Whoa, An Epic Paradigm Shift Is Happening In Retail

We’ve been talking a lot recently about the acceleration in retail bankruptcies  – to the tune of 2 per week. We saw four retailers of size file Ch.11 in the last 7 days alone.


Take a close look at the chart below. It’s not what you’d expect to see.


Whoa, An Epic Paradigm Shift Is Happening In Retail - z bri


Retail bankruptcies accelerated during the 2008-2009 financial crisis, as economic growth cratered. No real surprise—it’s what you’d presume would occur.


Fast forward to today


U.S. growth is accelerating, and yet .. retail bankruptcies are spiking to the highest levels we have ever seen. Not supposed to happen right?


My analyst team has been doing a lot of research into what’s going on. We have an idea on what’s driving this counterintuitive development.


We will explore this as one of our ‘game-changing’ themes in our “Retail 5.0” deck later this month. This is an important call. If you’re an institutional investor, email for more info and access.


Short Deere: 'An Unusually Favorable Opportunity' - Conference Call

Short Deere: 'An Unusually Favorable Opportunity' - Conference Call - deere machinery


Our Industrials Team – led by Jay Van Sciver – is hosting an institutional call on our Deere (DE) short thesis. 


With FY17 guidance likely to be updated in the May earnings report amid deteriorating credit, rising input costs, and ongoing unit declines, we believe investors should position accordingly.  DE shares have risen sharply providing an unusually favorable opportunity.


The call will take place on Wednesday March 15th at 11am ET. Email for more information.


Short Deere: 'An Unusually Favorable Opportunity' - Conference Call - de image for call 2



Management Comments Don’t Match Data, As We See It:  Ongoing deterioration in credit metrics and year-on-year increases in the lease portfolio portend pressure on DE Financial.  A proper historical context implies that provisions will have to move significantly higher.


Materials Costs To Move Higher:  While key suppliers may have limited the hit to DE from higher steel prices, we expect equipment margins to be compressed by rising input costs in FY17.  Current estimates continue to incorporate aggressive margin assumptions.


Valued Incorrectly:  We see investors applying a trough multiple to financial services earnings, which we believe is best valued on a multiple of book.  We also see a trough multiple as inappropriate, as prior equipment cycles have lasted as long as many investors’ careers.


Not Trough:  We do not believe DE results have ‘troughed’, with unit sales declines for the Ag Equipment industry ongoing.  Viewed on a longer-term basis, the risk to units becomes clear, as referenced previous ‘troughs’ were comparatively minor relative to the current downcycle.


Short Deere: 'An Unusually Favorable Opportunity' - Conference Call - de image for call


Ping for more information. Please note if you are not a current subscriber to our Industrials research there will be a fee associated with this call.  


Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing.


The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.

Corning Best Idea Call: Wall Street Is Ambivalent... Time To Get Long

Corning Best Idea Call: Wall Street Is Ambivalent... Time To Get Long - phones gorilla glass


Our Technology Team – led by Ami Joseph – will be hosting a deep dive institutional call on our long Corning (GLW) call.


The call will take place on Wednesday March 15, at 1pm ET


Email for more information.


  1. The Unknowns here are around TV Units. We see the setup for a classic replacement cycle bubbling up, and in this deck we walk you through the math and the catalysts as well. If we are right about the direction of TV units, Corning revenue gets a boost from units + faster shift to larger screen TV + tight glass market yielding to better pricing. 2017 is the first year in a while not facing a down year in Display will all this translate to 2018 GM.
  2. There are several Known positives, not reflected. Gorilla Glass is getting a large content shift in the next generation iPhone. Typically, Apple leads the market and others follow, especially given the underlying technology reasons that Apple is shifting to a glass back. When we waterfall that content growth across high end smartphones, and also factor growing penetration for GG3 in the mid-tier, the effect is a ~2x on Gorilla Glass revenue by 2019. In Optical, carrier networks are investing in fiber, and in the US Corning has a strong market and technology lead. We show a # of positive vectors in this area, notwithstanding some recent lumpiness in the optical supply chain. Finally, the environmental business has a 3-4x content growth opportunity in the years ahead. All of this translates, to us, as better than wimpy 4%, 1%, and 4% growth modeled by the Street in 2017-2019.
  3. A Forgotten LONG whose time has come. The Street is more or less ambivalent about Corning's stock, featuring 8 buys, 10 holds, 1 sell, and more than 3 days to cover on the short side. Valuation is choppy due to the cyclicality of the industry, but if you believe in the dream, namely - that the company has multiple drivers that will lift revenue estimates in the coming 8-9 quarters, then you will be rewarded with enormous FCF, for a company returning 8% of the cap in a buyback and a 2%-plus div yield, AND, has bought back 24% of the share count in the last 24 months. And, let's be honest, in this time we all need cyclical longs we can live with, and this one is for living!!


