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The Grindstone

This note was originally published at 8am on March 24, 2015 for Hedgeye subscribers.

“Now it is necessary to get to the grindstone again.”

-Ernest Hemingway

 

For those of you who are Hemingway fans, you’ll remember that classic one-liner.

 

He penned it at the end of his preface to “The First Forty Nine” in 1938. He was preparing for the next stage of his life, writing from Finca Vigia (his home in Cuba). That’s where he’d spend the last 22 years of his life, before dying in 1961.

 

For those of you who didn’t know, that one-liner inspired “Back To the Global Macro Grind…” While my English Lit professor @Yale was very close to failing me in 1995, thank God she saved me with Hemingway’s short-form writing examples.

The Grindstone - grindstone farmer

 

Back to the Global Macro Grind

 

With the Federal Reserve having not made a monetary policy (rate hike) mistake last week, Fed Vice Chair, Stanley Fischer, reiterated lower-rates-for-longer at his rock-star-status meeting of the mainstream minds yesterday.

 

No matter where you’ve been positioned, here we are. If I were you, with both interest rates and the US Dollar grinding lower this morning, this is what I’d be doing next:

 

  1. Buying US Dollars on red; Shorting Euros on green
  2. Shorting Commodities and their related stocks/bonds on green
  3. Buying Long-term Bonds (and stocks that look like bonds) on red

 

In other words, from a Foreign Currency market perspective, I’ll be fading (doing the opposite of) the counter-TREND move. But from a Fixed Income standpoint, I’ll stay with what’s been a very bullish intermediate-term TREND.

 

The main reasons for that are twofold:

 

  1. The best way to be positioned for Global #Deflation and #GrowthSlowing remains being long Long-term Treasuries
  2. The best way to stay with the Europeans, Japanese, and Chinese devaluing their currencies, is to be long US Dollars

 

On Global #Deflation, If you grind through all of the recent Global Macro data, it’s not that hard to see:

 

  1. Germany’s producer prices (PPI) for FEB were -2.1% year-over-year (vs. -2.2% in the prior month)
  2. Finland’s producer prices (PPI) for FEB were -1.8% year-over-year (vs. -1.9% in the prior month)
  3. United Kingdom’s PPI for FEB was -1.8% year-over-year (vs. -1.9% in the prior month)

 

And while some of these year-over-year #deflations slowed month-over-month, don’t forget that this all happened in FEB when most things commodities had a Down Dollar bounce. In March, all of the #deflation data should accelerate to the downside again.

 

On Global #GrowthSlowing (key word there is Global), here’s your data update:

 

  1. Eurozone PMI for March 51.9 (vs. 51.0 in FEB)
  2. Chinese PMI for March 49.2 (vs. 50.7 in FEB)
  3. Japanese PMI for March 50.4 (vs. 51.6 in FEB)

 

Chinese and Japanese stocks are running right at YTD highs of +13-14% on those sequential slowdowns. Why? #GrowthSlowing begets more currency burning expectations, which begets higher stock prices in those currencies.

 

Meanwhile everyone who is long Europe who thinks the German PMI data (which was good, not great, sequentially at 52.4 MAR vs. 51.1 in FEB) is going to carry all of Europe for the rest of the year (France’s PMI sucked at 48.2), has a simple question to answer:

 

Is the European “growth story” (going from recession to something hoped-for that is less than recessionary) intact with Draghi allowing all of his Burning Euro accomplishments to get unwound?

 

From a research perspective, the answer to that question is an unequivocal no. Yesterday Draghi was thumping his Italian chest hairs celebrating the “benefits of a weaker Euro.” The immediate-term risk range for the EUR/USD also blew out to $1.03-1.10.

 

Not to be confused with my English Lit professor, my calculus guy in New Haven never threatened to fail me. The math of the matter is that as risk ranges “blow-out” like the Euro’s just did, variance rises, and so does my expected volatility for the FX market.

 

As you just witnessed with the Fed’s latest move, in reaction to unexpected currency strength, the only play in the central planner’s playbook is to get easier, not tighter. So, now it’s your turn Super Mario and Mr. Kuroda – prepare your respective FX grindstones.

