% Movers at 4:35 p.m.

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Breadth

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Let's see if the rotation out of equities and into bonds can off set quarter-end "markups."

Food for thought

Masterhedge:

$RH - McGough

On the stock's rally after these abysmal numbers... It kinda feels like what we'll call a 'Floor & Decor (FND – Short) kind of reaction', in that as numbers come down, the stock is going up – to a price almost spot-on with where RH repo'd 17% of the float last year. It's basically mirroring Friedman's tone on the (2-hour) call, which was for a material acceleration in revenue as the year progresses.

This is an extremely notable change from his tone on the 3Q call, which was a certifiable train wreck from a business tone perspective. The market is putting a full-cycle multiple (30x) on trough earnings. That's very un-retail-like, as we usually see trough multiples on trough earnings. But like FND, this is the kind of name most people want to own over a multi-year time period and are looking through the bottom. We completely agree with that, for RH at least.

What we like here is that this company is investing during a downcycle. It never fails...the market overly punishes companies that invest in their businesses – especially when the category is out of favor. It also almost always underestimates the torque in the model as investments roll off, the cycle turns, and the company gains share at an outsized rate. That's what we think is in the cards for RH.

With the multiple where it is today, you need to get paid on upwards earnings revisions. And we think you will. We're well above the Street in Revenue and Earnings across durations, and build to over $40 in TAIL EPS power as outlined below. We think at a minimum, that gets a 25x multiple, and we wouldn't argue with 30x. That's a 3-bagger from the current price. When we issued caution around this quarter, we said that we'd be just as comfortable adding to positions with the stock at $375 as with the stock at $300. 

That's still the case. The reality is that Friedman just set the bar such that the trough in earnings is a 1Q event, and that we build sequentially from there. That's what a $325 stock believes. Fundamentally, we believe it too. We're modeling it. We just think the volume acceleration still might need help by giving back some of the 40% price increase RH took during the pandemic. 

Bottom line is that RH is still a Best Idea Long. We think the sell side will be upgrading this stock at $500. We've been saying that all along, and are sticking to it. If you've got duration, we'd be buyers here. But we wouldn't be surprised to see the name trade lower on price actions. If we're wrong, then great. We'll buy more/reload closer to $400, which is when we're likely to get signal confirmation (referring to Hedgeye Macro's Signal Strength) in being Long. There's a LOT more upside from there if our fundamental call is right, which we obviously think is the case.

* Rate cuts and markets...

On today's Market Call.

Guy and Dan are talking about how markets have historically reacted to interest rate cuts.

Here is my take:

Fed Rate Cuts Are Typically Bearish: It is clear that the Fed's tightening cycle is over. But, as seen in the following chart, it is important to recognize that over time policy loosening and interest rate cuts are typically equity market unfriendly:

I added to my DJT short this morning - moving from very small to small-sized.

Tim on Cannabis:

Randy

Tim Seymour Sees High Times Ahead For Cannabis Stocks

• The slumbering cannabis sector has reawakened following Germany's partial legalization and possible rescheduling of marijuana in the United States. Tim Seymour, founder and CIO of Seymour Asset Management discussed his views on these "exciting times” in cannabis.
• The regulatory changes announced by Germany last week were a significant catalyst for the recent rally in weed stocks. Germany's new laws will take effect on April 1 and remove cannabis from the country's Narcotics Act, where it was listed as a banned substance subject to specific criminal provisions.
• "Germany has quietly moved ahead of the U.S. They may totally, federally legalize the adult market before we do, as well," Seymour said on the show.
• The portfolio manager pointed to Tilray Brands, Inc.(TLRY)as the major distributor in Europe best-positioned to benefit from the new German regulations. The company made key investments in Germany years ago, which may generate returns under the new cannabis regulatory system, according to Seymour.
• Cannabis investors view Germany's progressive legal changes as a step in the right direction for the industry, which is poised to benefit from increased sales and revenue growth. Many are hopeful the U.S. will take a similar path to federal rescheduling and possible decriminalization.
• Seymour highlighted the increasing number of states that have legalized both medical and adult-use marijuana. He sees rescheduling in the U.S. as inevitable, and noted that the Biden Administration is running out of time before the next election.
• "There's no question about what's happening, no question about where it's eventually going to go," Seymour said.
• Vice President Kamala Harris recently pressured the Drug Enforcement Agency (DEA) to quickly reschedule marijuana during a roundtable discussion at the White House earlier this month.
• "Marijuana is considered as dangerous as heroin and more dangerous than fentanyl which is absurd, not to mention patently unfair," Harris said during the roundtable conversation.
• Seymour expects growth in the cannabis industry to be magnified by major improvements in efficiency and a steady stream of catalysts ahead.
• "Investors that are here now are certainly going to be rewarded," Seymour said. 

