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$40 Oil = Less Babies Born In Houston

Takeaway: Lower oil prices means less babies being born in Texas.

 

Editor's Note: This is an excerpt from a recent research note by Hedgeye analyst Josh Steiner. Email sales@hedgeye.com for info on how you can subscribe to our institutional research.

 

$40 Oil = Less Babies Born In Houston - houst

 

Birth rates at the national level declined to -6.2% Y/Y...

...while those in Texas and Houston decelerated even more.

 

Texas saw birth rates fall in August to -8% Y/Y while Houston declined to -13.6% Y/Y. Those are the fastest rates of decline at the national, Texas and Houston levels since the Great Recession. 

 

$40 Oil = Less Babies Born In Houston - houston oil births


RTA Live | September 17, 2016


Five Reasons Why a Freeze Isn’t in the Cards

Takeaway: A freeze now would just throw a lifeline to US shale.

Editor's Note: OPEC will meet informally on September 26-28 on the sidelines of the International Energy Forum in Algeria spurring speculation that a production freeze may be under consideration to stabilize prices. The following is an excerpt from an in-depth client note sent this morning. To see the full note and all five reasons not to expect an OPEC production freeze later this month, please contact sales@hedgeye.com.

 

Five Reasons Why a Freeze Isn’t in the Cards - OPEC cartoon 08.24.2016

 

1.  For Saudi Arabia, it’s too soon for a production freeze. The market is still oversupplied with record crude inventories. Therefore, in the Saudi’s view, more cap-ex cuts and production declines are needed to bring the market into balance, otherwise the last two years of pain - costing the Saudi’s about $100 billion a year - were for naught. 

 

In 2014 when the Saudi’s declined to intervene with production cuts to limit the price slide, the market share strategy was launched. Saudi Arabia realizes they are no longer the only actors affecting oil markets, especially in light of surging US shale production. If the Saudi’s cut production to stabilize prices, they lose market share.

 

The strategy called for a period of low prices that would force production declines in high cost production (shale & off-shore mega projects). After one year, the Saudi’s, and most everyone else for that matter, were surprised at the resiliency of US shale. So the Saudi’s were determined to ride out another year of low prices to starve non-OPEC production.  What followed were cap-ex cuts two years in a row and a steady decline in US production. According to the IEA, global cap-ex cuts since 2015 are now at $330 billion, and Wood Mackenzie further estimates cap-ex cuts in global upstream of nearly $1 trillion out to 2020.  Meanwhile, US production has steadily declined about one million b/d from a high of 9.5 million b/d n April 2015.

 

But crude stocks are still at record levels – a stark reality that is putting a damper on the market-is-balancing party. The most recent EIA data for the week ending September 9  reported crude stocks were at 510.8 million barrels - up 55 million barrels this year and 100 million barrels above the five-year average.

 

The Saudi market share strategy has worked. The IEA said this week that Saudi Arabia has ousted the US as the world’s top producer. So the last thing the Saudi’s want to do now is to put the brakes on a strategy that is working for them. A production freeze that boost prices will only encourage more US production.

 

As we have seen this summer, price signals near $50 have slowed declining production. Just this week, the IEA changed its previous forecast that the market was balancing at year-end and now says non-OPEC production will rise in the first half of 2017. Rising non-OPEC production is anti-freeze to the Saudi’s. Another nail in the coffin of a production freeze later this month.

 

So a freeze now would just throw a lifeline to US shale. In our view it is still too soon for any change in OPEC production policy. Saudi Arabia is more nervous about oil at $50 than $40 because they know it keeps US shale alive. The barometer for any new change in OPEC production policy is declining US production, and Saudi Arabia wants to see more of it.


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CIRCULAR CESSPOOL OF DESPAIR

Takeaway: "Success is not linear. Process, focus and effort all are." – Me

THE BIG PICTURE

It’s conference season – especially in Retail (back to school, Holiday approaching, etc…). That’s when CEOs of the biggest and baddest (literally) US retailers strut to Downtown NYC, Boston, or Nantucket. They flash their pearly whites in front of hundreds of people, then retreat to the "secret meeting" rooms most of you are not invited to share their real, uncandid thoughts about business. This is so bad, in so many ways, and has been core to how so many money managers have generated Alpha in the past.

 

But let’s be clear about something. You should be glad not to be invited to what I think is an egregiously clubby hot mess. Why? The information is simply wrong. It's maybe 75% accurate on the upcoming quarter (TRADE duration). 50% accurate on the year ahead (TREND). And it’s at best 25% right over one to three years (TAIL). Many investors we respect are increasingly not even showing up at these things anymore. The groupthink is pervasive, and the groupthink is often wrong.

