• run with the bulls

    get your first month

    of hedgeye free



Takeaway: Global CPI readings should trend higher in the short-term, but to low absolute levels before resuming their current disinflationary trend.



  • After several meetings on the road with clients and prospective clients this week, it became clear to our team that a noteworthy competitor of ours is making noise about a demonstrable pickup in inflationary pressures that will slow inflation-adjusted GDP growth across the globe.
  • While we would agree that CPI readings are going to, on balance, trend higher here in 1Q and perhaps through 2Q as well, we completely disagree with the premise and conclusion of the aforementioned view.
  • Broadly speaking, we think reported CPI readings are poised to continue their rocky path lower over the next several quarters, fully equipped with a transient bounce(s) to demonstrably lower cycle peaks relative to their 2008 and 2011 highs.
  • Our call for reported inflation to broadly continue making a series of lower-highs is backed by our call for the DXY continue making a series of higher-lows while the global commodities basket (via CRB Index) continues to make a series of lower-highs.


At Hedgeye, we have developed a proprietary modeling process that allows us to front-run both consensus estimates of and the actual reported growth and inflation readings of any country, region or economic bloc (such as the world, on a GDP-weighted basis). In the note below, we walk through what this rigorous analytical process is signaling to us right now.



Unlike many researchers who impose their theses and theories upon the market – usually the “smartest guys in the room” types – our research process remains grounded in uncertainty. We use a proven, three-factor quantitative overlay to consistently guide us to the most appropriate places to “fish”.


Right now, those signals are suggesting the US Dollar Index is poised to continue making a series of higher-lows over the intermediate-to-long term. That view is underpinned by our uber-bullish bias on US housing, our street-leading expectations for US employment growth and our call for a currency crisis in Japan.




We have been vocal about our call for the domestic housing market and the yen in recent weeks/months, as culminated in our 1Q13 Macro Themes of #HousingsHammer and #Quadrill-yen. Our updated thoughts on the domestic labor market can be found in the notes below:



Moving along, we anticipate that the confluence of the domestic factors highlighted above will result in the FX market pulling forward its expectations of the culmination of QE (which, on the margin, would likely be functionally equivalent to a rate hike).


That’s explicitly bullish for America’s currency and bearish for commodities and international inflation hedges – which are broadly priced in and settled in US dollars internationally.






At least for now, domestic interest rates are confirming this view:





Now that we know where to look from a quantitative perspective, we turn to our predictive tracking algorithms to guide us to hard numbers on the economic data front. With respect to Bloomberg’s GDP-weighted world CPI YoY index specifically, our algorithm backtests with an r² of 0.76 on the median estimate.


For background, the model is purposefully designed to produce a high, mid and low estimate and we use the respective market-based quantitative signals to guide our expectations to the higher or lower of the two economic data risk ranges.


Applying the same algorithm to a particular country, region or economic bloc’s GDP growth figures allows us to triangulate the associated sequential deltas and monetary/fiscal policy implications on our GIP chart. Currently, the world is entering Quad #2 on this analysis (i.e. Growth Accelerates as Inflation Accelerates).




Taking a broader perspective of what the model is signaling to us, we can rest assured that any near-term pickup in reported inflation across the world (again, generally speaking) will be both transient and to absolute levels that we would consider not threatening to economic growth.




As the chart above highlights, our model has been better than bad at calling for major inflection points and trends in global inflation readings for the past 4-5 years, so we feel comfortable with its summary outputs in the absence of disconfirming evidence.



It would be intellectually lazy to rest our call on the confluence of quantitative signals and the output of our modeling of economic data. Rather, the appropriate exercise – which is what we spend all day doing when not publishing research or engaging with clients – is to constantly vet confirming or disconfirming evidence.


With respect to commodities specifically – which we think holds a slightly leading relationship with reported CPI readings globally (varies by country based on index weights) – we are coming up with some particularly muted YoY gains when you streamline current prices throughout the year, which is in and of itself a generous assumption.


In fact, the current estimate of a JUN ’13 peak of +10% is well off the peak YoY growth rates of we saw in the summer of 2008 (+45.4%) and the summer of 2011 (+37.2%).




Our Global Macro team continues to hold the view that commodities – particularly food and energy price inflation/deflation - have become the largest contributors to the direction and magnitude of global inflation readings in the post-crisis era of muted/nonexistent labor and income growth across the key developed markets. Slack capacity utilization also remains a headwind for the economic growth-driven inflation policymakers have been desperately searching for across much of the developed world.


