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Investing Ideas - Levels

Takeaway: Here are Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction investing ideas.

Investing Ideas - Levels  - Investingideas12.19

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

Anything longer than 3 years is unpredictable.

 


The Best of This Week From Hedgeye

Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.

HEDGEYE TV

 McCullough: I’ve Never Tried Heroin and Europe Looks Like Hell

In this excerpt from Wednesday’s Morning Macro Call for institutional subscribers, Hedgeye CEO Keith McCullough discusses the recent moves in European equities and questions whether ECB President Mario Draghi’s money printing (which we affectionately call the “Draghi Drugs”) can still deliver a high. If you’re hedged on the hope that central banks will save you, the fundamental issues in the major economies will hurt you.

 

 

McCullough: Why You Won't See Me In Barron's Any Time Soon

In this brief excerpt from Monday’s Institutional Morning Macro Call, Hedgeye CEO Keith McCullough discusses failed forecasts from Barron’s and the only catalyst for the long bond.

 

 

EXCLUSIVE: Keith McCullough’s 2015 Market Forecast

In this brief excerpt from Tuesday’s Morning Macro Call, Hedgeye CEO Keith McCullough finally offers his coveted 2015 market forecast in response to a viewer’s question. 

 

 

Q&A: What Deflation Means for Texas and Your Portfolio

The crash in oil is old news by now, so on Wednesday's Morning Macro Call Keith McCullough responds to a subscriber question with a breakdown of how deflation impacts the rest of your portfolio, from the MLP space to Healthcare.

HEDGEYE IN THE MEDIA

McCullough on Fox Business: "The Most Contrarian Thing I've Ever Heard!"


Hedgeye CEO Keith McCullough appeared on Fox Business' Opening Bell with Maria Bartiromo Friday morning with Jeff Kleintop of Charles Schwab and Jones Trading Chief Market Strategist Mike O’Rourke. During a heated discussion on what will drive stocks in 2015, Kleintop claimed the new year will be brighter for global growth and Keith fired back that this is the most contrarian view he has ever heard.

 

Next, Keith and Mike O’Rourke sounded off on the state of the markets. Keith highlighted his view that the rest of the world is an ongoing "train wreck" and discussed risks associated with rising volatility. 

 

In this final clip, Keith and Mike O’Rourke discussed the economic implications of low oil prices. Keith reiterated his call to buy the long bond (TLT) as growth will surprise on the down side.

CARTOON

Everything Good?

The Best of This Week From Hedgeye - World Market No 12.16.14

"Nowhere to run to, baby ... Nowhere to hide." 

-Martha and the Vandellas

 

Red October...

The Best of This Week From Hedgeye - Russia ruble oil 12.15.14

 "The risk that was developing in Russia has been crystal clear," Hedgeye's Keith McCullough tweeted on Monday. "It's nothing new." On a related note, the Russian stock market crash continues unabated... down another -5.7% #NoWorries right?

CHART

Positioning for Fire $LNCO

The Best of This Week From Hedgeye - COD LNCO 12.19.14

Editor's note: Below is an excerpt from Friday's Morning Newsletter written by Hedgeye Energy Sector Head Kevin Kaiser. 

 

I don’t spend a lot of time trying to forecast what I’m ill-equipped to forecast with a high degree of confidence.  I don’t know when lightning will strike.  But I can put forth investment ideas that are based on sound data and reasoning, and are likely to work under various assumptions and scenarios.  And when the spark is set, I am prepared and well-positioned. 

 

I’ve written about no company more than LINN Energy (LINE, LNCO) over the past two years because I thought that the system was extremely unstable.  The basic story has always been the same – the company makes no real profit, but dividends out $1 billion per year, which it pays for via serial debt and equity issuance.  As I saw it, it was highly likely to end disastrously.  The pushback was consistent, “There’s no catalyst.”  This was not a good idea, I was told, because there wasn’t a lightning storm in sight…

 

Is It Really Different This Time? (Consensus U.S. GDP Forecast Edition)

The Best of This Week From Hedgeye - COD GDP 12.16.14

For more information on how you can become a subscriber to the fastest-growing independent research firm in America click here.

POLL OF THE DAY

Poll of the Day: Will Vladimir Putin Take Major Military Action in 2015?

