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Risk Managing Global #Deflation

Client Talking Points

OIL

#1 read-through from the Mario Draghi move was more, not less, #deflation – there are a lot of ways to play this, but obviously pressing the short side of WTI Oil is one of them, -1.6% this morning (after a -7.2% down week) to $44.95 and no support to lower-lows – there’s still a massive net LONG position of +324,642 futures/options contracts in crude.

#DEFLATION

Reported, big time, in Spain this morning with a -3.7% year-over-year PPI (vs. -1.5% last) and Finland -1.8% year-over-year – remember that A) Mario Draghi is not going to be able to arrest this, B) it’s bad for many corporate top-lines tied to pricing and C) will freak out the Fed (see Hilsenrath article this morning which comes my way on pushing out the dots) – BUY TLT.

 

FINANCIALS

On last week’s beta bounce, the first sector we signaled SELL on (Real Time Alerts) wasn’t Energy, it was the Financials – consensus is dead wrong on both rates and the yield spread compression born out of being wrong on rates – 10s/2s Yield Spread hitting fresh 12 month lows today at 128 basis points – SELL KRE and XLF.

 

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Asset Allocation

CASH 53% US EQUITIES 4%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 32% 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

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.

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

RUSSIA: leads #deflation's losers this am, down -4.5% (UAE -3.6%, Norway -0.7%) #NoWorries

@KeithMcCullough

QUOTE OF THE DAY

Practice isn't the thing you do once you're good. It's the thing you do that makes you good.

-Malcolm Gladwell

STAT OF THE DAY

The Euro is getting burnt to a crisp, -3.1% week-over-week, to -7.4% year-to-date, while the U.S. Dollar is  up +2.7% on the week to +5.2% year-to-date.


Monday Mashup: EAT, SONC and More

Monday Mashup: EAT, SONC and More - 1

 

Recent Notes

01/20/15 Post-MLK Day Mashup: SBUX, MCD on Tap

01/23/15 SBUX: Closing Best Idea Short

 

Events This Week

Wednesday, January 28th

  • EAT earnings call 10am EST

Thursday, January 29th

  • SONC Annual General Meeting

 

Chart of the Day

Monday Mashup: EAT, SONC and More - 2

 

Recent News Flow 

Tuesday, January 20th

  • BJRI upgraded to buy at KeyBanc with a $52 PT.
  • CAKE upgraded to outperform at William Blair.
  • CHUY Vice President of Operations Southeast, Frank Biller, has resigned from his position.  Mr Biller will remain with the company in an advisory role.
  • EAT downgraded to hold at Wunderlich with a $65 PT.
  • PNRA downgraded to hold with a $185 PT.

Wednesday, January 21st

  • MCD FY15 and FY16 estimates reduced at Janney, citing its latest franchisee survey.
  • RUTH completed the previously announced sales of Mitchell's to Landry's.

Thursday, January 22nd

  • COSI CFO Scott Carlock resigned to pursue other opportunities.  Richard Bagge will serve as interim CFO, while the company works with an executive search firm to find a new full-time CFO.
  • JBFCF Philippine's largest food company, Jollibee Foods said it is keen to buy a U.S. quick-service chain worth at least $1 billion and may partner with a PE firm to do so.  We believe KKD, JACK, PLKI, SONC, WEN, LOCO and FRGI are all in play.
  • JMBA announced the expansion of its Whole Food Nutrition and Fruit & Veggie smoothie lines with the introduction of two new flavors: Amazing Greens and Greens 'n Ginger.
  • SBUX announced that current board member Kevin Johnson will assume the vacant position.  Schultz noted that, while Johnson’s responsibilities will mirror Alstead’s, he will be more heavily involved on the digital side of the business than his predecessor.  Johnson formerly served as a President at Microsoft and, more recently, as CEO of Juniper Networks. 

Friday, January 23rd

  • BLMN announced that director, and former Bain managing director, Mark Nunnelly provided the company with notice of his resignation, effective February 15, 2015.
  • CBRL Senior Vice President of Strategic Initiatives, Edward Greene, notified the company that he plans to retire from his position around November 2, 2015.  The firm is conducting a search for a new Senior Vice President, Marketing.

