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Cartoon of the Day: Naughty List

Cartoon of the Day: Naughty List - Lump of coal cartoon 12.25.2014

The only thing worse than getting coal in your stocking this year? Getting oil. It remains the epicenter of the risk of deflation with WTI falling from $101 six months ago to $55.98 today.


Japan, Oil and Sentiment

Client Talking Points

JAPAN

We have been signaling the probability of the Japanese stock market to go up. Yen down = Japanese equities up. Japanese equities signaled immediate term trade over bought up, Weimar Nikkei (which we have people long of) up another +1.2% last night to +11.2% year-to-date. Yen is testing the low end of the immediate term risk range.

OIL

You saw the bounce in oil yesterday and then it fails to show follow through (again). WTI oil is down -1.5% to $56.25, the risk range immediate term risk range is 52.87 to 59.23. Look at oil as the epicenter of the risk of deflation.

SENTIMENT

The immediate term risk range on the VIX (volatility index) is wacky wide at 13.17 to 24.35. At the low end of the range you sell and at the high end of the range you buy. The II Bull/Bear Spread is +3770 basis points to the Bull side - not an all-time high, but close. People just believe they can’t make fundamentally make money on the short side, that’s not true because we have.

Asset Allocation

CASH 57% US EQUITIES 4%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 7%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

XLP

The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road

TWEET OF THE DAY

Serious Lack of Momentum in the Momentum Stocks | $GPRO $LOCO https://app.hedgeye.com/insights/41390-mccullough-serious-lack-of-momentum-in-the-momentum-stocks-gpro-l … via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

The Revolution transformed science from a popular hobby into a full-fledged profession.

-Sharon Bertsch McGrayne

STAT OF THE DAY

Keurig Green Mountain has announced a recall affecting roughly 7 million of its K10 Mini Plus Brewing Systems manufactured between 2009 and 2014. 


athenahealth $ATHN | Practice Count Updated

Takeaway: Growth in net new medical practices held steady at 27% CAGR since 12/10. Sequential q/q growth is tracking 6.1%.

Editor's note: This unlocked research note was originally published by Hedgeye Healthcare Sector Head Tom Tobin and analyst Andrew Freeman on December 23, 2014 at 09:43.

athenahealth $ATHN | Practice Count Updated - 2014 12 23 Medical Practice Growth

 

Tracker update

Update through 12/22 places the annual growth rate of new medical practices on athenaNet at 27%. In terms of attrition, net adds since 12/10 were 34, with 46 practices won and 12 lost. Sequential q/q growth is tracking 6.1%.

 

Please call or e-mail with any questions.

 

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APPENDIX

 

athenahealth $ATHN | Practice Count Updated - 2014 12 23 Attrittion

athenahealth $ATHN | Practice Count Updated - 2014 12 23 Medical Practice Count

 

Andrew Freedman

Analyst

203-562-6500

afreedman@hedgeye.com

@HedgeyeHIT 

 

Thomas Tobin
Managing Director 

203-562-6500

ttobin@hedgeye.com

@HedgeyeHC

 


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THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's edition of the Macro Playbook, we circle the wagons on the domestic economy just the way you like it – in chart form.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. Health Care Select Sector SPDR Fund (XLV)
  2. iShares National AMT-Free Muni Bond ETF (MUB)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. iShares 20+ Year Treasury Bond ETF (TLT)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

 

QUANT SIGNALS & RESEARCH CONTEXT

Quick Check-In With the U.S. Economy: It’s been a few weeks since we circled the wagons on the state of the domestic economy so we thought we’d bequeath to you today’s visual summary – presented without spin or further commentary, effectively allowing you be the judge of the state of the U.S. economy (let us know what you think; as always, we’d love to hear your thoughts!).

