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Quarter-end Markup

Client Talking Points

CHINA

The dude from the PBOC called it a “very huge” growth problem in Q1, so the Chinese are going to bet on very huge stimulus as a result! Shanghai Composite ramps another +2.6% overnight to +17.1% year-to-date and +65% from the OCT lows.

USD

It’s a #StrongDollar morning, and we like it – EUR/USD backed off our $1.10 resistance, hard, last week and is back down to $1.08 this morning – German Stocks love it +1.4%, erasing all of last week’s losses at +22.7% year-to-date – Denmark +30.1% year-to-date!

OIL

Get the Dollar right and you’ve been getting Oil right, for 8-9 months – staying with our Commodity #Deflation call as WTI backed off the top-end of my range - risk range is now $42.82-51.40, signaling lower-intermediate-term highs yet again.

Asset Allocation

CASH 26% US EQUITIES 16%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 26% INTL CURRENCIES 17%

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. Recent nonresidential and nonbuilding construction data remains firm for 2015, which suggests that MTW’s crane sales should see a pickup in the first half of the year. The Architecture Billings Index (a survey of architects) typically leads nonresidential and residential construction spending by approximately 9-12 months. More importantly, the ABI Index leads MTW Crane Orders by 2 quarters.

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. Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007.  We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather.

 

While labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market.  All else equal, we’d view improving demand as a net positive.  On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.

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. Most of the #Deflation trades bounced to something less-than-terrible (both absolute and relative) for 2015, whereas the real alpha trending in macro markets continues to play to the lower-rates-for-longer camp’s advantage.

Three for the Road

QUOTE OF THE DAY

Life is the art of drawing without an eraser.

-John W. Gardner

STAT OF THE DAY

The Euro bounced +0.6% to -10.0% year-to-date vs the USD.



Ole Fashioned Group Patterns

“Individual persons tend to act pretty randomly.”

-Peter Zeihan

 

“But put those individual persons into large groups and individual randomness gives way to group patterns.”

-The Accidental Superpower, pg 92

 

Zeihan was alluding to one of the most important research topics @Hedgeye right now (demographics), but it can very well be applied to intermediate-term TRENDs in Global Macro positioning.

 

Eventually, most have to chase. And until everyone has given up on inflation expectations, I think the chase for #StrongDollar Deflation performance remains very much #on.

 

Back to the Global Macro Grind

 

I do both bottom-up and top-down investing. And while some of their respective rate-of-change analytics are the same, how I consider “valuation” in each discipline is not.

 

In Global Macro, funds flow to and from specific exposures and styles; whereas in value-investing, for example, you can buy something that’s “cheap”, and get paid – provided there is a catalyst. In macro, “cheap” tends to get cheaper – and “expensive” tends to stay expensive, until a phase transition finds a causal factor to arrest it.

 

In the case of what was our Top Global Macro Theme for Q1 of 2015, Global #Deflation, the causal (and correlating) factor is the US Dollar. Get the TREND in the US Dollar right, and you’re going to get a lot of other things right.

 

Last week, the US Dollar had what we call a counter-TREND move, closing down for the 2nd straight week. Down Dollar weeks provide us both buying (stocks) and selling (commodities) opportunities – here’s what a -0.6% wk-over-wk decline in the US Dollar Index delivered:

 

  1. Burning Euros bounced +0.6% to -10.0% YTD vs. USD
  2. Commodities (CRB Index) bounced +0.5% to -6.4% YTD
  3. Oil (WTI) bounced +4.9% to -11.1% YTD
  4. Gold bounced +1.3% to +1.3% YTD
  5. Copper bounced +0.2% to -2.0% YTD

 

That’s a lot of bouncing! Notwithstanding that I was long 0% of those 5 things, I am quite pleased that I didn’t chase any of them either. Come Friday afternoon, most of these counter-TREND bounces failed @Hedgeye immediate-term resistance.

 

In Global Equities last week, Down Dollar didn’t get either the #BigBeta chasers (Biotech and Technology) or #YieldChasers (Utilities and REITS) bulls paid. For one of the few weeks of the year, it didn’t get European Equity bulls paid either – Emerging Market equities were weak as well:

 

  1. SP500 lost -2.2% on the week taking it to +0.1% YTD
  2. EuroStoxx600 corrected -2.1% wk-over-wk to +15.5% YTD
  3. Emerging Markets LATAM dropped another -2.3% to -11.8% YTD

 

In other words, if you chased the counter-TREND move in Oil mid-week, by the weekend you were getting spanked, in Brazilian stock market terms, as the Bovespa reversed sharply, closing down -3.6% on the week at +0.2% YTD.

