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DRAGHI’S DOVISHNESS

Client Talking Points

EURO

The Euro is getting smoked down to $1.31 this morning (vs USD) after Draghi says he “stands ready” to devalue Europe’s way back to economic stagflation? Net short position in the EUR/USD (CFTC futures + options) hits a big year-to-date high of -142,738 contracts.

FRANCE

The Prime Minister resigns on the economy, so that’s gotta be good for more money printing too. The CAC is up +1.1% this morning as European economic growth slows (German IFO for AUG at 4 month low), the @Hedgeye TREND line resistance for CAC is 4364.

UST 10YR

The UST 10YR Yield drops back down to 2.39% this morning as the bond market figures this doesn’t end well from a U.S. growth perspective. Yield Spread (10yr minus 2yr) compressing to a new year-to-date low of +189bps as U.S. equity futures (SPX) test all time highs.

Asset Allocation

CASH 56% US EQUITIES 0%
INTL EQUITIES 12% COMMODITIES 4%
FIXED INCOME 24% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

BOBE

The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last week. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road

TWEET OF THE DAY

OIL: after falling -2.0% last wk, WTI is down another -0.1% this morn #bearish TREND

@KeithMcCullough  

QUOTE OF THE DAY

We cannot solve our problems with the same thinking we used when we created them.

- Albert Einstein

STAT OF THE DAY

India (our favorite stock market in the East) is up +0.7%, +27.5% year-to-date.


August 25, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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Central Planning's Curse

“Ideas have consequences.”

-Richard M. Weaver

 

That’s the introductory quote from Hamilton’s CurseHow Jefferson’s Arch Enemy Betrayed The American Revolution, by Thomas Dilorenzo. And oh isn’t that an appropriate thought now that our central planning overlords have talked down at us from upon high from the Tetons in Jackson Hole.

 

Big ideas, moreover, can have big consequences, and there are probably no ideas in American political history bigger than the ones debated by Alexander Hamilton and Thomas Jefferson at the time of the founding.” (pg 1)

 

Japan has had the same failed central economic planning ideas for decades. Now both the un-elected US and European monetary policy duo of Janet Yellen and Mario Draghi and are hell bent on executing on the same. It’s the economic curse of devalued currencies. And I don’t think it will end well.

 

Central Planning's Curse - 789

 

Back to the Global Macro Grind

 

The number one thing I have had wrong in 2014 is how dovish Draghi was going to get in the face of what was a decent European economic rate of change acceleration. Ever since he decided to devalue the Euro in May, the European economy has slowed, sequentially.

 

I thought Yellen was going to be more dovish than consensus thought at Jackson Hole (she was). But I didn’t think her headline impact was going to be trumped by Draghi. He said he “stands ready to adjust” his Euro devaluation policy stance further. Whatever that means… the currency market believes him.

 

“So”, following the bouncing macro ball:

 

  1. Euro (vs USD) is getting smoked to fresh YTD lows of $1.31 this morning
  2. US Dollar Index is now breaking out to fresh YTD highs of $82.59
  3. Commodities (CRB) index, led by oil’s decline, are retracing most of their YTD gains

 

And our macro playbook would call the alleviation of the #InflationAccelerating tax (on Americans) good, on the margin. But what’s good for the country with the consumption tax cut is bad for the economy who gets the devaluation tax.

 

The other thing that’s not good is what the US bond market thinks:

 

  1. US Treasury 10yr Yield has fallen back to 2.39% this morning (down -63bps YTD from 3.03%)
  2. US Treasury Curve Yield Spread is compressing to a fresh YTD low of +189bps (bps = basis points)
  3. US growth expectations (Russell 2000) are still down for the YTD as well

 

But, but, there are no buts…

 

I am bearish on both US and European growth, and both US equity futures and European stocks are up on whatever it is that Draghi is going to do next.

 

BREAKING: Draghi Pushes ECB Closer To QE As Deflation Risks Rise –Bloomberg

 

That’s one of the most read headlines of this morning. Alongside Germany’s IFO (business climate index) dropping to a fresh 4 month low of 106.3 (vs. 108.0 last month) and France’s Prime Minister resigning over the economy, that is…

 

“So” you just have to buyem when they are up on this, right? No thanks.

