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CHART OF THE DAY: A Closer Look At Retail Sales

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. 


"... A few points on why we’ve been revising GDP higher throughout the quarter:

  1. The government has been understating “inflation” in both GDP and PCE Consumption reports
  2. When you understate inflation, you can overstate “real” consumption and GDP growth

A real-world example of this is Retail Sales. Because it’s reported nominally, lower gas prices actually drag on reported growth while higher prices – despite acting as a tax on real consumption – actually manifest as stronger reported growth."


CHART OF THE DAY: A Closer Look At Retail Sales - 07.18.16 EL Chart

Almost Perfect

“If everything was perfect, you would never learn and you would never grow.”

-Beyonce Knowles


Last week, after registering 4 consecutive all-time closing highs in a row, US Equity Beta (SP500) was almost perfect. On Friday (Day 5), it lost -0.09%, closing at 2161. That’s +1.65% higher than where it was one year ago today.


Perfect was not my macro market “call” last week. Unless we define all of my macro longs being down on the week (and all of my macro shorts being up) as perfectly terrible, that is…


If everything was perfect, I’d never have to timestamp any ideas or themes. My macro teammates and I would never learn or grow.


Back to the Global Macro Grind


Depending on how you’re positioned, you might find our call on US GDP this morning almost perfect. It’s high enough to take out the GDP recession risk (for now), and won’t be reported in time for the Fed to have to tighten on it…


After Friday’s US Retail Sales sequential (month-over-month) acceleration to +2.7% year-over-year, our GIP (Growth, Inflation, Policy) predictive tracking algorithm has ramped to a YTD high forecast of +2.3% year-over-year for Q2.


If we extrapolate that into a forecast that would resonate with Wall St. (they like to read GDP on a quarter-over-quarter SAAR basis), US GDP could be as high as +3-4% in Q2. If you’ve been looking for that number for a year now, that’s almost perfect too!


Almost Perfect - 4  growth cartoon 03.02.2016


A few points on why we’ve been revising GDP higher throughout the quarter:


  1. The government has been understating “inflation” in both GDP and PCE Consumption reports
  2. When you understate inflation, you can overstate “real” consumption and GDP growth


A real-world example of this is Retail Sales. Because it’s reported nominally, lower gas prices actually drag on reported growth while higher prices – despite acting as a tax on real consumption – actually manifest as stronger reported growth.


In addition to thinking through the timing of a better than expected Q2 GDP report: A) don’t forget that our call on the #ProfitCycle Recession remains on the other side of it and B) GDP up sequentially in Q2 means down again, sequentially, in Q3.


For Q3 2016 our current GIP model is tracking:


  1. GDP year-over-year growth of +1.9-2.1%
  2. GDP quarter-over-quarter SAAR of 0.8%


In other words, not too hot (so the Fed won’t raise rates) and not too cold (so you don’t yet have to freak out about a US #Recession and sell your charts). If the government reported real GDP using the right Deflator, we’d already be in a recession…


But, heh, it’s an election year!


Another way to look at this is that I have an almost perfect explanation for why our favorite S&P Sector setup got crushed last week (Utilities -1.0% vs. Financials +2.6%).


If our math is right, sequentially accelerating GDP growth (Q2 vs. Q1) should manifest into rising bond yields (from all-time lows) inasmuch as slowing growth (Q3 vs. Q2) should result in a reversion back to the TREND of falling yields.


CONTEXT: don’t forget that it literally took a full year for Consensus Macro to agree with us on our call for an all-time low long-term US Treasury Yields. Right on time though, with net positioning at its LONGEST position of 2016, the 10-year Yield ramped +19 basis points last week. Here’s how that positioning looks (CFTC Futures & Options data):


  1. 10YR TREASURY: net LONG position +27,841 contracts week-over-week to +114,702 contracts
  2. The 3 month and 1 year average net positions for the 10YR are net SHORT -21,166 and -6,260, respectively
  3. On a 1-year z-score that +114,702 net LONG position is a perfect +2.00x


Yep. Right on the screws, perfect. Any time a macro position is plus or minus 2.0x, our sentiment model says fade the directional move in whatever that position is, for a TRADE… then you either buy/sell more (post correction) if the TREND remains.


