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THE HEDGEYE MACRO PLAYBOOK

Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes & noteworthy quantitative signals.

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Darius Dale

Associate: Macro Team


Ongoing Conversations

This note was originally published at 8am on September 02, 2014 for Hedgeye subscribers.

“There is an ongoing conversation among the different factions in your brain…”

-Dr. David Eagleman

 

That’s an important quote from neuroscientist , David Eagleman, that was cited by Brene Brown in a new #behavioral book I finished this long weekend called Daring Greatly. If you’re looking for some introspection into both your investment process and life, this one will make you think.

 

Thinking is good. So is reading/writing. These basic brain exercises help you debate yourself in that ongoing conversation “among the different factions in your brain, each competing to control the single output channel of your behavior.” (Daring Greatly, pg 76)

 

Eagleman calls your brain a “team of rivals” within the two-party system of “reason and emotion.” Brown contextualizes the back and forth conversations you have with yourself with feelings like vulnerability and shame. These are perfect things to read about right before you take your kids to a pancake breakfast!

 

Ongoing Conversations - br5

 

Back to the Global Macro Grind

 

The market is at its 2014 highs, baby! How does that make you feel? Oh, and what “market” are you thinking about when you read the word market? The long end of the US bond market has had a much better year than the US stock market (TLT = +19%, with dividends).

 

While it didn’t shame me to see the broad measure of US growth expectations (Russell 2000) rise +1.2% on no volume last week, it certainly didn’t please me to see consensus chasing a misplaced expectation that it’s had all year (for US GDP to be +3-4% and bonds to fall).

 

It evidently didn’t shame the European growth bulls to beg for a new round of Quantitative Pleasing either. If being long European stocks was always based on Europe slowing to the point that it needed moarrr money printing, my hat is off to whoever nailed that.

 

For equities-only fans, in addition to European stocks (Europe’s Stoxx 600) and the Russell 2000 being +1.2% last week, here’s what else happened:

 

  1. US Industrial Stocks (XLI) were down -0.2% to +3.4% YTD
  2. Emerging Markets (MSCI) were down -1.4% to -1.0% YTD
  3. US Utilities (XLU) were +2.0% to +14%YTD
  4. Russian stocks were -5.5% to -17.5% YTD
  5. Argentine stocks were +7% to +82.1% YTD

 

In other words:

 

  1. Slow-growth #YieldChasing (long XLU vs XLI) remains alive and well as a US Equity Sector strategy
  2. Emerging Market equities still do not like a stronger Dollar
  3. The more screwed up your country gets, the higher the stock market goes?

 

Oh, yeah. Definitely.

 

Doesn’t this all make you feel good? Like this time is different or something? With Japanese, European, and American central planning committees going all in on Policies To Inflate, even that crazy critter called commodity #InflationAccelerating came back online last week:

 

  1. CRB Commodities Index +1.4% on the week to +4.5% YTD
  2. Coffee prices up another +7.4% on the week to +67.5% YTD
  3. Cattle prices up another +3.5% on the week to +28.0% YTD

 

I know. Eat a hot dog or something. Steak is overrated. Ask the government people about the “substitution effect” on your barbeques, eh! (PS: if you bought the sausage instead of the ribeye, hog prices were up another +5.7% last week too = +17.2% YTD).

 

Now the reasoning side of the veggies and water brain couldn’t care less about this stuff. It’s we emotional guys pounding the caffeine and burgers who need to deal with ourselves. Because the US equity consumption growth bulls don’t want to talk about real things, like inflation.

 

To be clear, even the CRB Index is beating both the Russell 2000 and Euro Stoxx 600 by +360 basis points for 2014 YTD (both the Russell and Euro Stoxx 600 moved back into the black to +0.9% for 2014 last week – raging bull in emotions there!).

