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What The Bond Market Tells Us About U.S. Growth (Or The Lack Thereof)

Takeaway: Despite the Fed's talk of rate hikes, we remain the bulls on Long Bonds (TLT).

What The Bond Market Tells Us About U.S. Growth (Or The Lack Thereof) - tlt lowdown

 

"Unfortunately, the bond market isn’t buying into the hope that GDP is +2.5% here in Q2 (we’re still below 1%) – at 1.86% this am the 10yr Yield is signaling at 1.68% is still very much in play ahead of next week’s #EmploymentSlowing report," Hedgeye CEO Keith McCullough wrote in a note sent to subscribers earlier today.

 

Take a look at the 10-year Treasury since the Fed's December "rate hike."

 

What The Bond Market Tells Us About U.S. Growth (Or The Lack Thereof) - 10yr treasury 5 25

 

The flattening of the 10s/2s yield spread to a year-to-date low is another explicitly bearish U.S. growth signal.

 

What The Bond Market Tells Us About U.S. Growth (Or The Lack Thereof) - 10s2s yield spread

 

That's why we remain THE BULLS on Long Bonds (TLT).

 

Stick with it here.


TIF | It’s Time To Man-Up

Takeaway: When you call yourself a luxury brand, but your reputation on the Street starts to converge with Kohl’s, you know there’s a problem.

We don’t know what’s more surreal…Tiffany’s horrible results, its forecast accuracy, its seemingly blasé attitude towards consistently missing forecasts, the arrogance of its management team in addressing its issues, or lastly – it’s multiple. What we are sure of, however, is that this stock is still a short barring a massive correction today that erases a third of TIF’s market cap. Here’s our brief thoughts on each of the aforementioned points…

1) Horrible Results. There’s no ifs ands or buts about this. The company comped down 9% (or -16% on a 2-yr stack), with sales down in every region (excl. Japan easy comp). Margins were off by 256bp, and pre-tax income was down by 29%. Virtually every line of the P&L eroded sequentially in a very material way. But the balance sheet was no better. The days in inventory was 612, which was up 52 (!) days versus last year. To put that into context, TIF has to wait longer to convert a dollar of earnings into cash than Kohl’s, Target, JC Penney, Macy’s, Nordstrom and Wal-Mart -- combined. There are absolutely no redeeming financial characteristics here.

2) Forecast Accuracy. There are too many examples to fit here, but let’s look at the last two annual updates.  On the Jan 2015 holiday update, TIF guided to FY15 $4.15-$4.20 in earnings, which was 15% below expectations at that time.  By year end they reported $3.83.  On this year's holiday update, it gave initial 2016 guidance of ‘minimal growth in earnings’, which just 4 months later is now guided to a mid-single digit decline, assuming back half improvement. Needless to say, we don’t think that back half improvement will come.

3) Complacency in Missing. Is it me, or has management grown seemingly comfortable in missing numbers? It really does not seem to bother them anymore. The only other management team we can think of that is this comfortable missing numbers is Kohl’s.  KSS can’t be the affiliation a once-great company like TIF aspires to keep. But by its actions, you’d never know.

4) Arrogance. Ok…you just missed – AGAIN, guided down for the seventh time in two years, which just happens to be just two weeks after your CFO resigned. And all we get is what was likely a pre-recorded message by IR with no Q&A? TIF has one of the most stand-up IR programs in the business, but let’s face it…when you miss by this magnitude – and this frequency – you get the CEO on the phone, take your lumps, and stand accountable to your business. Heck, when Macy’s dropped a lousy quarter on the Street last November, Terry Lundgren (CEO) jumped on the call for the first time in almost a decade to show his confidence and support.  So…we can’t expect this from Tiffany, but we can from Macy’s?  The question here is whether TIF management really wants this to be a public company.