From Danielle DiMartino Booth:

The short opens in the town of Canasta Flats in 1889, panning past the Last Chance Saloon and the Next to the Last Chance Saloon and into the Fat Chance Saloon, where the patrons hang out. A mustached cowboy tells his friend that he hears Yosemite Sam is in town, to which his friend makes up an excuse about leaving a cake in the oven and flees.

A card-playing cowboy tells his friend that Yosemite Sam is swinging his fastest gun of the West, to which Injun Joe tells them that that’s because Yosemite Sam has never met him. When Yosemite Sam is spotted approaching the saloon, Injun Joe goes out to have a showdown with him, only to be instantly shot off-screen (with a customer gulping down the beer Injun Joe handed him to hold).

As he did in many a Warner Brothers cartoon, famed American voice actor Mel Blanc played all the parts in “Wild and Woolly Hare.” In 1959, it was this scene that made the first reference to the phrase ‘Hold my beer.’ Sorry, Jeff Foxworthy.

A cursory glance at yesterday’s nearly empty U.S. economic calendar in this holiday-shortened trading week might have escaped notice. But we’re not just any economists here at QI. Revisions to Wholesale Sales and Inventories were eye-openers, the first of which spoke to…BEER. 

It would seem wholesalers of beer and other alcoholic beverages are the ones left holding the proverbial beer. Alcoholic Beverages’ Wholesale Inventory-to-Sales (I-S) ratio rose to 1.63 in January 2024, nearly matching the record high 1.66 readings hit in April and May of 2023 (teal line). 

Weaker upstream demand is driving the rise as Wholesale Sales fell 5.4% in the two months ended January. That’s a Top 10 Worst Performance since the series’ 1992 inception. Downstream demand resembles a patient who’s died on the table as real consumer spending on alcoholic beverages has flatlined since December 2022. The 2023 holiday bump swiftly slipped back to zero in January (fuchsia line).

For another channel check, a visit to the Beer Institute is on tap. Founded in 1862, this national trade association represents large and small American brewers. Per the Institute, U.S. beer consumption – domestic plus Mexican imports – has fallen from 199,186,660 barrels in 2021 to 194,223,070 barrels in 2022 and 184,230,589 barrels in 2023. The 5% volume decline last year followed a 2% drop the previous calendar year prompted a beer-consuming-on-the-beach (Sands Light) and vacationing (almost) Danielle to postulate: “Is there such a thing as “post-pandemic suds scarring?”

From noncyclicals to cyclicals, wholesalers of lumber and other construction materials are flying a HIGH HAZARD flag on the beach. Lumber & Construction Materials’ I-S ratio vaulted from 1.66 in December to a record high 1.82 in January, marking the largest monthly advance outside of the pandemic (yellow line). 

The demand-supply imbalance deteriorated on both sides of the ledger. In one of the worst combinations on record, sales fell 7.4% month-over-month, while inventories rose 1.5% versus last month. This is the opposite of a planned stockpiling.

The upstream bad news is happening at a time when completed speculative inventory of new single-family homes rose to a seasonally adjusted level of 85,000 in February, reaching the highest level since 2010 (purple line). QI friends and housing gurus at Zelman & Associates added additional color, noting that “the number of specs in the pipeline to be started soon increased 4% sequentially to 105,000, just fractionally below the all-time peak of 106,000 in June 2006 and up 19% year over year.”

