Will The Macro Mean Revert Back to TREND?

Client Talking Points


The main reason for the whip around, counter-TREND, moves in macro last week was the USD whipping around – down hard mid-week, then up on the jobs report = -0.1% on the week! The USD is down this morning as the Yen couldn’t hold its Friday losses and the Euro’s risk range has tightened up (on the low-end) to 1.12-1.15.


Stocks in Europe don’t like Euro up and Greece down – Greek stocks failed @Hedgeye resistance for the umpteenth time last week and are -4.6% this morning to -7.2% year-to-date; German stocks -1.9% having their biggest down day since Mario Draghi’s central planning week – does he have another one pending?


It was a terrible day for our rates call on Friday, but we’ve seen plenty of rate hike head-fakes in the last year, and we’ve been paid to buy long-duration bonds on every one of them. Less terrible to see the USt 10YR drop 7 basis points this morning to 1.89%, down from 2.17% where it started 2015, and still bearish TREND yield signal.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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.


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


OIL: +0.4% to $51.91 w/ a wicked wide risk range of $42.89-54.02



When you catch a glimpse of your potential, that’s when passion is born.

 -Zig Ziglar


51% of millennials believe they will receive no benefits from Social Security, and 39% think they will get benefits at reduced levels (according to a Pew Research Center survey of 1,821 young men and women 18 to 33 years old in February 2014).

CHART OF THE DAY: Consensus Macro Storytelling Time 10YR UST $TLT

CHART OF THE DAY: Consensus Macro Storytelling Time 10YR UST $TLT - 02.09.15 chart


Editor's note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough.


To be balanced, the other side of the storytelling remains that US GDP growth is going to magically accelerate to +3-4% year-over-year, and that we’re going to get rainbows and puppy dogs delivered in every late-cycle employment report, throughout…


To a degree, Consensus Macro bets still agree with that – here’s the updated CFTC Futures/Options net positioning:


  1. SP500 (Index + Emini) net LONG position = +66,335 contracts (vs. the 1 yr avg of -10,119)
  2. Treasuries (10yr) net SHORT position = -145,402 contracts (vs. the 1yr avg of -65,444)
  3. Crude Oil net LONG position = +324,181 contracts (vs the 1yr avg of +365,957)


For 2015, unless you bought the lows, being long SP500 and commodity related beta has been painful, but consensus has worn it the whole way down inasmuch as it has suffered the under-performance pain of not being bullish on the Long Bond.


Storytelling Time

“Storytelling is probably the single most popular recreational activity after sex and shopping.”

-Tham Kai Meng


Do you agree with that? Would your grandmother? How about Wall Street?


Interesting questions from a book I’m reading called The Ape, the Adman, and the Astronaut, by Ogilvy & Mather’s Chief Creativity Officer who claims that “the neuroscientists are saying your grandmother may have been right all along.” (pg 11)


Since I got crushed on Friday thinking that the US jobs report could be bad, I’m wide open to any story you’d like to tell me this morning. While I still think interest rates are going lower – storytellers make a market, after all.

Storytelling Time - 55


Back to the Global Macro Grind


To be, or not to be crushed (by counter-TREND moves) … remains the question. With the front-runner on big macro moves (the US Dollar Index) whipping around last week (down, then up), here’s what drove macro storytellers right batty:


  1. USD Down – during the front-end of the week, drove Oil, Russia, and Energy Stocks Up
  2. USD Up – on Friday’s jobs report, drove Rates, Utilities, and REITS down


These two story lines are not one and the same thing. And to have been properly positioned for both of them (while not getting your rear-end handed to you for 3-6 months prior) was next to impossible.


