prev

MACAU WEEKLY ANALYSIS (FEB 16-23)

Takeaway: The Year of the Goat is starting off baaaadly. Lowering Feb and 2015 forecast

CALL TO ACTION

The Macau stocks have worked against us the last few weeks; that is to say they’ve worked higher. However, February 2015 doesn’t just face a difficult comparison, trends are deteriorating and the month is set up to fall at least 50%, much worse than the consensus 30-35% decline projected before the month started. The latest weekly numbers were awful, a sequential decline despite the onset of the Chinese New Year celebration. With still deteriorating market conditions – March looks awful - and new risks emerging including a further restriction of Visa travel, the outlook for Macau stocks looks lower, possibly retesting 52 week lows.

 

Please see our detailed note:

http://docs.hedgeye.com/HE_Macau_2.24.15.pdf


Countered

Client Talking Points

#DEFLATION

Despite the 3 week counter-TREND reflation move in FEB, this remains our Top Global Macro Theme right now. The Eurozone just reported lower-lows in CPI at -0.6% year-over-year and the U.S. is going to print another CPI miss on Thursday. Will Janet Yellen be as dovish as this data is going to get come JUN? Stay tuned. Her forecasts are the problem.

USD

Burning Yens and Euros perpetuate #StrongDollar, so this Yen move to -0.6% gets you new 15 year highs in the Nikkei (+0.7% overnight to +6.6% year-to-date), but it also gets you an uglier Oil price deck and falling CRB Commodities Index (-1.2% yesterday to -3.5% year-to-date). Coffee prices pounded yesterday -3.3% to -13.3% year-to-date!

UST 10YR

UST 10YR Yields finally backed off @Hedgeye resistance and remains bearish TREND ahead of both the Yellen comments and slowing CPI and GDP data (Thursday/Friday) – immediate-term risk range is now 1.85-2.16% and that made REITS the best sub-sector yesterday +0.7% vs. Oil & Gas stocks (XOP) -0.9%. 

Asset Allocation

CASH 42% US EQUITIES 8%
INTL EQUITIES 8% COMMODITIES 0%
FIXED INCOME 29% INTL CURRENCIES 13%

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.

HOLX

Hologic (HOLX), at this stage in their product cycle and in the current stage of the economic cycle, has some very impactful tailwinds emerging to their revenue growth and the implied growth in the future. A stock generally will perform really well when doubt about future growth turns to optimism while the most recent data confirms the optimism. So far, we have a little bit of both; recent positive data like the December 2014 quarter upside and consensus estimates and ratings starting to move off of multi-year lows. A less-worse trend in Pap testing and rising patient volume can combine to get us close to flat for HOX’s Cytology (Pap) business. As the growth in Cytology improves and is less of a drag, the 3D Mammography growth can flow through. We think the outlook is bright, and with a few more data points, we think a lot more investors will agree with us.

Three for the Road

TWEET OF THE DAY

The Dr (Copper -0.3% to $2.53/lb) continues to get us paid on the short side, in #Deflation terms

@KeithMcCullough

QUOTE OF THE DAY

My only plan is to keep coming to work

-Henry Singleton

STAT OF THE DAY

The market cap of the largest publicly traded U.S. company Apple is for the first time in 30 years more than twice the size of the market cap of the runner up (Exxon Mobil Corp.). Apple’s cap is $765 billion, Exxon’s is $374 billion.


CHART OF THE DAY: Most Ridiculous Economic Forecast of the Day Award

CHART OF THE DAY: Most Ridiculous Economic Forecast of the Day Award - 02.24.15 chart

 

Editor's note: This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to become a subscriber.

 

But, have no fear, the San Francisco Fed’s John Williams is here! Being a lifer at the Federal Reserve is not a compliment. John has been there since 1994 and, alongside Janet, missed some large predictions about risk (2000, 2008, to name a few) along the way.

 

Not to be confused with one of the best American composer’s in US history (The John Williams of Jaws, ET, Star Wars, etc. film score fame), this Williams is more like Brian – a storyteller, but with less NBC Nightly pizzazz.

 

In assessing the US economy yesterday, Williams said two things in particular that caught my attention:

 

  1. Employment – he called the jobs market “remarkable” (as in booming, strong, etc.)
  2. Oil – he called the recent #Deflation “transitory” (as in oil is going higher, not lower)

 

Yes, in case you didn’t know – now you know. Some of the worst forecasters in our profession now have forecasts for everything.