 

In other news, what real cost of living ripping to all-time highs in the US does is slows real growth – so last week you also saw:

 

  1. Goldman cut its Q3 US Growth estimates for the 2nd time in 2 months
  2. US 10yr Treasury Yield drop another 6 basis points on the week to 2.34%
  3. US Treasury Yield Spread (10yr minus 2yr) continue to compress, -79 basis points YTD

 

Net of all my own performance issues, emotions, and reasoning, this is where I stand on September 2nd:

 

  1. Wanting to buy more long-dated bonds (High-grade Corporates or Treasuries) on dips
  2. Wanting to be longer of our two favorite Emerging Markets (China and India) on pullbacks
  3. Wanting to avoid anything US growth equity bubble like the bubonic plague

 

Plague? Yep. I really do not like to buy the all-time-bubble highs in anything.  But that’s just me. For better or worse (we’ll see), these factions of 1999 and 2007 in my brain just won’t go away.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.33-2.43%

SPX 1980-2009

RUT 1151-1179

Shanghai Comp 2199-2278

EUR/USD 1.31-1.33

Pound 1.65-1.67

Gold 1271-1299

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ongoing Conversations - Chart of the Day


Crashing?

Client Talking Points

EUROPE

ECB President Mario Draghi cuts rates weekly now? That centrally planned pop in stocks did nothing for the economy, and now equities (Italy, Portugal, France) are moving back to bearish TREND signals @Hedgeye. ZEW slows (again) in September.

UST 10YR

Whispers about “what the Fed is going to do” can only take bond yields so high - nothing slows the UST 10YR more than gravity (#GrowthSlowing), down 6 basis points this morning to 2.56% - no support to 2.34% - buying the dips in the Long Bond much more attractive in 2014 than something like the Russell 2000 which is now -1.4% year-to-date.

GOLD

Rates Down = Gold Up; so this is not where you give up on the long Gold position; it’s where you double down, especially if you agree with me that Janet Yellen talks down rate hikes on Wednesday. No Gold resistance until $1276.

Asset Allocation

CASH 36% US EQUITIES 6%
INTL EQUITIES 19% COMMODITIES 4%
FIXED INCOME 31% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

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.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

Copper and Nickel continue to break down (that's new) - violent move in Nickel in the last wk

 

QUOTE OF THE DAY

Excellence is not a singular act, but a habit. You are what you repeatedly do.

-Shaquille Oneal

STAT OF THE DAY

UK consumer prices fall to +1.5% AUG year-over-year vs. 1.6% JUL - excellent run for the UK economy.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

CHART OF THE DAY: Domestic Growth Exposure Outperforming: Is That Right Call Going Forward?

 

CHART OF THE DAY: Domestic Growth Exposure Outperforming: Is That Right Call Going Forward? - Chart of the Day


Barking Cats

“A government institution that is not dominated by politics is as likely as a barking cat.”

-Milton Friedman

 

To be balanced, I like to fact check what high profile economists have stated as fact. And while Friedman’s statement was more of a probability-based one, there’s a YouTube video (click here to watch) that shows a cat that was (allegedly) barking, but resumed meowing. There are 19,624,067 views of this thing. #Riveting

 

There was an article in the Wall Street Journal yesterday that suggested that the Mother of All Doves (Janet Yellen) attacks like a hawk. While everything in the Currency War is relative (when Draghi devalued the EUR/USD, she looked relatively hawkish), in the face of slowing US and European economies, Yellen raising rates is as likely as my dog purring.

 

Oh, and I don’t have a dog.

 

Barking Cats - cat1

 

Back to the Global Macro Grind…

 

So what do you do if Janet reverts to meowing like a dove?

 

1. Buy the Long Bond (TLT)

2. Buy stocks that look like bonds (XLU)

3. Buy Gold (GLD)

 

That’s what Mr. Market told you to do yesterday. That’s what he told you to do in 2011 (when Europe slowed last time) too. Here are your timestamps in what was a big time diverging US equity tape yesterday:

 

1. Utilities (XLU) up +0.3%

2. US IPO Bubble (IPO) -2.1%

3. Russell 2000 (IWM) -1.1%

 

To be fair, away from the 40% of IPOs that have blown up already (-20% from peak in the last 12 months), 60% of these puppies have been barking alpha to the upside. If you’ve played lucky on that front (or are just a supreme stock picker), congrats!

 

The Nasdaq got tagged for a -1.1% drop yesterday too. The beta-chasing there (and in small/mid cap stocks) has been epic this year, if only because you could have been neutered (dogs don’t like that either) on the long side 40-50% of the time.

 

Pardon? Mucker, I thought the “market doesn’t go down.” If you call the SP500 (+7% YTD) or the long end of the Bond market (TLT is +12% YTD), the “market”, I guess that is accurate. Unfortunately, most of us don’t get paid to buy the index.

