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Monday Mashup: 'Tis the Season

Monday Mashup: 'Tis the Season - 1

 

Recent Notes

12/22/14 Monday Mashup: BOBE, RT and More

12/23/14 Industry-Wide Comp Outlook (2015)

12/23/14 Statement Analysis (Replay)

 

Events This Week

None

 

Chart of the Day

Gasoline prices are down -31.2% YTD and -30.9% YoY.

 

Monday Mashup: 'Tis the Season - 2

 

Recent News Flow

Monday, December 22nd

  • BLMN appointed MediaVest as its lead media agency following a review.

Tuesday, December 23rd

  • PNRA EVP Scott. G Davis announced he will not return to the company following his previously announced sabbatical for personal reasons.  Mr. Davis has played an instrumental role in "the ongoing evolution of the Panera Bread [bakery-café] concept" and had the sourcing, quality assurance, contract manufacturing and logistic teams reporting to him.

 

Sector Performance

The XLY (+1.8%) outperformed the SPX (+1.3%) as both casual dining and quick service stocks, in aggregate, underperformed the XLY.

 

Monday Mashup: 'Tis the Season - 3

Monday Mashup: 'Tis the Season - 4

 

XLY Quantitative Setup

The XLY continues to be bullish on an intermediate-term TREND duration.

 

Monday Mashup: 'Tis the Season - 5

 

Casual Dining Restaurants

Monday Mashup: 'Tis the Season - 6

Monday Mashup: 'Tis the Season - 7

 

Quick Service Restaurants

Monday Mashup: 'Tis the Season - 8

Monday Mashup: 'Tis the Season - 9


#Deflation = A Big Risk

Client Talking Points

EUROPE

The Greek stock market continues to crash (-10% this am to -34% year-to-date) but the more interesting breakdowns @Hedgeye TREND resistance are those in Italy’s MIB and Spain’s IBEX – don’t forget who #deflation hurts the most, #debtors (hence why central planning policies will do anything to try to avoid deflation).

UST 10YR

Best Big Macro, low-volatility, liquid long position to have on if you agree with us on global #GrowthSlowing and #Deflation is the Long Bond (TLT, EDV, etc.) but you have to be there on the pullbacks like you had last week. The UST 10YR Yield is -4bps to 2.21% this am with no support to 2.05%.

RUSSELL 2000

All small/mid cap bulls had to do was be long the Russell for 2 of the last 3 weeks of the year (+5.4% in the last 2 weeks on decelerating volume) and they killed it! (after the 1st week of DEC, Russell was down year-to-date); no short position in Real Time Alerts as higher-highs are bullish until they aren’t, so we are waiting/watching.

Asset Allocation

CASH 56% US EQUITIES 3%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 32% 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

OIL: trying to "bounce" (again) +1% but treading #deflation's water at $55.28 within a 54.01-57.43 risk range

@KeithMcCullough

QUOTE OF THE DAY

The drops of rain make a hole in the stone not by violence but by oft falling.

-Lucretius

STAT OF THE DAY

Four days after its release on December 24th, The Interview has become Sony's most-downloaded title of all time. It was downloaded more than two million times as of December 27th, making back a third of its $44m budget.


CHART OF THE DAY: Phase Transition to the #Deflation

CHART OF THE DAY: Phase Transition to the #Deflation - 12.29.14 chart

 

Editor's note: Below is a brief excerpt from today's Morning Newsletter by Hedgeye CEO Keith McCullough. Click here for more information on how you can become a subscriber to the fastest-growing independent research firm in America.

 

For those of you who don’t know that breakevens are a leading indicator for the rate of change in inflation expectations, now you know. For all of you who know that falling bond yields and flattening yield curves are leading indicators for #GrowthSlowing, well, you still know that… but need to ignore it on low-volume SPY ramps into your year-end!

 

In the last 6 months, what we (and physicists like Cooper) call a phase transition (from bullish to bearish) in #deflation has been much more pronounced than the macro market acknowledging it as a #deflation risk in the 1st 2 weeks of December. To put that in time/price context, check out these 6 month moves:

 

  1. Japanese Yen -15.5% vs. USD (yes, that was on Japanese #GrowthSlowing to the point where they needed more QE)
  2. Euro -10.5% vs USD (as the Draghi devalued in response to #GrowthSlowing)
  3. CRB Commodities Index #crashed -24.8% in the last 6 months
  4. Oil (WTI) #crashed -45.7% in the last 6 months
  5. Natural Gas #crashed -34.3% in the last 6 months

 

And 5yr breakevens were actually down a lot more in the last 6 months (-90bps, or -43%) than they’ve been for the YTD (remember when late-cycle inflation accelerated in the first half of 2014 and the perma growth bulls just called that bullish for consumers too?).



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New Discoveries

“Our interdisciplinary approach sets us apart and gives us a chance to lead new discovery.”