 

The crash in Russia continues as the ruble plunges to record lows, oil drops 50% since June, and the Russian stock market sinks over 50% YTD. We wanted to know what you thought.


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, MUB, RH, TLT, XLP and YUM.

Below are Hedgeye analysts’ latest updates on our six current high-conviction long investing ideas.

 

We also feature two pieces of content from our research team at the bottom.

 

*Note: We will send CEO Keith McCullough’s updated levels for each investing idea in a separate email.

CARTOON OF THE WEEK

Investing Ideas Newsletter       - FED cartoon 12.18.2014

IDEAS UPDATES

TLT | EDV | XLP | MUB

Does Your View on Rates Include the Risk of a "Reflexive Deflationary Spiral"?

 

Takeaway: We see amplified risk of a reflexive deflationary spiral over the NTM, strengthening our non-consensus bullish bias on long-term Treasuries.

 

To start, please review slides 29-39 of our 12/16 presentation on Emerging Markets, which outlines a probable fundamental case for EUR parity and a re-test of the August ’98 lows on the JPY with respect to the intermediate term. Those just might be 11 of the most important ~20 charts in all over global macro by this time next year. CLICK HERE to access that presentation.

 

Moving along, let’s review where consensus is on rates:

 

  • We know the sell-side is bullish on rates (i.e. bearish on Treasury bonds). Always have been; always will be. To my knowledge, there simply aren’t enough banking and trading fees associated with being bullish on long-term Treasury bonds in lieu of other asset classes. Along those lines, it’s worth noting that since the onset of the economic recovery, the start-of-year Bloomberg consensus forecast for the 10Y Treasury note yield at the end of the corresponding year has been off by an [astounding] average absolute value of 106bps! Sell-side consensus thinks rates put on +87bps from today’s price to close out 2015 at 3.05%.
  • The buy-side is perhaps even more bullish on rates (i.e. bearish on Treasury bonds) at the current juncture. The net SHORT position of 215k 10Y Treasury note futures and options contracts is the widest net SHORT position since April of 2010. On a TTM Z-Score basis, which we use to show deviations that are typically indicative of crowded trades, the buy-side hasn’t been this net SHORT of long-term Treasuries since March 2012, October 2011 and April of 2010. The subsequent draw-downs in the 10Y Treasury note yield from those peaks in bearish sentiment are -99bps, -45bps and -160bps, respectively.

 Investing Ideas Newsletter       - c1

 

Investing Ideas Newsletter       - c6

Source: Bloomberg L.P.

Investing Ideas Newsletter       - c7

Source: Bloomberg L.P.

 

So, is this time different? Will “the crowd” finally be right on long-term Treasuries? Having been appropriately bearish on rates (i.e. bullish on Treasury bonds) in 2014 (after having been bullish on rates in 2013), we are in an enviable position of lacking the kind of baggage that might cloud our judgment.

 

Regarding that judgment, we strongly believe the aforementioned dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

 

Here’s how that process would work:

 

Step 1: Both the BoJ and ECB accelerate their monetary base expansion, at the margins, during a time where the Fed is on hold and deliberating [out loud] the appropriate timing of their first [and subsequent] rate hikes. Looking to our proprietary G3 Monetary Policy Model, which contextualizes trends across 10 key economic and financial market indicators, the ECB is clearly facing immense pressure to ease. The Fed should maintain a neutral-to-ever-so-slightly-dovish bias, while the BoJ should maintain a slight hawkish bias. That said, the BoJ’s current composite score is roughly equivalent to its late-October score, when Kuroda pushed through a contentious expansion of the BoJ’s QQE program. That signals to us that politics, not economics, are the primary driver of the BoJ’s current easing bias.

 

Current:

Investing Ideas Newsletter       - c8

 

October 30

Investing Ideas Newsletter       - c9

 

Step 2: As G3 monetary policy continues to diverge, the currency market responds by appropriately inflating the value of the U.S. dollar vis-à-vis peer and emerging market currencies. We think the implied ~3% appreciation of the U.S. Dollar Index through year-end 2015 as currently assumed by Bloomberg consensus is way off the mark. The DXY is up over +3% since the end of October alone!

 

Investing Ideas Newsletter       - c10

 

Investing Ideas Newsletter       - c11

 

Investing Ideas Newsletter       - c12

 

Investing Ideas Newsletter       - c13

 

Step 3: As the dollar strengthens, commodity prices continue their deflationary descent.

