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Rocking Returns!

“You are what your record says you are.”

-Bill Parcells

 

That’s how William Thorndike kicks off a solid history/investing book that one of my friends recommended to me titled The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.

 

Chapter 1 of the book, “An Intelligent Iconoclasm”, starts with another great quote from John Templeton: “It is impossible to produce superior performance unless you do something different.

 

In other words, if being long Europe with a concentrated position in Italian stocks was your big idea for 2015, you definitely did something different. And you’re getting paid for it. Italy’s stock market is +15.4% YTD!

 

Rocking Returns! - parx

 

Back to the Global Macro Grind

 

Yep, after 3 straight up weeks (on decelerating volume), never mind a +2.5% YTD return for the SP500, being long something like Germany’s DAX (+13.1% YTD) is where the rocking returns are at, baby!

 

After taking a -0.6% breather in the week prior, the US Dollar stabilized at higher-lows again last week and is ramping versus Burning Euros and Yens again this morning, +0.6% to $94.84 on the US Dollar Index.

 

Inverse correlations between commodity markets and USD remains surreal. Going back to when #Deflation’s Dominoes started to become readily apparent (let’s use 180-days ago) here are 4 big correlations to keep in mind:

 

  1. USD vs CRB Commodities Index -0.98
  2. USD vs WTI Oil -0.96
  3. USD vs. Gold -0.55
  4. USD vs SP500 +0.69

 

In other words, #StrongDollar has perpetuated both Oil and Commodity #Deflation. And now the US stock market is looking for some love from the bond market (or the lack thereof), because both USD + #RatesRising would force funds out of Treasuries.

 

That was our call in 2013 (#StrongDollar + #RatesRising) would force the Fed’s hand – and that would shake Fixed Income markets. Today is not 2013. It’s 2015, and this week USA’s un-elected-central-planner-in-Chief has 2-days of “testimony” to talk about that.

 

Will Yellen be hawkish or dovish on rates? I can tell you what I think she should do, but what she actually does is entirely another matter. Immediately following her lagging forecasts will be slowing inflation (CPI Thursday) and growth (GDP Friday) data…

 

“Hawkish” in currency terms = #StrongDollar, Commodity #Deflation.

 

On a mere +0.1% USD gain last week, here’s how that looked, in Global Macro terms:

 

  1. The Euro (EUR/USD) -0.1% to -5.9% YTD
  2. Canadian Dollar -0.7% to -7.3% YTD
  3. CRB Commodities index -1.9% to -2.3% YTD
  4. WTI Oil -5.3% to -6.4% YTD
  5. Gold -1.8% to +1.7% YTD
  6. Copper -0.6% to -8.2% YTD
  7. Coffee -8.2% to -9.7% YTD
  8. Wheat -4.2% to -14.7% YTD
  9. US Energy Stocks (XLE) -1.8% to +1.7% YTD
  10.  Latin American Stocks (MSCI LATAM) -0.8% to -3.7% YTD

 

Exactly! There are a lot of places (primarily USD/Commodity correlating) that you do not want your assets allocated during Global #Deflation. But you already know that. We’re well over 180 days into this, don’t forget.

 

Away from being long Italy, what else is rocking on the other side of this FX flow trade?

 

  1. European Stocks (EuroStoxx600 Index) +1.4% last wk to +11.6% YTD
  2. Japanese Stocks (Weimar Nikkei) +2.3% last wk to +5.1% YTD
  3. US Healthcare Stocks (XLV) +2.1% last wk to +5.6% YTD

 

Yep, in relative equity terms, US equity returns aren’t exactly rocking (Dow Bro 18,000 got you +0.7% last week to +1.8% YTD) this year. But they aren’t getting rocked like pie charts over-indexed to commodity inflation expectations either!

 

Seriously, who needs details about Greece when you can just look up YTD returns and see what your record is? Beating the market is the goal of the game, after all.

 

While I didn’t get beat telling you to be long commodities last week, I continued to get slapped around on the long-end of the Treasury bond curve. The Long Bond weakened (yield strengthened) with the UST 10yr Yield +6 basis points to -6 basis point YTD.