CIRCULAR CESSPOOL OF DESPAIR - 9 16 2016 chart1

 

Why, you ask, can these vaunted CEOs be wrong? The management teams give the impression that they have a crystal ball. They don’t. The same could be said about the Fed. The irony here is that the Fed is increasingly using Wall Street as a source of information. Wall Street looks to companies (and the Fed) for information. Companies look to what the government is selling this week, and what they hear from the competition (through Wall Street). It's a circular cesspool of despair.

 

The end result, I think, is the best opportunity in nearly two decades to make money. We keep hearing, “it’s such a tough environment. Hard to make money in this tape.” That is true, if you aren’t looking through the groupthink, or you don’t have a process to game it over the near term. Don’t get me wrong. I’ve had some lousy calls in 2016. But I’ve had more good ones, and will have even more by year end. #process always wins.

 

RETAIL MACRO GRIND 

Here’s one of the biggest opportunities to make money in Consumer Discretionary today. Let’s start with Retail Sales – in the context of what really matters.

 

• We have an $18 trillion economy.

• $13.8 trillion in disposable income.

• $12.7 trillion in consumption capacity (72% of GDP -- which is almost always maxed out).

• ‘Only’ $5.5 trillion of that makes its way to Retail Sales.

• Further, the GAFO category (General Merchandise, Clothing, Electronics, Home, etc…) is only $1.3 trillion.

 

It’s the GAFO category that’s represented by the sales and earnings reports of companies like Target, Home Depot, and Gap. There’s a perception that Retail Sales compares vs 2H15 are easy this year, and that’s actually true. Retail Sales growth slowed by 20-30bps in each of the last three quarters of last year. But that’s the $5.5 trillion number. The GAFO category, the one that’s representative of companies that report earnings, actually strengthened by 20-30bps over that same period. In other words, the Retail Sales comparisons for the data set that actually matters  get tougher from now through year end. Ignore the groupthink. Short the MVR.

 

But here’s the real trend that’s being obfuscated by those pearly whites – and that’s the impact e-commerce is having on the economics of the retail supply chain. “Yeah, thanks McGough, people are shifting spending online…thanks for that #newsflash.”  Got that.

 

What people don’t know is that e-commerce is accelerating off of a larger base. Consider this… online stores/marketplaces (like Amazon, Wayfair, etsy and even eBay) gained 263 basis points in share of retail sales over the past three years. That’s pretty huge given that it came off a base of only 7.6%. Keep in mind that the 180bps lost by a category like GAFO actually includes its own e-commerce sales. In other words, the share loss to online on the part of Kohl’s and Target came despite all their talk of growth opportunity in e-commerce when they are working the one-on-one circuit.

 

Here’s the kicker – of the 263 basis points in share gain for e-commerce, 177bps of it came over the past 12 months. That sentence might be worth rereading. It’s huge, and I can assure you that no self-respecting brick & mortar CEO is taking about that. Those that are probably are on their way our [case in point – HBI’s CEO has 16 days left on the job. Macy’s has 108]. Those guys know the drill.

 

But here’s what really matters. Most of these companies, HBI, TGT, KSS, LULU, FL, JWN, BBBY, BBY, TIF, JCP, WSM (I could go on) are all woefully underinvested in dot.com. Their current throughput in their D.C.s is near peak, and yet the e-commerce business simply can’t grow at a sustainable and profitable clip. That means they continue to suffer top-line misses, or meaningfully up investment spending and take earnings lower.

 

This is not to say all companies are doing it wrong. In fact, many of them, like RH, are perceived to be screwing up – and while they have had some painful self-inflicted wounds, the reality is that are leaning when others withdraw. That’s how you win a joust. Who else is doing that? WMT, NKE, and even DKS.

 

We’re about to enter a period (2017) where earnings/margin bifurcation should blow out between quality management teams and the junk. We’re modeling more companies than ever putting up 20%, 40% and even 60% earnings misses. Others will beat by the same magnitude. This is one of the biggest opportunities to make money in Retail equities since the dot.com bubble burst a decade and a half ago. Remember? 80% of the ‘new economy’ ended up being a really bad idea and subsequently crashed and burned. The other 20% blew out expectations and became the next Amazon.

 

Welcome to Retail 2017.

