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CHART OF THE DAY: Macro Markets Are Non-Linear

CHART OF THE DAY: Macro Markets Are Non-Linear - 04.10.15 Chart

 

Editor's Note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe.

 

"...In other words, some of my very short-term views are at odds with my longer-term ones – and others (rates) are aligned. After I’ve debated everyone else, I love to argue with myself about all of that. Macro markets, across durations, are non-linear."


I Love Debate

“I love argument, I love debate.”

-Margaret Thatcher

 

And I love Margaret Thatcher. She was a beauty.  She took down the old crusty central planners of British officialdom, and stood up for the purchasing power of the people and their currency.

 

I have debate on the mind as I am actually meeting with some big time central planners today in NYC. I am neither bringing a taster to the lunch debate, nor a rollover in all that I have been writing and ranting about for the last 7 years. I am bringing The #Process.

 

In preparation for today, Darius Dale, Josh Balch, Pavitra Duggal, and I spent all of yesterday meeting with Institutional Investors. The debate in most meetings was as vibrant as it has been in a long time. I’ll recap some of the highlights in the grind.

I Love Debate - Central banker cartoon 03.03.2015

 

Back to the Global Macro Grind

 

When I am on the road, some of the best discussions I have with my teammates are in between meetings. I can’t count how many times Darius and I can’t wait to get out of the elevator and debate amongst ourselves the best debate points of the prior meeting.

 

In that regard, banging out 6-8 meetings in a day is an exercise in gaining cumulative knowledge of not only what investors are thinking, but who has the most differentiated views and/or analogues that best support or refute our in-house research view.

 

Sometimes what people aren’t asking about is an idea in and of itself. China, for example, hasn’t been a trending topic in our meetings this year, and boom! The Hang Seng puts on a +15% ramp to the upside in the last month, so now we’ll get asked about it.

 

Since Global Macro can take the discussion anywhere, there’s a lot to talk about, but I’d say the Top 3 Debates I’ve had in the last week (I was in the Midwest to start the week) have been centered on these questions:

 

  1. Is the Dollar done going up?
  2. Is Oil done going down?
  3. Is the US economy that slow in Q1?

 

If I recapped what the healthiest debate was 1 month ago today, it was all about whether rates were going up or down. The Fed’s March 18th meeting put a lot of the questions about “liftoff” at bay (Fed Funds Futures pushed the 1st hike out to DEC too).

 

Markets moving in one direction with data supporting it will do that to a debate. The debates get much more interesting when market prices are whipping around in a range, like the US Dollar and Oil have been.

 

On the US Dollar:

 

  1. There tends to be a lot of anchoring on Fed policy, and less respect for what Draghi and Kuroda are committed to doing
  2. We agree with investors who tell us that our being right on lower-rates-for-longer is less bullish for the USD in isolation
  3. We don’t agree that consensus gets what a EUR/USD level of 80 cents looks like from an asset allocation perspective

 

On Oil:

 

  1. Since we believe that the US Dollar’s epic 6 month ramp is the beginning of a longer-term TREND, Oil bulls don’t like that
  2. Oil Bulls tend to data mine for decoupling – meaning they’ll agree with our USD view, but say supply or demand is bullish
  3. Oil Bears tend to believe that demand is as good as it’s going to get (it’s pro cyclical) and supply is a long-term problem

 

On the US Economy:

 

  1. Almost everyone asks about the Atlanta Fed forecast chart that’s been getting passed around (going straight down)
  2. Almost no one models GDP year-over-year like we do, so we surprise them when explaining Q1 GDP is going to be good
  3. The timing of what the Fed thinks GDP is in Q1 (and what they’ll probably have to say April 29th) is a great debate

 

On that last point about April 29th, it’s interesting because:

 

  1. That’s the date of the next FOMC decision on rates/policy
  2. It’s also the date of Q1 2015 GDP being released
  3. And, most importantly, that date is pre the next US jobs report

 

So when debating the timing, I’ve been trying to make the point that A) since the most recent jobs report was the worst in almost a year and B) the way the Fed looks at GDP (Q/Q SAAR) is going to look really “slow” sequentially, they’ll punt on rate hikes.

 

And since Fed Fund futures are pricing in my view, it’s tough for someone to argue with me on that, unless they have inside information… that said, anything can happen obviously. We’ll see if I’m right.

