[UNLOCKED] Early Look: American Goldilocks

Editor's Note: Below is a complimentary Early Look written by Hedgeye CEO Keith McCullough on 8/8/16 discussing why U.S. growth will continue to slow. It's particularly prescient given the less-than-stellar August U.S. jobs report released a few weeks later. Click here to get the Early Look delivered in your inbox weekday mornings.


“If you want to be the best, you have to do things other people aren’t willing to do.”

-Michael Phelps


I don’t know about you, but I absolutely love watching the Olympics. As a boy (pre internet), I used to write down every medal for every country, comparing my totals to what I could find on TV. I got used to penciling in American Gold. #MaryLouRetton!


Now my 8 year-old son Jack keeps score for me on Google. After Michael Phelps won a record setting 19th Gold last night (I was in bed), that took the American medal count to 12 vs. China and Australia at 8 and 6, respectively.


I am Canadian. We’re in 18th place with 1 Silver and 1 Bronze. But somehow we beat USA’s Men’s Volleyball Team in straight sets yesterday. That was a golden moment for Team Canada. Yes, since we don’t win many golds, we’re in it for the moments!


[UNLOCKED] Early Look: American Goldilocks - olympic medal


Back to the Global Macro Grind


Gold itself got hammered on it, but in what seemed like a golden jobs report moment for American Goldilocks last week, both the SP500 and Nasdaq closed at all-time highs of 2182 and 5221, respectively.


I wrote those down too.


Since I’m short the Nasdaq in Real-Time Alerts right now, that sucked (for me). That said, memories can be short. If you were shorting the all-time highs in most things US Equities in July/August of last year, you were feeling golden come the February 2016 low.


What is American Goldilocks?


  1. Forget the 2-3-4%, we need GDP of 1% (but definitely not 0%)
  2. Earnings to “beat” beaten down expectations (and still be negative y/y)
  3. A Dovish Fed that pretends to be hawkish so they can go back to dovish
  4. The “but, but… the labor market is good” political narrative
  5. Stocks and Bonds near their highs for the YTD, at the same time


Yep. Don’t worry. We’re all in the 1% now.


And since our predictive tracking algo for US GDP is around 1% for Q3, why can’t this continue? Especially if the next jobs report goes from “good” to bad again, bonds (and stocks that look like bonds) are going straight back up.


From a US stock market perspective, here’s what I wrote down for last week:


  1. SP500 +0.4% last week to +6.8% YTD
  2. Nasdaq +1.1% last week to +4.3% YTD
  3. Financials (XLF) +1.6% last week to 0.8% YTD
  4. Tech (XLK) +1.3% last week to +9.9% YTD
  5. Consumer Discretionary (XLY) -0.1% last week to +4.4% YTD
  6. Utilities (XLU) -2.7% last week to +17.2% YTD


In other words, it was mostly a hopeful move higher in US interest rates that drove the Sector Style Factor performance last week. Since most macro tourists don’t do the rate of change thing, they saw a “good” jobs report as great. Bond Yields rose on that.


The US Treasury 10yr Yield was +14 basis points on the week to 1.59%. That drove the Financials out of the red, temporarily, for 2016. And it slapped a big correction on the biggest macro gold medal winners YTD (Utilities, Gold, etc.).


The other big thing that continues to manifest is a #StrongDollar move. That’s something we didn’t have wrong last week:


  1. US Dollar Index +0.7% last week and +2.6% in the last 3 months
  2. EUR/USD down -0.8% last week and -2.8% in the last 3 months
  3. British Pound -1.2% last week and -9.7% in the last 3 months


I’m using the last 3 months for our FX view as that’s when we started getting louder on both Gold and the US Dollar winning the Currency War. A big part of this view has been complimented by our Q3 Macro Theme of #EuropeImploding. While the goldilocks narrative is fun for all things American right now, both the UK and Europe are heading into a protracted recession.


I know, I know. #StrongDollar, Strong Gold (+5.2% in the last 3 months) isn’t exactly a panacea for all things “earnings”… Then again, we need to get to Q3 #EarningsSlowing before we see how sweet American Goldilocks is looking come The Fall.


With the pace of non-farm payroll growth slowing to a new cycle low of 1.72% year-over-year in JUL (vs. +2.1% JUL 2015), the probability continues to rise that jobs growth slows to 0%. And 0% isn’t 1%. That won’t even be in contention for bronze.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.45-1.60%

SPX 2148-2188

NASDAQ 5101-5228

VIX 11.29-15.16
USD 94.60-97.51
EUR/USD 1.09-1.12

Gold 1315-1385


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


[UNLOCKED] Early Look: American Goldilocks - 08.08.16 EL chart

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.




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."




Toll Free:


UK: 0

Confirmation Number: 13645449


$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 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

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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


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.


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


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.



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.



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 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 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.

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.