CIRCULAR CESSPOOL OF DESPAIR - Online Carrying Retail Sales 

 

Have a great weekend.


JT TAYLOR: ELECTION UPDATE: Call Invite with Charlie Cook of the Cook Political Report

Hedgeye Potomac is hosting a call with Charlie Cook - one of the nation’s leading authorities on American politics and U.S. elections, and founder of the Cook Political Report.

 

Cook will share his outlook on the presidential race, discuss the state of play for House and Senate elections, and give a preview of the upcoming presidential debates later this month.

 

The call will take place on Tuesday, September 20th at 2:00 PM EST with prepared remarks from Cook followed by Q&A.

 

ABOUT CHARLIE COOK

 

Charlie Cook is the Editor and Publisher of the Cook Political Report and a political analyst for National Journal magazine, where he writes a twice weekly column. Charlie is considered one of the nation’s leading authorities on American politics and U.S. elections. In 2010, Charlie was a co-recipient of the American Political Science Association's prestigious Carey McWilliams award to honor "a major journalistic contribution to our understanding of politics." In the spring semester of 2013, Charlie served as a Resident Fellow at the Institute of Politics at the Kennedy School of Government at Harvard University.

 

Charlie founded the Cook Political Report in 1984 and became a columnist for Roll Call, the newspaper of Capitol Hill, in 1986. In 1998 he moved his column to National Journal. Charlie has served as a political analyst or election night analyst for CBS, CNN and NBC News and has been a frequent political analyst for all three major broadcast news networks and has appeared on Meet the Press and This Week.

 

The New York Times has called Charlie “one of the best political handicappers in the nation" and has said the Cook Political Report is "a newsletter which both parties regard as authoritative." The late David Broder wrote in the Washington Post that Charlie was "perhaps the best nonpartisan tracker of Congressional races," while CBS News' Bob Schieffer called the Cook Political Report, "the bible of the political community."

 

CALL DETAILS

 

Toll Free:

Toll:

UK: 0

Confirmation Number: 13645449


Thank goodness for more US data slowing (Retail Sales, IP, PPI) – but is that it for the bounce?

Client Talking Points

UST 10YR

Globally, yields are backing off again this morning (10yr JGB and Bund back down to -0.05% and -0.01%, respectively as UST 10yr fails at the top-end of my 1.49-1.73% risk range after Retail Sales down to +1.9% y/y in AUG and Industrial Production slows again sequentially to -1.1% y/y i.e. double-dippin’ cyclical #recession).

VIX

With yesterday’s bad = good move out of the way for US Equity Beta, the volume (accelerating on down days, decelerating on up days) to multi-duration volatility relationship really matters now; immediate-term TRADE support (i.e. the breakout line) for front month VIX = 13.42 (TAIL risk support down at 10.74).

Reflation

Longer-term investors who understood that #Deflation was the biggest risk when cyclicals peaked in 2H14 sidestepped a lot of excuse making in 2015 – then broader US GDP slowed so fast in Q116 that the Fed had to bail out markets with a big dovish pivot to “reflate”… but now what? We’re at the slowest rate of y/y change of the year (local and global GDP), and cyclicals are breaking down again…

 

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
9/15/16 51% 5% 4% 8% 30% 2%
9/16/16 52% 3% 3% 9% 31% 2%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
9/15/16 51% 15% 12% 24% 91% 6%
9/16/16 52% 9% 9% 27% 94% 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

No update this week.

VYM

After a relative pull-back in large cap, low beta, liquid names (an exposure we’ve like for the balance of the year). We can now buy back that exposure lower. As you can see in the style factor table below, high debt, high beta, and small cap stocks in the S&P 500 have outperformed over the last month. As Keith McCullough wrote to II subs Friday:

 

“We've seen plenty a one-way chart chaser lose lots of other people's money doing it otherwise (they are chasing what’s worked recently). VYM has a 3% Yield and is signaling immediate-term TRADE oversold within our bullish intermediate-term @Hedgeye TREND view.”

TLT

No update this week.

Three for the Road

TWEET OF THE DAY

CHART OF THE DAY: Online Retail Crushing Brick & Mortar app.hedgeye.com/insights/53858… via @HedgeyeRetail @KeithMcCullough pic.twitter.com/fQxMM0o2bi

@Hedgeye

QUOTE OF THE DAY

 “Continuous effort — not strength or intelligence — is the key to unlocking our potential.”

-Liane Cardes

STAT OF THE DAY

Ryan Fitzpatrick threw for 374 yards and 1 TD last night against the Bills.


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