Remember that Burning Euros and Yens perpetuate what they are trying to arrest (#Deflation). The U.S. Dollar Index +9.9% for the year-to-date now, and European stocks love it – German DAX and MIB Index in Italy both punching new highs at +18.7-19.1% year-to-date vs SPX -0.7%.
Forget about headline news of German Bunds at 0.23% and the Swiss 10YR negative still at -0.13%, the Dutch 10YR Yield of 0.27% is now trading well inside of Japanese Government Bond 10YR of 0.42%! Real Yields in Europe are implying #deflation expectations are here to stay, for now...
After testing all-time highs into FEB end in the II Bull/Bear Survey, the Bull/Bear Spread pulled back from +4460 basis points bullish to +3950 basis points wide this morning as front-month VIX tests the top-end of our current 14.26-17.13 risk range – good morning to be buying U.S. stocks on sentiment alone.
|FIXED INCOME||25%||INTL CURRENCIES||11%|
iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.
Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.
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.
apparently, Fitch Ratings is forecasting Macau gaming revenues -4% in 2015. um, i'll take the under $LVS $WYNN $MGM $MPEL
To succeed, jump as quickly at opportunities as you do at conclusions.
Boston is 1.9 inches away from breaking it's all-time snow fall record at 105.7 inches for the season.
Editor's note: This is a brief excerpt from today's Morning Newsletter which was written by Hedgeye Director of Research Daryl Jones.
In today's Chart of the Day, we look at employment versus PCE going back some 25 years. As usual, stats don’t lie and what the chart shows us is that the Fed is going to face a real conundrum as it relates to reported inflation and its mandate. Either they can find the truth, like Governor Carney, or yet again the Fed might surprise us all on the dovish side because as the chart clearly shows, at least based on PCE, we are in a deflationary environment.
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“If you tell the truth, you don’t have to remember anything.”
Let’s call a spade a spade - it’s hard to be 100% honest. I mean we all stretch the truth a little at times. Maybe it is small things like saying you are 6’2" when really you are 6’1", or saying your fund was up double digits when really it was up 8.5% for the year. On some level, it is just human nature to tell a tall tale.
In a paper published in Human Communications Research in 2010, Professor Kim Serota and colleagues attempted to determine exactly how often people lie in their everyday lives. She conducted an online survey of 1,000 people that asked how many times the participant lied in the last 24 hours, the conclusions were as follows:
So undoubtedly you get the ironic point of the survey, the most honest people in the survey were the ones that actually lied the most.
Back to the Global Macro Grind...
As it relates to central bankers, we haven’t exactly called them liars, but certainly they have misled the investing masses at times. The one exception to that may be the honest Canadian at the head of the Bank of England, Governor Mark Carney.
Yesterday, Carney said what a lot of central bankers aren’t allowed to say, or are afraid to say, which is that the Bank of England would be “foolish” to fight current low inflation. Specifically, Carney said that:
“That’s one of the key judgments the MPC has to make . . . the one thing we can’t do and the thing that would be extremely foolish would be to try and lean against this oil price fall today and try to provide extra stimulus up at this point in time.”
Carney’s point was that to add stimulus now would only lead to undue volatility in the English economy - a lesson certainly the Japanese and ECB should be learning in spades, only they are not.
Back in American central banking land, the WSJ’s Jon Hilsenrath, among other Fed watchers, is suggesting the next move by the Fed will be rhetorical in nature. That is, the Fed is purportedly strongly considering removing the word “patient” from its policy statement. The implication of this move would be that the door would then be left open for rate increases. Well, that is assuming Fed insiders aren’t lying to Hilsenrath and his cadre.
In the Chart of the Day below, we look at employment versus PCE going back some 25 years. As usual, stats don’t lie and what the chart shows us is that the Fed is going to face a real conundrum as it relates to reported inflation and its mandate. Either they can find the truth, like Governor Carney, or yet again the Fed might surprise us all on the dovish side because as the chart clearly shows, at least based on PCE, we are in a deflationary environment.
Now the caveat to that is that employment, at least on the headline metric of the unemployment rate, is indicative of an economy that is operating at tight capacity. Employment is also the foundation of the thesis for most equity bulls. Historically, of course, the employment rate has been much more of a lagging indicator than a leading one. On this topic, we are actually going to do a deep dive on employment on Tuesday March 17th at 11am on a conference call titled: “Employment: The Good, The Bad and The Ugly”. Ping sales@hedgeye if you’d like dial in information.