 

Sector Performance

The XLY (+3.2%) outperformed the SPX (+3.0%) last week.

Monday Mashup: EAT, SONC and More - 3

 

Monday Mashup: EAT, SONC and More - 4

 

Quantitative Setup

From a quantitative perspective, the XLY remains bullish on an intermediate-term TREND duration.

Monday Mashup: EAT, SONC and More - 5

 

Casual Dining Restaurants

Monday Mashup: EAT, SONC and More - 6

 

Monday Mashup: EAT, SONC and More - 7

 

Quick Service Restaurants

Monday Mashup: EAT, SONC and More - 8

 

Monday Mashup: EAT, SONC and More - 9


MACAU WEEKLY ANALYSIS (JAN 19-25)

Takeaway: Less bad weekly data (YoY) but on easy comp. Still forecasting January GGR to fall 15-20%.

CALL TO ACTION

Nothing really to glean from the latest weekly numbers out of Macau – GGR is set to fall more than anticipated when the month began, but in line with our forecast last week.  YoY revenue deterioration looks better than the rest of the month but that’s due to the easier comparison.  Optically, February should be horrible. By our math, the market could fall 35% and that would represent flat sequential volumes from January, seasonally and calendar adjusted.

 

We do not as of yet see a basing in the fundamentals while the risk of further deterioration remains high.  Without a basing combined with cheap valuations or a positive catalyst, entry points remain elusive. We will sit it out for now.

 

 

Please see our detailed note:  

http://docs.hedgeye.com/HE_Macau_1.26.15.pdf


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CHART OF THE DAY: Burning Euro (and Central Planning Ramifications)

CHART OF THE DAY: Burning Euro (and Central Planning Ramifications) - 01.26.15 Chart

*  *  *  *  *  *  * 

Editor's note: This is an excerpt from today's Morning Newsletter by CEO Keith McCullough.

 

Sure, in Burning Euros, they got European stock markets to rip last wk (EuroStoxx600 +5.1% on the wk) – but what else did they get?

 

1. Euro burnt to a crisp, -3.1% week-over-week, to -7.4% YTD

2. US Dollar +2.7% on the week to +5.2% YTD

3. Commodity #Deflation (CRB Index) -3.4% on the wk to multi-yr lows

4. Oil continuing its epic crash, -7.2% wk-over-wk to -15.1% YTD

5. Dr. Copper -4.4% on the wk to -11.5% YTD

6. Long-Term Bond Yields (10yr UST Yield) down another -4bps to -37bps YTD (1.80%)

 


Important People

“Learn not to be intimidated by important people.”

-Orit Gadiesh

 

For those of you who don’t know her (I don’t), when it comes to the Private Equity business, Orit Gadiesh (Chairman of Bain & Company) is a very important person.

 

“Gadiesh is known as the person whose leadership brought Bain out of financial difficulties in the early 1990s… her reputation and mystique are well known in the consulting world. So is her history. She spent two years in the Israeli intelligence unit” learning the aformentioned life lesson in today’s quote. (The Medici Effect, pg 75)

 

Important People - gadiesh orit

 

Do “important” people intimidate you? If your house was burning down, my Dad could definitely impress you with a plan. But how about assessing the torching of what used to be your free-markets? Are you just going to stand idle and let these “important” people experiment on the job? Or are you going to let Mr. Macro Market lead you out of the blaze?

 

Back to the Global Macro Grind…

 

I won’t be intimidated by people by the name of Draghi, Kuroda, and Yellen. Instead, I’ll do my best to stand here on the front-lines of this foreign currency and market volatility fire and risk manage what’s born out of the expectations they are trying to create.

