Client Talking Points
The bounce isn’t bouncing. Greece is down -0.7%, Portugal is down -0.4%, Russia is down -0.4% (-13.5% year-to-date) this morning as almost every major European equity index remains below @Hedgeye TREND risk resistance.
The UST 10YR Yield is back down to 2.47% this morning and the Yield Spread (10yr minus 2yr) is compressing to a fresh year-to-date low of +193bps (that’s -20bps since July 7th when the Russell topped). Regional Banks (KRE) were down -1.1% yesterday. #Q3Slowing sinks in.
There’s always a bull market somewhere. Gold loves U.S. economic stagflation, and has once again held immediate-term TRADE support, moving back up to $1308 (big breakout line = $1323) and we might get that this week if A) GDP misses again and B) Janet freaks out about growth slowing, housing, etc.
|FIXED INCOME||24%||INTL CURRENCIES||12%|
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.
Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.
Three for the Road
TWEET OF THE DAY
$DRI Darden announces Clarence Otis to step down; chairman and CEO roles to be separated
QUOTE OF THE DAY
We cannot change the cards we are dealt, just how we play the hand.
STAT OF THE DAY
McDonald's operates almost 36,000 restaurants worldwide, serving nearly 70 million people in more than 100 countries each day.
This note was originally published at 8am on July 15, 2014 for Hedgeye subscribers.
“Frankly, my dear, I don’t give a damn.”
That’s what Rhett epically told Scarlett at the end of Gone With The Wind. That pretty much sums up what I think of the Goldman call to sell Gold yesterday too.
Earlier in the movie, Rhett explains the generational gap to Scarlett:
“If you are different, you are isolated, not only from people of your own age but from those of your parents… but your grandparents would probably be proud of you and say, there’s a chip off the old block… and your grandchildren will try to be like you.” (The Fourth Turning, pg 79)
And that pretty much summarizes my generation vs. The Old Wall’s boomer and GI generations. Yes, I’m generalizing to make a point. You can blame my birth year, or blame them. It doesn’t matter. History won’t care. In terms of our Global Macro #process, we are different. And that’s just fine with me.
Back to the Global Macro Grind…
If you ask the bond market what it thought of the GS call to sell Gold yesterday, evidently it couldn’t give a damn either. US 10yr Treasury Yields are back down to 2.53% this morning and remain as bearish as Gold is bullish in our model. If you want to get Gold right, get rates right.
Put another way:
- If you are bearish on Q3 US GDP growth slowing, you are A) bullish on bonds and B) bullish on Gold
- If you are bullish on Q3 US GDP growth accelerating, you are B) bearish on bonds and B) bearish on Gold (like we were in 2013)
Inclusive of yesterday’s newsy selloff in Gold, don’t forget the context of the move:
- Gold is +9% YTD
- UST 10yr Bond Yield is -17% (-51bps) YTD
So the Goldman growth bulls have some hay to bail. That’s not a personal attack – I have plenty of friends at Goldman who I hold in the highest regard. It’s just the YTD score.
Since Goldman has some very thoughtful people in their research department, this makes for an interesting bull/bear debate. From a macro perspective, their calls for 2014 are fairly uniform. Their highest profile strategists have a bullish growth and interest rate bias:
- Abby Cohen is looking for US growth to accelerate and US Equities to see multiple expansion
- Jan Hatzius is trying to get the Fed to pull forward the “dots” (raise rates sooner)
Hedgeye, on the other hand:
- Is looking for #InflationAccelerating to slow US consumption growth and perpetuate multiple compression in early cycle stocks
- And is trying to front-run the Fed’s decision-making process by predicting they get easier (as the economic data slows) in Q3/Q4
Don’t worry – “front-running” is only a bad compliance word if you’re running a bank, broker dealer, or asset management firm with some sort of inside information. I don’t do that. I just run my mouth.
On our Q3 Macro Themes Call last Friday, I went through the bull case for Gold via our #DollarDevaluation theme (ping sales@Hedgeye.com if you’d like to review our slide deck – I’ll be presenting it in London this week). The sequence of front-running predictable Fed behavior is as follows:
- On the margin, Q314 real consumption data slows like the June data did (i.e. the Fed can’t blame FEB weather anymore)
- Janet Yellen, being a very particular bureaucrat looking to dot i’s and cross t’s, will want to acknowledge that slowing
- By the SEP Fed meeting, Wall Street will be looking at a much more dovish Fed than the tapering one it had at the start of the year
If you agree with me on that:
- You short the US Dollar
- You buy more Treasuries (and slow-growth #YieldChasing equities that look like bonds)
- And you buy more Gold
What I care most about on the GS call is the impact it had on our core 3-factor risk management model yesterday (price, volume, and volatility):
- PRICE – Gold held both its immediate-term TRADE line of $1301 and intermediate-term TREND line of $1271
- VOLUME – vs the 5-day avg, futures and options contract volume was +27.7%
- VOLATILITY – implied volatility didn’t move much (it’s still down -2% and -18%, respectively, on a 1 and 6 month basis)
Put another way, Goldman can still move markets, big time, from a volume perspective. But on my score card, when A) price holds my TRADE and TREND lines of support and B) implied volatility is falling, across durations… I buy more.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.49-2.58%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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“You see, I’m the event. I am the news.”
