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Cross-Disciplinary Macro

This note was originally published at 8am on January 12, 2015 for Hedgeye subscribers.

“Disciplinary science has died.”

-Alan Leshner


From a risk management perspective, if something embedded in your #process is dead or dying, you better come up with something better to replace it!


Since 2001, Alan Leshner has been the Executive Publisher of the journal Science. He was cited in a fantastic #behavioral book I just finished reading called The Medici Effect, where he added that “most major advancements involve multiple disciplines.”


George Cowan, from one of the birthplaces of Complexity Theory (the Sante Fe Institute), added that “you need to get scientists to think about things other than their specialty.” (pg 27) This is so obviously true in asset management today. And I think we are so early.

Cross-Disciplinary Macro - 77


Back to the Global Macro Grind


Since many US institutional investors still focus exclusively on the US Equity market, there is a lot of frustration out there when it comes to relative performance compared to their US stock market index bogeys.


While I’m obviously sympathetic to what people are paid to do, that doesn’t mean I have to put my head in my hands and capitulate alongside them. I can only re-explain that broadening one’s horizons beyond what the SPY is doing is going to help them win.


If you’ve evolved your process to Cross-Disciplinary Macro you should be killing it right now. There are major asset classes like Long Duration Sovereign Bonds (think TLT) that are going straight up at the same time that others (like Commodities) are going straight down.


If you’re a US Equity only investor (and you’ve expressed the aforementioned position in what we call Sector Style Factors), you should be crushing it too. Look at last week’s S&P Sector level returns:


  1. Healthcare Stocks (XLV) +2.3% week-over-week to start 2015 +2.7% YTD
  2. Consumer Staples (XLP) +1.6% on the week to start the year +1.3% YTD
  3. Energy Stocks (XLE) down another -4% last week to -3.5% YTD
  4. Industrial Stocks (XLI) -1.9% week-over-week to start 2015 -2.1%
  5. SP500 -0.7% last week to start the year -0.7%


In other words, instead of banging you head against the Old Wall trying to short SPY into a global #GrowthSlowing + #Deflation, all you had to do was be short both of those factors and long the 2 S&P Sectors that literally jump off the page in our Macro Playbook on the long side.


I can recap why Healthcare (XLV) and Consumer Staples (XLP) outperform in what we call #Quad4, but since I have been writing about this since September, there’s no need to be repetitive. Since October, our net asset allocation to Commodities has been 0%.


How about a US equity only “Income Fund”? Here’s the other very basic differential your portfolio should have capitalized on last week:


  1. US REIT Stocks (MSCI Index) +3.5% week-over-week to start the year +5.0% YTD
  2. US MLP Stocks (Alerian Index) down another -3.5% on the wk to start 2015 -2.5%


Again, when A) global growth is slowing, bond yields are falling… so you buy stocks that look like bonds… but B) you don’t buy the ones that have two-rocks tied together (Oil + Energy Leverage) like these widely owned and overvalued upstream E&P MLP stocks.


If you run a diversified macro fund, making lower-volatility (and higher absolute) returns was so easy a Mucker could do it last week:


  1. Long Bond Bulls got paid bank with the UST 10yr Yield down -16 basis points on the wk to -10% already for the YTD!
  2. Commodities (CRB Index) deflated another -1.2% on the week to start 2015 -1.9% YTD
  3. Oil (WTI) got slammed another -8.4% week-over-week to -9.4% already for 2015
  4. US and German 5yr Breakevens (#deflation risk proxies) both dropped to 1.18% and -0.19%, respectively
  5. European Stocks (EuroStoxx600) dropped -1.0% week-over-week to start 2015 -1.3%


No, there’s nowhere in our playbook that says “buy European stocks on valuation.” And thank god for that as country equity indexes like Italy and Spain dropped -5% and -6% (on the week!), respectively.


If you’re a Global Macro hedge fund, you should be slaying the alpha beast right now. Imagine just being Short Euros, European Stocks, Oil, US Energy and Industrials… with the Long Bond and some Healthcare/Staples/REITs action on the long side?