 

Investing Ideas Newsletter       - c14

 

Investing Ideas Newsletter       - c15

 

Step 4: As commodity prices continue to fall, both expected and reported CPI readings continue to fall. At first, breakevens and headline CPI rates will bear the brunt of the aforementioned deflationary forces. We anticipate core CPI readings are likely to follow those rates lower on a lag.

 

Investing Ideas Newsletter       - c16

 

Investing Ideas Newsletter       - c17

 

Step 5: As reported inflation slows in all three of the world’s major economies, the pressure for each central bank to get marginally dovish will heighten. The central bank closest to achieving its mandate (i.e. “full employment” and “price stability” in the U.S., “price stability” in the Eurozone and “5% monetary math” in Japan) is likely to see its currency bear the brunt of global capital flows as investors anticipate relatively weaker monetary policy for longer in the other two economies. For now, that is undoubtedly the U.S. dollar.

 

Investing Ideas Newsletter       - c18

 

Investing Ideas Newsletter       - c19

 

Investing Ideas Newsletter       - c20

 

Step 6: Repeat steps #3-5.

 

Scary stuff if you bought the dip in Russia (RSX) or domestic E&Ps (XOP)…

 

RH 

Retail Sector head Brian McGough has no new update on Restoration Hardware this week. Shares of RH notched a new record high on Thursday trading over $100, before falling back a bit on Friday to finish the week up 3%.

 

RH is up almost 18% over the past month.

YUM 

 

Counting on Creed


If there was one key takeaway from the analyst day we attended a couple of weeks ago, it is that new CEO Greg Creed is the real deal.  The energy, creativity, and passion he brings to the business cannot be understated.  He played an instrumental role in the Taco Bell turnaround and is now in a place to effect change across the whole organization.  While Mr. Novak built a tremendous company, Mr. Creed was very clear that his vibrant personality will transpire throughout the organization.  He will leave his mark, and we think it will be for the better.

 

Investing Ideas Newsletter       - yum creed

 

As we mentioned in last week’s addition, the new global reporting structure allows for a clean split of YUM’s business units into multiple asset light models.  What we failed to mention, however, is that this new structure should enhance brand focus across the portfolio.  For this reason, we don’t necessarily need a restructuring or financial engineering event to occur to be comfortable with our long thesis.  We genuinely believes the company, and its brands, are heading in the right direction. 

 

In other words, there are multiple ways to win.

 

If an activist steps in, we win.  If an activist doesn’t step win, we probably still win.  All told, while an activist would likely create shareholder value rather quickly, we’re confident that this management team can be counted on to create value over the long haul.  Looking one to two years out, under any scenario, we see the stock trading significantly higher than where it is today.

 

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

just charts: eye-catching industrial data

Industrials Sector Head Jay Van Sciver shines a light on ten key developments.

Investing Ideas Newsletter       - i9

DARDEN: recovery expectations are premature

We remain very cautious on DRI shares and believe expectations of a 2H15 recovery are not grounded in reality.

Investing Ideas Newsletter       - darden restaurants


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%

The Week Ahead

The Economic Data calendar for the week of the 22nd of December through the 26th of December is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 12.15.14 Week Ahead

 


DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”?

Takeaway: We see amplified risk of a reflexive deflationary spiral over the NTM, strengthening our non-consensus bullish bias on long-term Treasuries.

To start, please review slides 29-39 of our 12/16 presentation on Emerging Markets, which outlines a probable fundamental case for EUR parity and a re-test of the August ’98 lows on the JPY with respect to the intermediate term. Those just might be 11 of the most important ~20 charts in all over global macro by this time next year. CLICK HERE to access that presentation.

 

Moving along, let’s review where consensus is on rates:

 

  • We know the sell-side is bullish on rates (i.e. bearish on Treasury bonds). Always have been; always will be. To my knowledge, there simply aren’t enough banking and trading fees associated with being bullish on long-term Treasury bonds in lieu of other asset classes. Along those lines, it’s worth noting that since the onset of the economic recovery, the start-of-year Bloomberg consensus forecast for the 10Y Treasury note yield at the end of the corresponding year has been off by an [astounding] average absolute value of 106bps! Sell-side consensus thinks rates put on +87bps from today’s price to close out 2015 at 3.05%.
  • The buy-side is perhaps even more bullish on rates (i.e. bearish on Treasury bonds) at the current juncture. The net SHORT position of 215k 10Y Treasury note futures and options contracts is the widest net SHORT position since April of 2010. On a TTM Z-Score basis, which we use to show deviations that are typically indicative of crowded trades, the buy-side hasn’t been this net SHORT of long-term Treasuries since March 2012, October 2011 and April of 2010. The subsequent draw-downs in the 10Y Treasury note yield from those peaks in bearish sentiment are -99bps, -45bps and -160bps, respectively.