Sticking with the acutely interest-rate sensitive, while Motor Vehicle & Parts Wholesalers saw their I-S ratio dip in January to 1.77 from December’s post-COVID peak of 1.81, save for the spike north of 2 during the Great Recession, today’s level remains near the top last few decades’ range (orange line). 

Downstream auto buying plans from Tuesday’s March Consumer Confidence report indicate the climb in the wholesale auto I-S ratio ain’t over (a technical term). For context, readings south of 3% are far left tail outcomes, which highlights how low the reading of 2.6% of consumers planning to buy a new car or truck in the next six months is (green line).

We’re all aware of how supply chain disruptions targeted the auto space. As impediments have abated and vehicles delivered to dealer lots, days’ supply has consistently risen. The only reason sales haven’t buckled is automakers’ radical approach to move product. 

To that end, Cox Automotive threw down the gauntlet, stating that the auto market is shifting from a sellers’ to a buyers’ market with dealers getting hit with a double whammy of tighter margins and higher costs. Chief Economist Jonathan Smoke explained: “After some highly profitable years for many dealers, 2024 will be a tough comparison…Dealers are clearly indicating the U.S. auto market is very different than it was just two years ago.”

Hold my beer. To drum up business, low financing rates under 3% APR (annual percentage rate, light blue line) have been combined with radically rising incentives. After hitting a low of $877 per vehicle in August 2022, discounts poked above $1,000 by the end of that year. But it wasn’t until November 2023 that incentives broke through $2,000 on their way to $2,675 this month. The 55% increase in the last five months speaks volumes about the vulnerability of spending against a backdrop of rising joblessness.

I just made the following adds:

* Long: PGC at $23.95.

* Short: NVDA $907.51

No trades today in the regular trading session.

But the day is young!

11:15 AM: Fed Bank of San Francisco President Daly (Voter) gives welcome remarks before the Federal Reserve Bank of San Francisco Macroeconomics and Monetary Policy Conference (No Q&A. No group media availability.

11:30 AM: Fed Chair Powell participates in moderated discussion before the Federal Reserve Bank of San Francisco Macroeconomics and Monetary Policy Conference (No text. Q&A from moderator. 

Breadth

Nasdaq 100 Heat Map

S&P 500 Index

From Peter:

You really have something to say about what you want the cadence of rate cuts to be as the whole world watches when you title your speech "There's Still No Rush." This from Fed's Waller, the same guy who gave a speech in November 2023 titled "Something Appears to Be Giving" and where he said they could be cutting rates within 3-5 months. "It has nothing to do with trying to save the economy. It is consistent with every policy rule. There is no reason to say we will keep it really high." 

That further stoked the asset price rally into year end that continues to this day and that is completely unbothered by what he said last night, bizarrely I believe.

I say bizarrely because higher for longer interest rates is a real thing and should not be ignored, but it is. Waller said last night after mentioning the progress they've made towards their inflation goal and with the labor market now in "better balance", he said "But the data we have received so far this year has made me uncertain about the speed of continued progress." 

He still wants to cut interest rates this year upon further progress, "But until that progress materializes, I am not ready to take that step" and because he said the US economy is strong and the labor market is resilient, "the risk of waiting a little longer to ease policy is small and significantly lower than acting too soon and possibly squandering our progress on inflation."

In other words, a weaker economy is more the trigger for sooner rather than later rate cuts and less so a further slowing in inflation. To this, at the end of his speech he said "in the absence of an unexpected and material deterioration in the economy, I am going to need to see at least a couple months of better inflation data before I have enough confidence that beginning to cut rates will keep the economy on a path to 2% inflation."

He also was rather skeptical of the recent rebound in productivity as it comes after a string of weakness where over the past few years overall productivity is only averaging about 1.25% per annum, rather lackluster. He laid out his case.