 

Consensus Macro (non-commercial CFTC futures/options net positioning) dog-piled me on that:

 

  1. Long Bond (10yr Treasury) net SHORT position ramped another 41,164 contracts last wk to -124,964
  2. Gold’s net LONG position dropped -23,800 contracts last wk to +110,164
  3. Oil’s net LONG position remained nauseatingly high at +328,656 contracts

 

#Dog-Piled. As in they bullied me, telling me what they’ve been telling me for 15 months (“rates are going higher, not lower, Keith”).

 

I don’t like (but I don’t mind) being knocked around. Especially when my team isn’t winning. We are what our record says we are. And there’s no better way to learn from that than by absorbing and learning from every mistake.

 

UST 10yr Yield 1.82-2.16%

SPX 2085-2125
RUT 1
USD 93.69-95.16
Oil (WTI) 49.02-53.70
Gold 1185-1220

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Rocking Returns! - USD correls


Storytelling Time

This note was originally published at 8am on February 09, 2015 for Hedgeye subscribers.

“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%

SPX 1987-2075
VIX 15.67-21.44
USD 93.52-95.44

WTI Oil 42.89-54.02
Gold 1234-1270

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Storytelling Time - 02.09.15 chart


***MUST READ | Dan Alpert: No Economy Is An Island

Editor's note: A special thank you to Westwood Capital's Dan Alpert for letting Hedgeye run what follows below. Make sure to click on the link which takes you to his must-read, data deck presentation, "No Economy is an Island," challenging the current U.S. economic decoupling meme.

 

***MUST READ | Dan Alpert: No Economy Is An Island - 444

 

From Alpert:

 

Further to the data deck I released on Tuesday, I have done some additional work on the below series illustrating one big reason why U.S. labor productivity is slumping and unit labor costs have been rising somewhat. It is NOT an innovation thing, nor a labor supply mismatch thing…see below:

 

Click image to enlarge.

***MUST READ | Dan Alpert: No Economy Is An Island - al1

 

***On a related note, here's Dan's recent Real Conversations interview "A Dire Appraisal of Our ‘Broken Global Economy’" hosted by Hedgeye CEO Keith McCullough. Click below to watch.

 

***MUST READ | Dan Alpert: No Economy Is An Island - bbb

 


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Boston Security Analysts Society Conference: Q&A Session With Keith McCullough

Hedgeye CEO Keith McCullough recently presented an update on his Macro Theme #GLOBALDEFLATION at Asset Allocation 2015: Liquidity,  a conference hosted by The Boston Security Analysts Society in Boston, MA.

 

 

Above is the Q&A portion in which Keith discusses risk managing what the Fed should do vs. what they could do, Emerging Markets sensitivity to a strengthening USD and the 3 main factors currently influencing the market.


The Week Ahead

The Economic Data calendar for the week of the 23rd of February through the 27th of February is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

 

Click to enlarge.

 

The Week Ahead - 02.20.15 Week Ahead


Investing Ideas Newsletter

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

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      - levels 

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

CARTOON OF THE WEEK

Investing Ideas Newsletter      - Risk cartoon 02.19.2015

IDEAS UPDATES

YUM

Shares of Yum! Brands are up ~7.5% over the past month and have plenty of room to run.

 

The street’s reset earnings estimates are calling for 12% EPS growth in ’15 after 4% EPS growth in ’14.  China continues to be the wild card in the name, as a strong 2H15 would propel shares higher.  Any negative development would be viewed quite unfavorably.  If China recovers in ‘15, the stock will work.  If China doesn’t recover, management will be forced to de-risk the business – an event that the public market would immediately reward.  Remember, China has been a huge drag on the stock, making YUM a perennial underperformer over the past five years.

 

Here’s why it would make sense for management to de-risk the business from China:

  • YUM China is worth approximately $49 per share to YUM
  • YUM China represents a nasty mix for YUM – the business is under pressure and it makes up a significant part of YUM’s financial performance
  • The board must do something to evolve the business model and reduce its exposure to China in a meaningful way
  • The board can de-risk the business by selling off company-owned stores
  • The board should focus on selling assets in Shanghai and Beijing; operating stores in these regions is equivalent to operating stores in Manhattan (who would want to do that?)
  • It has recently been rumored that YUM is looking to sell its company-operated KFC business in India in order to avoid real estate costs that are corroding its profitability (why not in China?)
  • The board should create a Yum China tracking stock; we suspect there would be significant demand for the largest consumer company in China
  • Allowing the Chinese to own a part of KFC could help consumer perception of the brand and, ultimately, benefit same-store sales
  • The Chinese government may put less pressure on the company if Chinese nationals own it (it certainly wouldn’t make the situation any worse)

 

YUM remains one of our favorite longs in space.

