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#Deflation’s Dominoes

Client Talking Points

EURO

Both Euros and Oil (they’re trading together vs. USD) are signaling immediate-term TRADE oversold this morning, but both remain very #deflationary and (ex-DAX), European Equity markets do not like it – Greece and Russia -2.5%, and ex-Germany, most major European stock markets continue to signal bearish TREND (FTSE, CAC, MIB, IBEX).

OIL

WTIC Oil is making fresh 6 month lows as it tests this exhaustion zone $51.76-52.61 that we’ve been monitoring; to get a real bounce, you need a real USD selloff, and you have some big U.S. economic data points this week on that front with ISM Services tomorrow, Fed Minutes Wednesday, and Jobs repot Friday.

UST 10YR

The best way to play global #GrowthSlowing + #Deflation remains the Long Bond; 2.11% was a nice -14 basis points drop last week and the Yield Spread (10yr minus 2yr) compressed another -6 basis points to 145, in line with the rate of change in the December U.S. economic data (ISM and PMI, which both slowed).

Asset Allocation

CASH 54% US EQUITIES 6%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the 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.

XLP

Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deflation. 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. 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

Same Global Macro story we ended 2014 on, with both Greek and Russian stocks -2.5% leading losers

@KeithMcCullough

QUOTE OF THE DAY

Talent is cheap; dedication is expensive. It will cost you your life.

-Irving Stone

STAT OF THE DAY

The White House (1600 Pennsylvania Ave.) is appraised at 1 Billion Dollars.


CHART OF THE DAY: The Capitulation Risk of Consensus Macro

CHART OF THE DAY: The Capitulation Risk of Consensus Macro - 01.05.14 Chart

 

"I still think the Best Macro Idea (low-volatility, higher relative return) in positioning for our non-consensus posterior of global #GrowthSlowing + #Deflation is long the Long Bond (TLT)," wrote CEO Keith McCullough in today's Morning Newsletter.



My Slowing Posterior

“Ye shall know them by their posteriors.”

-The Theory That Would Not Die

 

For those of you who know me well, I’m not getting any younger today. And for those of you who will play men’s league hockey against me on Thursday night, you’ll note that my posterior continues to slow too.

 

What’s fascinating about language is that things like words can mean very different things. A “posterior” can be “A) a person’s buttocks, B) further back in position, or C) coming after in time as in subsequent to, or following”… (Wikipedia)

 

In Bayesian stats (probability-speak), there’s the “prior” and the “posterior.” In our profession, everyone has a prior (subjective forecast of the future), but few have accurate macro posteriors. That’s mainly because consensus tends to chase their behind.

 

My Slowing Posterior - 40

 

Back to the Global Macro Grind

 

Rutgers professor Glenn Shafer says that “much that has been written about the history of probability has been distorted by the English-centric point of view” (The Theory That Would Not Die, pg 129). Since most things have a bias, it’s hard to disagree with that.

 

It’s even harder to disagree that both #OldWall Street and the financial media that panders to its posteriors don’t have a perma-growth and inflation point of view. After all, central planning Policies To Inflate should give us asset price inflation, forever, right?

 

Not so much. In rate of change terms, market expectations both inflate and deflate. That is #history. And whoever wants to suggest “it’s different this time” can do so at the risk of other people’s moneys…

 

In what was supposed to be a “quiet week” to end 2014, the posterior of #deflation continued to manifest across Global Macro:

 

  1. US Dollar was up another +1.2% week-over-week as the Euro was burned -1.5% by more Draghi QE jawboning
  2. CRB Commodities Index (19 Commodities) didn’t enjoy that, closing the yr on its lows, and -2.7% wk-over-wk
  3. Oil (WTI) dropped for the 6th straight week, -3.9% wk-over-wk, crashing to $52.61/barrel
  4. Russian and Greek stocks led Global Equity #deflation, down -4.6% and -2% wk-over-wk (vs. SP500 -1.5%)
  5. Oh, and the former inflation expectations #Bubble known as Bitcoin, ended the yr on its lows, < 278

 

Germany’s 5yr Breakeven rate dropped -14 basis points last week to, get this, -0.07%. To put that in context, Japanese and American 5yr Breakevens are +0.35% and +1.24%. That’s just a flat out nasty #deflation signal to the world. Respect it.

 

All the while, the perma-bulls on US economic growth still think that the prior Q3 US GDP is going to provide for a posterior of USA “de-coupling” from global #GrowthSlowing + #Deflation risk…

 

*(i.e. the same risks that unglued US Commodity, Energy, and Junk Bond investors for the last 3-6 months)

 

The only problem with that “US is a closed economy” bull case for US economic growth is the current data. In rate of change terms, the data for December slowed versus both November and the Q314 data that growth bulls are anchoring on:

 

  1. ISM (USA) for DEC slowed from 58.7 NOV to 55.5
  2. PMI (Markit) for DEC slowed from 54.8 NOV to 53.9

 

The reason why our posteriors focus on rate of change is quite simply because the #history of market prices do. When growth and inflation are slowing, at the same time, 10yr US Treasury Yields fall and the Long Bond rises. On DEC data, that’s what happened last wk:

 

  1. US 10 yr Treasury Yield dropped a big -14 basis points wk-over-wk to 2.11%
  2. US Yield Spread (10yr minus 2yr) compressed another 6 basis points on the wk to 145bps

 

Yet Consensus Macro (net long/short positioning in CFTC non-commercial futures/options contracts) stayed with:

 

  1. LONG US Equity Beta (SP500 Index + Emini) net LONG position of +108,167 contracts (vs. 3mth avg of +28,575)
  2. SHORT US Treasuries (10yr) with a massive net SHORT position of -277,477 contracts (vs. 3mth avg of -121,963)

 

In other words, since consensus has a posterior of the prior (consensus thinks US growth is as good as it was in Q3), they think stocks get “multiple expansion” (from 19x ttm SP500 and 55x Russell) alongside rising bond yields and rate hikes.