That’s a beauty quote from a book that finally made it to the top of my reading pile this summer – Flash Boys, by Michael Lewis. Brad Katsuyama and I have a few things in common. Well, sort of. We’re both Canadian – but I’m more of a High-Frequency-Tweeter than a trader.
The context of Brad realizing that his Old Wall order-flow from the Royal Bank of Canada was “news” to the machines front-running his (lack of) technology may have been enlightening to him at the time, but so were late 17th century concepts like the sun rising in the East.
The better one-liner came before the aforementioned one when Katsuyama’s IT guys reminded him that “you aren’t the only one trying to do what you’re trying to do” (pg 33). Everyone and their brother who is trying to short spoos (SPY), at the same time, should always remember that.
Back to the Global Macro Grind …
On the “news” at 10AM yesterday that US Pending Home Sales “missed” (again), the Housing stocks (ITB) dropped to -1.6% on the day, and Consensus Macro hedgies started shorting SPY, feverishly. If you want to beat your competition in this game, don’t do that.
The time to short Housing (ITB) and the Russell 2000 (IWM) was last week (Tue-Wed) when:
- Existing Home Sales were hoped to be a new bullish TREND
- The Russell bounced to lower-highs of 1158, and the SP500 hit an all-time high of 1987
- Facebook (FB) beat big and every social media’s profitless cow was going to jump over the moon
Hope, obviously, is not a risk management process. And, despite my addiction to tweeting, Twitter is not Facebook. We call selling/shorting on green and buying/covering on red Fading Beta because that’s what it is – fading the machines. You see, consensus capitulating on both the upside and downside is the event. In an oversupplied industry of short-term performance chasers, it is the news.
Don’t get me wrong, for longer-term investors, recent US #HousingSlowdown (see our Q2 Macro Theme Deck for details on why) data is downright frightening. To put some meat on that bone, today’s Chart of The Day shows what our Housing team calls the Hedgeye Housing Compendium – it rolls Hedgeye-style, in rate of change terms. And it’s color coded (red/green) so that even a Mucker can understand it.
USA’s Pending Home Sales are now trending down -7.2% year-over-year (versus growing at +12% year-over-year when we were bullish on US Housing last year). At the same time, the mother of all behavioral factors (last price) in US Housing has seen US Home Price Inflation (HPI) slow from its CoreLogic data peak of +11.8% last year to a preliminary estimate for June of +7.7%.
Now, if you think in absolutes (instead of rate of change), you might say that Housing is still “good.” Even if I gave you that, in my risk management model going from great to good is bad – and the stocks agree.
It’s not just the Housing stocks that aren’t horning people up YTD – it’s a lot of things US domestic consumer:
- Housing Stocks (ITB) -1.3% yesterday to -8.0% YTD
- Russell 2000 (IWM) down another -0.6% yesterday to -2.1% YTD
- US Consumer Discretionary stocks (XLY) +0.19% yesterday to +0.18% YTD
So why would you be long any of that stuff when you could be long the following:
- Utilities (XLU) up another +1.3% yesterday to +13.3% YTD
- Energy (XLE) -0.2% yesterday to +12.5% YTD
- Healthcare (XLV) +0.1% yesterday to +11.6% YTD
Those are the Top 3 performing sectors in the SP500 and they are clean cut ways to be long of either A) #InflationAccelerating and/or B) the slow-growth #YieldChasing born out of it. One of our favorite ways to be long Healthcare inflation is being long the hospitals (HCA).
If you’re not into the US stock market naval gazing thing and want to diversify, across asset classes, you could also be long things like:
- Commodities – Nickel and Coffee were up another +0.2-1.1% yesterday to +39.4% and +63.6% YTD, respectively
- Emerging Market Equities – MSCI EM and LATAM indices are +8% and +11% YTD, respectively
- Long-term Treasury Bonds – our in-house fav (alongside TIP), the TLT is +13.4% YTD
Remember, “you aren’t the only one trying to do what you’re trying to do.” So try to stop guessing what the spoos or Dow are going to do next, and line up your investable Macro Themes with the asset allocations that will help you front-run your performance chasing competition.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.45-2.54%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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