-Leon Cooper

 

While he won’t lead you to where the latest Air Asia flight went this morning, 84 year old Nobel Prize winning physics professor Leon Cooper has had his fair share of discovery in his lifetime. From synaptic plasticity to superconductivity, being first (and right) is how you get that done.

 

This weekend I learned about Cooper’s interdisciplinary research while reading about one of my favorite topics (#monkeys) in a book called The Medici Effect, by Frans Johansson: “Tiny implanted electrodes read signals from the monkey’s brain cells… data from the brain could now be translated into what the monkey was thinking… turning thoughts into action in real time.” (pg 12)

 

Now if only Cooper’s team at Brown University could send us a real-time feed on what 50,000 fund managers were thinking during 5-10% corrections in stocks (in December) that are followed by sharp v-bottoms and epic no-volume ramps to new highs… oh, while commodities and global bond yields crash…

 

New Discoveries - m5

 

Back to the Global Macro Grind

 

Thankfully, I learned a long time ago that making a living trying to call what SPYs are going to do next is no way to live. That’s why I built our Global Macro Risk Management #Process to be both multi-factor and multi-duration, across asset classes.

 

If you do macro the way we do, you don’t have to be one-dimensional. You don’t have to have as many blind spots as I used to have either. From a research perspective, there’s always a new discovery to be made on both the bullish and bearish sides of markets.

 

In our research process, new discoveries are driven by what many probability theorists would call Bayesian Inference. That basically means that what we learned yesterday might change what we think about today.

 

Discoveries don’t always have to be progressive or regressive – sometimes they should just stop you from doing anything at all. While you may think you know your “companies” better than anyone on earth (and I genuinely hope you do), it’s next to impossible to have that kind of conviction on global macro risks.

 

If you had to pick one major new discovery (if you’re long Energy stocks, Emerging Markets, Junk Bonds, etc., it’s probably in your “diversified portfolio”!) in global macro risk that you should have proactively prepared for in the last 3-6 months, would it be?

 

A)     Global #GrowthSlowing

B)      Global #Deflation

 

Since the dogmatic +3-4% US growth forever bulls are still staring at non-year-over-year GDP growth data for Q3 (newsflash: it’s the end of Q4, and Q314 was +2.7% y/y, not +5.0), and inflation expectations continue to get hammered, I’ll take B).

 

While the causal factor for #deflation may be global #GrowthSlowing (think demand), for the last 3 days of the compensation calendar, who actually gets paid to care? What most of you really care about is the score, and here’s how that risk looked last week:

 

  1. US Dollar up another +0.5% week-over-week with Burning Euros and Yens down around the same
  2. CRB Commodities Index (19 commodities) down another -2.3% last week to -16.2% YTD
  3. Oil (WTI) continued its #crash -4.2% week-over-week to -40.1% YTD
  4. Copper down another -2.4% last week to -16.0% YTD
  5. US 5yr Breakeven Rate hit fresh YTD lows of 1.19% last week (-65 bps, or -35% YTD)

 

For those of you who don’t know that breakevens are a leading indicator for the rate of change in inflation expectations, now you know. For all of you who know that falling bond yields and flattening yield curves are leading indicators for #GrowthSlowing, well, you still know that… but need to ignore it on low-volume SPY ramps into your year-end!

 

In the last 6 months, what we (and physicists like Cooper) call a phase transition (from bullish to bearish) in #deflation has been much more pronounced than the macro market acknowledging it as a #deflation risk in the 1st 2 weeks of December. To put that in time/price context, check out these 6 month moves:

 

  1. Japanese Yen -15.5% vs. USD (yes, that was on Japanese #GrowthSlowing to the point where they needed more QE)
  2. Euro -10.5% vs USD (as the Draghi devalued in response to #GrowthSlowing)
  3. CRB Commodities Index #crashed -24.8% in the last 6 months
  4. Oil (WTI) #crashed -45.7% in the last 6 months
  5. Natural Gas #crashed -34.3% in the last 6 months

 

And 5yr breakevens were actually down a lot more in the last 6 months (-90bps, or -43%) than they’ve been for the YTD (remember when late-cycle inflation accelerated in the first half of 2014 and the perma growth bulls just called that bullish for consumers too?).

 

While the growth bulls finding a new narrative at all rates of change in prices doesn’t surprise me, what will definitely surprise me when the macro market’s volume comes back next week is if #deflation isn’t a marked to market risk for high yield debt.

