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Keith's Macro Notebook 1/16: UST 10YR | Financials | Kospi

 

 

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


Retail Callouts (1/16): NKE, AdiBok, KATE, DG, TIF

Takeaway: Port disruption/potential strike can only hasten NKE's plan to diversify manufacturing base. KATE Saturday partnership with NB.

COMPANY HIGHLIGHTS

 

Footwear industry warns of ‘catastrophe’ if U.S. West Coast ports shut down

(http://www.joc.com/port-news/footwear-industry-warns-%E2%80%98catastrophe%E2%80%99-if-us-west-coast-ports-shut-down_20150115.html)

 

Takeaway: The title of this article borders on ridiculous, as it would be a catastrophe for a few dozen industries (not just footwear), as well as the balance of US/Asia trade if the West Coast Ports shut down. But that's exactly why they will not shut down.

 

That said, continued interruptions are probable, which we're not sure is a bad thing in the footwear space. Keep in mind that Nike is on the verge of rolling out broader footwear production for FlyKnit product (non-labor intensive) in the US, and closer to the point of sale in other developed markets.  We can only think that problems with product delivery at the ports can only hasten Nike's plan to diversify its manufacturing base.  

 

Retail Callouts (1/16): NKE, AdiBok, KATE, DG, TIF - 1 16 chart1

 

KATE - Kate Spade Saturday/New Balance Partnership

 

Takeaway: This is Saturday's 2nd partnership of 2015. The first with West Elm debuted earlier this month and the 2nd (pictures below) with New Balance just went live. These partnership have zero downside for KATE. West Elm is carrying the load on the home wares side and the New Balance collection is featured in just 10 stores nationwide with an e-comm presence. They can't damage what does not exist in the event that this initiative goes South. 

 

Retail Callouts (1/16): NKE, AdiBok, KATE, DG, TIF - 1 16 KSS

 

OTHER NEWS

 

DG - Dollar General Provides Update on FTC Review of Its Proposed Acquisition of Family Dollar

(https://investor.shareholder.com/dollar/releasedetail.cfm?ReleaseID=891443)

 

TIF - Tiffany’s Slumping Shares May Rekindle Takeover Talk: Real M&A

(http://www.bloomberg.com/news/2015-01-16/tiffany-s-slumping-shares-may-rekindle-takeover-talk-real-m-a.html)

 

RSH - RadioShack Prepares Bankruptcy Filing

(http://www.wsj.com/articles/radioshack-prepares-bankruptcy-filing-1421279360?autologin=y)

 

Verizon: Retailers fail to maintain PCI compliance

(http://www.chainstoreage.com/article/verizon-retailers-fail-maintain-pci-compliance)

 

WTSL - Wet Seal Files for Chapter 11 Bankruptcy Protection

(http://ir.wetsealinc.com/releasedetail.cfm?ReleaseID=891670)


What Is The Trade?

Client Talking Points

UST 10YR

Coming into the week there was a -250,163 net SHORT position in the 10YR Treasury CFTC futures/options contracts (consensus had the wrong answer to the question); now we’re tapping the 1.70% target zone we’ve had for a year; that’s already -47 basis points (21%) year-to-date, -132 basis points(-43%) year=over-year – global #GrowthSlowing + #Deflation.

FINANCIALS

Obviously if you have a bearish rates view, you’re short/underweight the Financials (XLE, KRE, JPM), and liking it – with Gold up, this is very reminiscent of 2011 (fully loaded with European headlines), but this time the employment cycle can turn bearish too; U.S. jobless claims breaking out  – Janet Yellen gets easier on that.

KOSPI

As consensus stares at Europe, while obviously slowing, Asian demand read-throughs don’t cease to exist – KOSPI continues to signal bearish, -1.4% overnight and re-testing 12 month lows; even if you think the U.S. economy is going to “de-couple” from this, macro markets wont.

Asset Allocation

CASH 54% US EQUITIES 4%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 9%

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.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

The biggest risk from the Financials sector is LEVERAGE - all time highs in NYSE margin debt @HedgeyeFIG https://twitter.com/hedgeyeJC/status/556049087725072384/photo/1

@HedgeyeJC

QUOTE OF THE DAY

I have seen that in any great undertaking it is not enough for a man to depend simply upon himself.

-Lone Man Teton Sioux

 

STAT OF THE DAY

Mars robot Beagle2 has been found 11 years after launch, it was one of the cheapest ever missions costing $76 million.