You can see the obvious aforementioned relationship in the following chart of median YoY CPI readings of the US, Eurozone and China overlaid with our commodity price sample:




Net-net-net, it’s really tough to get to anything more than +3% inflation in the world’s three largest economies on a median basis by mid-summer without some meaningful degree of commodity price inflation from here – which is precisely what we do not expect to happen. If anything, further weakness across key commodity markets should augment our call for lower-highs in global reported inflation readings throughout the year.


Looking to the previous chart, we don't find it at all ironic that the universal view of "price stability" across developed central banks anchors on +2% YoY CPI when considering that the same +2% happens to align with neither inflation nor deflation in international commodity markets. The deep simplicity of chaos theory strikes again...


On the disconfirming evidence side, both Oil and the EUR are outliers here; each looks good quantitatively at the current juncture and both stand completely counter to our call for strength in the DXY and weakness across the commodity complex (energy prices are a key driver) over the intermediate term.






While it’s rather difficult for us to endorse a rock-solid fundamental call on either asset class at the current juncture, we think our non-consensus fundamental thesis regarding the USD and international commodities prices will ultimately prevail. For now, however, both crude oil and the EUR remain the two largest financial market-based risks to this view.



All told, our models, signals and the data all suggest global inflation readings should trend higher in the short-term, but to low absolute levels relative to their prior peaks. As such, the current disinflationary trend across the world economy is very much intact.


Have a wonderful weekend,


Darius Dale

Senior Analyst

Inflections in Germany

We have a bullish bias on Germany within Europe. This week we received three pieces of data from Germany that we think are worth calling out:


  • Germany PMI Manufacturing 48.8 JAN Prelim (exp. 46.) vs 46.0 DEC; PMI Services 55.3 JAN Prelim (exp. 52.0) vs 52.0 DEC

Germany is leading the charge in the Eurozone according to its PMI readings. Services are comfortably above the 50 line dividing expansion (above) and contraction (below).  Here we caution that the numbers could be ahead of themselves as the underlying economic climate of the region is still working off a sluggish base.  While Germany can lead in economic performance, the German economy cannot materially inflect without underlying improvement from the region given its dependence on its neighbors as export buyers.  To this end, French PMIs looked abysmal for the region’s second largest economy. France’s Manufacturing slowed to 42.9 in JAN vs 44.6 DEC and Services fell to 43.6 in JAN (exp. 45.5) vs 45.2 DEC. The Eurozone PMI Composite figure gained to 48.2 in JAN vs 47.2 DEC but still stands in contraction.


  • Germany ZEW Economic Sentiment 31.5 JAN (exp. 12.0) vs 6.9 DEC

The huge bounce in the 6-month forward looking economic ZEW sentiment survey month-over-month (a three-year high) may be overdone and we caution against slower, and even lower, numbers from this survey as we move further into 2013. Interestingly, we also saw a huge bounce in the Eurozone survey, 31.2 JAN vs 7.6 DEC.


  • Germany IFO Expectations 100.5 JAN (exp. 98.5) vs 98.0 DEC

The IFO survey confirmed the move in the ZEW earlier in the week, which gave investors more powder to be optimistic.  Consensus estimates for German GDP in 2013 are in a range of +0.5% to 0.7%. If this is as good as it gets for the Eurozone’s largest economy, it’s not that great, which could limit the run in these high-frequency surveys.


Inflections in Germany - 44. pmis


Inflections in Germany - 44. zew


Inflections in Germany - 44. ifo


Matthew Hedrick

Senior Analyst


Hedgeye In The News For The Week Ending January 25, 2013:


Hedgeye Raises Capital, Eyes Media Future (via PR Newswire)


Coach's Market Share Slipping Out Of Its Hands? (via Marketwatch)


McDonald's Plans 'Fish McBites' To Boost Sales (via Chicago Sun-Times)


Bet That Business Will Spend More On Microsoft (via CNBC)


Pros: Any Starbucks Pullback Is Buying Opportunity (via CNBC)


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 80.51%
  • SHORT SIGNALS 78.32%

PG Crushes Modest EPS Growth Estimates

PG delivered F2Q13 results with EPS of $1.22 versus a guidance range of $1.07 - $1.13 and The Street at $1.11 with better than anticipated organic sales growth of 3% (2% volume, 2% price, -1% mix).  The company saw EPS tailwinds from continued cost savings initiatives, better commodity comparisons (gross margin improved +110bps y/y), and a more favorable tax rate ($0.04 benefit).


