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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 26, 2014


As we look at today's setup for the S&P 500, the range is 54 points or 2.28% downside to 2020 and 0.34% upside to 2074.                                                          

                                                                     

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.73 from 1.74
  • VIX closed at 12.25 1 day percent change of -2.93%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Nov. 21 (prior 4.9%)
  • 8:30am: Durable Goods, Oct., est. -0.6% (pr -1.3%, rev -1.1%)
  • 8:30am: Init Jobless Claims, Nov. 22, est. 288k (prior 291k)
  • Continuing Claims, Nov. 15, est. 2.348m (prior 2.330m)
  • 8:30am: Personal Income, Oct., est. 0.4% (prior 0.2%)
  • 9:45am: Chicago MNI, Nov., est. 63 (prior 66.2)
  • 9:45am: Bloomberg Consumer Comfort, Nov. 23 (prior 38.5)
  • 9:55am: UofMich Confidence, Nov. final, est. 90 (prior 89.4)
  • 10am: Pending Home Sales m/m, Oct., est. 0.5% (prior 0.3%)
  • 10am: New Home Sales, Oct., est. 471k (prior 467k)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: DOE Energy Inventories
  • 11:30am: U.S. to sell $29b 7Y notes
  • 12pm: EIA natural-gas storage change
  • 1pm: Baker Hughes rig count

 

GOVERNMENT:

  • House, Senate out of session
  • 6am: Quinnipiac University Polling Institute releases poll of U.S. voters with their assessments of 2016 presidential race

 

WHAT TO WATCH:

  • Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize
  • HP’s Fourth-Quarter Sales Miss Shows Challenges Ahead of Split
  • EU Privacy Rules Said to Be Extended to Google U.S. Site
  • Uber Said Poised to Raise Funds Showing $40b Value
  • Holiday Sales: Earlier Thanksgiving Hours, Deeper Deals
  • Black Friday Specials to Lure 140 Million U.S. Shoppers
  • East Coast Storm Brings Headaches for Travelers and Forecasters
  • Households Drive U.K. Economy as Exports, Investment Decline
  • Constancio Says ECB Sovereign-Debt Buying Would Use Capital Key
  • Caesars Creditor Group Sues for Receiver to Run Operating Unit
  • HSBC, Goldman Rigged Platinum Prices for Years, Jeweler Says
  • CBS Program Accord With Dish Extended as Contract Talks Continue
  • Samsung to Buy Back Shares After $1.7 Billion Sale of Chemicals
  • China Widens ‘Tax-Evasion’ Net as Microsoft to Pay $150m
  • HSBC Said to Be Probed by U.S. on Hedge-Fund Leak, WSJ Says

 

EARNINGS:

    • Deere (DE) 7am, $1.57 - Preview
    • Golar LNG (GLNG) Bef-mkt, ($0.02)
    • Golar LNG Partners (GLMP) Bef-mkt, $0.67

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Pre-OPEC Meeting Fails to Deliver Output Cut: OPEC Reality Check
  • HSBC, Goldman Rigged Metals’ Prices for Years, Suit Claims
  • Shorting Chickens Becomes Hot Trade in Stock Market: Commodities
  • WTI Crude Trades Near 4-Year Low as OPEC Sends Mixed Signals
  • Gold Slips as Dollar Strengthens Before U.S. Economic Data
  • Copper Falls to Three-Week Low Before U.S. Durable-Goods Report
  • Gold Bulls Should Buy With Euros, Not Dollars: Chart of the Day
  • Iron Ore Extends Rout Below $70 as Global Supply Seen Expanding
  • Oil Bust of 1986 Reminds U.S. Drillers of Price War Risk: Energy
  • German 2015 Power Gains to 8-Month High Ahead of Capacity Sale
  • Rebar Closes Near Record Low as Investors Weigh Output, Demand
  • Vitol Sees New LNG Supply Adding to Glut as Demand Declines
  • Oil Volatility Here to Stay Regardless of OPEC Decision: Options
  • U.K. Gas Advances in Longest Streak Since 2011 Amid Norway Cuts

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


CHART OF THE DAY: Rate of Change in US Growth Versus the 10yr Bond Yield

CHART OF THE DAY: Rate of Change in US Growth Versus the 10yr Bond Yield - 11.26.14 EL Chart

 

Today's Chart of The Day shows the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind. To most of our “rate of change” fans,  the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…


Uber Bullish!

“If we can get you a car in 5 minutes, we can get you anything in 5 minutes.”

-Travis Kalanick

 

Travis, how about a massage? Or some turkey day beers and, bonds?

 

Everyone who has created an anti-consensus company likes how the CEO of Uber, Travis Kalanick, rolls. If this morning’s headlines about T Rowe’s investment are right, it looks like Uber is going to price its final private round at a $35-40B valuation too!