Early Look

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THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's can't-miss edition of the Macro Playbook, we answer the top-10 questions we've been getting from our institutional subscribers.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. iShares U.S. Home Construction ETF (ITB)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. Consumer Staples Select Sector SPDR Fund (XLP)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. CurrencyShares Japanese Yen Trust (FXY)
  3. iShares MSCI Emerging Markets ETF (EEM)
  4. SPDR Barclays High Yield Bond ETF (JNK)
  5. Industrial Select Sector SPDR Fund (XLI)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)

 

QUANT SIGNALS & RESEARCH CONTEXT

Q&A w/ the Hedgeye Macro Team: Yesterday, Keith and I enjoyed a solid start to two full days of client and prospect meetings; as always, the discussions were lively, entertaining and, most importantly, thoughtful. Per usual, we received a fair amount of questions pertaining to our macro themes, which are hyperlinked daily at the bottom of this note.

 

Below we share our responses to some of the most frequently asked questions from yesterday’s meetings. Please note that we are deliberately keeping these thoughts brief (we’ve already done the work, so please email us if you’d like additional color, charts, etc.).

 

With the VIX up +85.4% since we called the bottom in our #VolatilityAsymmetry presentation back on July 11th, we’re sure you’re plenty busy these days and don’t want to take up too much of your time. Enjoy:

 

Q: Will we see a rate hike by the Fed at some point over the next 6-12 months?

A: According to both the preponderance of data most central to their monetary policy decision-making tree and our outlook for employment growth, the FOMC will not be able to justify a rate hike over the intermediate term. In fact, we’d consider a rate hike at this stage in the economic cycle to be a deflationary policy mistake – a la Jean-Claude Trichet in 2008 or 2011 – that threatens to tip the U.S. and global economy into recession.

 

Q: What gets employment growth to roll over?

A: Reduced energy-related capital expenditures and business services would precipitate the first wave of not hiring and then firings. The knock-on effects are both unquantifiable and very real given that oil and gas E&P has a high multiplier effect because it is a capital intensive industry and because energy-related jobs are typically higher earning than the preponderance of other jobs created during the recovery. And remember, it’s not just energy companies that are reeling from the wave of commodity deflation ripping through their income statements; ask CAT about its mining businesses or BAC, JPM or C about their FICC business... 

(see: "Schlumberger to axe 9,000 jobs amid oil rout" or "Big Oil Companies Get Serious With Cost Cuts on Worst Slump Since 1986")

 

Q: How can housing work alongside your call for a negative inflection in the rate of change of employment growth?

A: The simple answer is that housing did not work in 2014 with employment growth breaking out to the upside. That alone should tell you not to isolate employment as the driver of housing equities. What’s occurring in housing is a lot more nuanced and we have a 100-slide presentation walking through all of those critical puts and takes. The summary is threefold: 1) macroprudential regulation is being unwound, at the margins, which should perpetuate a positive inflection in mortgage demand growth; 2) demand growth leads home prices by ~1yr and demand growth troughed in early 2014, which means home price appreciation is poised to positively inflect as well; and 3) the comparative base effect for home price appreciation – which carries a +0.90 correlation to housing equities since 2008 – gets incrementally supportive throughout 2015. Lower interest rates are a nice kicker as well as it relates to stimulating incremental demand. The 30yr fixed rate mortgage is now 3.8%; it was 4.42% one year ago. Many headwinds still exist in the U.S. housing market (e.g. low household formation; student debt bubble), but more are shifting into the tailwind category, at the margins.

 

Q: Are falling oil prices a net positive or a net negative for the U.S. economy?

A: It depends on what part of the cycle you’re referring to. Falling oil prices are very positive for early-cycle Consumer Cyclical and very negative for late-cycle Industrials (via slowing CapEx) and Financials (via slowing employment growth and asset price deflation). On a net-net-net basis after it’s all said and done, falling oil prices probably wind up doing more harm than good – particularly if asset price deflation continues. Remember, gasoline only accounts for 6.4% of median consumer PCE, so the consumer has only experienced a -279bps effective tax cut on the -44% peak-to-present decline in crude oil. Meanwhile, the SPY is down -482bps from its all-time high; MLPs – which are a favorite among retail investors – are down -1437bps from their all-time high. Robbing Peter to pay Paul is not a recipe for sustained economic growth – especially the +3-5% variety bandied about by consensus.