 

Markit Composite PMI: slowing on both a sequential and trending basis (CLICK HERE to learn why the trend in this data series is a very important economic indicator):

 

THE HEDGEYE MACRO PLAYBOOK - COMPOSITE PMI

 

Markit Services PMI: slowing on both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - SERVICES PMI

 

Markit Manufacturing PMI: slowing on both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - MANUFACTURING PMI

 

Industrial Production: accelerating on a both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - INDUSTRIAL PRODUCTION

 

Real PCE: accelerating on a both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - REAL PCE

 

Nominal Retail Sales: accelerating on a both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - RETAIL SALES

 

Conference Board Consumer Confidence: slowing on a sequential and ever-so-slightly on a trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - CONSUMER CONFIDENCE

 

NFIB Small Business Confidence: accelerating on a both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - BUSINESS CONFIDENCE

 

Exports: slowing on both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - EXPORTS

 

Imports: accelerating on a sequential basis and slowing on a trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - IMPORTS

 

Nonfarm Payrolls: accelerating on a both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - PAYROLLS

 

Jobless Claims (4-week rolling average, NSA, YoY): slowing on both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - JOBLESS CLAIMS

 

U-6 Underemployment Rate: slowing on both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - U 6 UNEMPLOYMENT

 

Real Wages: accelerating on a both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - REAL WAGES

 

Durable Goods New Orders: slowing on both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - DURABLE GOODS

 

Headline CPI: slowing on both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - CPI

 

Core CPI: slowing on both a sequential and trending basis:

 

THE HEDGEYE MACRO PLAYBOOK - CORE CPI

 

Merry Christmas, Happy Hanukkah and Joyful Kwanzaa to all!

 

***CLICK HERE to download the full TACRM presentation.***

 

TRACKING OUR ACTIVE MACRO THEMES

#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

 

Does Your View on Rates Include the Risk of a “Reflexive Deflationary Spiral”? (12/19)

 

#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.

 

Moscow, We Have a Problem (12/16)

 

#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

 

#Bubbles: “Hedge Fund Hotel” Edition (Part II) (12/8)

 

Best of luck out there,

 

DD

 

Darius Dale

Associate: Macro Team

 

About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.


CHART OF THE DAY: Sobering Online Sales Trends

CHART OF THE DAY: Sobering Online Sales Trends - el

 

Editor's note: Below is an excerpt from today's Morning Newsletter which was written by Hedgeye Director of Research Daryl Jones.

 

Staying on the theme of consumption as a big driver of Q3 GDP, our Retail Sector Head Brian McGough circulated a chart of “ICSC (International Council of Shopping Centers) YTD Comp Sales Trends,” which is in the Chart of the Day, and according to McGough:

 

“A big rebound in sales for the week, but this follows two big weekly declines in the context of an intermediate term downtrend. The point there is that with sales trending down so much into the biggest holiday week, it makes sense that retailers would really turn the discounting machine into overdrive to have any shot at hitting numbers and prevent a glut of inventory in January. Online sales trends per Channel Advisor are downright sobering.”

 

Certainly, this data doesn’t guarantee that Q4 GDP will slow from Q3, because it is still possible that old St. Nicholas has some last minute shopping to do!


The Night Before

“Twas the night before Christmas, when all through the house

Not a creature was stirring, not even a mouse;

The stockings were hung by the chimney with care,

In hopes that St. Nicholas would soon be there.”

-Major Henry Livingston Jr.

 

 

Whether you celebrate Christmas or not, undoubtedly many of you are familiar with the poem “Twas The Night Before Christmas”.  It is the classic story of children waiting for the mythological character Santa Claus to show up on Christmas Eve.

 

A side note on this poem is that there is some serious controversy surrounding the author.  The poem was originally published anonymously in 1823, but then attributed to Clement Clarke Moore, who acknowledged authorship in 1837. 

 

A graduate of Columbia University, Moore was an interesting character.   Among other things, his father officiated at the inauguration of George Washington, he was opposed to the abolition of slavery, he was also a vocal opponent to Thomas Jefferson for mostly religious reasons, and, ironically enough, founded the Chelsea area of New York City. 