So two things here, Waller joins voting member Bostic in wanting to wait and only likely expecting 1-2 cuts this year and Powell and Michelle Bowman likely are in this corner I'd say. The other, can we finally throw out the dot plot in the garbage as its relevancy is really only one day? I say this because it is only a snapshot of what members think on the day of the meeting and those thoughts can change by the next day. And, there is no differentiation between voters and non-voters.

Bottom line to what Waller said last night for purposes of policy, "In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data." While he said that could change, "Based on what we know now, there is no urgency in taking that step."

The 2 yr yield jumped 5.4 bps in response after the 2 bp drop yesterday. For the week it's up 3 bps. The 10 yr yield got as low as 4.18% yesterday and is back to 4.21-.22% as of this writing. Notwithstanding the current expression by Waller and Bostic that maybe we'll get one or at most 2 cuts this year (Bostic wants just one), the fed funds futures market is still currently pricing in 70 bps of cuts (100% of two and 80% chance of a third) this year.

Let's go over some important earnings releases starting with today's MSC Industrial Direct who is a major distributor of a variety of products to the manufacturing/industrial world.

"As we exit the first half of our fiscal year, our performance has been mixed." They are "pleased with how we are managing the business in a soft environment...our core customer growth rate has not yet improved in the face of a sluggish macro environment."

Further, "A slow start to the 2nd quarter and continued softness in heavy manufacturing verticals resulted in our average daily sales declining 2.7% y/o/y."

_____

Let's turn to Gary Friedman, the CEO of RH:

After mentioning that in 2023 they "faced the most challenging housing market in three decades", "We have positioned the RH brand to gain significant market share in 2024 and beyond."

"While we expect business conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our demand trends to accelerate throughout 2024."

And always enlightening he is, "Adventures are about leading people somewhere they've never been, doing things they've never done, and in search of better ways and brighter days. So we've been through countless adventures. We've looked at all the data that's available and created new data. So I personally feel great. I think the team feels great. And I think if you came here and you spoke to the people really doing the work, I think they'd all feel great. Our competition might not feel great over the next couple of years, but that's really not our problem."

He did talk about the sclerosis in the transaction market of existing homes because so many have low rate mortgages:

"My sense is that you've got a lot of people just holding on as long as they can, a lot of people have to move, they've got a new job somewhere, and some people have grown their families, had more children. They've gotten married, they need to buy a house. And so there's pent up demand, and I think that's a good thing when you look at it. But I still think you've got to have movement, we've got to have real movement in the interest rate market and we have to have some movement in the pricing market, and when those things start to converge, I think we're going to see a snapback, and I think no one's going to be better positioned for that snapback than us."

The baby boomers, in part, continue to drive the tremendous rebound in the cruising business. From Carnival:

"We outperformed our first quarter guidance on every measure." Yields reached a record and "customer deposits beat last year's record by another $1.3 billion."

"Prices ran up double digits on limited inventory left for Q2. They ran considerably higher for our peak summer period, Q3. And they were also considerably higher for Q4 while still building on our occupancy advantage."

Cintas, the uniform rental provider to a variety of industries, had a good quarter with nice margin expansion. They are gaining market share and pricing higher, thought they said on pricing it's moving back to historical norms.

They said "We haven't really seen much of a change in sales cycle...Momentum continues to be good. Outsourcing still resonates."

On the macro, "We haven't seen much change in our customer behavior. Certainly there's always some puts and takes...our employers are under pressure to figure out ways to automate things because of wage inflation, that has occurred and will continue to occur. It's occurred for many, many years. Now there is also the infrastructure bills that are out there, the onshoring...But generally, we like the spot we're in and we think the macro environment has been reasonably stable."