 

Notwithstanding simple things like long-term mean reversions, price history (Oil averaged sub $20/barrel during both the 1983-1989 and 1993-1999 real US economic demand booms), etc., this storytelling from Fed heads is becoming a massive risk to the economy.


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.

Steering The Boat

“My only plan is to keep coming to work…”

-Henry Singleton

 

I had a lot of encouraging feedback about the book I cited yesterday, The Outsiders, where William Thorndike analyzes the best practices and processes of some of the best CEOs in US history.

 

Henry Singleton, of Teledyne fame, tops the list and had some fantastic day-to-day leadership advice as a follow-on to the aforementioned quote:

 

“... I like to steer the boat each day rather than plan ahead way into the future… I know a lot of people have a lot of strong and definite plans that they’ve worked out… but we’re subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.” (pg 53)

 

If only our un-elected-central-planners of everything from markets to economic gravity embraced that risk management #process and humility…

 

Back to the Global Macro Grind

 

#Flexibility and “data dependence” be damned. Today our almighty overlordess of market expectations (not to be confused with economic realities), Janet Yellen, will predict the parting of the heavens and the smoothing of the seas.

Steering The Boat - Fed cartoon 02.23.2015

Since Mr. Macro Market tends to front-run inside information fairly efficiently, it will be interesting to see if yesterday’s move (lower) in US interest rates will get a love-tap from the Janet’s testimony.

 

But be careful not to mistake the “rates” trade with the US Dollar #Deflation one. I’ve been on the road telling investors from CA to MA in the last week that while these are not mutually exclusive macro moves, they are moving on different catalysts.

 

Here’s what that looked like yesterday:

 

A)     #StrongDollar (+0.5% on the day) > Oil Down -2.8% > CRB Index -1.2% > Energy Stocks (XOP) -0.9%

B)      #RatesDown (10yr -5bps intraday) > Long Bond (TLT) +0.9% > REITS (VNQ) +0.7% > Healthcare (XLV) +0.7%

 

Healthcare stocks (XLV) have positive quarter-over-quarter performance (returns) in both USD up/down and Rates up/down scenarios (we call those macro environments Quad1 and Quad4), so that’s the easiest S&P Sector to be long (you win both ways).

 

What’s not easy is being long Energy stocks when the USD ramps and/or REITS when Long-term Rates ramp (i.e. neither work). So this puts a lot of pressure on immediate-term monthly performance chasers as neither A) nor B) are cooperating week-to-week!

 

Another obvious observation here is how A) and B) are linked on the intermediate-term TREND duration:

 

  1. USD up + Rates Down > Global #Deflation… and
  2. #Deflation > Junk Debt Risk > Emerging Market Risk > Corporate Earnings Risk

 

But, have no fear, the San Francisco Fed’s John Williams is here! Being a lifer at the Federal Reserve is not a compliment. John has been there since 1994 and, alongside Janet, missed some large predictions about risk (2000, 2008, to name a few) along the way.

 

Not to be confused with one of the best American composer’s in US history (The John Williams of Jaws, ET, Star Wars, etc. film score fame), this Williams is more like Brian – a storyteller, but with less NBC Nightly pizzazz.

 

In assessing the US economy yesterday, Williams said two things in particular that caught my attention:

 

  1. Employment – he called the jobs market “remarkable” (as in booming, strong, etc.)
  2. Oil – he called the recent #Deflation “transitory” (as in oil is going higher, not lower)

 

Yes, in case you didn’t know – now you know. Some of the worst forecasters in our profession now have forecasts for everything.

 

Notwithstanding simple things like long-term mean reversions, price history (Oil averaged sub $20/barrel during both the 1 and 1 real US economic demand booms), etc., this storytelling from Fed heads is becoming a massive risk to the economy.

 

Why? Well, let’s start with where Henry Singleton would… and ask ourselves what is the risk that A) Williams is wrong (Oil remains #deflated, and jobs are at a late-cycle peak) and B) Yellen makes a policy mistake based on these Williams’ forecasts?