 

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

 

UST 10yr Yield 1.85-2.02% (bearish)

SPX 2080-2117 (bullish)

RUT 1235-1275 (bullish)

Nikkei 19341-19942 (bullish)
VIX 12.79-15.94 (bullish)

USD 97.01-99.24 (bullish)

EUR/USD 1.03-1.10 (bearish)

Yen 119.39-1.21.90 (bearish)
Oil (WTI) 42.42-48.28 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Grindstone - 03.24.15 chart


April 7, 2015

April 7, 2015 - Slide1

 

BULLISH TRENDS

April 7, 2015 - Slide2

April 7, 2015 - Slide3

April 7, 2015 - Slide4

April 7, 2015 - Slide5

April 7, 2015 - Slide6

 

BEARISH TRENDS

April 7, 2015 - Slide7

April 7, 2015 - Slide8

April 7, 2015 - Slide9

April 7, 2015 - Slide10

April 7, 2015 - Slide11
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April 7, 2015 - Slide13


Call Invite | Best Idea: Long ZOES

Takeaway: We're hosting a 30 minute call on Wednesday, April 8 at 1:00pm EST. Dial-in details and associated materials to follow.

Upside to $68 per share versus downside to $25 per share over the next three years.

 

Standing Out From the Crowd

After coming down hard on NDLS, CHUY, PBPB, DFRG and SHAK over the past year, it’s probably apparent that we have a strong bias against “high growth” restaurant companies that have recently come public.  Rest assured this bias has not detracted from our research process.  In fact, this prior work in the small cap restaurant field has allowed us to identify a company that we believe is distinctly different from the rest – which, if you’re familiar with our work, can only be construed as a good thing. 

 

We like ZOES on the long side for many reasons, including its:

  • Superior brand positioning
  • Management philosophy and execution
  • Unit opening geographic profile
  • Early-stage average unit volumes and returns

 

There is little competition in the Mediterranean category which directly appeals to the health conscious millennial crowd and has the potential to become America’s next big cuisine.  Due in large part to a best-in-class management team and operating philosophy, we believe ZOES will be able to grow with minimal roadblocks.

 

Please join us for 30 minutes on Wednesday as we walk through the intricacies of our call in a detailed Black Book.

 

Call Invite | Best Idea: Long ZOES - 11111


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Real Conversations: Stephen Roach on Global Imbalances, Risks and How It All Ends

 

Stephen Roach, Yale University professor and former Chairman of Morgan Stanley Asia, sits down with Hedgeye CEO Keith McCullough to discuss a number of important subjects in this extensive interview.


Cartoon of the Day: Lousy T-Shirt

Cartoon of the Day: Lousy T-Shirt - TLT cartoon 04.06.2015

We added TLT to Real-Time Alerts on 4/1/14. It is up +20% since then versus 10% for the S&P 500. We remain long the Long Bond.


[230 Words]: Why Keith McCullough Doesn’t Mince Words with One-Man-Know-It-All-Bands

The exchange below is from an interview Hedgeye CEO Keith McCullough did back in July 2014. It offers a quick glimpse into why McCullough doesn’t pull punches when it comes to calling out unaccountable market pundits, commentators, etc.

*  *  *  *  *  *  *

Q: You have been very vocal about your feelings towards holding stock market commentators accountable for their public recommendations or analysis of stocks. What made you begin speaking up about this?


KM: It all gets back to the founding principles of Hedgeye – Transparency, Accountability, and Trust. If we don’t #timestamp every call we make, how on earth can serious investors evaluate whether or not they should pay for our services? There is an “us vs. them” overtone to this culture war we are waging on Twitter with some of Old Wall’s newsier pundits, because the differences between what we do and what they do are significant.

 

[230 Words]: Why Keith McCullough Doesn’t Mince Words with One-Man-Know-It-All-Bands - 445

 

We spend most of our day producing proprietary research views so that we can debate the sharpest Institutional Investors in the world on our Best Ideas. We are in their offices and in their inboxes and on their phones.

 

We aren’t trying to be an inch deep and a mile wide across 5,000 securities in hopes of generating advertising revenues. We aren’t trying to spin everything positive for either our own book or banking revenues either.

 

I probably come off as a threat to the one-man know-it-all-bands out there because I should. I have a big team that’s proving itself at the highest level, each and every market day. In many ways we are the other team, so I don’t expect those we are competing with to support us. We want to stand on the front lines for both individuals and institutions so that the opacity of Old Wall investment recommendations won’t crush their returns again.

 

Click here for more information on why we actually are different here at Hedgeye and how you can become a subscriber.


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