Long awaited upside cometh!


Corning Best Idea Call: Wall Street Is Ambivalent... Time To Get Long - corning hedgeye image


Ping for more information. Please note if you are not a current subscriber to our Technology research there will be a fee associated with this call.  


Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing.


The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.

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A New Monetary Policy Approach: Economic Reality-Based Policies (ERMP)

Takeaway: My proposal would significantly reduce the likelihood that the Fed would make dangerous, far-reaching mistakes.

This guest commentary was written by Dr. Daniel Thornton of D.L. Thornton Economics

A New Monetary Policy Approach: Economic Reality-Based Policies (ERMP) - dollar cartoon 07.02.2014


The extraordinary monetary policy actions in the wake of the financial crisis exemplify Milton Friedman’s warning that “Any system which gives so much power and so much discretion to a few men, that mistakes — excusable or not — can have such far reaching effects, is a bad system.”


Consistent with Friedman’s warning, the Bernanke Fed has engaged in policies that have produced a number of dangerous distortions that threaten economic stability. This essay introduces a new approach to monetary policy that, if adopted, would significantly reduce the likelihood that the Fed would engage in such actions in the future. I call my approach economic reality-based monetary policy (ERMP). I explain what ERMP is and why it would significantly reduce the likelihood that the Fed would make mistakes that could have far-reaching effects.


A New Monetary Policy Approach: Economic Reality-Based Policies (ERMP) - fed callout thornton


ERMP requires the Fed to specify a set of fundamental economic realities and commit to conduct monetary policy within the limits implied by these realities. To see how ERMP works and how it would limit the Fed’s actions, assume the Fed committed to conducting monetary policy in accordance with the following economic realities:


  • Reality #1: Credit is most efficiently and effectively allocated by the market and, hence, by economic fundamentals.
  • Reality #2: Interest rates determine the allocation of credit. Hence, interest rates are best determined by the market.


Actions that the FOMC takes to affect interest rates necessarily distort interest rates and the allocation of credit and economic resources. The purpose of the Fed’s interest rate policy is to distort interest rates and the allocation of credit.


The problem arises when the Fed pursues its policy too aggressively and far too long. Together these realities imply that policy actions taken to affect interest rates should be limited in both magnitude and duration.


For example, if the FOMC had agreed to conduct monetary policy consistent with these realities, it may not have reduced its funds rate target to 1 percent in June 2003. Even if it did, it would have been reluctant to keep it there for a year. It might not have kept the target at 3 percent from September 1992 to February 1994, either.


The FOMC would have been more reluctant to engage in quantitative easing for the expressed purpose of allocating credit to specific markets. It almost certainly wouldn’t have kept its funds rate target near zero for six and a half years after the recession ended. Nor would it have engaged in its forward guidance policy, i.e., committed to keep interest rates low for an extended period, for the purpose of reducing long-term yields.

A Better Way: What Would "Economic Reality-Based Monetary Policy" Do?


ERMP wouldn’t prevent the FOMC from temporarily engaging in aggressive credit allocation in times of crises. However, the Fed would have to provide a strong case that financial markets are significantly impaired. But it almost certainly would prevent the Fed from engaging in such actions years after markets had stabilized.