Switching to Hedgeye stock calls, our Internet guru Hesham Shaaban, has been loudly calling out the management of Yelp. If @HedgeyeInternet is correct in his analysis, Yelp management is likely in the category of the one percent of the sample that tells more than 22% of the lies every day. In a note earlier this week on Yelp titled, “Hiding the Bodies”, Shaaban wrote:
“We originally believed revenues from SeatMe (reservation service) would be reclassified from YELP's Other Services segment into its core Local Advertising segment starting in 1Q15. However, that likely happened in 1Q14. We just didn't realize it because the reclassification wasn't explicitly disclosed in any of YELP's filings until its 2014 10-K filed two weeks ago. Given that its previously-reported 2014 quarterly segment revenues haven't changed within its recently-filed 10-K, we have to assume that the change already occurred in 1Q14.”
So the moral of the Yelp story is, it seems, that if the revenue doesn’t fit your tall tale then just reclassify, but just don’t tell anyone.
The larger issues with Yelp, though, is customer attrition. By Shaaban’s analysis, Yelp loses roughly 80% of customer every year, so the attrition rate is very high. Therefore unless Yelp’s TAM (total addressable market) is unlimited, which it is not, eventually growth will slow and dramatically slow for Yelp. And in a story stock like Yelp, trust me you don’t want to be there when the growth music stops.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.96-2.26%
Oil (WTI) 48.04-50.44
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
This note was originally published at 8am on February 25, 2015 for Hedgeye subscribers.
“The Road goes ever on and on… down from the door where it began.”
No, that is not from Janet Yellen’s testimony yesterday. It’s from J.R.R. Tolkien’s Lord of The Rings. It’s also the theme for a walking song that my favorite Tolkien character (Bilbo Baggins) cites in Chapter 19 of The Hobbit:
“Roads go ever ever on
Under cloud and under star,
Yet feet that wandering have gone
Turn at last to home afar.”
While Janet may have been pulled and pushed toward the path of “rate liftoff”, now she’s back to where she, Ben, and their fantasy novel has always been – back to the Shire of money printings and lower-rates-for longer, that is…
Back to the Global Macro Grind…
To be clear, The Fed’s Road doesn’t end with green meadows that rest under shining stars. Policies to Inflate, ultimately end in #deflation. And that gets the Long Bond Bulls paid.
Long Bonds? Yes, as in the things that are at all-time highs in Europe and Japan (10yr German Bund and Japanese Government Bond Yields are trading at 0.36% and 0.33%, respectively) as long-term economic expectations there = #deflation.
While the USA’s 10yr Yield has dropped -14 basis points to 1.96% in the last 24 hours, it’s still trading at a +160-163 basis point premium to German/Japanese Long-term Bond Yields. Unless you think US inflation is pending, you’re long the Long Bond (TLT).
So, thank you Janet – for pseudo telling the truth yesterday. My world needed that! What did she say?
Why do these 3 things matter (in the same order)?
On the “data”, you need both a calendar and a forecast – here’s mine:
While this game of front-running expectations isn’t easy, if I have 3 data points pending and I’m relatively certain about 2/3, I’d much rather see those 2 face cards first! I think both the bond and stock market see them the way I see them too.
In that regard, yesterday’s real-time market reaction to the Fed taking you right back down the road that they’ve always been on made complete sense to me:
Yes, all-time is a long-time – and that’s why I’ve been saying that it was more obvious to buy longer-term Bonds on the recent pullback than it was to buy the SP500. The 10yr US Treasury bond isn’t back to its all-time high yet = more upside!
But, for those of us who like to buy both stocks and bonds (I wouldn’t have an Independent Research business if I marketed one asset class over another, sorry), we want to be buying the parts of the US stock market that will go up the most.
We call these Sector Style Exposures. In Equities, the 2015 outperformance of the following sectors remains obvious:
Whereas the Sector Styles we’d want to be net short (hedge funds) or underweight (mutual funds) like Energy (XLE) and Financials (XLF) are +1.6% and -0.9% YTD, respectively, are underperforming the SP500 (which is +2.7% YTD).
Don’t get me wrong, in a world facing both Global #GrowthSlowing and #Deflation headwinds, a +2.7% YTD gain is nothing to complain about. Being positioned on The Hedgeye Road of Long TLT, ITB, XLV, and XLY has simply been more fruitful.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.84-2.07%
ITB (Housing) 27.01-28.36
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Here is the replay of The Macro Show for March 11, 2015. Hedgeye CEO Keith McCullough distills the world's key market, economic and political developments in 15 minutes or less for our Macro Institutional subscribers, then answers questions from viewers.
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