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What Are Your Competitors Thinking?

Our Macro team was on the road in California this week and met with a myriad of funds.  Below are some notes from some of the key meetings (with fund names removed).  Not surprisingly, the Fed, deflation, and employment were key topics of focus.

 

Enjoy the weekend,

 

Daryl

 

 

Long/Short Hedge Fund with Sector Managers of $4BN+

-          Deflation main topic of conversation

-          They think Fed raises rates and ignores deflation data

-          Of the mindset that the Fed raises to create a buffer to cut down the road if necessary

-          They aren’t as concerned with the jobs report as we are

-          They are having a tough month, confused where to go from here, had a good Jan, bad Feb. They think the reversal in Feb continues vs. our view that this is an aberration and what happened in January (deflation) perpetuates throughout the yr.

 

Long Only Fund of $5BN+

-          In tune w/ the model, he’s trying to figure out if we’re in Quad 1 or Quad 4

-          Thinks vol is cheap and uncorrelated assets are expensive

-          Lots of policy discussion, what does the Fed do on the Feb jobs report

-          Thinks there is the potential they hike rates once and then potentially cut

-          Next three months are risky in vol terms

-          Consumption growth slowing long term on demographic headwinds, longer duration, so a focus

-          Next five yrs, wants to buy equities with free cash flow and good balance sheets

-          His clients (long duration guys) want to own hard assets

-          They underwrite $80 WTI based on project economics

-          Late cycle demand looks worse to them

 

Large Multi-Strat Hedge Fund of $3BN+

-          They like US fixed income, think it’s a safe harbor in global deflation environment

-          They agree on global deflation

-          QE slows the entire global economy, people hoard money, it slows consumption growth and inflates asset prices

-          In a global deflation environment, USD rises, compresses margins as top lines come down when you see FX headwinds

-          Asked on cost of education, what does that do to avg American as costs continue to rise?

 

Very Large Mutual Fund Complex of $100s of BNs

-          Had a good January, they pay attention and like our call, tough Feb

-          UST, JGB, Bonds, Copper, all reversed since January, what’s going on and what’s the pervasiveness

-          USD is going to go up, at 40 yr low, now arresting its decline, want to know if this move is an aberration

-          Concerned with the currency impact on the S&P 500

-          USD strength starts to take out deflations dominoes

-          We need a negative jobs report

-          Jobless claims on a % basis of available jobs, lower than it was the last cycle and the cycle before, etc

-          Consensus thinks rates rise

-          Discussed GDP comp

-          Bad demographic trends long term

-          Always curious on flows in to and out of their competition – specifically asked our thoughts on what PIMCO is doing

 

Long / Short U.S. Equity focused fund - $2BN+

-          They have on a similar trade to our call, they want the market to go down, think they need to wipe out crappy companies and crappy hedge funds

-          Some of their shorts are popping up on this Feb reversal

-          Think this part of the economic cycle is important

-          Very concerned about the rate move in Feb, not positioned for it

-          Discussed binary effect of the jobless claims report

-          Discussed Greece leaving EU, good/bad, we think bad, they seem to be on our side here

-          Global recession more likely than US recession

-          Discussed which companies to buy vs. sell – good balance sheets and good free cash flow

 

Large Mutual Fund - $10BN+

-          Most of the discussion focused on policy decisions of the Fed

-          Jobs report very important

-          Could the Fed issue treasuries at the long end of the curve as a surprise?

-          Focused on the rate of change in the Fed’s balance sheet & credit spreads

-          Thinks the Fed is price targeting

-          They are going to do everything in their power to reduce vol, which causes people to take risk

-          Corporates stopped hedging currencies

-          Understands there is always a period of volatility in any regime change

-          Thinks the only reset is for bond market volatility to go to where oil just went

 

Large RIA $5BN+

-          Credit & equity L/S, HY & EM

-          Bearish low quality HY & EM debt

-          In tune with the deflation theme, agree with us

-          They are focused on the divergence in the equity and credit market

-          Volatility caused by Fed uncertainty

-          Don’t think Greece gets kicked out of the EU

 

Also Very Large Mutual Fund Complex $100s of BNs

-          Serious concern in USD, what to do on strength

-          Big time concern in deflation

-          Euro and Yen devaluation a concern

-          Jobless claims and demographic headwinds are a concern for these guys

-          Concerned about liquidity

-          Interested in labor effect relative to housing

 

Special situations hedge fund with macro bent $5BN+

-          Are policy hikes a mistake?

-          They are pretty in tune with our view and feel the same

-          Pressing the deflation trade, don’t care about near term pain

-          Discussed the Greek exit from the EU, don’t think it happens

-          Think the Fed will raise rates

-          Hyper focused on consensus’ view

-          Fed language a focus

-          Like growth in this environment


Cartoon of the Day: Moon Shot

Cartoon of the Day: Moon Shot - Kuroda cartoon 02.20.2015

Bank of Japan Governor Haruhiko Kuroda earlier today said that he likes his chances of achieving the central bank's 2% inflation target. In related news... we don't.


Retail Callouts (2/20): JWN, Ports, ANN, VFC, BBY

Takeaway: Removing JWN from our long bench with the company guiding flat earnings in 2015 and the stock at 20x P/E.

