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A Man Larger Than The Sun

This note was originally published at 8am on March 05, 2015 for Hedgeye subscribers.

“At rest, however, in the middle of everything is the sun.”

-Nicolaus Copernicus

 

On this day of in 1616, the Catholic Church banned Copernicus’ book. The establishment’s main issue with the man’s independent research (which correctly implied that the sun was at the center of the universe) was that it didn’t sync with their ideologies and politics.

 

Today will go down as one more day in central planning history where an unelected man of the mainstream will boil the oceans and part the heavens, raising stock markets to heights the world has never seen before.

 

That man, who sees himself residing in the middle of everything, is Mario Draghi…

A Man Larger Than The Sun - Draghi balloon cartoon 01.23.2015

 

Back to the Global Macro Grind

 

You go, Mr. Central Planning man. You go. You are the power and the light – you are the only one who can keep the Italian stock market up while its economy is in recession. Only you, the great Draghi, can see 0% improvement in Greek unemployment as Italian stocks move to +16.5% YTD.

 

While this is turning into a joke, the actual data fits what I just wrote:

 

  1. Italy’s GDP for Q4 of 2014 was -0.5% y/y (revised lower vs. the prior -0.3%)
  2. Greek Unemployment rose to 26.0% in DEC from 25.9% in NOV

 

Oh, right - the latest central planning of European stock markets didn’t really ramp until JAN, so I’m sure Greek government work is booming now and these structural debt, deflation, and unemployment problems all went away as a result…

 

And then there was moarrr #Deflation

 

Remember that, perversely, moarrr cowbell from Draghi = moarrr #StrongDollar driven #Deflation:

 

  1. Cowbell = Centrally Planned Currency Devaluation
  2. EUR/USD is getting smoked to -8% YTD and multi-yr lows of $1.10 ahead of Draghi’s latest (830AM EST)
  3. US Dollar Index is rocketing to $96.21 on that, +6% YTD and +21% from its 2014 lows!
  4. Commodities (CRB) Index (19 Commodities which largely trade in Dollars) continues to crash -28% y/y
  5. Oh, and WTI Oil, which you could have chased at $105 at this time last year, has crashed > 50% since

 

So we definitely need to have Bloomberg and CNBC cheer on more of this. Access to these Sun-smoothers drives ad revs. #clicks

 

Put another way, until either the Europeans and/or Japanese fail outright (i.e. when their people figure out this does jack for the economy, but keeps getting the bureaucrats and Eurocrats (and their all-access media) paid), this #StrongDollar + Down Rates #Deflation will continue.

 

Not to be confused with #StrongDollar + #RatesRising (our call on the US in 2013), the Down Rates (both locally and globally) part is critical to contextualize, in global growth expectations terms.

 

It’s obviously one thing to obfuscate Policies To Inflate with real-economic growth – but it’s entirely another to have neither inflation, nor growth. Japan (for the last decade), and Europe currently, that is …

 

At least in the USA we get to get paid owning all of the asset allocations and sector style exposures to this 17th century gong show of the vanities. We signaled doing more of the pure play on US domestic consumption #accelerating yesterday in Real-Time Alerts (buy Housing, ITB, on red!).

 

To review what we like during Global #Deflation:

 

  1. US Dollars (that’s our entire FX allocation, and it’s beating both US stocks and bonds YTD by a factor of 3)
  2. Long-duration-low-volatility Bonds
  3. US Housing (ITB), Consumer Discretionary (XLY), and Healthcare Stocks (XLV)

 

And what we really don’t like:

 

  1. Burning Euros and Yens
  2. Commodities
  3. Stocks and bonds that have the most #Deflation risk (energy and the financials)

 

Our Global Macro view is not that complicated. It is how you play Global #Deflation and #GrowthSlowing, while the US economy gets it’s “easy compare” Q1 sequential growth bounce (see Theme #2 @Hedgeye called #Quad414 for details).

 

And while it has been fun to be bullish on the Weimar Nikkei (in Burning Yen terms), which is handily beating US stocks and bonds YTD at +7.5%, that’s really just a rolling of the bones that can go bust whenever this epic human experiment in trying to bend gravity and the sun does.

 

Our immediate-term Global Macro Risk Ranges are now (intermediate-term TREND view in brackets):

 

UST 10yr Yield 1.89-2.17% (bearish)
SPX 2083-2117 (bullish)
Nikkei 18409-18998 (bullish)
USD 95.01-96.28 (bullish)
EUR/USD 1.10-1.12 (bearish)
YEN 118.67-120.66 (bearish)
Oil (WTI) 48.22-52.16 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

A Man Larger Than The Sun - 03.05.15 chart


Buy Everything!

Client Talking Points

USD

We have been waiting for Janet Yellen to clarify for weeks, and that she did – no rate hike policy mistake; instead, doubling down on her long-standing rate targeting (lower for longer) policy as she cut both her inflation and growth forecasts closer to ours = Down Dollar, Down Rates --> Reflation + Yield Chasing, worldwide.

OIL

Janet Yellen’s reflation of front-month WTI lasted less than a Viagra moment (biggest pop yesterday was in the commodity and Oil & Gas equities), so now this gets really interesting with WTI retesting the $42 handle and no immediate-term support down to $41.32/barrel – EUR/USD backed off hard too; the Dollar was down for a day, but it’s not out!

UST 10YR

We continue to think that the lowest-volatility and largest asset allocation call to all of this is long-term bonds; 1.94% on the UST 10YR (and new lows of 0.19% for the 10YR German Bund); Janet is “data dependent”, and the March #deflation data (to be reported in April) is going to be ugly = lower rates for longer.

Asset Allocation

CASH 37% US EQUITIES 16%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 11%

Top Long Ideas

Company Ticker Sector Duration
MTW

Manitowoc  (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. The low-end of our sum of the parts valuation is $26, and the low-end is not based on a MIDD comp (not that there is anything wrong with a MIDD comp).  In theory, spin-offs and break-ups unlock shareholder value while increasing operating potential of the formerly smothered units. 

ITB

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.

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

1 Min Fed Video | You Buy Everything! https://app.hedgeye.com/insights/43029-1-min-fed-video-mccullough-you-buy-everything… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Many of life's failures are people who did not realize how close they were to success when they gave up.

- Thomas Edison      

STAT OF THE DAY

85.8% of males and 66.5% of females in the U.S. work more than 40 hours per week.


CHART OF THE DAY: Consensus Bond Bear Squeeze!

CHART OF THE DAY: Consensus Bond Bear Squeeze! - 03.19.15 chart

 

Editor's Note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. If you're an active investor/trader and you're not subscribing, you're bathing in gasoline next to a roaring bonfire. Click here to learn more and sign up.

 

Yellen’s decision keeps our non-consensus view of lower-rates-for-longer on the table (US Treasury 10yr Yield smoked back down to 1.94%, German 10yr Bund Yield at all-time lows of 0.19%, etc.) and she reiterated our #deflation call.

 


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Buy Everything?

“A smile is a curve that sets everything straight.”

-Phyllis Diller

 

Oh, you’re not smiling this morning? Then you didn’t buy and cover everything within 3-6 minutes of the Fed statement yesterday. Consensus Long Bond Bears were not positioned for that!

 

Rather than rehash the who said what and when in yesterday’s epic Global Macro move (Dollar Down, Rates Down à Everything Reflation and Yield Chasing Up), here’s the replay of the LIVE coverage I did:

 

https://app.hedgeye.com/feed_items/43018-replay-fed-coverage-hosted-by-hedgeye-ceo-keith-mccullough

 

In the spirit of trying to “ESPN Finance” (i.e. provide live coverage and analysis from pros instead of journos), I figured I’d put myself and my analyst, Ben Ryan, to the real-time test. I’m glad we did. Evolving this profession is a big growth opportunity.

 

Buy Everything? - espnfinance

 

Back to the Global Macro Grind

 

The thing about ESPN is that they became the world’s curator of what mattered in sports (replays!). After yesterday’s macro market game was played, you know the score – and I highly doubt you want to watch 25 minutes of me analyzing, post game…

 

So go to minute 13 of that video, and I get to the highlight that mattered most. Apologies in advance for my tone and choice of words – when it’s game time, I care less about style, and more about results.

 

From an immediate-term perspective, “the call” yesterday was simple – buy everything.

 

Ok, maybe not everything – in immediately acknowledging the statement as dovish, you obviously wouldn’t have bought the US Dollar or TBT (Ultra Short 20yr Treasury ETF)… but you could have bought damn near anything else!

 

To review:

 

  1. Not only did Janet Yellen NOT make a Policy Mistake (signaling explicit rate hikes)…
  2. She masterfully pushed out the “dots” on both the timing and pace of hikes (if there will be any at all)

 

In doing so, she basically crushed whoever was betting on “rate liftoff” and may very well have put the guys who trade on inside information out of business too!

 

Can you imagine you had what you thought was the river card in hand (that she was going to remove the word “patient”) and put on a massive Long USD, Long Rates position with Utilities and REITS on the short side?

 

She removed the word alright – and then said “but that doesn’t mean we’ll be impatient.” Ha! Inasmuch as I am no fan of central planning, that was one of the best one-liners of the year. Bravo Janet – and shame on you insider-trading-bro!

 

In order to get these big macro moves right, you have to know where consensus is positioned in levered terms (in order to monitor that, we look at CFTC Non-Commercial futures and options positioning):

 

  1. US Dollar Bulls hit YTD highs at +81,210 NET long contracts at the beginning of the week
  2. Euro Bears hit all-time highs with a net SHORT position of -185,661 contracts
  3. SP500 (Index + Emini) net SHORT position was at YTD high of -39,891 contracts
  4. Russell 2000 net SHORT position hit a YTD high of -40,793 contracts
  5. Long-bond Bears ramped the net SHORT position in the 10yr Treasury to -173,194 contracts

 

Therefore, the call to “buy everything”, in the moment was more like a call to do the opposite of how the crowd was positioned. This job is not easy, but that’s why it was an easy call to make.

 

Context is the most important thing when making a high conviction “call.” I don’t make them frequently.

 

Ok ESPN guy - now what?

 

I’m just going to go back to doing what we always do – executing on our process. While the Fed could have changed everything yesterday, it did not. The USA has another month left in #Quad1, then moves back into #Quad4.

 

Yellen’s decision keeps our non-consensus view of lower-rates-for-longer on the table (US Treasury 10yr Yield smoked back down to 1.94%, German 10yr Bund Yield at all-time lows of 0.19%, etc.) and she reiterated our #deflation call.

 

With commodities having crashed again in March (and Oil’s Down Dollar Viagra bounce from yesterday fading, fast), reality is that Janet’s Fed is going to get more, not less, #deflation data when the March data gets reported in April.

 

As a Long Bond Investor (total Return of TLT up approximately +5% YTD vs SP500 +2%), you can smile this morning. If you’re still long the Russell 2000 (IWM), Healthcare (XLV), Consumer Discretionary (XLV), and Housing (ITB) stocks, you can smile too.

 

Thanks Janet, for keeping everything less-straight!

 

Our immediate-term Global Macro Risk Ranges are now (intermediate-term TREND views in brackets):

 

UST 10yr Yield 1.88-2.05% (bearish)
SPX 2076-2105 (bullish)
RUT 1 (bullish)
DAX 11811-12239 (bullish)
VIX 13.51-16.12 (bullish)
USD 97.39-100.93 (bullish)
EUR/USD 1.04-1.09 (bearish)

Oil (WTI) 41.32-46.34 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buy Everything? - 03.19.15 chart


March 19, 2015

March 19, 2015 - Slide1

 

BULLISH TRENDS

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March 19, 2015 - 6

 

BEARISH TRENDS

March 19, 2015 - 7

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March 19, 2015 - 13



GALAXY Q4 2014 CONFERENCE CALL NOTES

Takeaway: Margins missed expectations in Q4 and fell to lowest level since Q1 2012. Ph2 table request application submitted yesterday.

CONF CALL

  • Special dividend of HK$0.28 on May 22
  • Q4: Playing lucky benefited EBITDA by HK$35m
  • Galaxy Ph2 opening: on time
  • Operating velocity remains unchanged
  • Galaxy Macau: Playing lucky benefited EBITDA by HK$40m
  • Opened 2 VIP rooms (1 in December 201`4 and 1 in February 2015)
  • Starworld: bad luck of $5m
  • Galaxy Macau Ph2: invested HK$10.8bn (HK$1.8bn in Q4 2014).
  • Q4 2014: $790m total borrowing capacity

 

Q & A

  • Galaxy Ph2:  
    • Not as much VIP offering as you would expect given there is not much junkets out there
    • Cost of running property shouldn't change much per laborer
    • Officially submitted table requests yesterday.  Govt will be pragmatic about the process. Will be sitting down with govt very soon. Will not talk about table # expectations on the call.
  • 5 small VIP operators ceased operations in 2014 at Galaxy
  • 1-2% margin impact on employee retention program
  • Direct VIP:  growing but still very small part of overall VIP business. That segment has done well.
  • Labor cost pressures:  increasing staff numbers, compensation costs up ~20%.  Will continue to offer competitive package to employee and will evaluate pay costs in mid-year.
  • Full smoking ban:  very serious issue. Working with govt. 
  • Mainland China not only targeting Macau on corruption issues
  • Cannibalization between Starworld and Galaxy Macau:  not an issue since one property in Peninsula, one on Cotai. 
  • Galaxy Ph3/4 opening: 2018 (unchanged from previous commentary)
  • Want have some flexibility regarding dividends

real-time alerts

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

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