Client Talking Points
After last week’s +0.4% bounce off its year-to-date lows, the US Dollar has no follow through buying this morning. Both the Euro and Pound look good on the long side vs USD – so does the Yen, which is scary.
Big rip of +1.7% this morning to $3.13/lb after Chinese stocks closed up +2.1%. Copper’s immediate-term TRADE breakout line = $3.06/lb and consensus remains short of it (-17,289 net short position in futz/options).
Another solid session for Indian stocks as Dr. Raj proves to the world that a stronger currency works. The BSE Sensex is up +2.2% to +11.2% year-to-date, trouncing the Russell2000 which was down another -1.9% last week to -4.8% YTD.
|FIXED INCOME||22%||INTL CURRENCIES||22%|
Top Long Ideas
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.
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.
Three for the Road
TWEET OF THE DAY
Swiss Retail Sales +3% y/y in March, despite the "weather" @KeithMcCullough
QUOTE OF THE DAY
"A ship is safe in harbour, but that's not what ships are for." - William Shedd
STAT OF THE DAY
The NFL's top draft pick Jadeveon Clowney just landed around a $22 million contract with the Houston Texans. But while Clowney -- and hundreds of other NFL rookies -- know a lot about football, they know little about managing money. Many are likely to end up bankrupt. Just two years after their athletic careers end, 78% of former NFL players are bankrupt or nearly there. (CNN)
This note was originally published at 8am on April 28, 2014 for Hedgeye subscribers.
“One man with courage makes a majority.”
The broad based economic progress of the 1794-1847 period in American free-market-capitalist #history remains unrivaled. In the thick of it, many called Andrew Jackson’s 1828 sweep to become the 7th President of the United States, “the era of the common man…”
“Jackson represented the victory of an expanded electorate, a rebuke of the old elite… To many Americans, the president embodied the energy, mobility, and enterprise that they believed defined their nation.” (The First Tycoon, pg 84)
Shocking, I know. The People didn’t need the Federal Reserve to believe. In fact, leaders with courage ran against it; shutting down initial iterations of a US central bank, twice! On Friday, Janet Yellen said there “may be a flaw in how the Federal Reserve forecasts inflation.” Believe her. Until we abandon this un-elected US Policy to Inflate, the common man, woman, and child in America is going to eat it.
Back to the Global Macro Grind…
Eat it? Yep. Chow down, rinse it back with some coffee and OJ, and like it.
If you back out your rent, food, gas, education, etc. (cost of living), you may not have noticed the following last week:
- Corn prices up another +2.4% last week to +17.3% YTD
- Nickel prices up another +2.4% last week to +31.5% YTD
- Coffee prices up another +1.4% last week to +79.8% YTD
- Orange Juice up another +1.3% last week to +16.1% YTD
If you want to call that cherry picking, fine. Eat some of those too. But inflation continues to slow US consumption growth. And all 3 major US market intermediate-term TREND signals (currencies, stocks, and bonds) continue to agree with the same. On that score:
- US Dollar Index was down -0.1% to -0.4% YTD (and remains well below our long-term TAIL risk line of $81.17 resistance)
- US Consumer Discretionary (XLY) and Growth (Russell 2000) stocks were -0.5% and -1.3% last wk to -5.1% and -3.5% YTD, respectively
- US 10yr Treasury Bond Yield dropped another 6 basis points on the week to 2.66% (down -37 bps YTD)
Meanwhile everyone and their brother from the #OldWall in NYC to Washington and now California (PIMCO calling for “high 2% US Growth”) continue to confuse nominal growth (inflation) with real (inflation adjusted) growth.
On Wednesday the US will release GDP for the 1st quarter, and it will likely:
- Have a 1% handle on it (down hard from the sequential peak of +4.1% in Q413)
- See the Deflator (yes, you have to subtract it from nominal GDP) continue to rise from its sequential Q213 low
In other words, on the 2 core factors that matter in our GIP (Growth, inflation, Policy) model:
- INFLATION = will be accelerating
- GROWTH = will be slowing
More commonly called stagflation, the common man’s wallet gets squeezed when this starts to happen. That’s not my opinion, that’s US economic history in the post Greenspan era (Bernanke and Yellen).