 

I still think the Best Macro Idea (low-volatility, higher relative return) in positioning for our non-consensus posterior of global #GrowthSlowing + #Deflation is long the Long Bond (TLT).

 

That’s not to say I won’t cover my posterior (best short ideas) on pullbacks like we had last week, and signal buy in our best US domestic consumption long ideas (RH, HOLX, WWAV, etc.). In Real-Time Alerts, ye shall know my positioning by my #timestamps!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.20%

SPX 2052-2090

VIX 15.91-19.94

USD 90.29-91.57

EUR/USD 1.19-1.21

Oil (WTI) 51.76-55.12

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

My Slowing Posterior - 01.05.14 Chart


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.

January 5, 2015

January 5, 2015 - Slide1

 

BULLISH TRENDS

January 5, 2015 - Slide2

January 5, 2015 - Slide3

January 5, 2015 - Slide4

 

BEARISH TRENDS

 

January 5, 2015 - Slide5

January 5, 2015 - Slide6 

January 5, 2015 - Slide7

January 5, 2015 - Slide8

January 5, 2015 - Slide9

January 5, 2015 - Slide10

January 5, 2015 - Slide11
January 5, 2015 - Slide12


The Week Ahead

The Economic Data calendar for the week of the 5th of January through the 9th of January 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 - 01.02.15 Week Ahead

 

 

 


Investing Ideas Newsletter

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

Below are Hedgeye analysts’ latest updates on our seven current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.

 

Please note we added Hologic (HOLX) on Friday.

 

We feature two additional pieces of content at the bottom.

Investing Ideas Newsletter - levels1 

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

CARTOON OF THE WEEK

Investing Ideas Newsletter - Ball drop cartoon 12.31.2014

IDEAS UPDATES

TLT | EDV | XLP | MUB

 

Sticking With the Long Bond to Start 2015

 

Consistent with our intermediate-term view on the most probable trajectory of both rates and the reported inflation – i.e. lower – we remain bullish on the long bond (in TLT, EDV and MUB terms), as well as on equities with bond-like characteristics (in XLP, XLV and VNQ terms).

 

As most recently reiterated by today’s Markit and ISM Manufacturing PMI data, domestic economic growth slowed on the margin in 4Q14 and we will continue to receive such #GrowthSlowing data points throughout the month of January:

 

Investing Ideas Newsletter - dd1

 

Investing Ideas Newsletter - dd2

 

Additionally, there remains a 3-SIGMA net SHORT position in 10Y Treasury futures and options contracts; to the extent long-term Treasuries continue to rally, we think there is ample room for mass capitulation in the coming weeks on long-term.

 

Investing Ideas Newsletter - dd3

 

In summary, we continue to see ample risk of Consensus Macro having to cover [higher] securities that you already own.

RH 

Shares of Restoration Hardware closed 2014 up 43% and we think this name still has legs in the New Year.

 

We are modeling $2.40 in EPS for the 2014 fiscal year with a 45% EPS CAGR through 2018. At a mid-twenty multiple, that gets us to an RH stock price well over $250 by 2018.

 

It remains our favorite name in retail.

 

Investing Ideas Newsletter - rh

yum

We’ve previously mentioned that we believe YUM is vulnerable to activism, but in this week’s addition we seek to provide more detail on why now is an optimal time for change. YUM currently has both internal and external factors working for it. We believe the company is a change, or two, away from unlocking significant shareholder value.

 

Internal Changes are a Catalyst for Change

  • New CEO beginning in 2015
  • We believe the current CFO is likely more open to changes than the previous CFO
  • In 1Q15, YUM changed its reporting structure to align global operations outside of China and India by brand
  • This change in reporting structure allows for a clean sale or spinoff of brands
  • The new reporting structure also suggests little internal friction to a potential spinoff or sale of brands
  • YUM has been paying down debt and is now underleveraged relative to peers

 

External Environment Creates Possibilities


  • Restaurant multiples are at all-time highs
  • Restaurant IPOs are being very well-received by investors
  • Global asset-light business models are trading at a premium to the group
  • Significant liquidity in the fixed income markets
  • Significant liquidity in the franchisee finance market
  • It is a great time to be a seller of restaurant assets, especially of strong brands like YUM’s
  • The board needs to address the issue of increased volatility in the Chinese business
  • Gaming companies have successfully issued tracking on their Chinese assets
  • YUM China could be the largest consumer company in China and investor interest would be strong

 

Regardless of any major changes, upside to YUM shares in 2015 could also be driven by a recovery in China. The street is modeling a turnaround that is, in our view, rather tempered compared to expectations of past recoveries. If China recovers, the stock will take off. If not, we expect an internal or external force to effect change.

 

There are multiple ways to win here, which is why we continue to like YUM heading into 2015.

 

Investing Ideas Newsletter - yum

holx

We added Hologic on Friday. Here is the note which accompanied the addition.


 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

ici fund flows: heavy inflow to passive funds

Investors have favored passive over active this year. Passive equity put up its largest inflow in the 52-week period.

 

Investing Ideas Newsletter - p7

podcast: morning macro call (Friday 1/2)

Hedgeye CEO Keith McCullough walks through the most important macro data on his radar screen and answers key questions from institutional subscribers.

Investing Ideas Newsletter - 5p


Early Look

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