PG raised the full-year organic sales outlook to +3-4% from +2-4% and also raised the 2013 core EPS range to $3.97-$4.07 from $3.80-$4.00.


We think this is a big name stock that people missed and will want to own. As we said in our earnings preview note on 1/21, “our experience is that names that beat and raise go higher, particularly in the case of multi-year laggards such as PG.”


We can still see some upside to earnings as PG navigates fiscal 2013 and while valuation isn't particularly compelling, we think this is a name that investors can't afford to miss, and will chase.


Robert Campagnino

Managing Director


Matthew Hedrick
Senior Analyst


1565?: SP500 Levels, Refreshed

Takeaway: We expect the SPX to re-test its all-time closing price high of 1565 (OCT ’07) over the intermediate term.

Keith and I recently wrapped up a two-day road trip full of meetings with a multitude of sharp clients from all across the asset allocation spectrum. This is the first time in a very long time (roughly 12-13 months ago) where the Thunder Bay Bear and his blind-side protector universally left the room more bullish than the folks we had the pleasure of meeting with.


While an admittedly small sample size, we take solace in the fact that PMs, analysts and traders representing long-only equity funds, long/short funds, global asset allocators, bond funds and credit strategies all had a healthy degree of skepticism regarding how fast and how far the domestic equity market has climbed from the NOV cycle-trough – coincidentally when #GrowthStabilizing started to percolate though the global economic data.


While not a tangible bull thesis from these levels or any other prices, we do think the fact that money managers are A) not fully convinced this market is headed higher and B) not fully convinced that funds are poised to flow sustainably out of fixed income and gold/inflation-hedge strategies into equity funds is a sign that there are some out there who may be forced to chase this market higher in pursuit of relative performance.


The machines certainly will – especially given that the market remains in a Bullish Formation on our quantitative factoring: 

  • Overbought = 1506
  • TRADE Support = 1481
  • TREND Support = 1428 

Of course, that doesn’t mean the market will continue to make new highs a straight line. The call does remain, however, to trade this market with a bullish bias, booking gains on strength and buying the dip(s) on weakness. If the fundamental research signals (i.e. #GrowthStabilizing, #HousingsHammer and #BernankesExit) change, you’ll hear us get very loud about it.


For now, don’t be surprised if the flows, the machines and the institutional investment community all co-jam this thing higher. A re-test of the prior all-time closing highs is certainly not out of the question over the intermediate term.


Darius Dale

Senior Analyst


1565?: SP500 Levels, Refreshed - SPX

JCP: Increasingly Comfortable Renting the Stock in 2013

Takeaway: A name with well-publicized hair that deserves every strand. But retail failures are not linear. We're increasingly comfortable renting here

Ackman just noted on CNBC that “if Ron Johnson is still at JCP in 3-years, then he’s probably not the right guy.” This 3-year reference flies in the face of those who that think that Johnson is on a tight leash at JCP. He might be pressured to show improvement on the margin (signaling that the worst is behind us) but still has Board-level support to do the job he was brought on to accomplish.


Let's be clear, we're not fans of investing with Ackman. Going the other way has usually been a better bet.


But as noted recently, after 18 months of being bearish, we’re favorably predisposed on JCP. We still think that it is in the ‘Retail Hail Mary’ category, and its ultimate success 3-5 years down the road is suspect. But most failures are not linear. JCP’s stock performance on days where there are glimmers of hope are bigger than its corresponding losses on days where there are credible rumors of horrible fundamentals.


This is a year where JCP goes up against -25% comps, and will have nearly a third of its stores redesigned by the end of the year. That might not boost comps, but it helps sales per square foot -- which is what matters. Also, once the new format is complete for the redesigned stores, the content could be scaled into JCP's dot.com business, which has been down by over a third yy. Our strong view is that JCP will do what it can to close the comp gap this year – even if that means buying it. We think that the stock will trade with the top line – not with profitability. We’re not saying that’s right, but we think it’s reality.


Ultimately, is this one of those names where we fundamentally believe in the story and are comfortable putting our money alongside management and the largest activist shareholders. No way. It's got hair and it deserves it. But are we increasingly comfortable renting the stock in 2013? Yes.


See our 12/13/12 note – JCP: Reasons To Reconsider Your Short.   

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.