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CHART OF THE DAY: My Highest Conviction Macro Call

Editor's Note: Below is an excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more. 


...For 14 months, my highest conviction macro “call” has always been to fade rate hike fears, buy bonds (and stocks that look like bonds) and to stop being concerned about rates rising until the US growth data starts to undergo a phase transition into #GrowthAccelerating.


That’s why some people really don’t like me. They’re the guys who are short bonds on “valuation” and long the Financials on the same. With the 10yr US Treasury Yield having crashed -32% to 1.53% YTD (Utes and TLT +16% YTD vs. Financials up less than 3%) I don’t suck in 2016.


CHART OF THE DAY: My Highest Conviction Macro Call - EL 09.08.16 chart

Sucking #GrowthSlowing Bubbles

“No bubble is so iridescent or floats longer than that blown by the successful teacher.”

-William Osler


I’m starting to get a ton of traction on this Bad = Good #GrowthSlowing theme. That has to be because this is the easiest stock and bond market bubble story to tell, using the actual economic data.


Watch out Ed and Nancy, I’m getting some of your votes with this!


Long only’s love it. Levered long hedgies adore it. Long Bond and Gold bulls flat out want to get married to it. For now, forget what happens when bad = bad. Seriously. This is a bubble we can all risk manage, with a bullish bias, until it pops.


Back to the Global Macro Grind


Sucking #GrowthSlowing Bubbles - Bull   bear boxing cartoon 09.07.2016


I had my first “new prospective client” rejection of September yesterday. He’s a well-known perma bull (on “US Stocks” – blew up in 2008) and he said “nice call on Bonds and Gold this year, but you were really wrong in August.”


Rejection. Yes, I have dealt with it my entire life. Some people just don’t like me. I don’t blame them. I have as many faults as many humans. Sometimes I suck. And since I live in the fishbowl of my research and tweets, I get told that pretty much daily, even when I don’t suck.


If you keep score on when I’ve really sucked for the last year:


A)     It’s usually when rates are rising  

B)      But every single one of those rate “hikes” have been head-fakes


For 14 months, my highest conviction macro “call” has always been to fade rate hike fears, buy bonds (and stocks that look like bonds) and to stop being concerned about rates rising until the US growth data starts to undergo a phase transition into #GrowthAccelerating.


That’s why some people really don’t like me. They’re the guys who are short bonds on “valuation” and long the Financials on the same. With the 10yr US Treasury Yield having crashed -32% to 1.53% YTD (Utes and TLT +16% YTD vs. Financials up less than 3%) I don’t suck in 2016.


Oh, but I’m not long Facebook (FB) or Amazon (AMZN)… or the all-time high in the Nasdaq (which is up a whopping +5% YTD vs. Gold +27%). That is true. It would help if I had analysts who covered those stocks. But I sincerely congratulate whoever owns those bubble multiples too.


What is the difference between paying:


A)     All-time high multiples for #GrowthSlowing exposures like Bonds and Utility Stocks and

B)      All-time high market caps, revenue, TAM, EBITDA, EPS, etc. multiples for companies that grow like those 2 have?


If you ask a real “Growth Manager” and they’re honest about it, the top-down GDP #GrowthSlowing call has insulated the premiums paid for the organic growth stories. Being long US GDP growth sucks, big time, compared to what Bezos and Zuck have delivered.


That’s commonly called stock picking or alpha.


But there’s alpha in macro asset allocation “picking” too, isn’t there? I don’t have to go all volatility-adjusted YTD return of Long Bond (TLT) vs. US Equity Beta (SPY) on you this morning to remind you that you’d have had to take on a ton of economic risk to pick SPY over TLT.


And wasn’t there alpha in understanding the #GrowthSlowing call so well that you got to your most invested position of 2016 on that late-August stretch where the SP500 was down (in sync with bonds) for 8 of 10 trading days? Or did you sell at the August lows?


That’s right. That’s why I have a 20:1 ratio on new accounts signing up (68% y/y revenue growth in Q2) vs. those who can’t quite comprehend modern day macro. Unless they are fantastic fictional storytellers, alpha in this business generally wins the race.


In the USA, we buy/cover (stocks, commodities, bonds) on “rate hike” fears. Then we sell/short at the top-end of the #GrowthSlowing Bubble risk ranges (i.e. now in the SP500 at 2190). And we haven’t been long European or Japanese stocks all year long (bad = bad there).