Summarizing the Down Dollar (then up fast on Friday) week:


  1. The US Dollar Index finished the week -0.1% at $94.70 (still +4.9% YTD)
  2. Oil (WTI) ramped +7.2% wk-over-wk to $51.69 (still -3.7% YTD)
  3. CRB Commodities Index had its 2nd up wk in a row, +2.7% to -2.2% YTD
  4. SP500 had its 2nd up wk in the last 6, closing +3.0% to -0.2% YTD
  5. Energy Stocks (XLE) led SP500 gainers, +5.7% wk-over-wk to +0.8% YTD
  6. Utilities (XLU) led SP500 losers, -3.6% on the wk (falling to -1.4% YTD)


That last part (Utilities Down) all happened on Friday with the #RateRising move where:


  1. UST 2yr Yields ripped to +0.64% (+19 bps on the wk, but -2 bps YTD)
  2. UST 10yr Yields shot up to 1.96% (+32 bps on the wk, but -21 bps YTD)


And it wasn’t just Utilities that flashed an immediate-term TRADE oversold signal on that. So did REITS (VNQ) and pretty much everything that I’ve liked on the long side of Fixed Income for the last year (TLT, EDV, MUB, ZROZ, BND).


The MSCI REITS Index was -1.6% on the week, but is still up +4.9% YTD and my story-line is that looks a lot like the P&L of the Long Bond bull. One down week does not a new intermediate-term TREND make.


To be balanced, the other side of the storytelling remains that US GDP growth is going to magically accelerate to +3-4% year-over-year, and that we’re going to get rainbows and puppy dogs delivered in every late-cycle employment report, throughout…


To a degree, Consensus Macro bets still agree with that – here’s the updated CFTC Futures/Options net positioning:


  1. SP500 (Index + Emini) net LONG position = +66,335 contracts (vs. the 1 yr avg of -10,119)
  2. Treasuries (10yr) net SHORT position = -145,402 contracts (vs. the 1yr avg of -65,444)
  3. Crude Oil net LONG position = +324,181 contracts (vs the 1yr avg of +365,957)


For 2015, unless you bought the lows, being long SP500 and commodity related beta has been painful, but consensus has worn it the whole way down inasmuch as it has suffered the under-performance pain of not being bullish on the Long Bond.


But maybe the story is different this time? Could rates finally be ready to rocket to the upside? After oil and its related equities have had their counter-TREND bounce, could they continue higher and be the inflation catalyst big equity beta chasers need?


I don’t think so. If I did, on Friday I wouldn’t have signaled (in Real-Time Alerts) to:


  1. Buy Utilities (XLU)
  2. Buy Municipal Bonds (MUB)
  3. Short Banks (BAC)


Opportunities to go shopping for bonds and/or stocks that look like bonds have been few and far between for the last 6 weeks. So I want to signal that you take advantage of one of the two “popular recreational activities” that grandma would sign off on!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.64-1.95%

VIX 15.67-21.44
USD 93.52-95.44

WTI Oil 42.89-54.02
Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Storytelling Time - 02.09.15 chart

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Takeaway: Momentum in regional gaming stocks should continue - Jan numbers coming out strong and Feb should conclude the best 3 mths stretch in 6 yrs




The trade in regional gaming stocks still looks higher. Even after some big snowstorms, January regional revenue is on track for mid-single digit growth or better.  We’re projecting +7% same store revenue growth, best in a long time.  On top of a few more likely strong Q4 earnings releases, solid January State gaming revenue releases this week and next, and another solid month for February, recent share price momentum should be maintained by fundamental catalysts.  


Please see our detailed note:

Important People

This note was originally published at 8am on January 26, 2015 for Hedgeye subscribers.

“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,



Keith R. McCullough

Chief Executive Officer


Important People - 01.26.15 Chart

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: GLD, EDV, HOLX, MDSO, MUB, RH, TLT and XLU.

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


Please note that we added Utilities (XLU) this week and removed Consumer Staples (XLP)


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

Investing Ideas Newsletter     - chart1 

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     - central planning cartoon 01.04.2015




Patient volume in OB/GYN offices is off to a very solid start in January 2015.  One of the important things HOLX said on their recent earnings call was that ThinPrep revenue was coming in flat year over year. Physicians continue to expand the interval between Pap tests for their patients, adhering to guidelines issued in 2012, and as a result the demand for ThinPrep (Pap Testing) testing continues to decline year over year. However, as we saw with HOLX, a solid quarter in patient volume, an exclusive deal with a large lab company, and market share gains overseas, can fill the hole pretty quickly as we saw in the quarter. HOLX managed to go from the declining ThinPrep sales they’ve seen for many quarters in a row to flat year over year growth, an important change in terms of how fast the company can grow in the years ahead. Most importantly, we’re bullish on the immediate opportunity for 3D Mammography,  which can accelerate company growth overall much easier if the rest of the company can just hold steady.  


