This note was originally published at 8am on July 22, 2014 for Hedgeye subscribers.
“In cyclical time, a society always evolves.”
-The Fourth Turning
Are you long Millenial evolution? “From the Arthurian Generation through today’s Millenial Generation, there have been twenty-four generations in the Anglo-American lineage. The first six were purely English. Millenials are the fourteenth in the American line.” (The Fourth Turning, pg 95)
So get in the burrito line. With +17% same store sales and +29% year-over-year revenue growth, evidently Millenials are eating lots of Chipotle (CMG). They are texting, tindering, and talking about things baby boomers don’t talk about too.
Being long new patterns of consumption and short old ones is a profitable way to look at the world. Having been on the long/short side of consumer stocks for almost my entire career, this is where I’ve seen some of the biggest moves – and they go both ways!
Back to the Global Macro Grind…
BREAKING: US Orange Juice Sales Fall To Record Low –Wall Street Journal
Yep. Damn Millenials are drinking the fruitier and frumpier stuff that costs 10x more. But, no worries, there’s no inflation in food/beverages – ask the Fed. With Orange Juice prices up another +0.4% in a down US Equity tape yesterday to +12.3% YTD, there’s deflation in whoever is short OJ demand.
As we age in this business (I’m a 13th gen dude and will be 40 within the next 6 months) we learn that most things we learned early on were in some way, shape, or storytelling form, false.
Risk managing macro, for example, rarely has anything to do with “valuation” or even reported supply and demand metrics. Most of the big moves in macro happen on the margin when there is a phase transition in price momentum, volume, and volatility.
How about long Copper (JJC)?
- Worldwide supply is hitting all-time highs
- But prices are starting to breakout from a TREND signal perspective
Or are they?
I’m not wed to a Millenial or Copper. I am happily married with three children and a risk management process that will hopefully allow me to be less wrong than I have been over the course of the last 15 years.
But in Real-Time Alerts I issued a buy signal in Copper on last week’s pullback. This morning I am getting buy signals for both the Shanghai Composite Index (China) and the Hang Seng. Both broke out above my intermediate-term TREND signal. We don’t have a research call to support that signal (yet), but do you always need one? Or is Mr. Macro Market telling you that you are going to get one?
What is a phase transition?
“A phase transition is the transformation of a thermodynamic system from one phase or state of matter to another by heat transfer.” –Wikipedia
And, in modern macro times, the heat transfer of price, volume, and volatility is measurable.
So why don’t more investors care about multi-duration, multi-factor, risk analytics. Why do so many still hinge on some gospel like “valuation” for direction, when reality is that market multiples expand and contract much more on economic and/or market phase transitions than anything else?
If you can answer all these questions, let me know. Because I can’t.
What are the most interesting big macro time/price cycles (for asset classes) that have gone from bearish to bullish from 2013 to 2014?
- US Treasuries
- Emerging Market Equities
- Chinese Equities?
That last one I won’t buy until Darius Dale gives me the green light. But there’s no reason to sit in 50% cash when very liquid asset classes like this are getting people paid. On the bear side, we’re all about shorting USA baby-boom #ConsumerSlowing patterns:
- US Housing
- US Casual Dining Stocks
- Broadline Retailers
In macro investing, it’s important to contextualize where you are in the cycle. Almost every single short idea we have that isn’t purely bottom-up is what we call an “early cycle” call. Plenty of the mid-to-late-cycle ideas out there (like being long inflation) will eventually run their course. It’s our job to always evolve our process and try to signal when they do.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.46-2.56%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Client Talking Points
Taiwan and the Nikkei led Asian losers overnight in what was an uncharacteristically weak relative session, but if the Nikkei can hold 15,062 TREND support we may be looking at a bearish to bullish TREND reversal in the making – stay tuned.
The front-month VIX corrected from overbought highs last week, but didn’t A) didn’t break 11.94 TREND support and B) has a wicked wide immediate-term risk range now of 13.84-17.82 (usually means more volatility pending).
Gold is up +0.3% to $1291 and while it held $1271 TREND support, we don’t like how it or the commodity complex (CRB Index) acts as of late – could be QUAD 4 in our model (Inflation and Growth Slowing).
|FIXED INCOME||26%||INTL CURRENCIES||10%|
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
RUSSIA: leads losers (again) -1.1% to new 2mth lows, -13.8% YTD
QUOTE OF THE DAY
The quality of an individual is reflected in the standards they set for themselves.
