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Begging For More QE?

Client Talking Points

JAPAN

Japan released a horrendous Household Spending report of -5.9% year-over-year in JUL (vs -3% JUN) and Housing Starts in Japan tanked -14.1% in JUL too – this is what happens when you print inflation but don’t get real consumption. But anyone who has studied monetary policy history already knows that. 

RUSSELL 2000

It’s been a tight race between the Nikkei (-4.4%) and U.S. growth expectations (Russell 2000) all year, and now the Russell is right back to breakeven at 1165. After the no-volume ramp into month-end, what’s next in SEP? We say sell, but you already know that too!

UST 10YR

UST 10YR Yield of 2.34% drives our Best Macro Idea (TLT) to +17.2% for 2014 (that’s pre dividends) and we still can’t understand why consensus doesn’t get the rate of return on slow-growth vs Russell 2000. Watching too much TV, perhaps.

Asset Allocation

CASH 60% US EQUITIES 0%
INTL EQUITIES 12% COMMODITIES 2%
FIXED INCOME 22% 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

RUSSIA: Ruble on its knees and the Russian Trading System is down -0.6% to -12.8% YTD

@KeithMcCullough

QUOTE OF THE DAY

I prefer to be true to myself, even at the hazard of incurring the ridicule of others, rather than to be false, and to incur my own abhorrence.

-Frederick Douglass

STAT OF THE DAY

Cattle and Coffee prices both up over +1% yesterday to +15% and +76% year-to-date, respectively.


CHART OF THE DAY: $TLT +17.2% vs. $IWM 0.0% #TimeStamped

CHART OF THE DAY: $TLT +17.2% vs. $IWM 0.0% #TimeStamped - COD

 

Score: Long Bond (TLT) +17.2% vs. Russell 2000 0.0% YTD #timestamped (10yr yield = 2.34%). Incidentally, that’s pre-reinvesting dividends if you are long the 30yr UST Bond, the absolute return is even better.


Arena or Circus?

“Because there is no effort without error and shortcoming.”

-Teddy Roosevelt

 

That’s one of the best quotes from one of the best leadership speeches in American history – President Teddy Roosevelt’s “The Man In The Arena” (more formally referred to by political types as his “Citizenship in a Republic” speech).

 

I’m not much of a political type. I’m more of a Mucker in the arena type. Perversely, I love getting smacked around once in a while. I love to fight against consensus. Yes, it can get messy. But working alongside those of you whose portfolios are “marred by dust and sweat and blood” drives me.

 

Those of you who didn’t get run over buying the tops of the 2000 and 2007 US stock market bubbles get where I am coming from. We are going to do this all over again. And while this time may be different, we know “the triumph of high achievement” … and if we fail, at least we’ll do so “while daring greatly.”

 

Arena or Circus? - tr

 

Back to the Global Macro Grind

 

I obviously love that speech, but I don’t think our call for US #GrowthSlowing as inflation accelerated (from 3 year lows) in 2014 was much of a dare at all. It was a playbook modeling call. Amidst all of the storytelling out there, the easiest US Macro positions to take were:

 

  1. Long Inflation Assets in 1H 2014 (JAN-JUN)
  2. Long Slow-Growth all year long (Long Bond and anything Equities that looks like a Bond)
  3. Short US Domestic Growth (Russell 2000)

 

Score: Long Bond (TLT) +17.2% vs. Russell 2000 0.0% YTD #timestamped (10yr yield = 2.34%)

*that’s pre-reinvesting dividends if you are long the 30yr UST Bond, the absolute return is even better

 

But you won’t hear that on Old Wall TV. You probably won’t read that in the paper either (I certainly haven’t – mainly because I don’t read newspapers!). Instead, you’ll hear something from the cheap seats like, “look at the Dow – its above its 50-day moving avg.”

 

The Dow, btw, is up less than 3% for 2014. Thanks for coming out.

 

If you’re a hard core perma growth bull, where you should really be long is India. Unlike the Russell 20000, India’s stock market (BSE Sensex) closed the month at its YTD highs, +27.7% YTD. Inflation is falling there – and real consumption growth is accelerating. Sound familiar?

 

It certainly doesn’t sound like Europe.

 

European central planning bureaucrats (who are just like the un-elected ones we have here at the Fed) live in perpetual fear of what the general population wants (hint: lower cost of living). Read their conflicted and compromised media headlines this morning:

 

  1. “Eurozone deflation risk at its highest level since 2009”
  2. “Draghi hints at more stimulus”

 

This isn’t the arena of real life where real players have a real scoreboard. This is a joke.

 

For those of you who recall what the Keynesian finance newspaper (The Economist) was trumpeting last year (Abenomics), only 1-year after implementing 60-70 TRILLION Yen in incremental “easing”, here’s what Japan reported for July 2014:

 

  1. Japanese inflation +3.4% y/y
  2. Japanese Household Spending -5.9% y/y
  3. Japanese Housing Starts -14.1% y/y

 

In Hedgeye rate of change speak, “y/y” means year-over-year (or what it is now versus last year). And in Japan it’s just plain sad to watch. If you’re blowing up on the golf course this weekend, try it yourself – just keep doing the same things, over, and over, and over again. But don’t expect different results.