 

If the US Dollar and rates were rising alongside US growth expectations, I’d be right bullish on being long US growth right now. But that’s not happening. The #InflationAccelerating of the first half of 2014 is sticky. In other words, you aren’t getting a cheaper cup of coffee and a rent reduction this morning.

 

Over time, what we call a 4th Quadrant move in our GIP Model (Growth, Inflation, Policy = GIP) becomes a big idea. But going there (both Growth and Inflation slowing, at the same time) requires a big asset price reset. This happened in Q3/Q4 of 2008, don’t forget.

 

I don’t think it’s 2008. I think it’s Q3 of 2014. While every economic cycle rhymes with parts of others, we haven’t seen all three of the major Currency War central planners (Japan, USA, and Europe) try to devalue (print moneys, monetize debt, bend gravity, etc.) at the same time like this.

 

If US and European growth continues to slow, at the same time (and both Yellen and Draghi get easier and easier into that)… and it ends well… I’ll be wrong on that too. In the meantime, 200 years after Alexander Hamilton’s Euro style Central Planning Curse was imposed on the American people, Jefferson is rolling in his grave.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.34-2.46%

SPX 1

RUT 1130-1171

VIX 10.91-14.12

USD 81.67-82.59

EUR/USD 1.31-1.33

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Central Planning's Curse - Chart of the Day


MONDAY MORNING RISK MONITOR: FADING THE GEOPOLITICAL (FOR NOW)

Takeaway: The signals are now bullish in the short-term and mixed on an intermediate term basis.

Current Best Ideas:

 

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Key Callouts:

The XLF put in a good showing last week, rising 2.4%, but that brings the month-over-month change to just +0.4%. Not much to get excited about. Much of the geopolitical risk that was pushing risk premia out last month is now in retreat. This is evident across the EU, Sovereign and US Financials CDS complex as well as in the move in high yield (tighter by 8 bps on the week). 

 

On an intermediate term basis, there are now 5 measures that are positive while 4 are negative. One of the few areas that continues to retreat aggressively is the 2-10 spread, now tracking 10 bps tighter on the week at 191 bps.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Positive / 5 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

 

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1. U.S. Financial CDS -  Swaps tightened for 25 out of 27 domestic financial institutions. Led by WFC (-6 bps) the large cap financials were tighter by an average of 4 bps. Specialty finance also saw big swings with Sallie Mae tightening by 20 bps on the week to 228 bps.

 

Tightened the most WoW: TRV, CB, ACE

Widened the most/ tightened the least WoW: AXP, GNW, GS

Tightened the most WoW: RDN, AGO, WFC

Widened the most MoM: GNW, AXP, MET

 

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2. European Financial CDS - Swaps mostly tightened in Europe last week, dropping by an average of 6 bps on the week. Swaps are now tighter by 5 bps on a m/m basis. Even Sberbank, a proxy for the geopolitical turmoil of the Russia/Ukraine situation, tightened by 11 bps on the week, but remains over 300 bps at 316 bps.

 

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3. Asian Financial CDS - Default swaps across the Asian financials complex were generally tighter with the most improvement coming from India, where they tightened by an average of 8 bps. 

 

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4. Sovereign CDS – Sovereign swaps tightened around the world last week, except in the US, where they widened by 1 bp to 18 bps. Portuguese sovereign swaps tightened by -10.9% (-20 bps to 161 bps).

 

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5. High Yield (YTM) Monitor – High Yield rates fell 8.3 bps last week, ending the week at 5.61% versus 5.69% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6.0 points last week, ending at 1878.

 

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7. TED Spread Monitor – The TED spread rose 1.1 basis points last week, ending the week at 21.5 bps this week versus last week’s print of 20.41 bps.

 

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8. CRB Commodity Price Index – The CRB index fell -0.9%, ending the week at 289 versus 291 the prior week. As compared with the prior month, commodity prices have decreased -3.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 15 bps.