Will the strong patient volume trend continue? The prospects certainly look good. Friday’s Employment Report from Labor Department showed solid job and wage growth overall, so the patients seem to be doing better. But also, the providers seem to be doing well too. In particular, the growth among healthcare professions continues look very good. If demand wasn’t good in the doctor’s office, we don’t think everyone from Chiropractors to Physician Offices to Hospitals would be hiring at an accelerating pace.  


Investing Ideas Newsletter     - chart11


Investing Ideas Newsletter     - chart12 



MDSO came up short on our expectations for sales as one of our key drivers deviated materially from actual results. While that key metric failed us this quarter, other drivers related to customer growth and backlog remain on track.   Despite not getting our "beat and squeeze", we are not changing our positive view on the company as underlying fundamentals remains in-tact.


Application Services Y/Y % ROC

 Investing Ideas Newsletter     - chart5

key drivers 


Competitive Wins & Customer Growth

We are encouraged by a recent competitive win that management described as having the potential "to be our second largest platform win". Additionally, 40% of deals in Q4 that were over $1 mill were done with companies below the top 50 pharma. This alleviates concerns over their ability to compete effectively in the small-mid size market given their premium pricing. These metrics also run counter to the short thesis we've heard most often, that Oracle was making competitive inroads after a long period of ceding share to MDSO.


Customer Y/Y %

 Investing Ideas Newsletter     - chart6




Customers using multiple products increased to 58% in Q4, with average product per customer ("intensity") of 2.5. This marks an increase from 49% in the prior period and is an important metric to track as cross-selling is critical to supporting long-term growth. Meanwhile, revenue retention among enterprise clients continues to be near 100%.


Product Per Customer 

Investing Ideas Newsletter     - chart7 




We would highlight that management is now reporting an adjusted backlog figure that is inclusive of their estimates for intra-year renewals. In prior quarters, they reported backlog excluding intra-year renewals. Adjusting for this change, backlog growth was +12.9% y/y and below our model estimate. Deal timing impacted the backlog figure as the recent large competitive win was signed in January, as oppose to December. We anticipate an acceleration in backlog growth in 1Q15 as this deal gets rolled into the reported backlog figure. 


Backlog Y/Y % ROC

Investing Ideas Newsletter     - chart8



After a year of disappointment, a chastened management team may be incrementally conservative. Management is basing guidance on their adjusted backlog which does not include increases in ASPs and potential upsells. Adjusted backlog provides coverage for approximately 85% of the midpoint of '15 revenue guidance of $402 mill (vs. $409 mill consensus).


We find the following metrics as sign of positive momentum going into 2015:

  • Annualized bookings in Q4 and full year were up 30% and 22%, respectively
  • High proportion of deals greater than $5 million, up 33% y/y in 2014
  • Overall transaction size increased by 17% y/y in 2014
  • A platform deal and competitive takeaway with the potential to become the second largest deal in company history.


Punk’d By Late-Cycle Labor Market Strength


Follow the bouncing ball:

  • Friday’s JAN U.S. employment report was really good – i.e. showing 2nd derivative improvement on nearly all key metrics, massive revisions to NOV and DEC data and besting the Bloomberg consensus estimate by 29k.
  • The U.S. Dollar Index skyrockets nearly a full percent on the release.
  • The 10yr Treasury note yield rips nearly +10bps on the release.
  • Long-duration bonds (e.g. TLT,  EDV and MUB) and bond-like proxies in the equity market (e.g. XLU) end the day deeply in the red.


The Frequentist view of interpreting the labor market won the day and crushed the week:

  • TLT -5.3% WoW
  • EDV -7.7% WoW
  • MUB -1.2% WoW
  • XLU -3.6% WoW


That said, however, the Bayesian view of interpreting the labor market is winning the year:

  • TLT +4.0% YTD
  • EDV +5.4% YTD
  • MUB +0.4% YTD
  • XLU -1.4% YTD


For context’s sake, those YTD returns compare to +0.00% return for the SPY.