Sadly, Consensus Macro funds can’t. Here’s where they were position from an options perspective going into the end of last week (CFTC Non-Commercial futures/options positioning):


  1. SPX (Index + Emini) net LONG position got +31,658 LONGER last week to +170,240 (vs the 6mth avg of +14,575)
  2. 10yr Treasury Bond net SHORT position got +17,379 smaller last week to -250,163 (vs the 6mth avg of -72,383)


Forget generating alpha, having those levered (options) positions on issued some seriously negative beta. And we’re quite happy you made money on the other side of that, fading the crowd, doing Cross-Disciplinary Macro, Hedgeye-style!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.88-2.07%

SPX 1995-2090

FTSE 6321-6579

VIX 15.69-21.89

EUR/USD 1.17-1.19
Oil (WTI) 46.01-50.99


Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer


Cross-Disciplinary Macro - 01.12.15 chart

Time Change | HIBB - Short Hibbett Sports BLACK BOOK Call

Takeaway: New time for Hibbett Sports Black Book. Friday, February 6th at 11:00am ET.

Please join us on Friday, February 6th at 11:00 am ET where we'll be hosting a call to review our next Black Book on Hibbett Sports. Please note the change in time.


Since we launched our 90-page Athletic Black book in late December and our 60-page Short Foot Locker Black Book on Thursday of last week, Foot Locker has been something of a lightning rod, accounting for a disproportionate amount of our call volume. But we don't think that people are as focused as they should be on HIBB, which has major downside in the model.


Like in our Foot Locker Black Book, we’ll be doing a thorough deep dive into every line item and business driver for HIBB. 


Here’s Just a Few of the Topics We’ll Hit On

1) Store footprint potential vs what we see today.

  • 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 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 the 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.
  • Which retailers have the greatest risk as Nike goes more direct? When and where should we see it?

4) What SG&A levers can HIBB pull if the gross profit algorithm rolls. 



HIBB Call Info (Friday 2/6, 11:00 am ET)

Participant Dialing Instructions

Toll Free Number:

Toll Number:

Conference Code: 38877775

Materials: CLICK HERE

The Week Ahead

The Economic Data calendar for the week of the 26th of January through the 30th 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 - 01.23.15 Week Ahead



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Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3 usd correls

Commodities: Weekly Quant - chart4 volume

Commodities: Weekly Quant - chart5 open interest

Commodities: Weekly Quant - chart6 volatility

Commodities: Weekly Quant - chart7 sentiment


Ben Ryan


Investing Ideas Newsletter

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

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


We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter    - REAL 

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


Investing Ideas Newsletter    - Draghi cartoon 01.20.2015



Hologic reports next Wednesday and we’ll be listening for comments about the substance of their positive pre-announced results.  We suspect there was better growth in 3D placements and related revenue than the total Breast Health revenue number suggests, but we’ll have to wait to hear what they say on the call (MRI Divestiture, 2D Declines) and what they disclose in their 10-K filing with the SEC, to have a complete view. 


We spoke to an institutional investor earlier this week after pitching HOLX to them last quarter.  He was reluctant to “buy it up here” which means buy HOLX after a rally, which we agree is an emotionally difficult thing to do.  There are lots of easy things that make a good stock decision, but worrying about where the stock was 3 months ago, should not be one of them.


Looking ahead, the fundamental turn in the company is indeed getting priced into the shares near $30  and yes that is a long way from $20 where we started with HOLX in April 2014.  But we don’t think “up here” reflects silly optimism.  For example, the sellside (who typically chases HOLX after the price has risen) 45% of them still rate the stock a HOLD and 9% think it’s a SELL(SHORT), only modestly better than sentiment lows we saw in mid-2014.  The sellside rating doesn’t seem to be in the area code of “up here” and has a long way to go before it gets there.

Investing Ideas Newsletter    - tt 


Medidata Solutions announced they will report Q4 2014 earnings before the market open on Thursday, February 5th, 2015. We are tracking several key drivers that say they beat estimates and the stock goes higher as a result. Short interest has been increasing, and is near a multi-year high of 12% heading into earnings.


After taking down guidance last quarter (Q3 2014) and missing expectations for several quarters before that, this upcoming earnings event is critical, particularly for management’s credibility. Historically, high short interest has had a positive correlation to the next 12-month excess return of the stock. In other words, shorts are typically wrong.

Investing Ideas Newsletter    - andrew1


Investing Ideas Newsletter    - andrew2



Bonds Rally Strong to Conclude a Volatile Week


From an intra-day low of 1.7642% on Tuesday to an intra-day high of 1.9398% on Thursday to today’s close of 1.7840%, the 10yr U.S. Treasury yield has had a volatile week.