5) Multiple. First we heard from people that a ‘low 20s’ multiple is fair. Then ‘20x’. Then 17-18x was ‘cheap’. But what’s really the appropriate multiple for a company that is shrinking earnings at a mid-teens rate, and seemingly has no strategy to ever grow again sans a rebound by spending in US Tourist markets? The best we’d give it is a 10% discount to the market – or 15x. We’re well below the Street next year, which we think will be another down year. We’re looking at earnings of $3.25, vs the Street at $4.15. Give our number a 13-14x multiple and we’re looking at a stock about $20 lower than what we’ve got today ($40-$43).

 

TIF | It’s Time To Man-Up - 5 25 2016 TIF SIGMA chart1

 

TIF | It’s Time To Man-Up - 5 25 2016 TIF Earnings chart2

 

TIF | It’s Time To Man-Up - 5 25 2016 TIF CCC chart3

 

TIF | It’s Time To Man-Up - 5 25 2016 TIF Algo chart4


Daily Market Data Dump: Wednesday

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

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Wednesday - equity markets 5 25

 

Daily Market Data Dump: Wednesday - sector performance 5 25

 

Daily Market Data Dump: Wednesday - volume 5 25

 

Daily Market Data Dump: Wednesday - rates and spreads 5 25


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Investors are Frustrated

Client Talking Points

S&P 500

Will 1 big up day give U.S. stocks their 1st real up week (into month-end) in the last 6 weeks? Maybe we should all buy/cover high again so that we can sell 50 handles lower! Inasmuch as our signal was clear to buy/cover around 2030-2040, it’s crystal clear to start selling again in the 2080-2090 range as Equity Volatility makes yet another higher-low.

UST 10YR

Unfortunately, the bond market isn’t buying into the hope that GDP is +2.5% here in Q2 (we’re still below 1%) – at 1.86% this morning the 10YR Yield is signaling at 1.68% is still very much in play ahead of next week’s #EmploymentSlowing report.

GOLD

Gold down to +15% year-to-date – what a disaster that is! If you haven’t owned it all year, here’s another BUY signal. It’s been a great way to play #GrowthSlowing and we have Durable Goods, GDP, and Labor all being reported in the next week.

 

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

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/24/16 52% 6% 0% 8% 28% 6%
5/25/16 58% 2% 0% 10% 28% 2%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/24/16 52% 18% 0% 24% 85% 18%
5/25/16 58% 6% 0% 30% 85% 6%
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

Why Hedgeye's Howard Penney Is Still Bearish On Shake Shack https://app.hedgeye.com/insights/51167-unlocked-why-hedgeye-s-howard-penney-is-still-short-shake-shack… @KeithMcCullough $SHAK

@Hedgeye

QUOTE OF THE DAY

Life is really simple, but we insist on making it complicated.

Confucius

STAT OF THE DAY

This past 2015-16 season Broadway had 13,317,980 visitors, up 1.6% over the previous season.


CHART OF THE DAY: How To Risk Manage Our Favorite Macro Positions

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.

 

"... Since Utilities (XLU) and Long-term Bonds (TLT) already signaled immediate-term TRADE oversold (lower) last week, the only big thing that I like on the long side that is signaling oversold today (i.e. it’s at the low-end of the risk range today) is Gold.

 

Gold’s immediate-term risk range is now $1215-1260. So I’d buy some at $1215 and sell some at $1260."

 

CHART OF THE DAY: How To Risk Manage Our Favorite Macro Positions - 05.25.16 EL Chart


Brier Bear

“The distance between what you forecast and what actually happened.”

-Phil Tetlock

 

Not to be confused with Tim Horton’s Brier Cup (or what Canadian Curling fanatics call The Brier), your Brier Score is a probability weighted measure of how good you are at forecasting.

 

As Phil Tetlock explained in the must-read #behavioral economics book I’ve been citing for the last month, Superforecasting, “Brier scores are like golf scores: lower is better. Perfection is 0.” (pg 64)

 

No one is perfect. But that doesn’t mean we shouldn’t strive for excellence. We’ve been within 20-30 basis points of forecasting US GDP perfectly for the last 5 quarters. If we’re right on Q2, being positioned for lower-for-longer is going to make for better performance again.