MDSO

Medidata Solutions is the eClinical market leader with an estimated 40% share.  MDSO has been successful in gaining share due to a superior product offering and Oracle’s botched acquisition of Phase Forward (major competitor) in 2010.  Those short the stock argue that Oracle is beginning to compete more effectively on price, and more broadly, that EDC is a commoditized business.  However, anecdotes from the field suggest otherwise:

 

Clinical Trial Data Manager (Top CRO)

 

  • Oracle is so large and they lack customer focus and support. Medidata is more customer friendly”
  • “It’s a 24-hour turnaround with Medidata, and with Phase Forward it is 48-72 hours”
  • “[EDC] not viewed as a commodity, absolutely critical

 

VP of Business Development (Major Competitor)

 

  • “…Medidata has made it difficult for new entrants to come in. EDC market is still going to be relevant and is still growing”            
  • “Both Medidata and Oracle are taking an aggressive stance in Asia and trying to cement their share

 

Former Medidata Salesperson

 

  • Customer not price sensitive for EDC – “I don’t want the cheapest brain surgeon”

Investing Ideas Newsletter      - mdso

HOLX

The U.S. Supreme Court will hear the case King v Burwell to decide the fate of of subsidies for individuals buying insurance through federally run exchanges. According to the Urban Institute, upwards of 10M people will lose their insurance, or a reduction of 69%, should SCOTUS rule that subsidies must flow through a state run exchange.

 

Hologic has certainly benefited from the ACA.  The OB/GYN patient mix is primarily under the age of 65, commercially insured (70%), with a significant Medicaid population (15%), and lines up well with the ACA population.  However, quantifying the impact is an indirect measure at best.  

 

Using our survey data we compared the Patient Volume Index (>50 is expanding) across Medicaid expansion states, non-expansion states, and practices with a high percentage of commercially insured volume.  Exchange based volume had a modest impact overall while the Medicaid expansion drove much of the patient volume benefit, particularly in the middle part of 2014.

 

Bottom line: Most of HOLX's benefit from the ACA has come through Medicaid expansion. SCOTUS can hurt, but impact looks modest.

Investing Ideas Newsletter      - holx

TLT | EDV | XLU | MUB

In this granular, deep dive report written late last night, Hedgeye macro analyst Darius Dale details our intermediate-term scenario analysis for rates and rate-sensitive equities. We remain bullish despite rising volatility.

 

Click here to read the note in its entirety.

RH 

The chart below shows Restoration Hardware's stock price and score on our sentiment monitor.  Our sentiment monitor triangulates short interest, Sell Side ratings, and Insider activity.  The lower the sentiment score, the more bullish it is for the stock, the higher the sentiment, the more bearish. Over the past few months, sentiment on RH has been treading water at or near all-time lows (which we think is extremely Bullish for the name).

 

Investing Ideas Newsletter      - RH Sentiment

 

We think that’s the case for a couple of reasons.

 

1)      RH is a name that investors love to hate. Short interest as a percent of the float is sitting at 29%, off slightly from the 34% peaks heading into the 3Q print.

 

2)      That would concern us if we didn’t see the type of raw earnings power locked in the model which will add 1mm sq. ft., $3bil in revenue, while taking margins from high single digits to the mid-teens. Add all that up and you get to $11 in earnings power.

 

3)      Valuation – The stock is currently trading at 24x our ’15 Earnings number and 28x the Consensus number. That may look expensive, but if we adjust it for growth it’s among the cheapest names in the consumer space.

 

Investing Ideas Newsletter      - rh PEG 

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

what are your competitors thinking?

Our macro team was on the road in sunny California earlier this week meeting with myriad funds. Here are the key notes from some of the key meetings (fund names removed).

Investing Ideas Newsletter      - 221

cake: a troubled concept

Despite strong industry trends, restaurant stocks are not immune to looming cost pressures.

Investing Ideas Newsletter      - x4


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