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Shellacking

Client Talking Points

JAPAN

The biggest hedge fund net short position in currency markets is being unwound and the Nikkei is getting royally crushed on that. It's down another -4.2% overnight on a 30 basis point FX move to -14% year-to-date! Ugly. At the same time, Japanese Government Bonds continue higher (0.59% 10year), signaling a probable sequential peak in Japanese growth in Q413.

RUSSIA

Some people apparently bought the #Sochi catalyst. No, that was not a smart decision. Russia’s Trading System leads European losers this morning, down another -0.6% to -11% year-to-date, The Ruble looks like bloody hell and Brent Oil is one of the few major commodities that remains decisively broken in our TREND/TAIL model.

COMMODITIES

So... U.S. stocks get totally slammed yesterday (biggest 9-day decline since November 2011 for the Russell 2000 which was drubbed -7.4%). But wouldn't you know! The CRB Commodities Index went UP on that! The CRB Index is now +1.4% year-to-date versus Consumer Discretionary (XLY) which has been pummeled -8.7%. We stand by our #InflationAccelerating macro call. On the margin it mattered.

Asset Allocation

CASH 56% US EQUITIES 4%
INTL EQUITIES 6% COMMODITIES 10%
FIXED INCOME 6% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
JPM

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.

FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

If my $SPY TREND line wasn't broken, I'd buy the damn-bubble; but it is, and bubbles pop @KeithMcCullough

QUOTE OF THE DAY

"We are still masters of our fate. We are still captains of our souls."

-Winston Churchill

STAT OF THE DAY

Amazon is considering raising the price of Prime membership by as much as $40, hoping it can strike the right balance between managing rising costs and scaring away customers. Prime members get 2-day shipping on a large number of Amazon items at no extra cost, plus the ability to borrow Kindle books and stream movies. Prime currently costs $79 a year, but that might jump to $99 or even $119.


U.S. Economy Update Call: What Is Priced In?

U.S. Economy Update Call: What Is Priced In? - usclient

 

Hedgeye's Macro Team will be hosting a flash call updating our U.S. Economic Thesis on Wednesday, February 5th at 11:00am EST.

 

We'll provide an update to our 1Q14 Macro Investment Themes of #GrowthDivergences and #InflationAccelerating, while highlighting the current quantitative setup for domestic equities, bonds, and the $USD. We will review how to be positioned for slowing growth and rising inflation as well as host a live Q&A Session at the end of the call. 

 

 

KEY TOPICS WILL INCLUDE

  • #GrowthDivergences:  Since our call on 1/9/14, the incremental fundamental data has continued to reflect a deceleration in the slope of domestic growth.  We'll survey the latest income, housing, manufacturing and consumption data and the implications for equity and asset class positioning. 
  • #InflationAccelerating:  Long inflation expectations and #GrowthSlowing has been the positioning playbook YTD with the CRB commodities index accelerating, Utilities and Healthcare leading sector performance and low short interest, low Beta, and large Cap style factors driving relative equity out-performance. We'll discuss whether to remain long this trend.     

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 944389#
  • Materials: CLICK HERE (slides will be available approximately one hour prior to the call time)

 

Please email for details.


February 4, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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Early Look

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Got A Shovel?

“In the real world, action and reward go together.”

-Greg Berns

 

Greg Berns is part of a stealth movement in America – he’s a neuroeconomist working in the Department of Psychiatry and Behavioral Sciences at Emory University in Atlanta, GA.

 

John Coates introduced me to Berns in a chapter called Thrill of The Search in The Hour Between Dog and Wolf. Coates went on to suggest that “when the Theory of Relativity dawned on Einstein, he must have had the mother of all dopamine rushes… dopamine, like noradrenaline, does a lot more than motivate the brain: it prepares the body for action” (pg 139).

 

Was your mind and body prepared for this selloff in US and Japanese equities? I can tell you one thing, my back is in spasm. But I think that has more to do with shoveling snow than being long Japan’s Mother’s Index (-18% in two days). Through action and reward, #History, #Math, and #Behavorial economics continue to be the three pillars of our learning process. Risk happens fast.

 

Back to the Global Macro Grind

 

In addition to the crash in Japan’s widely held brokerage index, the Nikkei got crushed for another -4.2% lost last night, taking it to -14% for 2014 YTD. How many hedge funds were snowed into the short Yen, long Nikkei trade last year? Lots.

 

How many stayed long the Russell 2000 at the all-time high? That was only 9 trading days ago, don’t forget. And while I am certain that everyone on CNBC nailed it, for the rest of us a -7.4% nine day correction from an all-time peak provides a bit of a rush too!