STAT OF THE DAY
Toyota Motor Corp. surprised with record profits as U.S. SUV Sales surged, net income in the April-to-June period rose to 587.8 billion yen ($5.7 billion).
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“When we hang the capitalists, they will sell us the rope.”
That wasn’t a very nice thing to say. But Stalin wasn’t nice; especially to economists! “In 1930, Stalin arrested Nikolai Kondratieff and shipped him off to Siberia. His crime: daring to defy the most linear of ideologies – Marxism – by suggesting that the long-term performance of market economies is cyclical.” (The Fourth Turning, pg 110)
Kondratieff died in the gulag, but his “long wave” cycles will live on for as long as gravity does (let’s hope someone isn’t empowered to centrally plan that away!). For longer-term risk managers, they are also called super-cycles (45-50 years). They are a tad longer than the monthly performance chasing thing you see your peers wrestling with in an oversupplied asset management industry today.
If you aren’t into the 45-50 year thing, how about 20-25 years? This is what demographer and economic historian Neil Howe calls a “turning” within your saeculum (lifetime). Like the Four Seasons, there are roughly four turnings in your life. I had a Real Conversation @HedgeyeTV with Neil about this recently that you can watch here: https://www.youtube.com/watch?v=h6vYv9O0dEM
Back to the Global Macro Grind…
Now if you don’t want to think about a long-term US economic cycle (which is 62 months into an expansion) rolling over, you can always ditch the 25 yr demographic reading for a 50-day moving monkey (chart). When those break, oh baby do the emotions kick in!
Obviously, using a 1-factor point-and-click model that my 4 year old daughter could figure out isn’t a multi-duration, multi-factor, interconnected Global Macro risk management process, so let’s move on…
What I wake up trying to do every morning is identify the intermediate-term-cycles within longer-term ones. Trust me, I don’t read a non-fiction book every 10-days for kicks and giggles. I do it in order to make myself less dumb. And that’s not an easy thing to do!
Not to be confused with an economic cycle, when considering the shorter-term market cycle within the “long-wave”, a really basic 3-factor model I use is:
Therefore, if I am looking at something like the Russell 2000 (IWM)
- PRICE – is -7.0% in the last 2 months and below my intermediate-term TREND resistance line of 1175
- VOLUME – accelerates on the DOWN days and decelerates on the UP ones (yesterday’s was -18% vs its 3 mth avg)
- VOLATILITY – is breaking out on the front-month, undergoing what we call a bearish to bullish phase transition
And if I want to be long the upside down of that #GrowthSlowing message (long the Long Bond):
- US Treasury 10yr Yield of 2.49% this morning remains well below my intermediate-term TREND level of 2.81%
- Fund Flows have turned back to bullish on the “safe” side of Fixed Income (after being bearish in 2013)
- Implied volatility in being long TLT (+12.5% YTD) vs Russell 2000 (IWM) -3.4% YTD is as low-stress as it gets
If you want a proverbial rope to hang yourself with in this game, start calling your best performing long ideas (on a lag) “low-stress.” Before you know it, you’ll be having a nervous breakdown.
One thing that starts to stress me out is being bullish on something macro that the crowd starts to dog pile (50-day moving avg is intact, bro!). So one place I watch very closely on that sentiment score is futures and options positioning.
Yesterday I wrote about how there was a net SHORT position of -41,210 contracts SP500 (SPX Index + Emini) that consensus short sellers (those who cover high and short low) built into Friday’s close being a catalyst for a bullish no-volume “bounce.”
We got that. But how about in the things I like (like Gold, Pounds, and Bonds)?
- Gold = net LONG position of +122,092 contracts (vs. its 6 month avg of +100,747)
- British Pound = net LONG position of +31,046 contracts (vs. its 6 month avg of +34,681)
- UST 10yr = net LONG position of +7,090 contracts (vs. its 6 month avg of -40,094)
In other words, Consensus Macro is:
- Too long Gold (after it’s up +7.4% YTD) so I should sell some
- Too bullish on what’s been the best major FX position vs USD for the last year, but not wacky bullish
- No longer short, but not yet Bullish Enough on longer-term UST Bonds
So, provided that our longer-wave economic cycle call is giving us confirming evidence (both sequential data and market prices), we just say “buy more” long-term bonds on all pullbacks to @Hedgeye TRADE and TREND lines of support.