 

If I haven’t been, allow me to be crystal clear on how expectations are tracking:

 

1. Central planners are perpetually trying to create asset inflation expectations…

2. And after they’ve failed to create economic growth, cut to zeros, then tried to redefine “zero”…

3. Global #Deflation of all Policies To Inflate becomes the most paramount to risk manage

 

Sure, in Burning Euros, they got European stock markets to rip last wk (EuroStoxx600 +5.1% on the wk) – but what else did they get?

 

1. Euro burnt to a crisp, -3.1% week-over-week, to -7.4% YTD

2. US Dollar +2.7% on the week to +5.2% YTD

3. Commodity #Deflation (CRB Index) -3.4% on the wk to multi-yr lows

4. Oil continuing its epic crash, -7.2% wk-over-wk to -15.1% YTD

5. Dr. Copper -4.4% on the wk to -11.5% YTD

6. Long-Term Bond Yields (10yr UST Yield) down another -4bps to -37bps YTD (1.80%)

 

Oh, right, and the US stock market had its 1st up week in 4, closing:

 

1. Dow +0.9% wk-over-wk to -0.8% YTD

2. SP500 +1.6% wk-over-wk to -0.3% YTD

3. Russell 2000 +1% wk-over-wk to -1.3% YTD

 

Yep, all of the CNBC cheer-leading and storytelling aside, being long a broad measure of the US stock market (2000 stocks in the Russell) for the last year, instead of something that’s low-volatility-high-return like the Long Bond, has sucked.

 

Back to the 1st paragraph point where I characterized what all of this panic-central-planning has done as a “foreign currency and market volatility fire” (yes, when you’re an unimportant person like me, you can quote yourself!):

 

1. Last 6 months, European central planners have devalued the Euro by an epic -16.8%

2. Last 6 months, Japanese central planners have devalued the Yen by an epic -13.8%

3. Last 6 months, Canadian central planners have joined, cut, and now devalued by -13.7%

 

And while it’ll be a national embarrassment to both me and my countrymen if Canada overtakes the Japanese in rate of change terms, the point is that they are trying to smooth the un-smoothable right now – it’s called (drumroll) #volatility:

 

1. Last 6 months, via FX Burnings > Strong Dollar > Oil Volatility (VIX) is +244%

 

So I guess managing US equity volatility being +45% in the last 6 months is no problem, right? #Wrong. If you look at most of the performance problems out there in money management land, this time wasn’t different – they all started with volatility breaking out from what Bernanke’s Fed called the new “normal” (10 VIX). In reality, that’s the most asymmetric risk level in US history.

 

Market #history and positioning doesn’t lie; people do. Here’s the latest look at Consensus Macro in net CFTC non-Commercial futures/options terms:

 

1. Crude Oil +324,642 net LONG position (vs. +307,819, 6 month avg)

2. Gold +145,742 net LONG position (vs. +82,472, 6 month avg)

3. SP500 (Index + Emini) +71,224 net LONG position (vs. +22,987, 6 month avg)

 

In other words, when it comes to asset price inflation expectations, the truth is that Wall Street is still betting on the “important” people and their central plans delivering them higher-prices…

 

In everything other than the Long Bond, that is… where the net SHORT position in the 10yr Treasury is -138,230 (vs. an avg net short position for the last 6 months of -84,336).

 

“So”, I say cheers to you – for making your independent research thinking vs. a crowded consensus what the legendary Howard Marks would call, “the most important thing.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.75-1.86%

SPX 2020-2066

RUT 1155-1197

VIX 15.79-19.68

EUR/USD 1.12-1.15

WTI Oil 44.06-46.92

 

Best of luck out there this week,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Important People - 01.26.15 Chart


January 26, 2015

January 26, 2015 - Slide1

 

BULLISH TRENDS

January 26, 2015 - Slide2

January 26, 2015 - Slide3

January 26, 2015 - Slide4

January 26, 2015 - Slide5

January 26, 2015 - Slide6

 

BEARISH TRENDS

January 26, 2015 - Slide7

January 26, 2015 - Slide8

January 26, 2015 - Slide9

January 26, 2015 - Slide10

January 26, 2015 - Slide11
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January 26, 2015 - Slide13


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.

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