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Volume, Russell 2000 and Bond Yields

Client Talking Points

VOLUME

Volume was up huge (in rate of change terms) on yesterday’s U.S. stock market down day (that’s when we get the real volume, accelerating on down days. Total U.S. Equity Market Volume (including dark pool) +26% vs. its 3 month average – the liquidity trap in the small cap #bubble remains obvious.

RUSSELL 2000

The Russell 2000 closed the month at lower-lows than the ones it made in AUG, and is now -8.9% from its all-time #bubble peak established on July 7th. I have been calling it a #bubble A) because it is one and B) no one else will.

UST 10YR

UST 10YR Yield falling again to 2.47% this morning and we don’t think it will take much (another bad jobs report?) to smack this sucker right back to its year-to-date lows; bond yields rise/fall with the rate of change in U.S. growth – oh, and now there’s a rumor that Draghi’s “shock and awe” might include buying Treasuries? #wonderful.

Asset Allocation

CASH 58% US EQUITIES 2%
INTL EQUITIES 8% COMMODITIES 4%
FIXED INCOME 26% 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

Yesterday's Total US Equity Volume was +26.1% vs its 3mth avg - volume comes on the down moves

@KeithMcCullough

QUOTE OF THE DAY

The secret of getting ahead is getting started.

-Mark Twain

STAT OF THE DAY

In 2013, real median household income was 8.0% lower than in 2007, the year before the most recent resession.


CHART OF THE DAY: The Hong Kong Government Has Already Lost

 

CHART OF THE DAY: The Hong Kong Government Has Already Lost - CHINA High Frequency GIP Data Monitor


The Hong Kong Government Has Already Lost

“The triumphant success of Hong Kong demands - and deserves - to be maintained.”

Charles, The Prince of Wales

 

The crowds of tens of thousands in Hong Kong are swelling in number. Today, Chinese National Day, the numbers are likely to increase significantly. While started by students, all facets of the population are represented. One can only be in awe at how so many can demonstrate peacefully, even in the face of harsh and utterly unnecessary police tactics: Not one single shop window has been broken in 5 days of protest.

 

The Hong Kong Government Has Already Lost - zz. EL 2

 

Back to the Global Macro Grind

 

How did this all get started?

 

In the run-up to the 1997 Handover of Hong Kong, Universal Suffrage was promised under Article 45 of the Basic Law. In 2004, the National People’s Congress said this would not occur before 2012. In 2007, the NPC pushed the date to 2017. In 2014, Universal Suffrage is redefined: Everyone can vote, but only for the 2 or 3 candidates pre-selected by Beijing. The serious matter of a peoples’ freedom to elect their leaders has been made a farce by the Central Government and the current Hong Kong leadership.

 

Over the summer, Beijing completely misread the situation thinking that its version of a seemingly democratic process would be sufficient to keep the Hong Kong people at bay. Yet the proposal was so far off the mark and without any room for negotiation that a tipping point was reached.

 

While Beijing is known for digging in and using all means necessary to obtain its will, it appears the people of Hong Kong are willing to do the same this time around. There is no quick solution given Hong Kong Chief Executive CY Leung’s unwillingness to work for the Hong Kong people he supposedly represents. Leung’s administration has fantastically mismanaged this situation.

 

The Central Government needs this win. A loss of face isn’t the primary concern: The very survival of the Communist Regime is at stake in the eyes of China’s leaders. No progress is being made at containing unrest in Xinjiang Province where Uyghur separatist are claiming the region.

 

To add to Beijing’s woes, the Chinese economy is cooling quickly. Fixed assets investment is slowing both sequentially (as of AUG) and on a trending basis – as are retail sales, exports and imports. Manufacturing PMI and consumer confidence are also slowing on a trending basis as of SEP and AUG, respectively. Additionally, the property market is in dire straits, as Darius Dale details in a note yesterday titled, “DEFCON 2.5: The “China Overhang” Is Likely To Continue”.

 

Already, we have seen a few, albeit small, public gatherings in large cities supporting the protesters in Hong Kong. What if demonstrations spread beyond Hong Kong?

 

In the last few days, the world has experienced an unprecedented crack-down on social media and freedom of speech to prevent just that from happening. But we know very little about it in the United States. One would need to live in the PRC to experience it. It’s hard for us to imagine what the internet looks like when one only gets to see a carefully selected portion of it. Overnight, there are reports of a Trojan virus aimed at infiltrating the iPhones of HK protesters. Make no mistake, this is a first rate electronic communications war being played out in front of us.

 

How will the world react to all of this? The United Kingdom, as former colonial masters, surely has a moral responsibility. But the West is and will be reluctant to take a stand against China. Cross-strait relations also play a factor: Beijing continues to strive for a unified China, inclusive of Taiwan. The wrong action in Hong Kong could further alienate the Taiwanese people.

 

Unless the protesters get tired we will all be watching this for some time. There will be economic impact. But the big changes will play out in the long term.

 

Can democracy thrive in Hong Kong? And will this lead to a softening of the regime in Beijing?

 

The people of Hong Kong appear ready to find out.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.46-2.55% (bearish)

SPX 1 (neutral)

RUT 1090-1026 (bearish)

EUR/USD 1.26-1.38 (bearish)

WTIC Oil 90.16-94.42 (bearish)

 

Michael Blum

President and Resident of Hong Kong

 

The Hong Kong Government Has Already Lost - CHINA High Frequency GIP Data Monitor


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October 1, 2014

October 1, 2014 - Slide1

 

BULLISH TRENDS

 

October 1, 2014 - Slide2

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October 1, 2014 - Slide5 

BEARISH TRENDS

October 1, 2014 - Slide6

October 1, 2014 - Slide7

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October 1, 2014 - Slide9

October 1, 2014 - Slide10

October 1, 2014 - Slide11


What Is Your Vision?