COMPANY HIGHLIGHTS

 

JWN - 4Q14 Earnings: Removing From Long Bench

 

Takeaway: We added JWN to our long bench on 10/16 following our Department Store Black Book. There are a lot of things to like about the name: e-commerce proficiency, brand portfolio, and square footage growth. But, we couldn’t get comfortable with the fact that it was operating in a space that has grown at a -2% CAGR over the past 20 years and needs to see 93mm square feet not just close, but exit the industry all together over the next 5 years. Since that time, the stock is up about 11%, in-line with the S&P. Now the company is guiding the mid-point of the earnings range to flat on 8% revenue growth. Either the company is sandbagging or this name is uninvestable trading up here at 20x next year's earnings. We're removing it from the long bench.

Retail Callouts (2/20): JWN, Ports, ANN, VFC, BBY - 2 20 chart1

Retail Callouts (2/20): JWN, Ports, ANN, VFC, BBY - 2 20 chart2

 

 

OTHER NEWS

 

Report: West Coast ports running at 50%-60% of capacity; retailers stockpile inventory

(http://www.chainstoreage.com/article/report-west-coast-ports-running-50-60-capacity-retailers-stockpile-inventory)

 

ANN - Ann Taylor Parent Said to Be Working With JPMorgan on Sale

(http://www.wwd.com/retail-news/designer-luxury/ann-taylor-parent-said-to-be-working-with-jpmorgan-on-sale-8209436?module=Business-latest)

 

VFC - VF Settles ITC Laser Denim Case

(http://www.wwd.com/business-news/government-trade/vf-settles-itc-laser-denim-case-8205968?module=Business-latest)

 

KORS - Report: Michael Kors joins Snapchat

(http://www.chainstoreage.com/article/report-michael-kors-joins-snapchat)

 

BBY - Best Buy adds Curbside app service in Bay Area stores

(http://www.chainstoreage.com/article/best-buy-adds-curbside-app-service-bay-area-stores)

 

H2O Plus Names Joy Chen CEO

(http://www.wwd.com/beauty-industry-news/people/h2o-plus-names-joy-chen-ceo-8205148?module=Business-latest)


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Keith's Macro Notebook 2/20: Nikkei | Greece | Euro

 

Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.


Keith's Daily Trading Ranges, Unlocked

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published February 20, 2015 at 08:36. Click here to learn more and subscribe.

Keith's Daily Trading Ranges, Unlocked - Slide1

BULLISH TRENDS

Keith's Daily Trading Ranges, Unlocked - Slide2

Keith's Daily Trading Ranges, Unlocked - Slide3

Keith's Daily Trading Ranges, Unlocked - Slide4

Keith's Daily Trading Ranges, Unlocked - Slide5

Keith's Daily Trading Ranges, Unlocked - Slide6

 

BEARISH TRENDS

Keith's Daily Trading Ranges, Unlocked - Slide7

Keith's Daily Trading Ranges, Unlocked - Slide8

Keith's Daily Trading Ranges, Unlocked - Slide9

Keith's Daily Trading Ranges, Unlocked - Slide10

Keith's Daily Trading Ranges, Unlocked - Slide11
Keith's Daily Trading Ranges, Unlocked - Slide12

Keith's Daily Trading Ranges, Unlocked - Slide13

 


The Nikkei, Greece and The Euro

Client Talking Points

NIKKEI

The Japanese Nikkei-225 is at roughly 15 year highs, up about 2.3% for the week. Bank of Japan Governor Haruhiko Kuroda came out and reiterated his call on the 2% inflation target, the reality is that it will be very difficult for the Japanese to hit this inflation target. They will need to implement more dovish policy. Kuroda however, believes he has lots of options. We will have to wait and see what kind of impact his actions have on the real economy. 

 

GREECE

It is a relatively slow day in Global Macro but Greece is causing a lot of controversy. Eurozone Finance Ministers are meeting today in Brussels to discuss the Greek bailout; Greece has requested to have its loan agreements extended another 6 months. Some newspapers are reporting that Greece may exit the Eurozone, but the reality is that nobody seems to have a clear indication of what will really happen.

EURO

The Euro seems to be driven by the chaos surrounding Greece. It is down about 50 basis points today, down 650 basis year-to-date vs. the USD and down 1,752 basis point in the last year. That is a staggering move for a currency (despite PMIs coming in better than expected). 

Asset Allocation

CASH 40% US EQUITIES 9%
INTL EQUITIES 8% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
EDV

You want to own the Vanguard Extended Duration Treasury (EDV) in this current yield-chasing, growth slowing environment. The trend in domestic growth continues to signal growth slowing, and the counter-TREND moves we’ve seen over the last few weeks (@Hedgeye TREND is our view on a 3-Month or more duration) remain something to fade until we can see more follow-through that growth is trending more positively (second-derivative positive).

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road

TWEET OF THE DAY

Real Conversations: How @Firefly_Space Founder Tom Markusic Is Changing the New Space Paradigm https://www.youtube.com/watch?v=0QmYH0IQdy8&feature=youtu.be&t=1s… w/ @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

The man who does not read has no advantage over the man who cannot read.

-Mark Twain

STAT OF THE DAY

3.3 million people in 2013 earned at or below the federal minimum wage, according to the Bureau of Labor Statistics. 


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