Despite claiming authorship, Professor Donald Foster of Vassar, who is considered of the top forensic linguists in the world, has concluded quite definitely that true author was Henry Livingston, Jr.   Livingston was also a New Yorker, though primarily a gentleman farmer as opposed to being a political and religious activist, and wrote the poem for his seven children.

 

Admittedly, this story of disputed authorship, jolly men in suits bringing presents and a red nosed flying rein deer leading the way, remind us a little of the global stock markets.  On Nasdaq, on Dow, on Yen and on Ruble ! (Ok, not on Ruble.)

The Night Before - Yellen cartoon 12.23.2014

 

Back to the Global Macro Grind...

 

Yesterday, the market mildly cheered on not the arrival of St. Nicholas, due to a meaningful upward revision in GDP for Q3.  The most prominent area of revision from the initial GDP estimate was a +0.70% increase in consumption to +3.2% from last quarter.  But across the board, the other key components were revised higher as well.

 

The challenge with GDP for stock market operators, of course, is that it is often rightfully considered a lagging indicator.  Case in point is that we are just now getting the final GDP number for Q3 when we are seven days before the end of Q4 2014.  The key questions from here to ask are: a) Did GDP just peak? and b) How is Q4 and beyond shaping up?

 

On the first point, to us it certainly looks like Q3 GDP was the peak, or close to it.  On a sequential basis, GDP was up +5%, which was the best sequential increase since Q2 2011.  On a year-over-year basis, it was the second best print since Q2 2011.  Most importantly, on a two and three year average basis this was the best year-over-year growth rate since Q2 2011. The question from here, of course, will the rate of change accelerate or decelerate, on the margin?

 

Staying on the theme of consumption as a big driver of Q3 GDP, our Retail Sectorhead Brian McGough circulated a chart of “ICSC (International Council of Shopping Centers) YTD Comp Sales Trends”, which is in the Chart of the Day, and according to McGough:

 

“A big rebound in sales for the week, but this follows two big weekly declines in the context of an intermediate term downtrend.  The point there is that with sales trending down so much into the biggest holiday week, it makes sense that retailers would really turn the discounting machine into overdrive to have any shot at hitting numbers and prevent a glut of inventory in January.  Online sales trends per Channel Advisor are downright sobering.”

 

Certainly, this data doesn’t guarantee that Q4 GDP will slow from Q3, because it is still possible that old St. Nicholas has some last minute shopping to do!

 

It won’t all be coal in our stockings heading into 2015.  One area that we recently highlighted as likely to see improvement and outperformance in 2015 is U.S. housing.   A headwind to housing has been the inability, by some, to get credit.  Aside from the potential easing of down payment rules, another key area that might provide a credit tailwind is the improvement in subprime mortgage market.

 

According to an analysis by Barclays, subprime mortgage bonds have gained 12% this year, which is more than 6x the return of junk rated corporate debt.  In aggregate, subprime bonds have returned more than 75% since 2010.  To be fair, 30% of the subprime mortgages tied to these bonds are more than 60 days delinquent, but that too is an improvement from 41% in 2010.

 

Certainly, we aren’t hoping for a return to the days when mythical characters like Santa Clause took out mortgages with no paperwork, but incremental improvement in the ability to get financing for the younger and less wealthy demographic is a real positive.

 

As it relates to real-time data on housing, my colleague Christian Drake wrote a note yesterday that looked at new home sales and recent pricing data.  While in his words new home sales was still a bit muddling, on the pricing front FHFA Home Price Index accelerated to +4.4% in Oct from +4.2% in Sep.  All three primary price series are telling the same (2nd derivative) stabilization story.

 

So really what we are saying is that if your loved ones were really well behaved in 2014, this is probably a very good time in the cycle to buy them a house!

 

Our Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.04-2.27%

SPX 1

RUT 1125-1208

VIX 13.17-24.35

USD 89.08-90.66

YEN 118.43-121.18

WTI Oil 52.87-59.23

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Night Before - el


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