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China, USD and the Russell 2000

Client Talking Points

CHINA

Hang Seng slammed for a -1.9% loss on the protest news being the Top Trending Story in macro this morning, but somehow the Chinese marked up the Shanghai Comp on the close +0.4% to a new year-to-date high of +15.1%!

USD

Big deflation signal continues as Draghi devalues (we only like US #GrowthAccelerating on USD up, when Rates are up – and they are falling); we don’t think the Japanese, European or American central plans ultimately work where it matters (i.e. in real economic growth terms).

RUSSELL 2000

Russell 2000 slammed for a -2.4% loss last week, making that its 4th consecutive weekly loss and taking its draw-down from its all-time #bubble high -7.4%. Liquidity traps out there are real. Respect them.

Asset Allocation

CASH 56% US EQUITIES 2%
INTL EQUITIES 8% COMMODITIES 4%
FIXED INCOME 28% INTL CURRENCIES 2%

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

Senate democrats pushing CFTC to investigate LME metal warehousing. LME-Midwest premium is 3x higher than  historical avg

@Hedgeye_Comdty

QUOTE OF THE DAY

I have been up against tough competition all my life. I wouldn’t know how to get along without it.

-Walt Disney

STAT OF THE DAY

The Russian stock market slammed below its AUG closing lows, -1.1% this morning to -17.8% year-to-date.


CHART OF THE DAY: Legislating Deflation? (10YR Yield vs US Dollar Index)

 

CHART OF THE DAY: Legislating Deflation? (10YR Yield vs US Dollar Index) - 09.29.15 USD vs. 10 Yr


Legislating Deflation?

“There are far too many great men in the world; there are too many legislators.”

-Bastiat

 

Today in 1789, the 1st United States Congress adjourned. There were no political parties in Congress back then. Members of US Congress were grouped (informally) according to their voting records. There was at least some peer review and accountability in that.

 

As far as who was a “great” man back then, I personally can’t tell you for sure. My only certainty is that the more I try to understand #history through the lenses of different perspectives (books), the less I know.

 

I can tell you with 100% certainty that, of all the great men and women I know, not one is a legislator. The thing about great leaders is that they embrace their own imperfections and rarely feel certain about anything. Find me that in today’s political media and I will happily reconsider. Sadly, the deflation of my expectations continues to accelerate on that front.

 

Legislating Deflation? - founding fathers

 

Back to the Global Macro Grind

 

Deflation and depression aren’t cool feelings. I guess that’s why the Bush/Obama politicians who perpetuated the most recent decade of US economic growth surprising on the downside call the recession a #Great one.

 

There’s always spin from political incumbents who aren’t telling you the truth about economics.  The Federal Reserve is going to be spinning its wheels with a conflicted “World Economic Think Tank” from Germany called the Kiel Institute this week.

 

Their topic: “The Labor Market After The Great Recession.” Their problem: that both the US and Germany may very well be entering their next recessions. Yep. So let’s make sure US legislators get told what to do by left-leaning German states in preparation for that…

 

Deflated yet?

 

Back to real world leading economic indicators in Global Equity markets, here’s what happened last week:

 

  1. The illiquid small-cap #bubble component of the US stock market continued to deflate
  2. The Russell 2000 was down another -2.4% on the week and is now down for 4 consecutive weeks
  3. The more liquid (and “cheaper”) Dow and SP500 were down -1.0% and -1.4%, respectively
  4. US Industrial Stocks (XLI) led losers, falling -2.1% on the week and have lagged for the last 3 months
  5. REITS (MSCI Index) corrected another -1.9% as deflation in real estate prices continues in #Quad4
  6. Emerging Markets deflated another -2.7% and -4.2% on the wk for the MSCI EM and LATAM indexes, respectively

 

In what we call FICC (Fixed Income, Currencies, and Commodities), here’s what Mr. Macro Market said last week:

 

  1. Draghi’s (un-elected) Devalued Euro move continues with the EUR/USD down another -1.1% on the week
  2. US Dollar Index added to its most deflationary move since 1997, closing up the same that the Euro was down
  3. Canadian Dollars dropped -1.7% in kind, and the Japanese Yen fell another -0.2% on the week to $109.29 vs USD
  4. Commodities (CRB) Index held the 280 line (where it started 2014), closing +0.3% on the week
  5. Gold and Copper were +0.1% and -3.7% on the week, respectively (YTD: Gold +1% vs Copper -10%)
  6. UST 10yr Bond Yield dropped another -5 bps to 2.53%, down -17% YTD (or down 50bps)

 

That last thing (10yr yield falling) is one thing that the perma-US-growth-bulls have had a very hard time explaining (especially overlayed with the Russell). Since US #history tells you that falling bond yields are never a sign of accelerating growth, that’s for good reason.

 

Much like the politically partisan, perma-growth-bulls are very good at seeking data that confirms their bullish biases. Instead of talking about early cycle-stocks like Housing (ITB), Regional Banks (KRE), and Consumer Discretionary (XLY) being down for 2014 YTD, they’re now all experts on #Strong Dollar and “falling oil prices” (even though WTI crude was +2% last week to flat on the YTD).

 

I like #StrongDollar, but only as a leading indicator of US economic #GrowthAccelerating when long-term interest rates are RISING at the same time. Let me write that one more time in these terms: Dollar Up, Rates Up = Hedgeye Bullish On Growth!

 

That, of course, was why we loved US growth stocks in 2013 and had an equal amount of joy shorting the US bond market. This year, being the only decisively bi-partisan bull/bear risk managers you pay, we have had precisely the opposite position.