 

But why does CNBC’s beloved SP500 look as anemic as a major equity market index that is tied to commodities (like Brazil). Oh, right – they’ve morphed the SP500’s earnings into an international basket that is very much infected by #StrongDollar too. That sucks.

 

This is why, instead of owning the SP500, Global #Deflation Bulls have appropriately re-allocated their US equity exposure to US domestic revenue and earnings expectations:

 

  1. US Housing Stocks (ITB) were +0.1% in a down tape to +7.3% YTD
  2. US Consumer (XLY) and Healthcare (XLV) stocks continue to beat the SP500 at +3.8% and +6.8% YTD, respectively
  3. Russell 2000 and Nasdaq are +3.0-3.3% for 2015, beating their International Earnings Index competition too

 

If I didn’t signal “BUY” in what I signaled on red last week (and I had to chase the green US Equity futures this morning), I’d definitely buy more of the aforementioned basket over the SP500. It’s much more appropriately positioned for #Deflation.

 

The last point I wanted to make this morning has to do with Consensus Macro Sentiment. Going back to the weekend wood chopping, here’s how Wall Street’s (non-Commercial CFTC Futures & Options) net positioning looks going into quarter-end:

 

  1. SP500 (Index + Emini) net SHORT position came in by 41,359 contracts last week to -35,152
  2. Russell 2000 net SHORT position came in by 12,952 contracts last week to -13,277
  3. US Treasury 10yr Bond net SHORT position ROSE by 23,083 contracts last wk to -155,983

 

So you’ll probably get paid on hedge fund guys getting squeezed in both SP500 and Russell 2000 today anyway. We call this a good ole fashioned group pattern of a month-end markup!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-2.01%

SPX 2043-2080
RUT 1
DAX 113
USD 96.35-100.02
EUR/USD 1.05-1.09
Oil (WTI) 42.82-51.40
Gold 1150-1208

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ole Fashioned Group Patterns - 03.30.15 chart


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REPLAY | The Macro Show with Keith McCullough

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Hedgeye CEO Keith McCullough distill the world's market, economic and political news in 15 minutes or less, then answer viewer questions.

 


March 30, 2015

March 30, 2015 - Slide1

 

BULLISH TRENDS

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March 30, 2015 - Slide6

 

BEARISH TRENDS

March 30, 2015 - Slide7

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March 30, 2015 - Slide13


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: UUP, EDV, GS, ITB, TLT, MTW, MUB, 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.

 

*Please note we added GS, EDV and UUP this week.

 

We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter      - m9 

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      - Dove cartoon 0325.2015 normal

IDEAS UPDATES

GS

We added Goldman Sachs to Investing Ideas this week.

 

This new position is a profitable way to invest in what will be incremental uncertainty about the U.S. economy and also a more active Federal Reserve into 2016. After six years of releasing credit into the banking system, the U.S. central bank on the margin will be looking for adjust its half decade long policy and slowly be more restrictive in monetary policy. These adjustments will finally spur trading volume in both credit and equities on the biggest trading desks on Wall Street.

 

The investment banks are a cheaper way to capitalize on this trend versus the more expensive exchange sector. Goldman firstly should put up its first year-over-year gain in Fixed Income trading in 1Q15 since 2009, marking an inflection point in trading activity. In addition, the firm is mentioning incremental dividend and share repurchase activity signaling that it finally has a handle on the new Financial regulatory regime instilled since the Financial Crisis and can again engage in shareholder friendly activities.

 

Only equity volatility remains stubbornly suppressed currently with FX, Bond, and Commodity volatility starting to percolate higher which will benefit the Goldman Sach trading desk throughout 2015 and beyond.

Investing Ideas Newsletter      - jc1

Investing Ideas Newsletter      - jc2

ITB

The Thaw

 

Housing was 3 for 3 in the latest week as Existing Home Sales improved sequentially, New Home Sales saw an epic acceleration and the high frequency purchase application data showed signs of thawing alongside the break in the weather.

 

To review the data:  Sales of Existing Homes, which account for ~90% of the total market, accelerated to +4.7% YoY in February, marking the fastest rate of growth in 17-months.  More impressively,  New Home Sales (~10% of the market) hit their highest level since February 2008 rising +7.8% MoM to 539K.  On a year-over-year basis, sales were up a remarkable +25% and should continue to look strong from a second derivative perspective as we traverse a 5-month period of (very) easy comparisons.  Meanwhile, weekly Purchase demand, as measured by the Mortgage Bankers Association, showed some emergent mojo as well, rising +4.9% sequentially and accelerating +200bps to +2.7% on a year-over-year basis.

 

As we’ve highlighted, we expect a modest backlog of deferred housing consumption in conjunction with healthy organic demand trends to manifest in accelerating improvement in reported activity over the next 6-8 weeks.   Indeed, the crux of our underlying thesis remains largely unchanged.   Labor market strength + credit box expansion + easy comps should continue to support improving rates of change in housing demand over the intermediate term.  

Investing Ideas Newsletter      - NHS YoY

TLT | MUB | UUP | EDV

We added the U.S. dollar (UUP) and Long-Duration Treasury Bonds (EDV) this week for two additional vehicles to play growth slowing and deflation over the intermediate to longer-term.

 

While day-to-day timing isn’t a focus for the longer-term investor, a big counter-TREND move in the U.S. dollar (pullback within a BULLISH TREND set-up) presents a buying opportunity.

 

After the Federal Reserve revised their growth and inflation expectations downward last week, a short-term rout in the USD has manifested as the market front-runs the currency-devaluing policy effects and discounts the expectation of an interest rate hike near-term.

 

Most importantly in contextualizing the market’s reaction, all of our key risk-management levels have confirmed our fundamental macro thesis: The dollar has more upside through the back half of this year as deflation remains a global reality moving forward:

  • TRADE Support (3 Weeks or Less): $96.29
  • TREND Support (3-Months or More): $93.20
  • TAIL Support (3-Years or Less): $88.12

Investing Ideas Newsletter      - z2

 

The long-end of the bond market has continued to prove its legitimacy as a proxy for forward-looking growth, and forward-looking growth can slow with inflation going both ways….

 

Look no further than the USD reversal over the last couple of weeks. The reactionary monetary policy from the Fed to “the data” last week succeeded at shifting global currency markets and the yield curve still moved lower. The forward-looking expectation for the dollar can shift, but the bond market continues to tell the same story: lower highs for long duration yields (higher lows for TLT, MUB, and EDV) with more pain for those levered to inflation expectations.

 

Investing Ideas Newsletter      - yellow

RH

Editor's Note: Shares of Restoration Hardware finished Friday's trading up 4%.

 

There was no shortage of moving parts in the Restoration Hardware print. Though the after-hours stock reaction immediately suggested otherwise, we think that the story is squarely on track. Actually, we know it is. We’re making slight changes to our quarterly estimates, but are not making any material changes to our annual numbers, which remain materially above consensus.

 

We would still take advantage of whatever weakness we see. Even though the stock closed up on the day, we’d still buy it here.

 

We think the road map to a $150 stock at the end of the year is intact. 

MTW

Improving public and residential construction activity amid continued private nonresidential construction spending growth has helped push the Dodge Index back toward peak 2005-2006 levels, while touching its highest growth rate since 1983.

 

It is worth noting that real nonresidential spending, excluding mining, oil & gas, has performed very poorly since the financial crisis, but still retains its cyclical rebound potential. So. as the Dodge Index and other construction indicators show signs of life, Manitowoc should receive a helpful tailwind. 

 

Investing Ideas Newsletter      - dt1

Investing Ideas Newsletter      - dt2

 

 

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ADDITIONAL RESEARCH CONTENT BELOW

china economic update: will the "beijing put" be enough to offset the slowdown?

Our updated, detailed thoughts on the Chinese economy and its financial markets.

Investing Ideas Newsletter      - y7

just charts: commodity unwind vs construction 

Improving public and residential construction activity amid continued private nonresidential construction spending growth has helped to push the Dodge Index back toward peak 2005-2006 levels.

Investing Ideas Newsletter      - z5


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