 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 4 basis points last week, ending the week at 2.85% versus last week’s print of 2.89%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

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11. Chinese Steel – Steel prices in China fell 0.8% last week, or 26 yuan/ton, to 3092 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

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12. 2-10 Spread – Last week the 2-10 spread tightened to 191 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 25, 2014


As we look at today's setup for the S&P 500, the range is 30 points or 1.08% downside to 1967 and 0.43% upside to 1997.                              

                                                                                                 

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

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CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.89 from 1.91
  • VIX closed at 11.47 1 day percent change of -2.47%

 

MACRO DATA POINTS (Bloomberg Estimates):           

  • 8:30am: Chicago Fed Natl, July, est. 0.20 (prior 0.12)
  • 9:45am: Markit U.S. Composite PMI, Aug. prelim (prior 60.6)
  • 9:45am: Markit U.S. Services PMI, est. 58.0 (prior 60.8)
  • 10am: New Home Sales, July, est. 429k (prior 406k)
  • 10:30am: Dallas Fed Mfg, Aug., est. 12.8 (prior 12.7)
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $29b 3M bills, $24b 6M bills

 

GOVERNMENT:

    • Senate, House out on August recess
    • FCC deadline for comments on proposed Comcast-Time Warner Cable merger
    • 1pm: Atlantic Council briefing on “Mexico’s Energy Reform: Ready to Launch” report

 

WHAT TO WATCH:

  • Roche to buy InterMune for $8.3b, adding lung drug
  • Roche said to have decided against bidding for rest of Chugai
  • CME opens electronic futures trading after 4-hour delay
  • Burger King mulls Tim Hortons deal in tax-saving Canada move
  • Occidental talks to Mubadala on $3b asset, PIW reports
  • Jackson Hole theme is labor markets can’t take higher rates
  • Pershing, Valeant say Allergan investors demand mtg on deal
  • Wal-Mart said to move India COO Mediratta to U.S. ops
  • Advaxis, Merck enter clinical trial pact for cancer treatment
  • Goldman’s new partner class unlikely to grow from 2012: WSJ
  • California quake to cost insurers up to $1b, Eqecat says
  • German business confidence drops for 4th month as risks rise
  • China urges U.S. to halt close air surveillance
  • Friends Life said to hire Goldman for sale of intl unit

 

EARNINGS:

    • OSI Systems (OSIS) 8:30am, $1.17
    • Prospect Capital (PSEC) 4pm, $0.32
    • Qihoo 360 (QIHU) 5pm, $0.67
    • Renren (RENN) 6pm, ($0.08)

               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Brent, WTI Oil Prices Reverse Decline as Libya Tensions Persist
  • China Gold Imports Drop for Fifth Month on Weak Consumer Demand
  • Speculators Lower Gold Bull Wagers on Rate Outlook: Commodities
  • Soybeans Slump to Lowest Since 2010 as U.S. Crop Seen at Record
  • CME Opens Electronic Trading on Futures After Four-Hour Delay
  • Copper in New York Swings Near 3-Week High After Trading Delay
  • Palm Oil Prices Seen Rebounding in 4Q on Demand, CIMB’s Ng Says
  • Hedge Fund Crude Bets Tumble Amid Surging Global Supply: Energy
  • Kurdish Oil Shipments From Turkey Said to Resume as Tanker Loads
  • TOP Oil Market News: Brent Rebounds on Libya to Iraq; WTI Steady
  • Rhodium Rally Pushes Price Past Platinum, Gold: Chart of the Day
  • BNP Paribas Recommends Selling Oct. Singapore Fuel Oil Crack
  • California Quake Crumples Buildings With Scores Injured in Napa
  • Gold Falls as Dollar Advances on Fed Outlook; Silver Halts Drop

 

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CURRENCIES


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GLOBAL PERFORMANCE

 

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EUROPEAN MARKETS

 

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ASIAN MARKETS

 

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MIDDLE EAST

 

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The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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 80.30%
  • SHORT SIGNALS 78.51%
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