Nope. It’s not easy nailing every counter-TREND move (i.e. immediate-term TRADES) and staying with the intermediate-term TREND itself. Over time, it’s not only “not easy” – it’s impossible.


That said, the goal of the game is perfection. And when I can define most of my daily/weekly mistakes using economic and market data, I’m happier than I’d be if I was always wrong but rarely sure and/or honest as to why.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.31-1.61%

SPX 2106-2187


VIX 12.02-17.23
USD 95.66-96.98
Oil (WTI) 43.77-47.27

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Almost Perfect - 07.18.16 EL Chart

The Macro Show with Keith McCullough Replay | July 18, 2016

CLICK HERE to access the associated slides. 


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

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.

July 18, 2016

Want more from Daily Trading Ranges? CLICK HERE to submit up to 4 tickers you'd like to see on the list. 


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
1.61 1.31 1.60
S&P 500
2,106 2,187 2,162
Russell 2000
1,161 1,225 1,205
NASDAQ Composite
4,890 5,110 5,030
Nikkei 225 Index
14,919 16,590 16,498
German DAX Composite
9,341 10,263 10,067
Volatility Index
12.02 17.23 12.67
U.S. Dollar Index
95.66 96.98 96.56
1.09 1.12 1.11
Japanese Yen
100.94 106.70 104.91
Light Crude Oil Spot Price
43.77 47.27 46.28
Natural Gas Spot Price
2.61 2.92 2.76
Gold Spot Price
1,317 1,375 1,338
Copper Spot Price
2.08 2.28 2.23
Apple Inc.
94.62 99.47 98.78
Amazon.com Inc.
721 758 735
Netflix Inc.
93.88 100.24 98.39
Alphabet Inc.
695 746 736
J.P. Morgan Chase & Co.
58.40 65.01 64.18
Infosys Tech.
16.40 17.99 16.81

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

NFLX | Thoughts into the Print (2Q16)

Takeaway: We're bearish over 2016/2017, but our trackers suggest it's too early to short it here, and sentiment is so bad that we may go long tomorrow