Turning to sentiment, Investors Intelligence continues to see extreme readings with well more than a 40 point Bull/Bear spread. Bulls rose to 60.6 from 60.3, though Bears ticked up by .5 pt to 15.2. The retail investor got more bullish as AAII said Bulls bounced by 6.8 pts to exactly 50, near the highest since 2021. Bears fell by 4.8 pts to 22.4, near the lowest since 2021. Here is a chart of the Citi Panic/Euphoria index, pretty optimistic but not technically 'Euphoric' yet:

The thing of note overseas was the March German jobs data and February retail sales data. The number of unemployed rose by 4k, better than the expected increase of 10k, so less bad. Their unemployment rate held at 5.9% as expected and the highest since 2017 when not including Covid. Retail sales were soft, falling by 1.9% m/o/m, well more than the estimate of a .4% rise.

German Unemployment Rate

I remain short Starbucks:

Upside

-RH +9% earnings

-CXM +12% earnings

-AVTX +330% cquires Anti-IL-1ß mAb, terms not disclosed

-RILY +5% earnings

-PLBY +5% earnings

-VRNT +3% earnings

-SNOW +2% insider buy

-XLO +200% Gilead and Xilio announce exclusive license agreement for Xilio's tumor-activated IL-12 program, XTX301

-HD +0.3% acquires materials provider for professionals SRS Distribution for EV of $18.25B

Downside

-MLKNA -16% earnings

-CC -8% earnings

-SNX -5% earnings

-DOOO -7% earnings

-WBA -1% earnings

-SSKN -16% earnings

-UGRO -18% earnings

-PRAX-3.5% secondary

-PLTR -2% insider sale

-AMC -11% equity distribution agreement 

Since I will be at meetings most of the morning, I wanted to wish our subscribers, contributors and editors a Happy Easter.

I hope you are all surrounded by sunshine, flowers, chocolate and family on Sunday!

MCRISAN

9 hours ago

Very unscientific observation - over the past year, twice I've noticed comments going noticeably bearish, both times it would have been a great time to go long. I only profited once, the other time I didn't act.

Today reading the comments, almost everyone is bullish, and Doug is getting raked over the coals for performance the last 6 months. People actually asking why he wouldn't recommend indexing the SPY (why would anyone pay for a service to be told to buy and hold SPY?). I'm taking this as a bearish signal. Increasing hedges in the morning. Good luck to you all.

* A bit more overbought...

As I am not doing a "Futures" column this morning, I wanted to highlight the S&P Short Range Oscillator, which has risen (overnight) to 2.86% from 1.73%.

In terms of sentiment, here is the CNN Fear and Greed Index.

Is this the real life? Is this just fantasy?

Caught in a landslide, no escape from reality

Open your eyes, look up to the skies and see

I'm just a poor boy, I need no sympathy

Because I'm easy come, easy go, little high, little low

Any way the wind blows doesn't really matter to me, to me

 - Queen, Bohemian Rhapsody 

Waller's rate comments are noticeably impacting interest rates this morning -- though stock futures could care less (!):

* The yield on the 2 year US note is 4.632%, +6 bps.

* The yield on the 10 year US note is 4.224%, +3 bps.

* The yield on the long bond is +6 bps to 4.366%

The Fed's Waller is in no rush to cut rates:

The violent end of day rally took me by surprise.

While I didn't expand my short exposure into the ramp, I did modestly boost my net shorts in early premarket trading.

At day's end (today) I expect some selling in equities and buying in bonds -- as accounts rebalance quarterly.

But I have been mistaken before on the reallocation trade.

That said, I am looking for a volatile afternoon of trading.

Meanwhile, last night Fed's Waller said that there is no rush to cut rates, which is putting some pressure on yields.

I will be out of the office most of the morning at two research meetings and a conference (the search of new ideas - long and short - continues... it's labor intensive!).

There will be no "Futures" column.

My posts will be brief and less frequent.

“Trends are not endless. In fact, the greater the consensus belief in the persistence of a trend, the less likely it is to persist.”

- Arthur Zeikel

Bonus - Here are some great links:

Only 14 times since 1950 

The S&P will explode higher

A healthy pullback? 

Three possible divergences

* Of a 4:10 a.m. kind...

Shorted more SPY $522.90 and QQQ $444.74.

Still small sized on the common, medium sized on the calls short.