 

That’s almost as bullish as I am in 2014… on the Long Bond (TLT). In less than 3 minutes, I can get you anything you need to explain the bull case. As growth and inflation expectations slow, globally, bond yields go lower. Ok, maybe that was less than 1 minute.

Uber Bullish! - Fightin  Words 08.29.2014

 

Back to the Global Macro Grind

 

In less than 1 minute, I can get you a chart (see Chart of The Day) showing the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind.

 

To most of our “rate of change” fans,  the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…

 

Yesterday’s Consensus Media headlines on US GDP were classic. Sadly, Bloomberg (who we pay a lot of money to for rate of change data), continued down the all-time-CNBC-ratings-lows-perma-SPY-bull-spin-path by writing:

 

BREAKING: “SP500 Little Changed Near Record On GDP, Consumer Confidence”

 

In other real-world news yesterday, “Consumer Confidence” actually tanked (falling to 88.7 in NOV from 94.5 in OCT), and the rate of change in year-over-year US GDP growth slowed (again) to 2.4% in Q3 versus 2.6% in Q2.

 

#PermaBull says pardon?

 

Yes. Evolve your process, just a little, and stop staring at a next to useless GDP quarter-over-quarter SAAR (sequentially/seasonally adjusted) report and look at it how you look at the companies you invest in (i.e. on a year-over-year basis).

 

This isn’t rocket science. I can get you these numbers (and a whole lot more of them) in less than 3 minutes!

 

Again, to review why US bond yields continue to crash (10yr yield -26% YTD to 2.25% this morning):

 

  1. After topping at +3.1% year-over-year growth in Q4 of 2013, Q314 US GDP growth slowed to +2.4% and…
  2. While the +1.9% year-over-year growth report for Q1 was much uglier than the +3-4% “expected”…
  3. You can look forward to a Q4 GDP growth print in 2014 that is closer to +1.9% than Q3’s 2.4% was

 

Put another way, we still have US GDP growth (year-over-year dammit!) tracking to +2.2% for 2014 – and, magically, that’s exactly where the 10yr US Treasury Yield is trading this morning.

 

#Tah-dah! Get growth’s rate of change right – and you get bond yields right.

 

My inbox is fun. I often get forwarded other people’s macro work and, most of the time, I can’t particularly understand what it means. Mostly, I think that’s because I only care about rates of change. And most of that work doesn’t.

 

It’s not personal. It’s simply my perspective. And it’s this anti-consensus process and perspective that had us as bearish on the Long Bond in 2013 (when the rate of change in US growth was #accelerating) as we are Uber Bullish now.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.22%-2.33%

SPX 2020-2074

RUT 1154-1190

VIX 12.16-15.62

Yen 117.20-119.16

WTI Oil 73.03-77.04

Copper 2.94-3.01

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Uber Bullish! - 11.26.14 EL Chart


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The Fade Trade

This note was originally published at 8am on November 12, 2014 for Hedgeye subscribers.

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius —and a lot of courage —to move in the opposite direction."

-E. F. Schumacker

 

The most challenging thing to do as a stock market operator is to make a trade or investment against consensus.  If you are wrong for any period of time, you hear about it in spades.  Especially in this day and age when every  Jamoke under the sun has a soapbox and/or a twitter feed.  (Admittedly, though, we do applaud the democracy that Twitter has brought to the media world!)

 

The fact is, the harder consensus leans, the higher your probability of being right in fading that view.   Conventionally speaking, one way in which this is manifested is in value investing.  Now, to some, value investing is about deep dive company analysis, which we get, but on a higher level it is really about the implications of company valuation.  Simply put: when a company’s valuation is high, the prospects for its future are perceived as rosier than when the valuation is low.  (That is a simplification, but you get the point.)

 

The Fade Trade - fish

 

In effect, valuation is an opinion, so when the vast majority of stock market operators give a company a low valuation, their opinion of that company is low.  Ironically, or not, this consensus opinion is consistently wrong over the long run.  In fact, Dreman Value Management proved this in spades in a study of “cheap” stocks:

  • First, the study showed that for the period of January 1st, 1970 to December 31st, 2010, stocks in the lowest P/E quintile outperformed stocks in the highest P/E quintile by a margin of 15.4% to 8.3% in terms of annual return;
  • Second, in the 52 quarters when the S&P 500 declined between 1970 – 2010, low P/E stocks outperformed the market by an average of +2.4% versus an under performance of -1.9%  for high P/E stocks; and
  • Finally, from 1973 to 2010 the lowest quintile P/E stocks went up +1.2% on a negative surprise versus a return of -7.4% for the highest quintile P/E stocks on a negative surprise.