This note was originally published at 8am on September 17, 2014 for Hedgeye subscribers.

“Leadership is the capacity to translate vision into reality.”

 -Warren Bennis

 

We held our inaugural Hedgeye Cares Charity Golf Challenge at Great River Golf Club in Milford, CT yesterday.  The group of my colleagues that banded together to form the Hedgeye Cares committee did an outstanding job translating a vision into a reality.

 

Like most charity events, it wouldn’t have been a success without the support of myriad sponsors.  On the corporate side, we were pleased to get support from The Lincoln Motor Company, Salesforce.com, Bloomberg, D.B. Root, MBIA, Better ITS, the Arizona Coyotes, and Firefly Space Systems just to name a few. In addition, many individuals like you were kind enough to lend a helping hand by either buying a foursome or providing items for the silent auction.

What Is Your Vision? - 44

Aside from being a very enjoyable day, we also raised close to $100,000 for Bridgeport Caribe Youth Leaders, which is an all-volunteer program based in Bridgeport, CT that provides “children with diverse educational, sports and community awareness programs that foster physical, intellectual and social development, while instilling pride and helping them build character and self-esteem, so that they can reach their full potential and value their role in society.” 

 

Certainly a group more than worthy of our support. Again, we thank you.

 

Back to the Global Macro Grind...

 

Even as many of my Hedgeye colleagues were away from their screens yesterday, the global macro news flow continued.  The most relevant global market over the next 24 hours is of course likely to be the Treasury market with the Federal Reserve policy meeting occurring later today.   Regardless of what the Fed says today, it is likely that very few investors have “nailed” the last month of interest rate moves, except in hindsight.

 

As shown in the Chart of the Day below, on August 15th, the 10-year yield hit a 2.30% low.  Within a month, by September 15th, the 10-year yield had tacked on 30 basis points and reached basically a three month high.  This morning the 10-year yield is trading off the recent highs from a couple of days ago, albeit only marginally.  Even if you didn’t nail the move, or did so in hindsight, the fact remains having a view on rates, and thus the U.S. dollar, is critical in global macro positioning.

 

So, what is the Fed going to say and how are we positioned? 

 

Despite the lack of a crystal ball, we are sticking with our house view that Fed will be more dovish than expected.  With reported inflation relatively benign, the housing sector seeing some cracks (arguably a lot!), and the most recent employment data points softer than expected, there seems to be little incentive for the Fed to ramp up the hawkish rhetoric.

 

According to his Wall Street Journal podcast from yesterday, the mighty Fed visionary Jon Hilsenrath appears to agree with us. As he noted:

 

“Given the economic backdrop, they don’t want to send a signal right now that rate increases are imminent.”

 

Indeed Mr. Hilsenreth, indeed.

 

So, interestingly, as we head into the main Fed event, the 10-year yield didn’t even make it into the top three things that Keith sends out to subscribers in his “Direct from KM” email every morning at 6:00am, which were as follows (if you aren’t on "Direct" from KM please email sales@hedgeye.com to get details on being added) :

  1. ASIA – w/ the Russell 2000 -1.2% YTD, it’s been a lot easier for small/mid cap growth investors to stay with long China, India, and Indonesia – all up again overnight to +12.5%, +27.6%, and +23.5% YTD, respectively – that’s where the real perf is and also why you’ll see a higher “International Equities” allocation in our asset allocation model than USA
  2. USD – one of the biggest overbought exhaustion signals in 15 years remains, but you saw what a downtick in USD can do yesterday; huge 1-day move in both Oil and Energy (XLE) stocks – I still think the Fed gets easier throughout Q3/Q4 as the rate of change in US economic growth data slows – consensus is hawkish
  3. UTILITIES – the Down Dollar, Down Rates move yesterday paid the slow-growth #YieldChasers – that was the 1st SPX Sector we signaled buy on alongside the SPX oversold signal at 1977; XLU +1.2% on the day yesterday to +13.1% YTD – we’ve stayed with that all year and I’m not changing my mind on it into the Fed statement either

 

Speaking of vision, it seems the Scottish vision of independence will be tested today.  According to the most recent three polls, the "No" for Independence voters are maintaining a narrow lead of some four points. 

 

As we have often written, polls in the aggregate matter and in the aggregate the polls continue to imply that the No votes will prevail.  Interestingly, as well, online betting site Betfair has already started paying out No votes as they consider the No majority win a foregone conclusion.  That all said, until the mighty Jon Hilsenreth opines nothing is truly a foregone conclusion! 

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.40-2.62%

SPX 1977-2007

Shanghai Comp 2267-2357 

VIX 11.34-14.09 

Pound 1.61-1.64

WTI Oil 91.37-95.12 

Gold 1221-1273

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

What Is Your Vision? - COD 09.17

 


THE HEDGEYE MACRO PLAYBOOK

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

CLICK HERE to view the document. In today’s edition, we highlight:

 

  1.  The degree to which Foreign Exchange is breaking down to new lows and the drivers of this move
  2. The continued buildup of negative momentum in Commodities and commodity-linked equities

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


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