CHART OF THE DAY: Great Job, Janet

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. 


"... That’s right. One super #LateCycle number (US jobs report) will determine the direction of the economy, when they raise rates, and what they do to justify it amidst the rest of leading indicator data. It will determine our market life, while we’re still pitching.


Great job, Janet."


CHART OF THE DAY: Great Job, Janet - 08.31.16 EL Chart

The Fed's Next Pitch

“I aimed to pitch the best I possibly can, day after day, year after year.”

-Tom Seaver


The Mets have been doing their best to fight off injuries and won last night, but they certainly didn’t have “The Franchise”, Tom Seaver, on the mound. After winning Rookie of The Year in 1967, over 20 years (4 teams), Seaver had 311 wins and 3,640 strikeouts.


If you want to build a real franchise, I believe that delivering the wood, day after day, year after year, is the best way to do that.


As Seaver went on to explain in a leadership book I just finished reading called Grit, “Pitching determines what I eat, when I go to bed, what I do when I’m awake. It determines how I spend my life when I’m not pitching.” (pg 63)


The Fed's Next Pitch - Jobs cartoon 08.30.3016


Back to the Global Macro Grind


Imagine that’s how an un-elected “leader” at the Fed thought about forecasting? We might have something greater than mediocre-at-best. Instead, Yellen has allowed herself to make the next Fed policy move based on one big fat pitch.


That’s right. One super #LateCycle number (US jobs report) will determine the direction of the economy, when they raise rates, and what they do to justify it amidst the rest of leading indicator data. It will determine our market life, while we’re still pitching.


Great job, Janet.


The Fed’s “communication process” was supposed to make monetary policy “transparent and predictable” to all, but it’s turned out to be anything but that. If you want to pitch your best and nail the number on Friday, you better be great at Powerball too.


Never mind that non-farm payrolls (NFP) are:


A) Subject to some of the largest margins of error/revisions in all of US economic data, or

B) That they’ve been SLOWING, in rate of change terms, since peaking in Q1 of 2015


No, no, no. You have to Ex-all-that-out, and never call a “really good” number (JUL) or a horrendous number (MAY) “transitory” (like the Fed likes to call inflation reports they don’t like). And pretty much accept this joke/nightmare for what it has become.


Are some real-time market indicators (not to be confused with lagging late cycle labor data) concerned?


  1. SP500 is down for 6 of the last 8 trading days
  2. DOWN days have been met with accelerating Total US Equity Volume
  3. US Equity Volatility (VIX) is +20% “off the lows” and threatening to breakout
  4. Bond Yields are up less than the stocks that trade on them are (Financials)
  5. Bond Yield proxies (Utes, REITS, etc.) had a terrible month


Oh, but Keith, the market “can handle a hike… it’s just one hike… it’s only 25 basis points.” Yep. Been there, seen that pitch. That was precisely what I was being told every other meeting right before the December rate hike, then whammo! #BeanBallToTheHead


The thing about raising rates when consumer data is good (true btw; July PCE growth was in line with how good the data usually is right before the #ConsumerCycle is about to slow, faster) is that you’re now committed to hikes as consumption goes from good to bad.


Since at least 30-40% of the US economy is already in a recession, what the Fed ensures by tightening into a slow-down is that those early cycle (cyclicals) sectors don’t get out of a recession! Why else do you think capex (i.e. real world business decisions) are on hold?


Then there’s this thing Janet used to whine about to provide a reason for her dovish pivots (2 this year alone) – it’s called the Global Economy. Did China, Copper, Japan, Europe, Brexit, etc. all of a sudden show “obvious improvements in the last few months”?


  1. CHINA (and things like Copper supply vs. demand) remains on its knees, making up numbers, just to hang in
  2. JAPAN just reported a recessionary year-over-year decline in Industrial Production of -3.8% in JUL (vs. -1.5% last month)
  3. EUROPE just reported 0.2% year-over-year “inflation” (Italy reported -0.1% year-over-year deflation)


But don’t worry, the Germans (who printed -1.5% Retail Sales this morning) are coming. They’re going to tie two rocks together (Deutsche Bank and Commerzbank) and the European banking system is going to rip with negative yields.


Looks more like an RIP formation in European, Japanese, and Chinese banking to me.


So how do I take my best cut at Friday’s Fed Powerball? Unless I want to abandon the stance I took in the batter’s box in December (telling you to buy the Long Bond and short Financials on a hike), I don’t really have a pitch to swing at, do I?


No matter what happens on Friday’s open-the-envelope event, my teammates and I will continue to measure and map the rates of change in both growth and inflation data, globally, day after day, and year after year.

Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.50-1.62%

SPX 2167-2190

VIX 11.04-14.47
USD 93.91-96.25
Oil (WTI) 44.29-49.08


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Fed's Next Pitch - 08.31.16 EL Chart

The Macro Show with Keith McCullough Replay | August 31, 2016

CLICK HERE to access the associated slides.

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


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LULU | In Wholesale Denial

Takeaway: 2 consumer-direct brands announced wholesale models. LULU needs to follow suit. But it won’t. 2017 numbers too high. Short on strength.

There were two announcements in two weeks about traditional consumer direct brands that ‘caved’ and explored a wholesale model:

1) ANF entered an agreement to sell through German-based Zalando, giving it access to 18mm active customers and 15 European markets.

2) J Crew announced that it will be selling through Nordstrom starting on September 12 (this has been rumored, but is now ‘officially’ out there). 


The bottom line is that any brand that is stuck in a legacy selling mode in this day and age is toast. Brands need to strengthen, and distribution needs to evolve – especially if the underlying stock is going to trade at 30x+ earnings like LULU.


We doubt LULU will go wholesale, though it needs it desperately if it is going to fish where the fish are. It can deny it for only so long until the company’s results demand it.


We still think next year’s numbers are too high by 10-15% for LULU and would short on near-term strength in the model.


See our note from earlier today (LULU | The Rubber Meets The Road) for more detail on the quarter.

HCA: Adding HCA Holdings to Investing Ideas (SHORT SIDE)

Takeaway: We are adding HCA to the short side today.

Editor's Note: Please note that Healthcare analyst Tom Tobin will send out a full report outlining our high-conviction short thesis. In the meantime, below is a brief summary written by Hedgeye CEO Keith McCullough earlier this afternoon.


HCA: Adding HCA Holdings to Investing Ideas (SHORT SIDE) - hca


Tom Tobin recently elevated HCA to our Best Ideas Institutional Research list, on the short side. It's signaling immediate-term TRADE overbought today within our bearish intermediate-term TREND view that was summarized by Tom as follows:


"We are expecting declines in adjusted admissions the next several quarters that will drive revenue and EBITDA misses potentially into the double digits. The uncertainty in modeling a high fixed cost model such as a hospital is how punishing the incremental EBITDA declines will be as a result.  On the upside, incremental admissions can carry 30% to 60% incremental EBITDA, versus the ~20% range reported. On the downside, it's hard to cut staffing fast enough, but the incremental margin depends largely on how prepared management is for the trend. Between a decline in the multiple and lower EBITDA, we think we will see a stock price in the $50s over the next 6-12 months."


Short/Sell Green,


Cartoon of the Day: Pregnant Pause

Cartoon of the Day: Pregnant Pause - Jobs cartoon 08.30.3016


Will Friday's Jobs Report give the Fed the green light for 2016 interest rate hikes? No matter what the headline number is the year-over-year rate of change in jobs growth peaked in February 2015 and continues its past peak slide.