That strategy has not sucked. Completely missing the causal factor behind 2016 cross-asset class returns does.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.50-1.60%

SPX 2165-2190

NASDAQ 5180-5289

VIX 11.43-14.39
EUR/USD 1.11--1.13
Oil (WTI) 42.91-48.50

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Sucking #GrowthSlowing Bubbles - EL 09.08.16 chart

The Macro Show with Keith McCullough Replay | September 8, 2016

CLICK HERE to access the associated slides.

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


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 80.46%
  • SHORT SIGNALS 78.35%

JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2


“Liberty may be endangered by the abuse of liberty,

but also by the abuse of power.”

- James Madison


MILITARY MATTERS: Donald Trump leads Hillary Clinton by 19 points amongst voters who are serving or who have served in the U.S. Military. Don’t get us wrong - it is a healthy lead - but the lack of policy details continues to surprise us and that was on full display at the last night. Trump goes out of his way to slam Clinton for her military adventurism and careless national security episodes, but never fully outlines his own path forward. After months of blasting Congress for overspending on defense, Trump is now leaning towards just that - a traditional Republican strategy of additional funding for a bigger Army and Marine Corps, missile defense systems, more ships and fighter jets. Trump may be making up ground in the polls, but his lack of a plan to combat ISIS, embrace of Russian President Vladimir Putin, and scarcity of new ideas was startling. Despite her command of national security issues Clinton delivered a lackluster defense of her tenure at the State Department and continues to be bogged down by her inability to decisively field questions about her emails at State overshadowing a rather uneven performance.   


TUG OF WAR: This year’s presidential race has been anything but conventional, we all know that, so we’re not entirely surprised to see a closer race than expected in a deep red state like TX, where the Dallas Morning News endorsed Clinton over Trump - recommending a Democrat for the first time in more than 75 years and nearly 20 elections. Along with TX, whose rapidly shifting demographics might tilt the historically red state more purple, AZ, another traditionally red state, is now a too-close-to-call battleground state. On the other side of the aisle, Trump has the newly-minted blue state of VA on his radar – he plans to spend $3.5 million in advertising in a state where the Clinton’s confidence reigns so supreme that it hasn’t run an ad in over a month - and pro-Clinton super PACs have canceled reserved time through the election.  


HILL REPUBLICANS DRIVE DEREGULATION: Republicans are planning a final push over the next few weeks to put their imprimatur on financial regulation ahead of the election. Both the Senate Banking and House Financial Services Committees will hold a series of hearings and markups, with the goal of taking legislation to the floor aimed at easing regulations in the financial services industry. Even if Democrats don’t play along, Republicans are planning to put on a show - illustrating their intent if given the reins at deregulating the nation’s financial system. The potential schedule includes a Fed hearing to offer previews of changes the party might make to the central bank, Senate Banking Committee Chairman Richard Shelby’s bill to relax rules under the jurisdiction of the SEC, and Financial Services Committee Chairman Jeb Hensarling’s extensive overhaul of Dodd-Frank.


BATTLE OF THE BUG: Congress has their hands full with FY16 expiring on September 30th, but many other issues remain atop the to-do list. For instance, funding for Zika vaccines at the NIH will halt by month’s end if funding is not approved. After failing to pass a standalone bill earlier this week, the next possible opportunity to attach Zika funding to must-pass legislation is perhaps the legislative package to fund the government. Though Republicans in both the House and Senate are weighing options to approve Zika funding independently, Republicans are reluctant to let go of their attack on Planned Parenthood in the bill, which will not provide funding for contraception.


ELECTORAL COLLEGE: Although the polls have tightened, Clinton still retains an Electoral College edge. It all comes down to 538 presidential electors to decide whether Hillary Clinton or Donald Trump take office on January 20, 2017. Cook Political Report currently predicts Clinton will obtain an overwhelming majority of the Electoral College come November 8th, winning the election by over 80 electoral votes.


CALL INVITE: TOP THREE DEFENSE POLICY ISSUES FOR NEXT PRESIDENT:  Our Senior Defense Policy Advisor LtGen Emo Gardner is holding a call with the Honorable Dr. James Miller, former Undersecretary of Defense for Policy and leading expert on defense policy. You can find details on the call here.



FL | Bearish 10-Q Takeaways

Takeaway: Several key takeaways from the FL 10-Q, almost all of which are bearish on the margin and support FL as one of our top Retail short ideas.

Here’s what we took away from the filing…


Runners Point

Management is considering an asset impairment charge for Runners Point and Side Step given the poor sales trends. Not a shocker to anyone following the story, but this definitely falls into the ‘oops’ department.


