro Show with Darius Dale Replay | May 23, 2016

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.


HBI | BLACK BOOK - BEST IDEA SHORT (Today 1pm ET)

Takeaway: Please join us Today...Monday, May 23rd at 1PM ET for our Black Book on Best Idea Short HBI.

Please join us Monday, May 23rd at 1PM ET for a call reviewing our Black Book on Best Idea Short Hanesbrands (HBI). CLICK HERE to watch this presentation live.

HBI | BLACK BOOK - BEST IDEA SHORT (Today 1pm ET) - Slide1

 

Call Details:

Toll Free:

Toll:

UK: 0

Confirmation Number: 13636869

Materials: CLICK HERE

Watch Live: CLICK HERE

 

We added HBI to our Best Ideas list as a short on May 2nd as recent acquisitions gave us higher conviction in our short positioning.  This goes beyond the whole ‘peak margins, low cotton cost, in a weak category’ argument. But rather, a management team that was aggressive, but is now behaving in a borderline reckless manner. Management is aggressively selling stock while it uses shareholder capital to accelerate acquisition activity at increasingly high (and potentially deceptive) multiples at the tail-end of an economic cycle, as its own factories operate near peak utilization. These deals are supporting earnings, while the Street looks right through the special charges. That makes timing on this short difficult, but we’ll provide a roadmap in our Black Book. Ultimately, we see 40% downside from here.

 

 

Below is our note from 5/2 outlining our thesis.

 

05/02/16 09:19 AM EDT

HBI | This Doesn’t End Well

 

Takeaway: We’re adding HBI to our ‘Best Ideas’ Short list. When a company behaves this badly, no one wins.

 

We’re adding HBI to our Best Ideas Short list. We initially put this short on in late March (see note below), but the company’s actions since then have given us greater confidence in the call. Here’s our basic thinking (we’ll have a Black Book out on the name shortly with a deep dive).

 

1. This is not a bad business…but it’s not a good one. On the plus side, it’s highly consolidated on the brand side – with Hanes and Fruit of the Loom accounting for 24% share. On the flip side, distribution is even more consolidated with Wal-Mart, Target, Kohl’s, Penny, and (yes) Amazon accounting for ~70%.  That might seem like a push, but we’d also argue that consumer trends are pushing towards the high end (Tommy John, Lululemon, UnderArmour, Nike). All in, the core is probably a 1% long term grower. Nothing to write home about. And unlike a CPG company, it is extremely volatile. A volatile 1%? Not where we want to be.

 

2. Margins are at peak. HBI’s own manufacturing plants account for roughly 65%. While the company guards these numbers closely, our sense is that utilization is likely running close to 90%. That’s actually to management’s credit, as they’ve got this engine running like a 911 Turbo. But where’s it going to go from here?

Most retail analysts don’t cover companies that actually own manufacturing assets. They all have offshore/outsourced models that lock in price, limit volatility, and make it such that the company has to worry only about design, sales and marketing. The point is that margins for these ‘other’ brands might move by 1-2 points in a year. But for a company like HBI that owns its own assets, we could see 4-5 point swings with no problem as demand shifts and factory utilization drops. 

In the end, we ask the question…why should HBI have higher margins (15%) than VF Corp, PVH, Ralph Lauren, and even Nike? We should note that it’s about on par with Gildan, which interestingly is the only other major company that buys cotton directly in such quantities for use in company-owned plants.   

 

3. The New ‘Jones’? No, we’re not talking about Hedgeye’s illustrious Daryl Jones, we’re talking about Jones Apparel Group – one of the worst companies in retail. Ever. And that says a lot. As its core rolled, Jones took capex down from 2-3% of sales to about 0.7%. That’s bad. It took shareholders’ capital and bought assets/brands – over 25 of them. Then it took special charges almost every quarter obfuscating the real earnings power of the company. It was a great trading stock until it ultimately went private at 30% of peak trading levels.  We’re not certain this is where HBI is headed, but the parallels are uncanny.

 

4. Management is investing away from the core. Maybe this is an exceptional idea. Maybe they’re doing what VFC did a decade ago when grew away from its stodgy old slow growing denim business, and sold off its underwear assets. But VFC bought things like Vans, Timberland, Lucy and Eagle Creek. HBI is diversifying into…you guessed it – underwear (and moderate priced sports apparel). Just in other parts of the world. We have no reason to think this category will grow any more outside the US than inside its borders.

 

5. These deals are getting more expensive. HBI bought DB Apparel for 7.5x in 2014, Knights Apparel for 8x in 2015, and now both Champion Europe and Pacific Brands cost 10x EBITDA. Basically, HBI is trading at a 20% lower multiple (tho still expensive) than it was, but it’s deal multiples are 20% higher. Why?

 

6. Why didn’t HBI buy Pacific Brands a year ago at half the price? That’s kind of a rhetorical question. I have no idea what the answer is. But it’s a public company…it’s not like it ‘wasn’t for sale’, and it’s also not like ‘HBI wasn’t a buyer’.  Just strange to pay nearly $400mm more for the same asset. That could have otherwise paid down 18% of debt, or bought back 3% of the float.

 

7. 2 and 20 is Back! Did we mention that HBI announced two acquisitions in 20 days? One in Europe, and the Other in Australia? I’m sorry, but even if you’re the biggest bull on this name, you’ve gotta be scratching your head over this. Yes, I know, the stock was up on both deals, because people know that the company now has a cookie jar to dip into for a year or two. But we’ll bet against two international deals/20 days any day of the week when we’re at the tail end of an economic cycle.

 

The Bottom Line

We think it’s absurd for a stock like HBI to trade at an EBITDA multiple in the teens. An EARNINGS multiple? Sure. But not EBITDA. We understand, however, that this is the type of name where there will need to be a major event to make people completely revalue the company – the way it did so on the upside as it repaired its balance sheet over the past two years. But until then, will we see the multiple push to 14x, 15x? We have a hard time with that one – unless we’re grossly underestimating a) how much juice it can squeeze out of the lemon in Australia, or b) the sustainability of its positioning in the US market. If we’re right, we’re looking at 7-8x EBITDA, and we’d argue that’s even generous. That’s a stock in the mid-teens, or 50% downside.


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