 

“So” Europe definitely needs to do that… definitely, right?

 

Right, right. And as US growth continues to slow from this fanciful Q2 headline Obama was trying to trumpet yesterday (newsflash: it’s Q3), guess what your central planning committee at the Fed is going to do in the face of that? Must do moarrr easing…

 

With a few Hedgeye Best Short Ideas going against us (like YELP) right now, I have plenty of issues of my own to deal with, but a broken process is not one of them. If I had a broken process, I would either get fired or mocked.

 

Where I grew up, they call the place where people who get paid to get mocked a circus. That’s the perfect place for a bunch of unaccountable people who are bought and paid for by governments policies to perform.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.32-2.39%

SPX 1

RUT 1138-1175

Shanghai Comp 2181-2280

VIX 11.34-13.90

EUR/USD 1.31-1.33

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Arena or Circus? - COD


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The Gambler

This note was originally published at 8am on August 15, 2014 for Hedgeye subscribers.

“You’ve got to know when to hold’em, know when to fold ‘em.

Know when to walk away, know when to run.

You never count your money when your sittin’ at the table,

There’ll be time enough for countin’ when the dealin’s done.”

-Kenny Rogers

 

It is hard to believe it, but the song “The Gambler," written by Don Schlitz and recorded by the legend Kenny Rogers is almost 36 years old.  Some songs, poems, and books transcend time and this is certainly one of them.

 

In many ways, the song is also apropos for stock market operators like ourselves.  Certainly, we don’t tell our clients that we are gambling, but some days it does feel like we are at the casino.  And some days certain stock market operators go on unbelievable runs that seem to belie even the best of odds.

 

The Gambler - gambler

 

Take my colleague Howard Penney for example.  Yesterday he introduced another Best Idea, which was to short HAIN.  (If you’d like learn how to get access to his 70 page deck on the name, please email sales@hedgeye.com.)

 

To say Howard has had a hot “hand” would be an understatement to say the least.  His last five short ideas have had great returns on an absolute basis and versus the market.  They are as follows:

 

  • Del Frisco – DFRG ~+20% (still live)
  • Annie’s Inc – BNNY ~+22% (still live)
  • Potbelly – PBPB ~+56% (still live)
  • Panera – PNRA ~+10% (closed)
  • Bloomin Brands – BLMN - ~+21% (closed)

 

So as it relates to the restaurant and consumer staples sectors, you can gamble or if you are going to go to the stock market casino you can listen to Penney and improve your odds versus the house.

 

Back to the Global Macro Grind...

 

Speaking of casinos and gambling, former Reagan budget director David Stockman recently had a great quote saying the markets were like a branch casino of the central bank.  According to Stockman:

 

“The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today.”

 

Now, casinos are great when the odds are lined up in your favor, but when the odds shift or are not aligned with your bets, it doesn’t matter how many red bulls and vodka you drink, the casino is a very frustrating place to spend the evening.

 

This morning, by and large, the ball has landed on green across the global markets.  This comes despite, particularly in Europe, some fairly despondent growth data points over the last couple of weeks.  

 

On the good news front, the U.K. continues to outperform as evidenced by its GDP report last night.  On a year-over-year basis, GDP in the U.K. expanded by +3.2% and was up +0.8% sequentially. Interestingly, U.K. policy makers seem to get that a strong currency helps.  Even the manic media is getting the point, as Reuters wrote this morning:


The strong Pound policy from Carney seems to be a tailwind for the U.K. economy.”  (Note that we bought the British Pound (via the etf FXB) on 8/13 in our Real-Time alert products.)

 

Hopefully, Dr. Yellen gets the memo!  

                            

Ironically, Dr. Yellen and her colleagues will actually have decent cover to become incrementally dovish (read: push out the dots) given the anemic situation in the U.S. housing market.  In the Chart of the Day today, we’ve included a table from our housing team that summarizes the recent data points in housing.  Of the 22 housing data points we track regularly, 18 of them are worse in the most recent period.

 

As my colleague Christian Drake wrote yesterday:

 

“The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended August 8th.

 

The Composite index fell -2.7% WoW as refi activity was weaker by -4.0% on the week and purchase demand slid -1.0% sequentially.

 

The anemia extends to August as purchase apps hold the 160 level for a 5th consecutive week and are now running -5.3% QoQ and at the lowest quarterly ave reading since 2Q 1995.  

 

  • Lower Lows in Purchase Demand:  The Purchase Index slid yet again to 164.8 on the index, down from 166.5 last week - marking a second week of decline and the 5th consecutive week at the 160-level.  As it stands, purchase demand continues to sit just above the 10Y lows recorded during the peak weather distortion trough in February while average purchase demand for 3Q to-date is currently tracking at its lowest level since 2Q of 1995.  
  • Refi & Rates:  Refinance activity declined -4% WoW with rates on the 30Y FRM contract static at 4.35% in the latest week.  Refi activity remains down -38.4% YoY and continues to improve as we traverse through the easiest 2013 comps. 