As far as the history of socialists vs. capitalists is concerned, Stalin’s followers can eat their own ropes. One of the few things I agree with him saying is that “print is the sharpest and strongest weapon of our party.” That’s why I like to print our #process, every day.
Our Immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.43-2.54%
Best of luck out there today (and Happy Anniversary, Laura),
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – August 5, 2014
As we look at today's setup for the S&P 500, the range is 44 points or 1.19% downside to 1916 and 1.08% upside to 1960.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.02 from 2.02
- VIX closed at 15.12 1 day percent change of -11.22%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am: ICSC weekly sales
- 8:55am: Redbook weekly sales
- 9:45am: Markit US Services PMI, July final, est. 60.8 (pr 61)
- 9:45am: Markit US Composite PMI, July final (prior 60.9)
- 10am: ISM Non-Mfg Composite, July, est. 56.5 (prior 56)
- 10am: Factory Orders, June, est. 0.6% (prior -0.5%)
- 10am: IBD/TIPP Economic Optimism, Aug., est 47.3 (prior 45.6)
- 11:30am: U.S. to sell $40b 4W bills
- 4:30pm: API weekly oil inventories
- Senate, House on August recess
- Africa Summit Day 2:
- 9am: Commerce Sec. Pritzker, former New York City Mayor Bloomberg deliver opening remarks
- 9:15am Former President Clinton moderates session including CEOs from GE, DOW, WMT, Dangote Group Shanduka Group
- 10:15: African Union Chair Nkosazana Clarice Dlamini Zuma
- 10:20: Treasury Sec. Lew remarks at open of panel featuring African Development Bank President Kaberuka, CEOs or Chairmen from MasterCard, Heirs Holdings, Carlyle Group, Standard Bank
- 11:05am: World Bank President Kim opens session moderated by National Security Advisor Rice; session includes CEOs from: IBM, KO, BX, Harith Fund Managers, Econet Wireless Founder/Chair
- 1:50pm: Secretary of State Kerry remarks at Africa future moderated by Charlie Rose; Presidents of Rwanda, Senegal, South Africa, Tanzania, Tunisia participate
- U.S. ELECTION WRAP: Mich., Kansas Primaries; Defense Donations
WHAT TO WATCH:
- Gannett said to agree to buy rest of Cars.com for $1.8b
- IBM said to have offered Globalfoundries cash to take chip unit
- Toyota posts surprise record profit as U.S. SUV sales surge
- Israel pulls its troops from Gaza as cease-fire under way
- Telefonica offers $9b for Vivendi’s Brazil unit GVT
- Euro-area services grew less than initially estimated in July
- China services expansion stagnates as HSBC gauge drops
- BMW posts best carmaking profitability in 3 yrs on SUVs
- GM subprime auto lending draws attention of U.S. investigators
- Eurozone June retail sales up 0.4% m/m; est. up 0.5% m/m
- U.K. services growth accelerates to fastest in 8 months
- Samsung wins back Apple’s advanced chip order, Maeil says
- Goldman makes changes at hedge fund services unit, WSJ says
- Western Refining (WNR) 6am, $1.31
- Actavis (ACT) 7am, $3.38
- Aecom Technology (ACM) 7am, $0.64
- Akorn (AKRX) 7am, $0.20
- Ameren (AEE) 8am, $0.58
- Ametek (AME) 7am, $0.59
- Ansys (ANSS) 7:09am, $0.80
- Archer-Daniels-Midland (ADM) 7am, $0.76
- Arcos Dorados (ARCO) 8:30am, $(0.11)
