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Japan, Europe and the U.S. Slowing

Client Talking Points

JAPAN

Japan is evidently not enjoying the other side of the USD/YEN correlation risk (Yen up, Nikkei down another -2.4% overnight to -7% year-to-date) – when you have neither economic growth nor a devaluation policy to inflate markets that are working, it gets tougher to convince people what is “cheap”.

EUROPE

Horrendous German ZEW for OCT would lead you to believe the Germans don’t trust the French/Italian monetization dressing; Draghi’s Policy To Inflate only resulted in #deflation across the entire Eurozone in reported CPI terms this morning too (France CPI -0.4% y/y SEP vs -0.3% AUG).

UST 10YR

UST 10YR Yield smashed to 2.21% this morning, so you can book some gains on the Long Bond (TLT) as capitulation is #on for Treasury Bond bears; Russell 2000 and UST 10Yr Yield continue to signal U.S. #GrowthSlowing in 2H14 vs the Q2 “bounce”.

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 4% COMMODITIES 2%
FIXED INCOME 22% 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

Oil price slump yet to hit US shale oil production: IEA chief http://www.reuters.com/article/2014/10/13/us-shaleoil-energy-breakeven-idUSKCN0I21GG20141013

@HedgeyeENERGY

QUOTE OF THE DAY

In the middle of every difficulty lies opportunity.

-Albert Einstein

STAT OF THE DAY

In China, Thailand, Germany and Egypt income inequality was about the same in 2000 as it had been in 1820.


October 14, 2014

October 14, 2014 - Slide1

 

BULLISH TRENDS

October 14, 2014 - Slide2

October 14, 2014 - Slide3

BEARISH TRENDS

October 14, 2014 - Slide4

October 14, 2014 - Slide5

October 14, 2014 - Slide6 

October 14, 2014 - Slide7

October 14, 2014 - Slide8

October 14, 2014 - Slide9

October 14, 2014 - Slide10



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.

#Nice Behavior

“It would be nice to think that such bad behavior will never happen again.”

-Daniel Alpert

 

Some people are nice in this business. Some people are mean. I tend to be nice to subscribers, children, and dogs. I guess I have a not so nice tweet-streak in me for pundits who aren’t accountable. Hockey players can be mean that way.

 

The aforementioned quote comes from a non-hockey-non-consensus economics book I have been waiting to review called The Age of Oversupply, by Dan Alpert from Westwood Capital. It’s an outside the box, but reasonable way to consider #deflation.

 

Dan is one of the nice guys who holds himself accountable to his clients. He is also on a short list of people who were appropriately bearish on things like supply in 2008. The main contention in his book is that oversupply is here to stay. That appears right, for now.

 

Back to the Global Macro Grind

 

Some of the #MoBros on Twitter have been calling me a meany for calling their levered-long-momentum positions in small cap and/or social (non profit publicly listed companies) stocks #Bubbles. But Dan is down with that – he calls them what they are too.

 

The Great Credit Bubble may have burst, but the age of oversupply hasn’t ended – and won’t anytime soon. Abundant labor, excess capital, and cheap money are here to stay.” (The Age of Oversupply, pg 18)

 

By my math, the only way to unwind the excess and stupid-valuation-storytelling associated with these cheap moneys is via lower prices for #bubble stocks. Yesterday’s US stock market volume was revealing on that front:

 

  1. Total US Equity Market Volume (total exchange + OTC + OTCBB) was +6.2% vs. its 3 month average
  2. Total Exchange Volume was +44% vs. its 3 month average
  3. Total Traded Value (Russell 3000) was +30% vs. its 4 month average

 

That’s three different ways we try to look at equity market volume in real-time. When it comes to the pick-toggling junk bond #bubble, finding real-time volume read-throughs is more like finding Waldo.

 

Today’s Chart of The Day (exhibit 51 in our Q4 Macro Themes deck) is a picture of what I am trying to hammer home in terms of the relationship volume has with inflated prices – Total Exchange Volume vs Russell 3000 TTM P/E multiple.

 

Punch-line: this is the most expensive and illiquid market since the caveman.

 

“So” how does expensive illiquidity sync with oversupply of labor, capital, etc.? Unfortunately, when Japanese, European, and US growth is slowing (all at the same time), I think what that means is pretty straightforward:

 

  1. Deflation of illiquid equity bubbles
  2. Re-flation of premiums paid for liquidity (JGBs, Bunds, Treasuries)
  3. And a whole whack of revisionist sell-side economics excuse-making along the way

 

You see, until this market snapped the backs of the Moving Monkeys (point and click single-factor time/price charts using things like the “50 and 200 day” moving averages), they didn’t have to pay attention to things like books, volume, or volatility.

 

After a +138% rip in US equity volatility (VIX since the Russell #Bubble topped on July 7th, 2014), they need to start reading!

 

To be clear on timing, since we’re now probing:

 

A)     Immediate-term TRADE overbought signals in VIX (risk range = 17.78-24.98)

B)      Immediate-term TRADE oversold signals in SPX and RUT (SPX risk range = 1)

 

I don’t want you to be shorting US stocks and buying TLT with the 10yr Yield at its YTD lows (2.21%) today.

 

I just want you to, objectively, rewind the risk management tapes and learn something from what a baseline 3-factor model (price, volume, and volatility) was signaling for, well, most of 2014.

 

For OCT to-date, the #Quad4 deflation in US equity sector styles levered to inflation and/or growth expectations looks like this:

 

  1. Energy Stocks (XLE) down -10.65%
  2. Basic Material Stocks (XLB) down -9.03%
  3. Industrial Stocks (XLI) down -6.79%

 

That’s precisely what you should see in #Quad4. Mr. Market is telling you that both growth and inflation expectations are slowing, at the same time. Unless you are overweight Cash, Treasury Bonds, and Munis, that is not #nice portfolio behavior.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr yield 2.20-2.39%

SPX 1

RUT 1042-1081

VIX 17.78-24.98
USD 84.99-86.64

Gold 1211-1241

 

Best of luck out there today,

KM

 

#Nice Behavior - 10.14.14 Volume vs. Russell PEs


Cartoon of the Day: Falling Stocks

Cartoon of the Day: Falling Stocks - falling bull cartoon 10.13.2014

It’s been a decidedly downward move for stocks lately.

 

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VIDEO | Macau: Doubling Down on Our Bearish Thesis

This note was originally published October 10, 2014 at 13:16 in Gaming

In this exclusive interview Todd Jordan gives his insights from Macau.

 

  

Gaming, Lodging and Leisure sector head Todd Jordan and senior analyst David Benz walk through their three-pronged negative thesis on Macau gaming (VIP slowdown as a result of a corruption crackdown, mass deceleration and mass margin contraction) and the threat of further shrinking mass margins.

 

 

 


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