 

The last time the US stock market had this sharp of a 9-day decline (Russell2000 = down -9.1% in 9 days in November of 2011), Ben Bernanke’s resolve was simple – print, print, print. So remind me why Janet Yellen won’t do the same?

 

If we get one more economic data point that crashes like yesterday’s New Orders component of the ISM did, remind me why the Mother of All Doves won’t:

 

A)     Stop the tapering

B)      Talk up more quantitative easing

 

Setting aside the eureka reality that commodity markets inflating and slowing real-consumption growth don’t give the Fed or the Bank of Japan what they are promising The People (sustainable growth), why won’t Yellen go back to the same old saw?

 

Maybe, just maybe, Mr. Macro Market is already front-running her on this. I know, while markets front-running our central planning overlords has been the only game in town now for the last half-decade, why would they be doing so again?

 

Humor Mr. Macro Market for another minute and play this probable (not to be confused with definite) scenario out:

  1. US #InflationAccelerating continues to slow real-inflation adjusted growth
  2. As US #GrowthSlowing freaks out the Fed, they whisper “no-more-taper” to Hilsenrath
  3. Whispers start to bury the Dollar again, Food and Gold prices continue higher yet again, and …

Growth slows even faster!

 

Oh, and by summer time they’ll be whining about “inequality” at Jackson Hole without accepting that Policies to Inflate only pay those who are long of coffee futures and mortgage-backed-securities, while they pulverize the poor.

 

Back to how bad that Institute for Supply Management’s (ISM) manufacturing report was yesterday:

  1. Headline ISM dropped -10% sequentially (month-over-month) to 51.3 JAN vs 57 DEC
  2. New Orders in the ISM crashed -20% month-over-month to 51.2 JAN vs 64.4 DEC
  3. Prices Paid in the ISM (inflation in costs) ripped +13% from 53.5 in DEC to 60.5 in JAN  

Yes, since I’m so plugged in politically, I rigged the numbers to fit our Top Global Macro Theme of #InflationAccelerating like a glove. But don’t tell anyone I get this inside info or I’ll have to change the name of my firm.

 

Again, to review, this wasn’t all about the “weather”:

  1. Inflation (prices) rose, fast, month-over-month… and…
  2. Growth (orders) fell, even faster in kind

So enjoy the “green arrows” this morning. I am sure this market will bounce on no-volume again until we get the next US consumption #GrowthSlowing data point (tomorrow) in the ISM Services report for January.

 

With the CRB Commodities Index +1.4% vs. Consumer Discretionary (XLY) stocks -8.7% YTD, bulls can blame the weather. But that is the score. In the real world, if you don’t shovel your driveway and get to work, you probably won’t get paid that way either.

 

Our immediate-term Global Macro Risk Ranges are as follows:

 

SPX 1

Nikkei 139

VIX 16.98-21.79

USD 80.80-81.45

Nat Gas 4.91-5.41

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Got A Shovel? - CortisolRising

 

Got A Shovel? - rtas


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 4, 2014


As we look at today's setup for the S&P 500, the range is 48 points or 0.40% downside to 1735 and 2.36% upside to 1783.                

                                                                                                               

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.30 from 2.28
  • VIX closed at 21.44 1 day percent change of 16.46%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45/8:55am: ICSC/Redbook weekly retail sales
  • 9:45am: ISM New York, Jan. (prior 63.8)
  • 10am: Factory Orders, Dec., est. -1.8% (prior 1.8%)
  • 10am: IBD/TIPP Economic Optimism, Feb., est. 44.5 (pr 45.2)
  • 10am: CBO releases U.S. economic outlook
  • 8:30am: Fed’s Lacker speaks in Winchester, Va.
  • 12:30pm: Fed’s Evans speaks in Detroit
  • 4:30pm: API weekly oil inventories

GOVERNMENT:

    • 10am: CBO releases U.S. economic outlook
    • 10am: Sen. Homeland Security Army recruiting contract hearing
    • 10am: Senate environmental panel on water supply safety post-W. Va. contamination
    • 10:15am TGT CFO John Mulligan at Senate Judiciary Cmte
    • 10:30am: Moody’s Chief Economist Mark Zandi on 2014 outlook at Senate Budget Cmte
    • 1:30pm: House Oversight and Govt Reform Cmte hearing on Obama admin marijuana policy

WHAT TO WATCH:

  • Yum profit beats ests. on growth in international division
  • Intel changes pay rules in seeking closer ties to performance
  • Symantec says facing $145m in damages in U.S. probe
  • TV shared ownership led by Sinclair said to get U.S. scrutiny
  • Second storm of week bound for U.S. Northeast with icy snowfall
  • BP 4Q profit drops as disposals hurt oil output
  • UBS 4Q net beats estimates on wealth management, tax gain
  • Toyota forecasts record annual profit as yen boosts exports
  • BofA bonuses for rates traders are said to drop at least 15%
  • Genfit seeks U.S. alliance for non-alcoholic liver ailment
  • Drug cos. join NIH in study of Alzheimer’s, other diseases: WSJ
  • House GOP said to finalize debt-limit strategy: WPost
  • Lockheed Martin to begin production of civilian Hercules: WSJ
  • Anadarko fails to find viable oil at first N.Z. well: TV3

AM EARNS:

    • Affiliated Managers Group (AMG) 7:10am, $3.09
    • AGCO (AGCO) 8am, $1.34
    • AGL Resources (GAS) 8am, $0.91
    • Arch Coal (ACI) 7:30am, ($0.38) - Preview
    • Archer-Daniels-Midland Co (ADM) 7am, $0.84
    • Becton Dickinson (BDX) 6am, $1.29
    • Bell Aliant (BA CN) 6am, $0.35
    • Boston Scientific (BSX) 7am, $0.13 - Preview
    • Clorox (CLX) 830am, $0.91 - Preview
    • CME Group (CME) 7am, $0.67
    • Delphi Automotive PLC (DLPH) 7am, $1.04
    • Eaton (ETN) 6:30am, $1.06
    • Emerson Electric (EMR) 6:30am, $0.67 - Preview
    • Fidelity National Information (FIS) 7am, $0.78
    • Gannett Co (GCI) 830am, $0.65
    • HCA Holdings (HCA) 8:29am, $0.86 - Preview
    • IDEXX Laboratories (IDXX) 7am, $0.81
    • International Paper Co (IP) 7am, $0.86
    • McGraw Hill Financial (MHFI) 7:10am, $0.79
    • Michael Kors Holdings (KORS) 7am, $0.86 - Preview
    • Ryder System (R) 7:55am, $1.29
    • Sensata Technologies (ST) 6am, $0.55
    • Sirius XM Holdings (SIRI) 7am, $0.02
    • Spectra Energy (SE) 6:30am, $0.38
    • UDR (UDR) 8am, ($0.01)
    • Vishay Intertechnology (VSH) 7:30am, $0.19
    • Westjet Airlines (WJA CN) 6:30am, $0.52 - Preview
    • Xylem (XYL) 7am, $0.52

PM EARNS:

    • Aflac (AFL) 4:15pm, $1.39
    • Ameriprise Financial (AMP) 4:05pm, $1.81
    • Axis Capital Holdings (AXS) 4:05pm, $1.47
    • Cerner (CERN) 4:01pm, $0.39 - Preview
    • CH Robinson Worldwide (CHRW) 4:15pm, $0.68
    • Covance (CVD) 4:01pm, $0.84
    • Genworth Financial (GNW) 4:30pm, $0.30
    • Gilead Sciences (GILD) 4:05pm, $0.51 - Preview
    • Hain Celestial (HAIN) 4pm, $0.87
    • Macerich (MAC) 4:30pm, $0.23
    • Mueller Water Products (MWA) 4:20pm, $0.00
    • Myriad Genetics (MYGN) 4:05pm, $0.46 - Preview
    • RenaissanceRe Holdings (RNR) 4:16pm, $2.78

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Crude Rises From One-Week Low Amid Cushing Pipeline Start
  • Gold Declines in London on Signs Physical Demand Is Slowing
  • Arabica Coffee Posts Biggest Gain Since 2004 on Brazil Drought
  • Cotton Crop Expanding After Corn Slump Spurs Switch: Commodities
  • Lead Paces Gains by Metals Amid Speculation Decline Was Overdone
  • Soybeans Extend Gain on Concerns Brazil Dryness May Curb Yields
  • Natural Gas Rebounds as Winter Storm Spreads in U.S. Northeast
  • Rubber Declines to 17-Month Low as U.S. Factory Growth Slows
  • Krung Thai Bank Won’t Lend to Government Rice Program: President
  • Platinum Mine Strike Costs $36 Million a Day as Talks Resume
  • Commodity Volatility Drops as Equities Swing: Chart of the Day
  • Fukushima Wash-Up Fears in U.S. Belie Radiation Risks: Energy
  • Senators to Vote on Farm Law That Keeps Their Benefits Secret
  • Robusta Coffee Rises to 5-Month High on Lack of Vietnam Selling

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


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