ERMP preserves Fed independence while simultaneously enhancing its accountability. Because policymakers’ actions are constrained by economics, there is less need for direct governmental oversight. For example, there would be no reason for Congress to enact the Fed Oversight Reform and Modernization Act (H.R. 3189).


ERMP would make the Fed more accountable because it has committed to conduct policy in a matter that is consistent with these realities. If the FOMC were to take actions that appear to be inconsistent with the stated economic realities, it would have to explain its actions to Congress and to the public. Oversight and accountability are achieved without creating a governmental bureaucracy.


ERMP also has the advantage that it neither requires nor restricts how the FOMC implements monetary policy. For example, many prominent economists, including several Nobel Prize winners, have endorsed Section 2 of H.R. 3189, that requires the FOMC to implement policy using a specific FOMC-determined policy rule.


Under ERMP the FOMC can adopt a specific policy rule or continue to rely on meeting-to-meeting discretion. It can target inflation, the price level, or nominal GDP. ERMP constrains how aggressively the policy can be pursued. It does not constrain how policy is conducted.

Bottom Line 

I strongly recommend the FOMC to adopt ERMP. If it doesn’t, legislation should be enacted to require it. Such legislation could list the set of economic realities or it could require the FOMC to establish the list. I believe the list should include the two I mentioned — I believe that nearly all economists and financial market analysts would endorse these realities. However, it’s likely that agreement could be reached on a somewhat longer list.


My proposal will produce better monetary policy, and better monetary policy outcomes, because it constrains policymakers’ actions to be consistent with economic realities. ERMP will make monetary policy more predictable, the Fed more accountable, and protect the Fed’s independence—it will fix a bad system.


This is a Hedgeye Guest Contributor piece written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.

What the Media Missed: Inside the (Strong) February Jobs Report

What the Media Missed: Inside the (Strong) February Jobs Report - come in hiring






These are just a few of the words the mainstream media used to describe last Friday's jobs report. They're finally right but for all the wrong reasons.


No matter. Ignore this noise and know that jobs growth is accelerating. Understand that yet more positive economic data is supportive for the broader stock market, even if the S&P 500 is within spitting distance of all-time highs and up +5.9% this year.


It can and probably will go higher from here...

Meanwhile, back at the White House...

#JobsReport #Trump #NFP


It didn't take long for sparks to fly. President Trump’s economic team offered their own thoughts on Friday's jobs report. National Economic Council director, Gary Cohn, called nonfarm paroll data “a perfect number." At 235,000 new jobs for the month of February, it's “right exactly where it needed to be,” Cohn said.


Nothing controversial there. But the week seemingly wouldn't be complete without a political monkeywrench from the White House. The Trump administration just couldn't help themselves. On Sunday, the political press had a field day after Trump's budget director claimed, while Friday's jobs data was fine, the Obama administration had "manipulated" labor market data for years.

Setting aside the partisan bickering, here are the facts...

Jobs growth is finally back. Sure, the February jobs report showed 235,000. Yes, that number beat Wall Street's expectations for 200,000 jobs added for the month.


But the media and Wall Street also missed the slowdown in U.S. growth last year – falling five straight quarters from March 2015 (3.3%) to June 2016 (1.3%) – precisely because they didn't dig a tiny bit deeper, thereby missing the bigger picture. 


In January, the labor market snapped a 23-month streak of declining jobs growth (year-over-year), accelerating to 1.6% from 1.5%. That trend held for the month of February, coming in at 1.6% year-over-year jobs growth. As you can see in the Chart of the Day below, wage growth saw modest improvements too.


From here, we're betting jobs growth improves through May 2017 since we'll be lapping last year's truly poor jobs data.


What the Media Missed: Inside the (Strong) February Jobs Report - 03.13.17 EL Chart

What's An Investor to Do?

As we've said many times before, partisan politics has no business dictating your portfolio positioning. Love him or hate him, U.S. economic data has turned positive under the Trump administration. Don't "manipulate" this truth to fit your own political leanings, know that this economic reality will remain positive for the U.S. stock market.