  1. THESIS RECAP: We doubt NFLX will be able to sustain its model and/or the breadth of its content offering, and that's it 2016 ROW launch will put that into context over 2016/2017.  We see NFLX’s contractual obligations as a considerably understated proxy for the ongoing cost of running its business rather than a distinct set of milestones; especially since its content outlays profile more as recurring quarterly expenses rather than asset purchases.  That said, the viability of its model is dependent on its ability to realize its user TAM.  However, our analysis of the US market suggests it may only have limited near-term runway, making the int’l expansion story crucial.  NFLX has essentially accelerated the test case for whether that story will work into 2016/2017 with its ROW launch, so we suspect the story may be coming to a head this year.  If Int'l starts sputtering out, we suspect the hype around the longer-term story fizzles out, and the multiple gets sucked out of the stock.
  2. US DOES APPEAR TO BE UNDER PRESSURE: Consensus is expecting net subscriber adds to decline -41% y/y to 532K in 2Q (vs. guidance of 500K), followed by a -12% decline in 3Q.  Our trackers are suggesting that the US did decline at a decelerating rate in 2Q, but not quite at the pace implied by guidance/consensus.  The 3Q guide may be a different story though since consensus is expecting a considerable moderation in the y/y decline in US net adds, and our tracker suggests only marginal improvement in the y/y trend in 3Q vs. 2Q.  Granted it’s still early in 3Q, but given that NFLX reports so early in the quarter, we suspect mgmt would need to take a big leap of faith in order to guide consensus domestic 3Q net adds.  We’re expecting 2Q net adds to come in at roughly 650K, with the 3Q guide slightly below that (vs. consensus of 774K).
  3. BUT INT’L LOOKS MUCH BETTER: Consensus is expecting net adds to decline -11% y/y to 2.1M in 2Q (vs. guidance of 2.0M), followed by a 4% increase in 3Q.  Remember that NFLX hasn’t annualized past all of its 2015 country launches yet, so a y/y decline in 2Q seems overdone, especially considering its 2016 ROW launch.  While our trackers are pointing to decelerating 2Q growth, we’re not seeing declines outside of a few notable countries (UK, CA, AU), but that is being largely offset by elevated growth throughout Latin America.  Our trackers also suggest that those two themes are largely extending early into 3Q as well, however the decline in those countries mentioned above is moderating, while Latin American growth remains elevated, if not accelerating in certain countries on a y/y basis QTD.  Collectively, we’re expecting int’l net adds to approach 3M in 2Q, with the 3Q guide coming in around 3.5M (vs. consensus of 2.85M)
  4. 2Q16 = BULLISH SETUP? We suspect that sentiment around the US story is fairly muted at this point, so attention has shifted toward the int’l markets as the proxy for whether the longer-term NFLX story has any legs.  In turn, we suspect if int’l works then than the stock could work as well.  We know we’re not alone in expecting upside to 2Q int’l net sub adds, but the 3Q guide hasn’t gotten as much attention.  If NFLX guides to a 3-handle for 3Q int’l net sub adds, we suspect the int’l story will find rekindled optimism following the shell shock from the 2Q guide, which would likely appear as a hiccup and/or sandbag in retrospect.  Regarding the US story, it’s tougher to gauge how sentiment tracks from here since we’re expecting a miss on the 3Q net sub adds guide, which could propel the bear case around potential churn from NFLX’s planned price increases.  But we suspect the street could look past a miss on US net sub adds as long as the 3Q guide isn’t worse than the 2Q guide, especially if NFLX produces upside to its 2Q net adds metric as we expect, and more importantly shows promise around the int’l story.   


See the notes below for supporting detail around our thesis.  Let us know if you have any questions, or would like to discuss further.


Hesham Shaaban, CFA
Managing Director




NFLX | Good vs. Bad (US User Survey)
06/09/16 10:41 AM EDT
[click here


NFLX | Breaking Down Content Costs
05/26/16 08:14 AM EDT
[click here

CALL INVITE | Brexit Implications – a 360° Analysis

Hedgeye Potomac, in conjunction with the international law firm of Squire Patton Boggs, will be hosting a series of calls on Brexit and will first examine the legal and procedural implications.  


With Prime Minister Theresa May now formally installed at 10 Downing Street, we will discuss with Squire’s Brexit Task Force the events following the UK’s exit vote from the EU and what the outcome of the vote spells for the UK and the rest of the world.


The call will take place on July 22nd at 11:00AM EST with prepared remarks followed by Q&A.



  • The timing and procedure of the withdrawal, and future negotiations between the UK and the EU
  • The consequences for UK, EU and US companies arising from the end of the application of EU Freedoms, Mutual Recognition, Passports and other privileges
  • Consequences under the domestic laws of the UK and the remaining 27 Member States
  • What happens to International Agreements entered into by the EU
  • What you need to know when entering into new contracts after June 23, 2016 and what you should do with respect to existing contracts
  • Labor, Employment and Immigration
  • What alternatives are available to the UK, including WTO, EFTA, EEA, Swiss-Style, Free Trade Agreements




Squire Patton Boggs is a full service global law firm that provides insight at the point where law, business and government meet. Squire Patton Boggs consists of over 1,500 lawyers in 45 offices across 21 countries.


Squire Patton Boggs’ Brexit Task Force is a multi-disciplinary team of lawyers and policy advisers who are uniquely placed to support clients from across the globe on the effects Brexit will have on business.


The Public Policy teams, particularly in Brussels and Washington, D.C., consist of top tier lawyers with considerable public policy experience - which helps them provide seamless and coordinated discussions with the relevant authorities.





Toll Free:


UK: 0

Confirmation Number: 13641782

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