Obviously key event of the week was the ECB announcing QE (CLICK HERE for our detailed recap). Perversely, Mario Draghi’s Sisyphean fight to produce inflation in the Eurozone is actually perpetuating global deflationary forces that continue to support weigh on U.S. interest rates.


We can explain this dynamic in three simple tweets:

  1. https://twitter.com/HedgeyeDDale/status/558272104605708288
  2. https://twitter.com/HedgeyeDDale/status/558272498383736832
  3. https://twitter.com/HedgeyeDDale/status/558273095312891904


Rarely is ex post market behavior so tightly correlated with an ex ante hypothesis, but that continues to be the case as we outlined back in early August.


Refer to slides 28-33 of the following presentation for the crux of our short thesis on the Euro, which is continues to be core to our bullish bias on the U.S. dollar and our bearish bias on commodity prices: http://docs.hedgeye.com/HE_GlobalFinancialMarkets_8.5.14.pdf. From that same presentation:


Investing Ideas Newsletter    - Quad4 Investment Recommendations


All told, we thank you for sticking with us and believing in our research and risk management processes, which continue to show positive divergence amid the universe of investment advisors. That decision has certainly gotten you paid on the long side of TLT, EDV, MUB and XLP.


Refreshed YTD performance:

  • TLT: +7.0%
  • EDV: +9.8%
  • MUB: +1.2%
  • XLP: +2.4%

Contrast that with the -0.3% YTD return for the S&P 500.


An astute Investing Ideas subscriber tweeted us earlier this week with the following question: "How can you be comfortable with the fact there is no free cash flow generation at RH?"


Good question. And simple answer.


Restoration Hardware is the growthiest of retailers. As much as the landlords are funding up to 75% of construction costs, the fact is that growing its store base costs money. So does expanding into new categories, such as kitchens, which launched this Spring.


Thus far, RH has proven to be an extremely good steward of shareholder capital. New stores have a payoff period as short as six months. That's unheard of for most retailers -- and most capital projects for any company in any industry.


With that as a backdrop, we think that RH has earned the right to spend. We'll monitor them every step of the way. But from where we sit, we'd be worried if the company STOPPED spending on all these capital projects, as that would jeopardize our model which gets RH at $5bn in sales by 2018 vs. $1.8 Bn today on top of a 700bp increase in ebit margins.


Thanks for the question. If you tweet them (and identify yourself as an Investing Idea subscriber) we'll be happy to address your questions every time, without fail.


There are no material updates to our high-conviction bullish thesis on Yum! Brands. For the record, YUM is up ~7.5% over the past three months, outperforming both the S&P 500 index and Consumer Discretionary (XLY) indices.  A few quick-service companies have pre-announced strong 4Q14 results, which should bode well for YUM’s domestic business. 

Investing Ideas Newsletter    - y7

However, we’re taking a more cautious stance on China, which could suffer from a slower than expected recovery.  We’ll have more detail on each region when the company reports in two weeks.


We remain attracted to the intrinsic value of the company and continue to believe it offers a compelling investment for long-term oriented investors. 



* * * * * * * * * * 


builder confidence still high despite recent weakness

Builder confidence remains high in spite of the new home market being the one laggard in the broader housing mosaic.

Investing Ideas Newsletter    - hb1

ici fund flow survey: the best offense is a good defense

Defensive categories including taxable bonds, fixed income ETFs, and the Healthcare Sector SPDR did best in the 2nd week of the year.

Investing Ideas Newsletter    - 444

Don't Miss Out! HedgeyeTV's Interactive "Market Marathon" This Wednesday!

WATCH and INTERACT with Hedgeye CEO Keith McCullough and Hedgeye's team of award-winning analysts as they discuss the stock market, economy and more all in real-time on HedgeyeTV. They will answer your questions live via email, phone, Twitter and chat throughout the entire trading day. 


Don't Miss Out! HedgeyeTV's Interactive "Market Marathon" This Wednesday! - live updated   


Special appearances by market experts, including best-selling "Currency Wars" author James Rickards, money manager Michael Holland, Jones Trading chief market strategist Michael O'Rourke and many more.


Don't Miss Out! HedgeyeTV's Interactive "Market Marathon" This Wednesday! - he market marathon logo



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