Summarily, the high frequency housing data continues to corroborate the sea of red currently blanketing our housing compendium.  As we’ve highlighted repeatedly, we’re inclined to remain bearish on the housing complex until the slope of HPI deceleration inflects.”

 

Not surprisingly then, we recently shorted Toll Brothers (TOL) in our real-time alert products.  There is nothing like fundamentals to put the odds on your favor!

 

Good “luck” out there today.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.38-2.48% 

SPX 1906-1960 

DAX 8999-9431 

VIX 11.84-14.99 

Pound 1.66-1.68 

Gold 1303-1323 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Gambler - Compendium 081314


August 29, 2014

August 29, 2014 - Slide1

 

BULLISH TRENDS

August 29, 2014 - Slide2

August 29, 2014 - Slide3

August 29, 2014 - Slide4

August 29, 2014 - Slide5

August 29, 2014 - Slide6

August 29, 2014 - Slide7 

BEARISH TRENDS

 

August 29, 2014 - Slide8

August 29, 2014 - Slide9

August 29, 2014 - Slide10

August 29, 2014 - Slide11


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 29, 2014


As we look at today's setup for the S&P 500, the range is 37 points or 1.24% downside to 1972 and 0.61% upside to 2009.                                                          

                                                                     

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10A

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.84 from 1.84
  • VIX closed at 12.05 1 day percent change of 2.29%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, July, est. 0.3% (prior 0.4%)     
  • 8:30am: Personal Spending, July, est. 0.2% (prior 0.4%) 
  • 9am: ISM Milwaukee, Aug., est. 60 (prior 63.87)               
  • 9:45am: Chicago Purchasing Manager, Aug. 56.5 (prior 52.6)        
  • 9:55am: UMich Confidence, Aug. final, est. 80 (prior 79.2)            
  • 1pm: Baker Hughes rig count     
  • 3pm: New York Fed to release Sept. QE schedule            

               

GOVERNMENT:               

    • President Obama to  Westchester, N.Y., for DNC fundraiser, Newport, R.I., for DCCC event        
    • Senate, House out on August recess      
    • IMF executive board meeting; considering Ukraine reforms, actions, add’l $1.4b traunche in aid               
    • U.S. ELECTION WRAP: Immigration Politics; Dark Money; Platforms         

 

WHAT TO WATCH:

  • Takeda, Lilly lose bid to overturn $9b Actos award           
  • Fiat clears Chrysler-merger hurdle as withdrawals below cap      
  • JPMorgan hack said to start mos. ago exploiting multiple flaws  
  • Schaeuble sees Draghi at end of road to help spur euro region  
  • J&J said to be exploring sale of Cordis devices business 
  • Microsoft cuts 1,050 jobs in Finland as talks end, YLE reports       
  • IBM, Ford win dismissal in U.S. of claims they aided apartheid    
  • Google takes rivalry w/Amazon to the skies with drone testing 
  • Tesla signs deal w/China Unicom to set up 400 charging points   
  • Google’s Smith said to be headed to D.C. for U.S. CTO Role         
  • Tesco slumps as retailer cuts div. 75% on lower outlook
  • Omega Pharma said to get interest from Perrigo to Boehringer 
  • U.S. joins EU denouncing Russia over surging Ukraine warfare   
  • U.S. Jobs, Fed, ECB, BOE, NATO, Abe: Wk Ahead Aug. 30-Sept. 6              
  • U.S. markets closed Monday for Labor Day holiday         

               

EARNINGS:        

    • Big Lots (BIG) 6am, $0.30             

                               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Sugar From Thailand Heading for NY Bourse Amid Global Glut
  • Aluminum Set for Record Run of Monthly Gains as Supplies Shrink
  • Corn Heists Turning Port Into Argentina’s Chicago: Commodities
  • WTI Oil Set for First Weekly Gain in Six on Economy; Brent Rises
  • Gold Falls for First Time in Four Days on Improving U.S. Economy
  • Wheat Extends Climb as Black Sea Tensions May Threaten Supplies
  • German Power Set for More Spikes in Winter on Supply Risk
  • Rubber Has Biggest Monthly Drop Since April on Ample Supplies
  • Russia-Ukraine Interim Gas Accord Sought by EU as Winter Nears
  • Morgan Stanley Extends Diesel-Buying Spree Amid Supply Surge
  • Rebar Drops for 2nd Month to Near Record Low on Weakening Demand
  • U.S. LNG Export Market Smaller if EU Enters Deflationary Period
  • WTI Oil Seen Rising on Ukraine-Russia Conflict in Analyst Survey
  • Sugar Rises in New York on Brazil Supply Concern; Coffee Gains

 

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 - 10

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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