Based on the following chart, us Bayesians are very confident that we will eventually prove correct in our expectation for the labor cycle to negatively inflect and in our forecast for the 10yr Treasury yield to test its all-time lows. Once 300k is breached to the downside on a trending basis in Initial Jobless Claims, that’s as good as it gets for the U.S. labor market.


Investing Ideas Newsletter     - chart13


The question is, however, “How long can the good times roll?”


Frequentists continue to argue quite reasonably that the U.S. labor market – fully loaded with its ~140,000,000 employees – does not turn on a dime. As such, market-based Bayes factors are bound to overshoot any dour intermediate-term outlook for employment growth at various intervals throughout the topping process. That’s exactly what happened when 10yr Treasury yields closed at 1.64% last week.


As Lee Corso would put it, “Not so fast, my friend!”


Keeping with the Frequentist vs. Bayesian debate, Frequentists are likely to “win” the next 4-6 weeks heading into the March 18th FOMC meeting if the prevailing macro narrative has indeed shifted from one of DEC/Q4 #GrowthSlowing to Q1 #GrowthAccelerating – for now at least.


Stay tuned; long bond investors may continue to experience PnL volatility if the [potentially] bond-unfriendly portion of our #Quad414 theme continues to develop according to plan.


For all people asking the question "Why is RH Pre-announcing?" 


Here you go...


The company wants to let everyone know that business is a-ok. They are looking at a a comp of 24% compared to the Street at 19%. That translates to 24% sales growth -- the top end of the guided range. EPS is $1.00-$1.01 -- vs prior guide of $0.99-$1.01. All numbers are preliminary -- meaning that they're probably headed a bit higher.


RH is not reporting earnings until late March. The company knows from past experience that large windows of time without financial information given to the Street is rarely a good thing. They're trying to fix that. So, if you're caught off guard by the release...we see where you're coming from. But absolutely don't freak out. This is good news. The story is on track. And the catalyst calendar for 2015 will be explosive.


U.S. Dollar Down has driven massive counter-TREND moves embedded in macro Correlation Risk over the last few weeks.


This counter-TREND move that started last Wednesday post-Fed meeting provided a look at the big USD reversal risk with every data point. Our asset allocation recommendation has been positioned for a #QUAD4 deflationary slowdown, and we want to hedge that position through the volatile swings we’ve experienced since October.


After a sequential annualized GDP print of +2.6% for Q4 vs. consensus expectations of +3.0%, rates plunged to new YTD lows, and commodities ripped last Friday:

  • CRB +2.9% on the day
  • 10-Yr yield -11bps to 1.64%


With the tight negative correlations in the commodity space; AND, the existence in a peak multi-year net LONG position in US Dollars of +70,456 futures and options contracts (vs. the 1yr avg of +24,739), we want some exposure to weak dollar asset classes (GOLD) against our negatively correlated macro positions (TLT, XLU, UUP).


Investing Ideas Newsletter     - chart9 



Market changes post-Friday’s payrolls number exemplified the necessity to have exposure on both sides of the coin which is why we want you long of GOLD:

  • USD +1.10%
  • 10-year Rates +11 bps
  • Gold -2.5%


Despite the positive Non-farm payrolls report Friday the jobless claims chart below is self-explanatory as a late cycle indicator and suggest we are within 12-months of a recessionary turn. The big reversal in the dollar’s path last week is a wake-up call that big macro correlations in a volatile market are REAL.  


Investing Ideas Newsletter     - chart10



* * * * * * * * * * 


what does crude oil volatility mean to you?

Volatility in oil (and across asset classes for that matter) hit historic lows this summer at the highs in crude oil. The OVX index bottomed in June and reached its highest point yesterday since 2008.

Investing Ideas Newsletter     - 2


While the rest of the country benefits from lower gas prices, those in the energy sector are feeling the squeeze.

Investing Ideas Newsletter     - 1


Early Look

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