 

Brier Bear - growth cartoon 05.24.2016

 

Back to the Global Macro Grind

 

But, but… bond yields rose (for a week), gold is getting “hammered” (to +15% YTD), and… if the SP500 can hold it’s short-squeeze day of +1.4% (yesterday), US stocks are going to be up for the 1st week in the last 6…

 

Doesn’t that mean GDP is going to be 2.5% and the Fed can raise rates in June?

 

C’mon. Let’s keep it real here. Inasmuch as the SP500 signaled immediate-term TRADE oversold (after 4 straight down weeks) in the 2030-2040 range last week, it will signal immediate-term TRADE overbought in the 2080-2090 range this week.

 

Oh, and it’s month-end.

 

That’s when everyone @CNBC who is in the business of marketing “but the market isn’t down” (meanwhile most fund managers they interview are) gets to try to tell you another story about how #TheCycle wasn’t really happening, afterall.

 

Yes, getting the rate of change in GROWTH And INFLATION right is a major component of having a low Brier Score. But risk managing the range (i.e. trading) of immediate-term oversold vs. overbought is a critical component to scoring well too.

 

From a Hedgeye #Process perspective, what I mean by that is this:

 

  1. Start with your best Bayesian bet on where the intermediate-term TREND is going (our research view)
  2. Contextualize that TREND within the long-term TAIL duration (i.e. #TheCycle)
  3. And then just risk manage the immediate-term TRADE range of oversold/overbought signals

 

I know. This isn’t perfect. But after 17 years of trial and error (making legions of mistakes), this process of marrying my multi-duration cycle research with quantitative risk management signals (multi-duration, multi-factor) is the best I can do.

 

What do you do? If you’re reading this, I certainly appreciate you having an open mind to what it is that I do.

 

What I don’t do is chase high and freak-out (sell) low. While it seems like forever ago (in inbox question terms), it was only last week that I wrote to you about 9-10 buy/cover signals, taking Real-Time Alerts to 9 LONGS and 3 SHORTS.

 

In the spirit of the chapter in Superforecasting that today’s quote about Brier Scores comes from (called Keeping Score), on May 18th, I also took our “Cash” position down to its lowest level of 2016 at 49%.

 

That’s when bond yields tapped the top-end of my risk range (and stocks sold off to the low-end of the immediate-term TRADE range) though. This morning European, Japanese, and US Equities are trading at the top-end of the range:

 

  1. SP500 immediate-term risk range = 2037-2084
  2. Nikkei immediate-term risk range = 16,331-16,890
  3. German DAX immediate-term risk range = 92

 

So I’ll raise my “Cash” position back up to 58% now (selling some US Equity and USD exposure).

 

Since Utilities (XLU) and Long-term Bonds (TLT) already signaled immediate-term TRADE oversold (lower) last week, the only big thing that I like on the long side that is signaling oversold today (i.e. it’s at the low-end of the risk range today) is Gold.

 

Gold’s immediate-term risk range is now $1. So I’d buy some at $1215 and sell some at $1260.

 

Selling and/or buying “some” in something doesn’t mean I don’t have “conviction.” It means I have a process to measure the distance between what I’m forecasting and what is actually happening.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are now:

 

UST 10yr Yield 1.68-1.89% (bearish)

SPX 2037-2084 (bearish)
RUT 1090-1140 (bearish)

NASDAQ 4 (bearish)

Nikkei 160 (bearish)

DAX 92 (bearish)

VIX 13.86-17.58 (bullish)
USD 94.11-95.95 (bullish)
EUR/USD 1.11-1.13 (bearish)
YEN 108.45-110.79 (bullish)
Oil (WTI) 46.98-49.89 (bullish)

Nat Gas 1.95-2.17 (bearish)

Gold 1 (bullish)
Copper 2.02-2.10 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Brier Bear - 05.25.16 EL Chart


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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