 

On the bullish side, with the macro market marking up everything US consumer assets (Consumer Discretionary, XLY +1.9% last week vs Energy, XLE -0.6%) on the “down gas prices” theme, it wouldn’t surprise me if the Russell (domestic pure play) continued to outperform Emerging Equity Markets linked to #deflation either. With new discoveries come new positions in the new year.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.05-2.31%

SPX 1

RUT 1131-1235

YEN 119.20-121.97

Oil (WTI) 54.01-57.43

Copper 2.80-2.88

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

New Discoveries - 12.29.14 chart


December 29, 2014

December 29, 2014 - 1

 

BULLISH TRENDS

December 29, 2014 - Slide2

December 29, 2014 - Slide3

December 29, 2014 - Slide4

 

 

BEARISH TRENDS

December 29, 2014 - Slide5

December 29, 2014 - Slide6

December 29, 2014 - Slide7

December 29, 2014 - Slide8

December 29, 2014 - Slide9

December 29, 2014 - Slide10

December 29, 2014 - Slide11
December 29, 2014 - Slide12


Money Man

This note was originally published at 8am on December 15, 2014 for Hedgeye subscribers.

"I can't hear you. There's too much money in my hand."

-Johnny Manziel

 

Whether former Texas A&M superstar Johnny Manziel said it that way (or with more expletives!) isn’t the point. If you’re a rookie and you’re going to give an entire profession the money signal like that, you better deliver on game day!

 

In what was an embarrassing professional start, Manziel did not deliver the moneys for Cleveland yesterday – and the Cincinnati Bengals veteran defense proceeded to spend the afternoon giving little Johnny some signals of their own.

 

Sort of like what the US Treasury Bond market did to the momentum chasing US equity bulls last week…

 

Money Man - man2

 

Back to the Global Macro Grind

 

After doing absolutely nothing for the 6 weeks prior, our least preferred 2014 player on the US Equity market field (Russell 2000), dropped -2.5% last week to -1.0% YTD. With only 2.5 weeks left in the season, that is not a Money Man bull market!

 

What was interesting about the Russell #Bubble’s drop (topped 5% higher on July 7th, 2014) was that it actually outperformed the almighty navel gazer on the week. The Dow Jones Industrial Index lost 50% of its 2014 gains, closing -3.8% to +4.2% YTD.

 

All the while, Global Equities continued to look like Manziel:

 

1. European Equities (EuroStoxx600) dropped -5.8% on the week to +0.7% YTD

2. Emerging Market Equities (MSCI) #deflated another -4.0% wk-over-wk to -5.6%

3. Latin American Equities moved closer to #crash mode, -6% on the week to -16.1% YTD

 

I know, cheery picking more than a few interceptions to make the game replay tapes look bad isn’t such a nice thing to do during the holiday season – but, to be clear, unless you are long bonds, there hasn’t been much to celebrate in December.

 

Bonds?

 

Yep. As the Barron’s Top Strategist 2015 Outlook reiterates its consensus 2014 outlook (GDP accelerating and #RatesRising, which btw was our 2013 outlook), we reiterate both growth and inflation slowing (and lower bond yields).

 

As US Equity Volatility (front month VIX) rocketed +78.3% last week, the low-volatility ramp in the Long Bond continued:

 

1. UST 10yr Yield -22 basis points on the week to 2.08% (that’s a -31.3% crash in bond yields for 2014 YTD)

2. UST Yield Spreads compressed to YTD lows (-12bps wk-over-wk and -111bps YTD for the 10s/2s Spread)

 

For those of you who do Moneyball (or Moneypuck) stats, you’ll respect the reality that A) higher absolute and relative returns + B) lower-volatility in those returns, is where the real money in this game is at...

 

If you want to think about that in Dow, Russell, or SPY terms vs the Long Bond (TLT and EDV):

 

1. TLT (20yr Treasury Bond ETF) was up another +2.9% last week to +24% YTD

2. Vanguard’s Extended Duration ETF (EDV) was +3.9% week-over-week to +40.8% YTD

 

What’s driving this?

 

1. Falling growth expectations

2. Falling inflation expectations

 

And while there was a time (earlier this year) where the Old Wall said “bond yields are falling in Europe, not because growth and inflation are slowing, because its different this time”… it’s not.

 

In rate of change (Hedgeye) terms, when both growth and inflation are slowing, at the same time, the Long Bond investor gets paid.

 

No, this wasn’t a sexy call. And you won’t see me or my teammates living large on bottle service drinking the chartreuse (Zervos?) or hanging with Roubini either… but it remains the call Consensus Macro still isn’t willing to make.

 

On that sentiment score, check-out where CFTC (non-commercial) futures and options bets went last week:

 

1. SP500 (Index + Emini) = +48,911 net LONG position (vs. its 6mth avg of a -21,000 net short)

2. TREASURIES (10yr) = net SHORT position at its YTD high of -214,778 contracts (vs. its 6 mth avg of -38,000 net short)

 

Yep, I can hear you loud and clear. There’s too much consensus in that hand!

 

UST 10yr Yield 2.08-2.22%

SPX 1980-2038

RUT 1146-1165

VIX 15.47-22.71

YEN 117.06-121.68

WTI Oil 56.48-63.21

 

Best of luck out there this week,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Money Man - 12.15.14 chart

 


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