 

I’ll go through the why on Dollar Up, Rates Down (it’s called #Quad4 deflation) on our Q4 Global Macro Themes call this Thursday afternoon at 1PM EST. Institutional Investors, please ping for access.

 

I’d like to extend an invite to any Member of The 113th US Congress who would like to learn something about where economic risks are going (rather than where they’ve been). I don’t hang with them, so I’d appreciate it if you passed it along to your local central planner.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.48-2.58%

SPX 1

RUT 1100-1136

VIX 13.53-16.13

EUR/USD 1.26-1.29

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Legislating Deflation? - 09.29.15 USD vs. 10 Yr


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

September 29, 2014

September 29, 2014 - Slide1

 

BULLISH TRENDS

September 29, 2014 - Slide2

September 29, 2014 - Slide3

September 29, 2014 - Slide4

September 29, 2014 - Slide5

 

 

BEARISH TRENDS


September 29, 2014 - Slide6

September 29, 2014 - Slide7

September 29, 2014 - Slide8

September 29, 2014 - Slide9

September 29, 2014 - Slide10

September 29, 2014 - Slide11


THE HEDGEYE DAILY OUTLOOK

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


As we look at today's setup for the S&P 500, the range is 32 points or 1.05% downside to 1962 and 0.56% upside to 1994.                                     

                                                                                          

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: 1.93 from 1.95
  • VIX closed at 14.85 1 day percent change of -5.05%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, Aug., est. 0.3% (prior 0.2%)
  • 9am: Fed’s Evans speaks in Chicago
  • 10am: Pending Home Sales m/m, Aug., est. -0.5% (prior 3.3%)
  • 10:30am: Dallas Fed Mfg Activity, Sept. est. 10.5 (prior 7.1)
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $24b 3M, $24b 6M bills

 

GOVERNMENT:

    • Senate, House out of session
    • President Obama attends DNC event, India’s Prime Minister Modi attends dinner at White House
    • Sen. Ted Cruz addresses National Security Action Summit
    • U.S. ELECTION WRAP: Nunn Calls Perdue Ad ‘Lie’; Cotton Donors

 

WHAT TO WATCH:

  • Yahoo’s Mayer Says Will Review Starboard Letter Carefully
  • Pimco Suffers $10b of Outflows After Gross’s Departure: WSJ
  • Allianz Won’t Sell Pimco After Gross Departure: FT
  • Encana Schedules Conference Call Before U.S. Market Open
  • Stock Exchanges Plan to Meet Deadline for SEC Audit System
  • U.S. Judge Rules U.S. Bank Must Face Some Peregrine Claims
  • DreamWorks Animation Studio Said Weighing Sale to SoftBank
  • Family Dollar: State AGs to Probe Dollar General Share Deals
  • Ex-Apple CEO Sculley Says IPhone Rollout Drama Overstated
  • Russia Oil Chief Says Sanctions No Bar to Work in Arctic
  • Greenberg Team to Grill Bernanke, Paulson, Geithner on AIG
  • Commerzbank Said to Face Probe of Money-Laundering Controls
  • Oracle Cloud Product to Match Amazon.com’s Pricing: Ellison
  • Alibaba Said to Pay Credit Suisse, Morgan Stanley Top IPO Fees
  • U.S. Iraq Strikes are ‘Not America Against ISIL’: Obama
  • ‘Equalizer’ Tops Box Office; Washington Shows His Worth

 

EARNINGS:

    • Cal-Maine Foods (CALM) 6:30am, $1.17
    • Cantel Medical (CMN) 8am, $0.27
    • Cintas (CTAS) 4:15pm, $0.75
    • Ferrellgas (FGP) 7am, $(0.28)
    • Synnex (SNX) 4:05pm, $1.48

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Crude Set for Biggest Loss in a Week With Brent Before Data
  • ICE Europe Takes Liffe Commodities Markets After 18 Years
  • Hedge Funds Raise Bullish Cocoa Bets on Ebola Risk: Commodities
  • Nickel Heads for Bear Market on Record Inventories Even With Ban
  • Gold Rises on Demand for Alternative Investment as Stocks Drop
  • LME Introducing One-Off Membership Application Fee as of Jan. 1
  • Iron Ore’s ‘Credible Guy’ Albanese Says Weak Prices Will Endure
  • Singapore Bourse to Start Kilobar Gold Trading to Lure Investors
  • Soybeans Drop to Four-Year Low as China Suspends Import Approval
  • Raw Sugar Rises for Fifth Session Before Expiry; Cocoa Advances
  • ABN Amro Commits to China Commodity Finance Growth Post Qingdao
  • Peanut Butter in Maple-Bacon Sandwiches as Prices Tumble: Retail
  • Rebar in Shanghai Falls to Record Low as Iron Ore Price Plunges
  • LME Raises Average Transaction Fees by 34% to Cover Investment

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


FLASH CALL TODAY 2PM: CRUISE LINES - EUROPEAN RISK

We are hosting a Flash Call at 2PM TODAY as we walk through our thesis on European slowdown risk and how it will impact CCL/RCL.

 

 


THESIS OVERVIEW:

 

  • Hedgeye cruise survey points to weakening European pricing
  • Fragile consumer environment in the Eurozone e.g. Germany, Italy, and France projected by Hedgeye Macro team
  • RCL and CCL share appreciation, overly bullish sentiment, and relatively high valuations suggest reaction to negative European pricing pivot could be sharp

 

CALL DETAILS:


Attendance on this call is limited.  Ping  for more information.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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