 

Q: Isn’t this setup – i.e. U.S. dollar breakout, mid-cycle economy and the Fed getting tighter – just like the 1990s

A: First and foremost, anyone who thinks it’s the 1990s from an economic standpoint clearly has not yet done the work on domestic debt and demographic trends. Those two factors alone will most certainly ensure that the U.S. economy will never again experience a period like 1990s for very long time.

 

Q: If so, why can’t stocks keep working?

A: It doesn’t have to be the 1990s for stocks to keep working - #Quad4 stocks that is. As highlighted daily in our thematic investment conclusions above, there are plenty of sectors and style factors you can buy with our bearish thesis. Nevermind that healthcare, staples, utilities and REITs are “expensive” on both a relative and absolute basis. The fact of the matter is that ~80-90 of active managers underperformed their benchmarks last year, so the majority of the buy-side clearly isn’t long what we were telling them to be long of most of the year. That means they will eventually have to sell what isn’t’ working (i.e. the U.S. “escape velocity” narrative) in order to chase what is working or even just to avoid becoming increasingly underweight the aforementioned sectors as a function of relative performance. This is how macro fund flows work. Moreover, this is why you need a competent macro view either internally or outsourced.

 

Q: How low can rates go?

A: Lower and lower and lower – until Consensus Macro strategists and the investors who either don’t do macro or overpay for the wrong macro research capitulate on the short side of Treasury bonds. Both camps remain far from having done just that.

 

Q: Will Draghi disappoint next Thursday?

A: From these levels in the EUR/USD, most likely. The probability that he disappoints is particularly high given the speculative net length in the futures and options markets and yesterday’s SNB revaluation, which prompted speculation that the ECB would pursue substantially more divergent monetary policy over the intermediate-to-long term. It remains to be seen whether or not Draghi has secured enough of a mandate to achieve the degree of balance sheet expansion believed needed to appropriately combat deflation and economic stagnation in the Eurozone.

 

Q: Are Japanese stocks a short?

A: Not here, but certainly if the USD/JPY breaks our intermediate-term TREND line of 114.26. That would be a clean-cut signal to us that either QQE expansion will not happen on our expected horizon (i.e. within 2-3 months) or that any QQE expansion will be overshadowed by a continued breakout in cross-asset volatility, which has historically been positive for the Japanese yen. Either of those events would make us very wrong on the bearish side of the JPY and bullish side of the Nikkei.

 

Q: Is gold a buy?

A: Right now, gold is trading right at our long-term TAIL line of resistance, which is $1,262/ozt. When securities or asset classes break out above or break down below our TAIL line, we don’t ask questions – we look for answers. Sometimes our fundamental analysis front-runs these TAIL risk events, like our call on bond yields in 2013 (i.e. domestic #GrowthAccelerating) and in 2014 (i.e. domestic #GrowthSlowing). Other times – like today’s setup in gold – we don’t yet know what the answer is so we simply make one up because that’s what the market is telling us to do. Could a breakout in gold be front-running a marginally dovish policy shift by the Fed that perpetuates a more material pullback in the DXY? We don’t know yet, but that’s a story that not only makes sense, but would also be easy for the preponderance of market participants to substantiate with data. Moreover, we’d look to confirm gold’s breakout across other dollar-sensitive asset classes like emerging markets and upstream MLPs.

 

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

 

TRACKING OUR ACTIVE MACRO THEMES

Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.

 

The Hedgeye Macro Playbook (1/12)

 

#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.

 

EARLY LOOK: Macro Stars (1/15)

 

Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014. 2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.

 

HOUSING: Purchase Demand | Post-Holiday Deluge (1/14)

 

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: What If Jobless Claims (Energy States) Break Out to the Upside?

CHART OF THE DAY: What If Jobless Claims (Energy States) Break Out to the Upside? - Claims vs Crudel


Climbing The Wall

“We were just us up there – 19 days on the wall.”

-Kevin Jorgeson

 

In case you missed it, two American free-climbers achieved greatness this week. After a 19-day epic #grind of human preparation, teamwork, and perseverance, Tommy Caldwell and Kevin Jorgeson successfully scaled Yosemite’s El Capitan.

 

Since you know I like to think and write in metaphors of historical feats and failures, there are obviously a lot of ways I can roll with this story. But the most important lesson is to have both patience and #process.