 

I don’t have answers to how all of this plays out. But I do have advice: keep both hands on the wheel and life preservers in the boat.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.85-2.16%

SPX 2066-2123
USD 93.79-95.36
Oil (WTI) 48.42-51.26
Gold 1185-1215
Copper 2.52-2.61

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Steering The Boat - 02.24.15 chart


February 24, 2015

February 24, 2015 - Slide1

 

BULLISH TRENDS

February 24, 2015 - Slide2

February 24, 2015 - Slide3

February 24, 2015 - Slide4

February 24, 2015 - Slide5

 

 

BEARISH TRENDS

February 24, 2015 - Slide6

February 24, 2015 - Slide7

February 24, 2015 - Slide8

February 24, 2015 - Slide9

February 24, 2015 - Slide10

February 24, 2015 - Slide11
February 24, 2015 - Slide12

February 24, 2015 - Slide13

 


Zero To Something

This note was originally published at 8am on February 10, 2015 for Hedgeye subscribers.

“Every moment in business only happens once.”

-Peter Thiel

 

I started reading Peter Thiel’s Zero To One on the treadmill yesterday. That’s the opening sentence of one of the better intros I’ve read in a while on independent thinking:

 

“… it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1.”

 

If I didn’t passionately believe in creating something new here @Hedgeye, I’d have just gone back to doing what I did before. While a lot of people have asked me about that over the years, a lot less have asked lately. That means building this only happens once.

 

Zero To Something - zero to one

 

Back to the Global Macro Grind

 

Whether it’s the birth of your children or an entrepreneurial business strategy that is unique to you and those around you, this is why you get up in the morning – to find special moments in your life that only happen when preparation meets opportunity.

 

This is one of the core problems I have with being centrally planned. There is no creativity or progression in that. To think that some room full of bureaucrats can smooth non-linear economic realities like growth and inflation is downright regressive.

 

But no matter how creatively destructive we are in building our businesses, we have to deal with these people, for now. What happens when the Fed goes from 0% to n? And what are the unintended consequences associated with moving preemptively?

 

Post a rainbows and puppy dogs jobs report, both US stocks and bonds have been down for 2 days… Why?

 

  1. Interest rates shot straight up from 1.64% on the UST 10yr to 1.99% this morning
  2. Rate sensitive (aka #YieldChasing) sectors of the SP500 went straight down on that

 

I’m not sure what got rates to go up more:

 

A)     The short-term alleviation of fear that the US jobs picture has hit its cycle-peak

B)      Legitimate fear that the Fed raises rates during global #GrowthSlowing + #Deflation

 

As I’ve said many times, what the Fed SHOULD do with a CPI trending towards (and below) 1% and COULD do are two very different things. Can you imagine they signal a rate hike into jobs reports that get as bad as the last 6 were good?

 

It isn’t just #deflation that the Fed should be concerned about – it’s their broken forecasting model. Janet Yellen is using a carbon copy of what Ben Bernanke used. In forecasting growth, they overweight the most lagging of late-cycle economic indicators.

 

For those of you that don’t know that Non-Farm Payrolls (Employment) are the latest of late-cycle, please see today’s Chart of The Day where Christian Drake reminds you of when the cycle of payrolls peak à AFTER the cycle is already slowing!

 

Back to the Global #deflation risk that blew up plenty of portfolios between late-September 2014 and January 2015’s lows:

 

  1. China just printed a PPI (producer price index) of -4.3% year-over-year for JAN (vs. -3.3% FEB)
  2. Norway reported, get this, -12.4% year-over-year #Deflation in their JAN PPI
  3. Switzerland reported a new low in CPI (Consumer Price Inflation) of -0.5% year-over-year in JAN

 

Sure, Oil (WTI) was +2.1% yesterday and is +9.5% for the month of February alone – but that’s just a counter-TREND move within a nasty deflationary risk. My immediate-term risk range can get you $43 oil as fast as this bounce can stop at $54-55/barrel.

 

Then what?

 

  1. The USA is going to report decelerating CPI and PPI reports next week (JAN reports)
  2. And there’s plenty of risk that the February employment report isn’t what January’s was

 

Then what?

 

Ahead of the March 18th Fed meeting, we could very well be sitting here in early March as concerned about Global #Deflation risk as we were at the beginning of January!

 

Is it easier for the Fed to keep using the same model that has rendered its growth and inflation forecasts inaccurate almost 70% of the time since 2007 than to create a new one?

 

That’s a rhetorical question. Sadly, they’re going to go from zero to something – and there will be loads of cross asset class volatility associated with their own flip-flopping internally about timing that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.62-1.99%

SPX 1987-2075
VIX 16.06-21.44
USD 93.47-95.35

Oil (WTI) 43.07-54.88
Copper 2.42-2.62

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Zero To Something - Labor cycle table CoD


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next