Pippa Malmgren Unplugged: Investing In An Age of Global Angst


It is an age of heightened global angst and uncertainty, an era of discontent. An age which gives birth to brazen, Never-In-a-Million-Years political outsiders like Donald Trump. And Brexit, Britain’s equally shocking decision to exit the EU.


Political “elites” might argue recent voting decisions of their electorate are chaotic, or mad. Whatever you call it, it’s the reality we must grapple with today, says Pippa Malmgren, founder of economic consultancy DRPM Group and author of the best-selling book Signals.”


“The philosophical question of our time is are you a globalist or are you a patriot,” she says. “And can you be a global patriot or a patriotic globalist?”


Once you accept that the global zeitgeist is divided along these two competing interests, Malmgren says, the world falls more neatly into place.


Malmgren knows a thing or two about simplifying the complex. She’s had a storied career on Wall Street and in Washington, having served as special assistant to President George W. Bush for economic policy on the National Economic Council. She also has considerable experience interpreting financial markets, serving as Deputy Head of Global Strategy at UBS and Chief Currency Strategist for Bankers Trust.


“What I find is that people in financial markets love to go around blind in one eye. They only look at things through a mathematical or data lens,” Malmgren says in the Real Conversations interview above with Hedgeye CEO Keith McCullough. These people miss a lot of things. On Brexit or Trump’s victory, Malmgren had the foresight to see both coming long before these events shocked markets.


“What’s fascinating is that you see this populist uprising everywhere in the world  and everywhere people think it’s a local issue,” Malmgren says.


The underlying driver is really simple. The debt burden is so big it can’t be paid down so that causes lack of jobs, slow economic growth and kills your hope for the future, she says.


Meanwhile, the only solution policymakers have come up with is to inflate away that debt by devaluing the currency. This hurts domestic purchasing power as citizens see their paychecks worth less and less.


“The question then becomes how come my wealth is being distributed to some other guy and not me?” Malmgren says.


That leads to a final question that should frighten any career politician desperately clinging onto their post, “Why are you in charge?”


If you follow this line of logic the rise of Trump in the U.S. or Le Pen and Macron in France isn’t a big leap. Malmgren has some intriguing ideas on Trump:


“I’ve been describing Trump as the “Uber of politics.” It’s important to think this way because he is literally disrupting, displacing, disintermediating the traditional power structures. That includes the media. It also includes the fundraisers, because there’s no need for them if you can win the presidency without them. It’s the technocracy, where I come from, and where people are normally hired into the senior jobs in bureaucracy and expect to get big titles. They’ve all been told we can run the government without you.”


Populist tides are clearly rising in Europe too. Malmgren lives with her family in London. She watched as the Brexit vote unfolded in real-time. As freaked-out investors watched at home, Malmgren watched with curiosity as Italian banks got whacked in early morning trading as British voters repudiated their EU membership. The market was sending a clear message to politicians across the continent. Get your act together or more countries could leave the Eurozone.


The reaction also served as a self-perpetuating feedback loop. With share prices tumbling, the pressure was on Italian banks to come up with more capital. The government stepped in:


“Italian politicians said we’ve got to have a bailout because this is such a structurally important institution. And the public heard this and said ‘We’re going to find $5 billion to bail out a bank that’s lost 98% of its share price but we can’t find five euros to deal with the 39% unemployment rate of 25 year olds and younger.’”


Malmgren thinks growing public discontent is stressing the social contract between governments and the people, which brings us back to the question of our times: are you a globalist or are you a patriot?


“It’s a fair fight at this point and the market has to decide the balance of global versus domestic issues. The solution I argue in my book is the only one I think works. It’s not turning to Washington, it’s not money printing, it’s not lowering interest rates. It’s that every one of us has to actually go and build a smarter global economy ourselves.”


Each of us has to do it, she says. The debt-laden state isn’t going to be there to look after you.


May we live in interesting times.

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