- Ares Capital (ARCC) 8am, $0.38
- Bloomin’ Brands (BLMN) 7am, $0.29
- Brookfield Infrastructure (BIP) 8am, $0.37
- Cablevision Systems (CVC) 8:30am, $0.17 - Preview
- Carrizo Oil & Gas (CRZO) 6:30am, $0.67
- Coach (COH) 7am, $0.53 - Preview
- Cobalt Intl Energy (CIE) 7am, $(0.19)
- CVS Caremark (CVS) 7am, $1.10 - Preview
- Emerson Electric (EMR) 7am, $1.06
- FirstEnergy (FE) 8:30am, $0.44
- Gartner (IT) 7am, $0.59
- Intl Flavors & Fragrances (IFF) 7am, $1.35
- Liberty Interactive (LINTA) 7:47am, $0.27
- Liberty Media (LMCA) 7:30am, $0.22
- Louisiana-Pacific (LPX) 8am, $0.01
- Magellan Midstream Partners (MMP) 8:30am, $0.71
- MGM Resorts Intl (MGM) 8am, $0.10
- Monster Worldwide (MWW) 7:30am, $0.09
- Motorola Solutions (MSI) 7am, $0.62
- Northwest Natural Gas (NWN) 6:30am, $0.09
- Och-Ziff Capital Mgmt (OZM) 7:30am, $0.18
- Office Depot (ODP) 7am, $(0.02)
- Quicksilver Resources (KWK) 7am, $(0.06)
- Regeneron Pharmaceuticals (REGN) 6:30am, $2.31 - Preview
- TransDigm Group (TDG) 7:30am, $1.98
- Vantage Drilling (VTG) 6am, $0.05
- Vulcan Materials (VMC) 8am, $0.38
- Westlake Chemical (WLK) 6am, $1.47
- WP Carey (WPC) 7:30am, $0.63
- Zoetis (ZTS) 7am, $0.38 - Preview
- Acadia Pharmaceuticals (ACAD) 4:01pm, $(0.13)
- Activision Blizzard (ATVI) 4:07pm, $0.02
- Cimarex Energy (XEC) 4:45pm, $1.71
- Continental Resources (CLR) 6:12pm, $1.70
- Diamondback Energy (FANG) 4:20pm, $0.68
- DryShips (DRYS) 4:02pm, $(0.06)
- EOG Resources (EOG) 4:11pm, $1.38
- Expeditors Intl (EXPD) 4:30pm, $0.47
- FireEye (FEYE) 4:05pm, $(0.60)
- First Solar (FSLR) 4:01pm, $0.33 - Preview
- Frontier Communications (FTR) 4:01pm, $0.05
- Groupon (GRPN) 4:04pm, $0.01
- Jazz Pharmaceuticals (JAZZ) 4:05pm, $1.92
- KAR Auction Services (KAR) 4:15pm, $0.37
- Liberty Global (LBTYA) 5:12pm, $0.03
- Oasis Petroleum (OAS) 8:24pm, $0.74
- Oneok (OKE) 4:10pm, $0.37
- Saputo (SAP CN) 12:11pm, C$0.77
- Scientific Games (SGMS) 4:01pm, $(0.28)
- Take-Two Interactive Software (TTWO) 4:05pm, $(0.27)
- Trimble Navigation (TRMB) 4:05pm, $0.40
- Walt Disney (DIS) 4:15pm, $1.16 - Preview
- WebMD Health (WBMD) 4pm, $0.19
- WPX Energy (WPX) 4:20pm, $(0.06)
- Zillow (Z) 4:30pm, $(0.04)
- Zogenix (ZGNX) 4:01pm, $(0.16)
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Trades Near 3-Day High Before U.S. Supply Data; Brent Steady
- Baconholics Undeterred by 30-Year High Pig Prices: Commodities
- Money Managers Were Net-Long Copper on Aug. 1 in LME Report
- Gold Rebounds on Speculation of Demand With Prices Below $1,300
- Soybeans Drop as Rains Forecast for Midwest Seen Easing Dryness
- Lead Declines as Gauge of Chinese Services Misses Projections
- BullionVault’s Gold Buyer Index Rebounds as Holdings at Record
- Coffee Rebounds on Speculation Prices Fell Too Far; Cocoa Rises
- China Said to Add 10,000 Metric Tons to Rare Earths Stockpiles
- CME to Start European Gas Futures as Trayport Stays Independent
- Parnon, Arcadia to Pay $13 Million in Oil Price-Rigging Suit
- Sugar Researcher Kingsman Retiring After 37 Years in Industry
- Citi Bearish on Aluminum as Chinese Product Exports Damp Demand
- Colorado Fracking Opponents Poised to Lose Local Control Battle
The Hedgeye Macro Team
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