This is the 3rd time Hedgeye has made a big directional call that #InflationAccelerating will slow US consumption growth, with the other two being:
- Q1 of 2008
- Q1 of 2011
Yep, it’s cyclical. And the ways to measure it in real-time are manifest. But if you want to throw a little Putin on top of your inflated corn flakes this morning (Oil prices accelerating), here are moarrr of them:
- US Treasury 5yr breakevens (Bernanke used these until they went against his ideology) +5bps last week and +17bps YTD
- CRB Foodstuffs index = +21.5% YTD and Treasury Inflation Protection (TIPs) testing YTD highs
- Slow-Growth #YieldChasing sub-sector styles of the US stock market like Utilities +13.5% YTD
What’s really impressive about the inflation-slows-growth trade is how obvious it is at this point. With the biotech and #SocialBubble stocks (FB, TWTR, YELP, etc.) getting pounded again on Friday (Nasdaq down -0.5% on the wk to -2.4% YTD), Utilities (XLU) closed the week up another +1.9%!
Sure, if you’re long Gold (up +0.5% last week to +8.1% YTD), Bonds, or any stock that looks like a bond, you’re having a great year. As you should be. You are in the 20% of America that A) has savings to invest into #InflationAccelerating and B) doesn’t have to eat it like the common man does.
In other news, not only is Bill Gross way late in getting bullish on US Growth, but consensus bear hedge fund bets in the bond market are. Last week’s net short position (CFTC non-commercial net futures/options contracts) in the 10yr Treasury Bond ramped to -93,722 contracts. If you have courage, you’ve been long consensus being wrong on #RatesRising all year long.
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.59-2.71%
WTIC oil 99.98-105.61
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.38%
SHORT SIGNALS 78.45%
“There is hardly a part of the United States where men are not aware that secret private purposes and interests have been running the government.” –Woodrow Wilson
I had a fantastic Real Conversation (HedgeyeTV video here: https://www.youtube.com/watch?v=hN7-u7Sd7Gk) with best-selling author Jim Rickards last week. Since he suggested we “quarantine the Princeton Economics Department”, I figured I’d quote the 28th US President (who was also President of Princeton).
Princeton is a cool place; especially if you go there wearing Blue and White and crush their Tigers at the Hobey Baker rink. While that may be easier for more recent Yale Hockey teams to do, back in my day Princeton was as tough as any team in the league.
There was tough love for the Keynesians in my conversation with Rickards. We talked about the broken Fed model and how the US government doesn’t think about financial market risk the right way. The feedback on this video has been tremendous. Evidently this taps into a new reality – The People Are Aware.
Back to the Global Macro Grind…
People in our profession are also very much aware of the real-time score on US Growth expectations falling, fast:
- Russell 2000 down another -1.9% last week to -4.8% YTD
- Nasdaq down another -1.3% last week to -2.5% YTD
- US Consumer Discretionary Stocks (XLY) down another -0.6% to -4.5% YTD
But, but, the Dow “hit an all-time high” on Friday (which puts it dead flat on the YTD #joy). So make sure you own everything in the Dow that is:
But you already have that on because that has been the strategy and asset allocation decision to make for the last 4.5 months. While that may not be trivial to someone who hasn’t evolved their process, in modern day markets real-time risk managers look at what we call Style Factors:
- Slow-growth stocks (Bottom 25% of the SP500’s EPS Growth is +5.2% YTD)
- Low-beta stocks are +6.1% vs High-beta up a paltry +0.4% YTD
- High-dividend-yielding stocks are +3.9% for 2014 YTD
“So”, what is driving slower-growth-hamster-on-the-wheel #YieldChasing? That’s too easy. It’s the Fed’s Policy to Inflate:
- So you buy inflation protections via TIPs
- Or you buy inflation by buying inflation itself (Oil, Food, Gold, etc.)
- Or you buy bonds and/or anything that looks like a bond as slower-growth-expectations drive down interest rates
Of course you’d have to let go of most academic ideologies that bonds don’t do well during #InflationAccelerating, and embrace that the Bernanke/Yellen Fed has 0% credibility on fighting inflation. I don’t know how many more times I can rant about this in print – that’s why I went to the video!
How about that stuff the Fed calls “non-core” (like ripping US rents and food) last week?
- CRB Foodstuffs Index up another +0.6% last week to +23.7% YTD
- Soybeans up another +1.1% to +11.6% YTD
- Corn up another +1.6% to +16.1% YTD
Yep. If you don’t like that definition of #InflationAccelerating, eat a REIT – and like it. Last week the MSCI REIT Index was up another +1.2% to +14.1% YTD, which means that you can bet your Madoff that rents are going higher in this country, not lower.
Oh, did I mention being long of US Housing in housing and/or related construction stocks terms (ITB) sucked wind again last week? For some reason this and most of the aforementioned market realities didn’t make it into Hyman’s weekly update. ITB (Housing) is down -6.4% YTD.
But never mind what Old Wall economists who missed calling the Q1 08’ and Q1 11’ slowdowns in US consumption growth think. As the early response to my un-plugged video with Rickards reminds us, The People Are Aware now. And that’s progress.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.56-2.67%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer