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Predicting Age

“People do predictable things as they age.”

-Harry Dent

 

People also do unpredictable things. Give them more than a few cocktails and you’ll see that prediction in motion! While simple, the aforementioned quote is true too. It comes from a macro research book I just finished reviewing called The Demographic Cliff:

 

“The average family borrows the most when parents are age 41, typically the time of their largest home purchase. They spend the most at age 46, although more affluent households reach that peak later… People save the most at age 54 and have their highest net worth at age 64…” (pg 11). These are obviously generalizations, but they are about the most important spending generation in American #history (Baby Boomers).  

 

Interestingly, but not surprisingly, Life-Cycle Economics was one of the most talked about macro topics when Darius Dale and I were on the road seeing Institutional Investors in NYC last week where I’d ask everyone the question we have on slide 22 of our Q1 Macro Themes Deck: “What Matters Most: Gas Prices, Jobs, or Demographics?”

 

Predicting Age - 90

 

Back to the Global Macro Grind

 

While many like to call themselves “long-term investors”, when it comes to answering the question in our Chart of The Day thoroughly, I think you should call yourselves multi-duration, multi-factor, risk managers. That’s my new marketing pitch!

 

Here’s one way to think about all 3 factors, across durations:

 

  1. GAS PRICES – immediate-to-intermediate-term (bullish TRADE and TREND duration impact to consumers)
  2. JOBS – intermediate-term (making a bearish turn? The cycle tends to be less lumpy and cyclical, or TRENDING)
  3. DEMOGRAPHICS – long-term (what was a long-term tailwind in the USA, Japan, and Europe is now a headwind)

 

Yep, after a long weekend, that’s a lot to think about – and I’m thinking that the immediate-term positioning of Consensus Macro futures/options in both the Spooz and Long Bond doesn’t quite agree with me yet on JOBS and DEMOGRAPHICS:

 

  1. SP500 (Index + Emini) = +110,971 net LONG position (-59,269 last wk but up big vs the 1yr avg of -11,681)
  2. US 10yr Treasury = -(187,997) net SHORT position (+62,166 last wk but a lot shorter than 1yr avg of -62,100)
  3. Crude Oil = +326,134 net LONG position (+11,230 last wk vs. 1yr avg of +368,447 net LONG contracts)

 

What consensus continues to think about is perpetually being long Macro Style Factors (growth and inflation) that have worked in the past. This implies nothing but volatility around these changing expectations in the future.

 

Let’s go through these (SPX, 10yr, Oil) one by one. First on US equity beta (SPX):

 

  1. SP500 (SPX) had its highest net LONG position since 2007 only 2 weeks ago at +170,240
  2. But the SPX didn’t pay the bulls, closing down for the 3rd straight week last week during its -3.5% correction
  3. Within the SP500’s -1.9% YTD return, the Top 2 Sectors are #GrowthSlowing + #Deflation winners
  4. Top 3 YTD = Utilities +2.6% last wk to +3.0% YTD, Healthcare (XLV) +2.9% YTD, Consumer Staples (XLP) +1.6% YTD
  5. Bottom 3 YTD = Financials -2.6% last wk to -5.0% YTD, Energy (XLE) -5.0% YTD, Consumer Discretionary (XLY) -3.4% YTD

 

Then on the best way to be long our global #GrowthSlowing + #Deflation view:

 

  1. UST 10yr Yield was down another -11bps last week to -33bps (-15% YTD) to 1.84%
  2. Yield Spread (10yr minus 2yr) was down another -3bps last wk to -15bps YTD
  3. Long-term Treasury (TLT) is already smoking everything US stocks at +6% YTD (pre-int payments!)

 

Finally, on the beloved Oil “space”:

 

  1. WTI Crude has its 1st up week in the last 8, closing up a whopping +0.7% last week
  2. WTI Crude has already given up another -3.1% to start this week and is already -11.4% YTD
  3. Whoever bought me the falling steak knives catching set for my birthday isn’t invited to next year’s party

 

In other words, you and I are having a great time to start 2015. Consensus Macro is not. And that’s mainly because consensus does predictable things as a global growth, inflation, and demographic cycle ages past a long-term cyclical peak.

 

Before I leave the keyboard this morning, here are some other big movers in Global Macro from last week that you need to keep front and center ahead of the BOJ and ECB central planning decisions this week:

 

  1. The Euro (vs. USD) was -2.3% last wk and signaled immediate-term TRADE oversold at $1.15
  2. Gold ripped +5% last week and is showing follow-through, up another +1.3% this a.m. to $1291
  3. Dr. Copper got blasted for another -5% #deflation last week and is down again this morning to $2.56

 

Of all that, what matters most?

 

All of it does. It’s interconnected. And I think it’s suggesting that Mario Draghi might not be able to deliver the Policy To Inflate drugs that central planning fans are begging for on Thursday.

 

Any short-term bottom in Euros = Down Dollar (from overbought highs) – and Gold loves nothing more than Down Dollar + Down Rates, at the same time.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.76-1.90%

SPX 1
USD 91.94-93.11

EUR/USD 1.15-1.19

Gold 1

Copper 2.48-2.65

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Predicting Age - 01.20.15 Chart


REMOVING PNK SHORT FROM BEST IDEAS

Takeaway: PNK should handily beat Q4 Street estimates and 2015 is off to a strong start in the regional gaming markets.

In line with our positive regional gaming call today:  "REGIONAL GAMING MOMENTUM TO CONTINUE", we are removing the PNK short from the Hedgeye Best Ideas List.


REGIONAL GAMING MOMENTUM TO CONTINUE

Takeaway: We’re above the Street for Q4 earnings for BYD, PENN, and PNK and the release of January gaming revenues should continue the trend.

CALL TO ACTION

We’re not ready yet to call a V-shaped regional gaming recovery but due to a variety of factors, the numbers look a lot better. Q4 earnings for BYD, PENN, and PNK should all handily exceed Street estimates. Moreover, January should prove to be the best month in regional gaming since well before the “Great Recession” began in 2008. Low gas prices, easy polar vortex weather comparisons, and maybe a little macro are all contributing. The stocks look like buys into earnings and the release of January gaming revenues.

 

Please see our detailed note:  http://docs.hedgeye.com/HE_Regional_Q4_1.20.15.pdf


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SHORT FL/HIBB - BLACK BOOKS THURSDAY (1/22) & NEXT MONDAY (1/26)

Takeaway: We’re releasing 2 Black Books – Deep Dive on FL and HIBB. Our Athletic Book focused on the Industry/Theme. This dives into the short ideas.

We’re going to release two Black Books over the next two weeks. One on Foot Locker this  Thursday, January 22nd at 11:00 am ET. And the other on Hibbett next Monday, January 26th at 1:00 pm ET.  Dial-in info is below.  Since we launched our 90-page Athletic Black book in late December, our Short Call on Foot Locker has been something of a lightning rod, accounting for a disproportionate amount of our call volume. Since then, we’ve seen several Sell-Side downgrades on FL, the latest because of a ‘Slowdown in Basketball’, which we think misses the mark and understates the downside in this financial model in the intermediate-term and long-term. Simply put, the ‘newly bearish’ out there are simply not bearish enough. Conversely, people are not as focused as they should be on HIBB, which has major downside in the model.

 

Unlike in our Athletic Black Book, where we had just a few slides on each company, we’ll be doing a thorough deep dive into every line item and business driver for FL and HIBB. 

 

Here’s Just a Few of the Topics We’ll Hit On For FL/HIBB

 

1) Store footprint potential vs what we see today.

  • FL cannibalization analysis by region and by mall, and why it’s biggest competitor is actually itself.
  • HIBB overlap analysis with Dick’s, Academy, and Sports Authority – how much quality growth is left?

2) Productivity

  • Opportunity to take productivity higher via mix, with all else equal.
  • Trends in pricing vs mix, and why it leaves little upside in the model from here.
  • Productivity and profitability if ‘Nike ratio’ shrinks – either by design or by misfortune.
  • Impact of category (basketball, running, etc…) trends on productivity.

3) e-commerce.  One of our key points is that store sales (barring 6% industry growth) will never grow again. In that regard…

  • What is each company’s installed investment base to facilitate e-commerce growth going forward.
  • How do consumers use the retail site as opposed to going to the Brand directly.
  • What are ‘free shipping’ trends in the Athletic space, and what are the ensuing margin implications for each company.
  • Which retailers have the greatest risk as Nike goes more direct? When and where should we see it?
  • We’ll quantify the AMZN risk for each retailer.

4) Ken Hicks was a bigger force inside FL than the market is recognizing. But FL is not in trouble because he left, he left because FL is in trouble.

 

5) What SG&A levers can both companies pull if the gross profit algorithm rolls.

 

FL Call Info (Thursday 1/22, 11:00 am ET)

  • Toll Free Number:
  • Toll Number:
  • Conference ID/Password: 13598538
  • Materials: CLICK HERE

HIBB Call Info (Monday 1/26, 1:00 pm ET)

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 733316#
  • Materials: CLICK HERE

January 20, 2015

January 20, 2015 - Slide1

 

BULLISH TRENDS

January 20, 2015 - Slide2

January 20, 2015 - Slide3

January 20, 2015 - Slide4

January 20, 2015 - Slide5

 

BEARISH TRENDS

 

January 20, 2015 - Slide6 

January 20, 2015 - Slide7

January 20, 2015 - Slide8

January 20, 2015 - Slide9

January 20, 2015 - Slide10

January 20, 2015 - Slide11
January 20, 2015 - Slide12


My Crystal Ball

This note was originally published at 8am on January 06, 2015 for Hedgeye subscribers.

“It’s far better having an approximate answer to the right question, than an exact answer to the wrong question.”

-John Tukey

 

Tukey was one of the most important mathematicians of the 20th century. The probability man died in 2000 and the only knock on him is that he went to Princeton. Yes, he was a Bayesian. He was also a Bell Labs guy. That’s where they asked the right questions.

 

The Global Macro question remains: will global #GrowthSlowing + #Deflation matter to both the US economy and its stock, bond, currency, and commodity markets? If you thought yes, then how so? Oh, and how did you position for that?

 

After rubbing it this morning, my crystal ball (my wife got me one for my birthday – no joke, a real one) says A) yes, it mattered and B) it translated into both crashing global long-term bond yields and commodity prices. “So”, let’s keep re-positioning…

 

My Crystal Ball - 78

 

Back to the Global Macro Grind

 

Re-position? Yes, as in rotate. With the UST 10yr Yield tapping the 1%-handle this morning:

 

  1. Book some gains in those Long Bond (TLT, EDV, BND, MUB, etc.) holdings
  2. Re-position some of that capital into oversold US consumption equities
  3. And send your Old Wall broker an email that says your crystal ball guy said to :)

 

In Hedgeye Asset Allocation terms (re-positioning = rotation of the allocation!), that means:

 

  1. Taking net Fixed Income down from max allocation to an asset class (1/3 of my capital) to +28%
  2. Taking net US Equity asset allocation up from +3% on December 29th, 2014 to +10%
  3. Do nothing in International Equities and/or Commodities

 

No, I don’t want to chase Gold up here. I haven’t told you to engage in amateur knife catching crude oil contests for the last 6 months either. My net asset allocation to #deflation (Commodities) = 0% because the answer to THE question mattered.

 

“Net” – what does that mean, net?

 

Net (and in rate of change terms) is how I think. Not because my crystal ball told me so (remember, I didn’t have one until today!), but because that’s how I learned, at a young age in the hedge fund business, to manage risk.

 

I know having longs and shorts isn’t for everyone. And it really shouldn’t be. On the short side in particular, at least 2/3 of hedge funds don’t do the hedging thing very well, don’t forget.

 

We are better than bad at that – and we also don’t tell our long only investors to chase tops. That’s why I referenced December 29th, specifically. If you are in the business of compounding returns and dynamically allocating assets, that day mattered because:

 

  1. The SP500 was 70 handles higher than yesterday’s 2020 close, at an all-time closing high of 2090
  2. The yield on the 10yr US Treasury was 2.25%

 

If you are a portfolio manager of anything Fixed Income or US Equities, THE question that day was:

 

  1. BUY
  2. SELL
  3. Or DO NOTHING?

 

As all of you veterans of the risk management gridiron know, sometimes doing nothing is the best answer. But, unless you are in the business of low-fee generating-passive-asset-management, sometimes you do need to BUY or SELL!

 

“So”, as the Old Wall analysts like to say, on December 29th:

 

  1. If you bought more Long Bond (TLT) exposure, the 10yr Yield just had a 12% move from there (1.98% last)
  2. If you bought more SPY (there was a big fund flow into it that week), you just lost -3.3%

 

“So”, crystal ball says you wanted to have done 1. And not 2.

 

The other thing crystal ball is telling me this AM is don’t short the Russell 2000 today. #Pardon? Yes. You heard it from whatever this transparent ball is that I am rubbing this morning first! Do not short the IWM because:

 

  1. After another swift -3.1% correction, the Russell 2000 is signaling immediate-term TRADE oversold
  2. The inverse of that beta trade (VIX) is signaling immediate-term TRADE overbought at 20.59
  3. Hedge Fund Consensus is short the Russell (IWM) vs long SPY

 

Back to the “net” concept. If you want to earn your keep in 2 and 20 land, it’s usually best to not be pressing the lows on the short side of your net exposure in a crowded macro short.

 

Rather than rant any further this morning, here’s a 2 minute video explaining why “I Would Not Do What Hedge Funds Are Doing” in what was one of our best Global Macro short ideas 1-year ago today: https://www.youtube.com/watch?v=hrl7J_HVKZw

 

Crystal Ball just told me to stop there. #Cool. I’m already starting to like this thing.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.97-2.16%

SPX 2017-2051

VIX 16.26-20.59
Oil (WTI) 48.45-54.15

Gold 1166-1217

Copper 2.73-2.84

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

My Crystal Ball - 01.06.15 chart


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