 

Here are some more US stock market #bubble stats for you:

 

1. 47% of stocks in the Nasdaq are crashing from their 12-month peak

2. 41% of stocks in the Russell 2000 are crashing from their 12-month peak

3. 6% of stocks in the SP500 are crashing from their 12 month-peak

 

*note: crash = a decline in price of -20% or more

 

That’s why I am overly comfortable calling the momentum and small cap side of the US stock market a #bubble these days – it’s easier to do when they are already popping!

 

It’s also why this year you will see who can really pick stocks. There’s a huge difference between a PM who is up +10-15% YTD with 5-10 positions that have been really right than ones who are -10% to +5%, with 50-100 positions that are trying to not blow up.

 

As all of you who run money and/or manage your own know, the key to compounding your net wealth is not losing money. Warren Buffett called it rule #1. Believe him. He’ll do anything these days to make his preferred investment a guaranteed win.

 

In other IPO #bubble news (in both market cap and names that have come public, we are beyond 1 now):

 

1. The Ali-bubble (BABA) has raised the top-end of its IPO price range to $68

2. Dave and Buster’s is trying to come back from the dead with a $100M IPO

3. Freshpet is going to try to get $100M of other people’s money through GS and Credit Suisse

 

Don’t get me wrong. If you are long all of this stuff at a lower-cost basis (pre-IPO) before the Old Wall jams it into the indexes, you are crushing it. That is capitalism and I am a big fan of your being early.

 

But as I watch this damn Freshpet website shuffle between slides this morning (“Healthy meals, so tasty, dogs and cats might just beg for more!” – is that a CS line for eat this IPO and I’ll give you more BABA?), I can’t say I support coming to this IPO bubble late.

 

While I am sure there’s another dog you can find purring somewhere on YouTube, I’m not in the risk management business of telling you that everything I learned during the 2000 and 2007 stock market bubbles is different this time.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.34-2.62%

SPX 1

RUT 1144-1161

VIX 12.86-14.69

EUR/USD 1.28-1.30

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Barking Cats - Chart of the Day


MACAU: ANOTHER LEG DOWN IN SEPT

Takeaway: Just when you think it couldn’t get any worse – we’re now projecting a YoY GGR decline of 14-18% in Sept

A review of the 1H numbers

 

 

CALL TO ACTION

We see no reason to buy any Macau related stocks with the possible exception of Galaxy Entertainment.  Even Galaxy looks more suitable as a long hedge, with upcoming higher labor costs this year.  For the first 2 weeks of September, average daily table revenues (ADTR) fell 20% from the comparable period in 2013.  The weakness resides in both VIP and Mass and while hold percentage was likely low for the casino operators in the aggregate, lower than expected volumes were also to blame.  We are currently projecting a YoY full month GGR decline of 14-18%.  Q3 2014, Q4 2014, and 2015 estimates look like they need to go lower for most of the Macau operators.

 

THE MARKET DATA

ADTR of HK$745 million over the first 14 days of September was the lowest since the 1st week of July.  Unless there is a miraculous recovery, full month gross gaming revenues (GGR) should fall in the mid to high teens which would represent the largest YoY decline since 1H 2009. 

 

MACAU: ANOTHER LEG DOWN IN SEPT - m00

 

The dismal results look broad based:  VIP and Mass volumes were weak and overall hold percentage was likely low.  On a YoY basis, we would expect ADTR in 2H of September to look better than 1H.  However, play levels are seasonally soft heading into Golden Week so on an absolute basis, 2H may mirror 1H ADTR.  The only glimmer of hope is that forward bookings seem to portend a decent Golden Week – only if full rooms convert into strong gaming play levels.

 

MARKET SHARES

In terms of market share, Galaxy is the standout with MGM and MPEL also producing above trend.  LVS is finally holding unlucky and that portfolio of properties dropped well below recent share levels.  SJM is also lagging badly.

 

MACAU: ANOTHER LEG DOWN IN SEPT - M2

 

CONCLUSION

Our negative “Mass Decelerating”call – as first articulated in our 06/13/14 note – remains fully intact.  In fact, the slowdown has been steeper than even we expected.  We remain negative overall on the Macau stocks and would use Galaxy Entertainment as the long hedge.  Estimates need to go lower across the board for Q3 and Q4 and with the possible exception of Galaxy (owing to an earlier opening of Phase 2), 2015 estimates look high.  LVS in particular looks ripe for a meaningful earnings downgrade.


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