Merchandise Margin

+40bps of Gross margin was driven by 50bps of merch margin and 10bps deleverage in occupancy with the NYC store relocation. Note that merchandise margin compares are quite tough over the next 4 quarters.

FL | Bearish 10-Q Takeaways - 9 8 2016 FL chart1


Segment Margins

We already knew brick and mortar stores did well both in comp and margin, but DTC was weaker than we suspected. In actuality, Brick & Mortar margins were 12.2%, up 54bps yy. DTC was 10.8%, that’s down 328bps yy. While still positive on a 2-year basis, the 150bps deficit to in-store margins flies in the face of management’s assertion that e-commerce is not margin dilutive.


Cash from Ops / Payables

Payables accounted for 77% of the $157mm CFFO this Q… higher than normal as the last two years saw 46% and 49%. It’s possible that we’re seeing better terms from vendors on product given the TSA bankruptcy and brands looking to fill the distribution void with product that’s already been ordered. But then again, 73% of sales bearing a Swoosh, and we don’t think Nike budged with its receivables. That suggests to us that perhaps Adidas, UnderArmour and Puma have gotten more aggressive. 

NKE | Why Nike iWatch is Meaningless. Our $0.02

Takeaway: A splashy press event, but at best 0.2% EPS boost. Lacks any and all investment significance to a story that we otherwise like very much.

Well, it took longer than we otherwise expected, but Nike is finally back in the watch/’timing’ business. Anyone watching the Apple extravaganza saw the co-branded Nike iWatch. We’d like to say that this matters as it relates to the investment thesis around Nike (which is still a bullish one), but it really does not.


This event should come as no surprise since Nike closed down its Nike Fuelband business over 2-years ago. Tim Cooke is on the Board of Nike, and with the advent of the iWatch – Nike would have been foolish to push forward and launch an inferior product at an identical ($400) price point. After all, Nike is a soft goods company, and Apple is a hardware/ecosystem company. No comparison as it relates to the ability to crank out a good watch (even though the last thing it’s used for is telling time).


And we should note our opinion that Nike’s ‘Nike Fuel’ idea – which was the core of its hardware business and online community -- is and was a horrible one in the context of the wearable market. After all, what is ‘Fuel’? It is a ridiculous, arbitrary statistic that measures steps, and maybe heartrate, without any reliable world-class geosynchenous (GPS) component.  


But the biggest flaw we find in Nike’s ‘Fuel’ concept is the lack of any real ‘fitness management’ program. Nike is focused on community, which is great from a marketing perspective. It is great at driving interest in the gadgetry component of the product. It’s also focused on the commercial opportunity to drive the footwear hook-up which is the biggest piece the puzzle as it supports better pricing on premium Nike+ enabled product.


But it is lousy at providing a real dashboard for consumers to easily and seamlessly track everything from calories in, calories out, water, sleep, mood, heart-rate, activity monitor. Check out the FitBit dashboard and you’ll see why it has the dominant share in the space. With the lower priced FitBit Blaze (about half the price of the Nike/Apple iWatch) you can do all these things – and not look completely uncool while doing so. We’d argue in certain respects that FitBit is to the wearable market what Nike is to shoes.


But personal preference for fitness gadgets aside, these numbers are small. Nike only had about $33mm in sales associated with its FuelBand business, and maybe $25-$50mm in added footwear/apparel sales linked to the product. Apple sold about 12-13mm iWatches last year. Let’s say Nike helps grow that by 2-3%. We’re talking around 350-400k watches at a retail price point of $400. That’s $150mm. But it’s likely an even revenue split with Apple – so let’s say $75mm to Nike. And it’s a product that comes with either low margin, or low asset turns – one or the other. Let’s say this comes in at an incremental margin of 20%, which seems fair given what we know. That’s about $15mm pre-tax, or about half a penny per share, or about 0.2% earnings accretion.


Again, a nice splashy press event. But this lacks any and all investment significance to a story that we otherwise like very much.



  • Costs $369-$399 (US) from apple.com, nike.com, Apple retail stores, select Nike retail stores
  • Will be available to order on Apple site on Sept-9, unclear when available on Nike site
  • Pairs exclusive Nike Sport Bands with Apple Watch Series 2
  • Includes exclusive Siri commands and iconic Nike watch faces along with deep integration with the new Nike+ Run Club app

NKE | Why Nike iWatch is Meaningless. Our $0.02 - 9 7 2016 NKE chart1

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