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - Bloomberg Consesus 10Y Tracking Error

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - CFTC NNCCP

Source: Bloomberg L.P.

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - UST 10Y Yield Draw Downs

Source: Bloomberg L.P.

 

So, is this time different? Will “the crowd” finally be right on long-term Treasuries? Having been appropriately bearish on rates (i.e. bullish on Treasury bonds) in 2014 (after having been bullish on rates in 2013), we are in an enviable position of lacking the kind of baggage that might cloud our judgment.

 

Regarding that judgment, we strongly believe the aforementioned dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

 

Here’s how that process would work:

 

Step 1: Both the BoJ and ECB accelerate their monetary base expansion, at the margins, during a time where the Fed is on hold and deliberating [out loud] the appropriate timing of their first [and subsequent] rate hikes. Looking to our proprietary G3 Monetary Policy Model, which contextualizes trends across 10 key economic and financial market indicators, the ECB is clearly facing immense pressure to ease. The Fed should maintain a neutral-to-ever-so-slightly-dovish bias, while the BoJ should maintain a slight hawkish bias. That said, the BoJ’s current composite score is roughly equivalent to its late-October score, when Kuroda pushed through a contentious expansion of the BoJ’s QQE program. That signals to us that politics, not economics, are the primary driver of the BoJ’s current easing bias.

 

Current: 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - MONETARY POLICY MODEL

 

October 30th: 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - MONETARY POLICY MODEL OCT 30

 

Step 2: As G3 monetary policy continues to diverge, the currency market responds by appropriately inflating the value of the U.S. dollar vis-à-vis peer and emerging market currencies. We think the implied ~3% appreciation of the U.S. Dollar Index through year-end 2015 as currently assumed by Bloomberg consensus is way off the mark. The DXY is up over +3% since the end of October alone!

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - EUR 1Y   2Y OIS

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - JPY 1Y   2Y OIS

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - DXY 1Y   2Y OIS

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - DXY Bloomberg Consensus NTM Forecast

 

Step 3: As the dollar strengthens, commodity prices continue their deflationary descent.

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - DXY vs. CRB Index

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - DXY vs. Brent Crude Oil

 

Step 4: As commodity prices continue to fall, both expected and reported CPI readings continue to fall. At first, breakevens and headline CPI rates will bear the brunt of the aforementioned deflationary forces. We anticipate core CPI readings are likely to follow those rates lower on a lag.

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - Brent Crude Oil vs. Breakevens

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - CRB YoY vs. CPI YoY

 

Step 5: As reported inflation slows in all three of the world’s major economies, the pressure for each central bank to get marginally dovish will heighten. The central bank closest to achieving its mandate (i.e. “full employment” and “price stability” in the U.S., “price stability” in the Eurozone and “5% monetary math” in Japan) is likely to see its currency bear the brunt of global capital flows as investors anticipate relatively weaker monetary policy for longer in the other two economies. For now, that is undoubtedly the U.S. dollar.

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - JOBLESS CLAIMS

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - CORE CPI

 

DOES YOUR VIEW ON RATES INCLUDE THE RISK OF A “REFLEXIVE DEFLATIONARY SPIRAL”? - FIVE PERCENT MONETARY MATH

 

Step 6: Repeat steps #3-5.

 

Scary stuff if you bought the dip in Russia (RSX) or domestic E&Ps (XOP)…

 

Have a great weekend,

 

DD

 

Darius Dale

Associate: Macro Team


Cartoon of the Day: Naughty or Nice?

Cartoon of the Day: Naughty or Nice?  - Naughty nice cartoon 12.19.2014

Mr. Market made his list... He checked it twice... He found out who's been naughty or nice... We're happy to report that our non-consensus, top macro call on the Long Bond via TLT made the "nice" list this year. It's been a great year at Hedgeye.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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