Now valuation is obviously only one factor, and not always the best factor for shorter term tactical trading, but over the long run it is a great gauge of the consensus opinions of companies.  And over the very long run, fading well loved “names” as based on high P/E multiples has provided enormous outperformance.

 

Back to the Global Macro Grind...

 

This morning it is not difficult to find the consensus view of U.S. equities.  The II Bulll Bear Spread (bulls minus bears) is +99% to the bullish since October 12th.  As well, Bears are tracking near all-time lows at 14.8%.  If you are a lemming, of course, this makes sense.  As markets go up you get more bullish and as markets go down you get more bearish.  Practically speaking, as we highlight in the Chart of the Day, chasing this rally is fraught with risk given how unconvincing the volume has been.

 

Complacency seems to once again be setting into the view of European equity markets as well.  We’ve seen a few notable chart followers suggest the turn is in for European equities and today they may have some fodder for the case with Eurozone Industrial production, which beat expectations.

 

Specifically, Eurozone September Industrial Production rose by +0.6% year-over-year versus the consensus view of -0.3%.  This compared to the August reading, which was a -0.5% decline (also an upward revision from -1.9%).   As well, the German economic minister was out this morning saying that the “German economy stabilized in Q3 after a Q2 contraction and now has slight upward momentum”.  Now, of course, if this is the best the Eurozone can do, fading any rally is certainly worth considering.

 

Over at the Bank of England today, the honest Canadian, BOE Governor Mark Carney, is at least being forthright  in saying, "it’s appropriate that markets now expect easier monetary conditions” based on the real-time growth and inflation data the BOE is seeing.  The challenge with easier monetary conditions for many global central banks is that while they are not out of bullets, the bullets are increasingly ineffective.

 

Yesterday we hosted a call for our Institutional Macro subscribers with Professor John Taylor from Stanford on this very topic.  Taylor is an outspoken advocate for rules based central banking (hence the eponymous Taylor Rule) and also highlighted in spades a point we’ve been harping on for some time, which is that the extreme QE monetary policy in the U.S. has became increasingly ineffective.   As Taylor noted on QE3:

 

“When started 10-year Treasury was 1.7%, then rose and has remained higher

  •  Effects of QE on yield spreads

– 1-year vs 10-year US Treasury spread

– 2003-2008 non-QE period……1.3%.

– 2009-2013 QE period……………2.4%”

 

It obviously begs the question of whether the biggest no-brainer “Fade Trade” has become to fade the increasingly impotent global central banking regime?  You likely already know our answer on that.

 

If you’d like to listen to the replay of our discussion with Professor Taylor, the replay and his presentation can be accessed below.

 

***Click here for Replay

***Click here for Presentation Materials

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.26-2.39%

SPX 1965-2049

RUT 1135-1182
VIX 12.33-16.51

Yen 111.99-117.87

WTIC Oil 75.61-78.97 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Fade Trade - cod


Cartoon of the Day: A Global Currency Gong Show

Cartoon of the Day: A Global Currency Gong Show - Dollar cartoon 11.25.2014

Sure... when you compare the Dollar to its peers in this global #CurrencyBurning gong show, the greenback looks pretty good.


Best Idea Call Invite: Long YUM

We recently added YUM to our Best Ideas list as a long.

 

We are hosting a call next Tuesday, December 2, 2014 at 10am EST to run through our thesis and field questions. We will send out dial-in information and materials for the call next week.

 

Key Topics Will Include:

  1. Vulnerable to Activism – There have been a number of events over the past two years that suggest the timing is optimal for YUM to simplify its corporate structure.  While there several different avenues of value creation, one thing is clear: YUM’s new corporate structure, multiple brands and underleveraged balance sheet almost ensure that the company is vulnerable to change.  What remains to be seen, however, is if the new CEO will be proactive and effect change or be reactive to the changing marketplace.
  2. Spinoff China (and/or Pizza Hut) – For the better part of the past two years, management has been asked about a potential spinoff of the China business.  In our view, this move would be the first step in a series of potential transactions that would simplify the structure and improve the operating performance of the company.  We find it likely that a group of influential shareholders begin to push the board in this direction.  It also makes sense to consider spinning off the dilutive Pizza Hut (co-owned stores) business, which would trade at a substantially higher multiple as a standalone entity.
  3. Multiple Ways to Win – The new global reporting structure of the company allows for a clean split of YUM's business units into multiple asset-light business models.  We also believe there is an opportunity to increase leverage (to repurchase stock or pay a special dividend), cut excess SG&A, refranchise additional restaurants and command a premium valuation. 

 

Under the scenario we will layout in our upcoming presentation, we see approximately 30-50% upside to the stock from current levels.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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