 

These guys spent 7 years planning to embrace the uncertainty of the climb… and 7 full days, literally stuck, hanging, on the most difficult face of mountain (Dawn Wall). If you think multi-duration and multi-factor like these guys do, you can achieve excellence too.

 

Climbing The Wall - 99

 

Back to the Global Macro Grind

 

I’m not a fan of excuse making or mediocrity. I know that might rub some people the wrong way but, in case you didn’t notice, I don’t particularly care about what they think. My teammates and I are out here, every day, climbing an Old Wall that we know we can beat.

 

Does that mean that this is easy? Of course not. This is one of the highest paying professions on the planet because excellence isn’t allocated to job titles and/or academic standing – it’s earned out there on The Wall, every day.

 

The toughest climb we’ve had in the last 3 years hasn’t been making the bullish Long Bond (TLT) call. It was in building a #process (for 7yrs as a team) that was flexible and could objectively go both ways, calling for:

 

  1. A breakout in US interest rates in 2013 (as real US economic and employment growth #accelerated)
  2. Then the reversal of rates in 2014 (global #GrowthSlowing + #Deflation)

 

I don’t know if it was the 7 days at the end of September (before the Russell’s JUL-OCT drawdown capitulated at -15%) or the last 7 trading days of December when everything was going the wrong way vs. our plan…

 

But there were plenty of times where I questioned my every premise. I had to review everything I’d written in my notebooks, my teammates models, etc. and ask myself, over and over again, whether or not this was the right path to take.

 

Fortunately, it was.

 

This morning both the inability of central planners to arrest gravity (global #GrowthSlowing) and market expectations for #deflation are reaching an immediate-term capitulation point.

 

No, that’s not just staring at the “Dow 18,000 Bro” futures guys – remember, we do Global Macro – and there’s a lot more to beating this Old Wall than calling out the 50-day in spooz.

 

Today is capitulation day for Long Bond bears. If they didn’t get rates right, they’re going to be feeling plenty of pain in those asset allocations that are directly correlating to crashing bond yields. Their pain is your gain.

 

Follow #Deflation’s Dominoes:

 

  1. UST 10yr Yield = 1.71% (already down 21% YTD, and -43% since this time last yr)
  2. Commodities (CRB Index) = 220 (that’s -29% since June of 2014, at 12 month #deflationary lows)
  3. Financials (XLF) and Regional Bank Stocks (KRE) are already -6.2% and -10.2% YTD, respectively

 

Particularly on that last point (which is just equities following what bonds and commodities already did), that’s a nasty start to the year. And it fundamentally should be, because:

 

  1. Crashing Bond Yields (and widening credit spreads) are clean cut #GrowthSlowing and #Deflation signals
  2. Yield Spread Compression (10yr minus 2yr at a fresh 12 month low of 128 bps today) = #GrowthSlowing
  3. And when 1 and 2 are true, you don’t buy late-cycle stocks like Energy, Financials, and Industrials

 

If all you do is US stocks (we don’t), here’s the YTD score:

 

  1. Energy (XLE) -8.0% YTD
  2. Financials (XLF) -6.2% YTD
  3. Industrials (XLI) -3.9% YTD

 

Vs. the #alpha climbers:

 

  1. Utilities (XLU) = +2.1% YTD
  2. Healthcare (XLV) = +1.0% YTD
  3. Consumer Staples (XLP) = +0.8%

 

In other words, if you are out-front, beating your competition on that absolute and relative performance wall, you are A) short/underweight what we don’t like and B) long what we like.

 

What’s next for bond yields, the late-cycle bank stocks, etc?

 

  1. What if jobless claims (Energy States) breakout to the upside (see Chart of The Day)
  2. What if #Deflation hurts sales, earnings, and margins? (SP500 is coming off peak)
  3. What if European stocks react to Draghi’s plan next wk like Swiss stocks just did?

 

What if you woke up, every day, asking yourself not whether or not you like me as a person… but asking yourself about yourself, your process, and your performance path?

 

This isn’t Yosemite. This is Wall Street. And yes, you need to have a macro view. So #Timestamp it! The plan is always that the plan is going to change. And while you might lose a few fingernails, stressing yourself to not take the consensus route along the way…

 

If you can make that epic performance climb, you can sit up there at the top, smiling all day.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.70-1.93%

SPX 1

VIX 19.78-23.31

Oil (WTI) 44.43-47.93
Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Climbing The Wall - Claims vs Crudel


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