 

If I am, from today’s time and price to that critical Macro Catalyst date (April 29th), I think you could see:

 

  1. USD sell off from this week’s immediate-term overbought zone of 99.46-99.87 on the USD Index
  2. Oil bounce again within its bearish TREND (top end of the risk range, for now is $53.54 WTI)
  3. US Interest Rates making yet another lower-high here and re-testing 1.81% on the 10yr Yield

 

In other words, some of my very short-term views are at odds with my longer-term ones – and others (rates) are aligned. After I’ve debated everyone else, I love to argue with myself about all of that. Macro markets, across durations, are non-linear.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.86-1.97%
SPX 2076-2096

RUT 1  
VIX 13.03-15.96
USD 98.03-99.76
EUR/USD 1.06-1.08
WTI (Oil) 46.43-53.03

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

I Love Debate - 04.10.15 Chart


April 10, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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TODAY AT 11AM ET: HEDGEYE MACAU MONTHLY UPDATE CONFERENCE CALL

The Hedgeye Gaming, Lodging, and Leisure team will host a conference call Friday, April 10th at 11:00AM ET to discuss the latest Macau data and our overall thoughts on the market and the stocks.   

 

 

RELEVANT TICKERS INCLUDE:

LVS, WYNN, MGM, MPEL, 0027.HK, 1128.HK, 1928.HK, 2282.HK, 6883.HK, and 0880.HK.

 

 

DISCUSSION POINTS

  • The company and market details behind March's 39% GGR decline
  • Summary of our late March Macau trip
  • The true Mass/VIP split is masked by smoking ban related reclassifications of tables - we'll get you the right numbers
  • In terms of YoY declines, the worst could be behind us - but does that mean sequential trends are improving?
  • Revised 2015 monthly market projections
  • Hedgeye company EBITDA estimates vs the Street (LVS, WYNN, MGM, MPEL, and Galaxy Entertainment) - Still below the Street?
  • Research Topic: Why we're a little more positive on Direct VIP

 

CALL DETAILS

Attendance on this call is limited. Please note if you are not a current subscriber to our Gaming, Lodging, and Leisure research there will be a fee associated with this call. Ping for more information.


MCD: Boom, Like That

“If you’re not a risk taker, you should get the hell out of business.”

– Ray Kroc

 

There has never been a time in the history of McDonald’s where following advice of its legendary founder has been more critical than it is today.  Importantly, if anyone within the organization knows what Ray Kroc meant by this, it’s the 84-year old Non-Executive Chairman, Andrew J. McKenna.  The company has made it clear that Mr. McKenna told Mr. Easterbrook he has the mandate of the board to fix McDonald’s at all costs.  Only time will tell how big and how deep the changes will be.

 

While McDonald’s restructuring plan will be a significant event for the company, it will also have significant implications for the industry.

 

Since the announcement of the new CEO, the news flow on MCD has been confusing and has supported our short thesis.  Sometime between now and the beginning of the summer, MCD will announce a comprehensive strategic turnaround plan.  We don’t want to be SHORT going into the announcement.

 

Below we offer up our opinion on rumors that are flying around as to what might happen at MCD.

 

Shrink to Grow

The number one priority is clearly to reset the sales trends in key markets.  Returning these markets to positive same-store sales growth will result in the greatest creation of shareholder value.  We will wait and see what the company plans to do, but the overarching theme here is that MCD must focus on the mantra “shrink to grow.”  The company must make a concerted effort to shrink the menu, which will likely call for the elimination of the most expensive mistake in the history of the company: espresso based beverages.  It’s time for McDonald’s to focus on being itself instead of pretending to be something it is not.

 

Financial Engineering

The street seems obsessed with the notion that the company will enhance shareholder value by leveraging its balance sheet or forming a REIT.  Taking on additional leverage while margins are declining will put unnecessary pressure on profitability and will perpetuate unnecessary financial risk.

 

G&A Rationalization

This will be the biggest challenge for the new CEO.  It will be critical for Mr. Easterbrook to make bold changes in inefficient and unnecessary operational areas.  While some of the cuts will fall to the bottom line, the company must better maximize its resource allocation (human capital and financial resources) and re-invest in the business to bring the company back to life. 

 

Addressing Franchise Concerns

The new CEO must reestablish the company’s connection with its owner/operators.  For the first 20 years of McDonald’s (under Ray Kroc), there was no franchisee advisory group since franchisees could directly speak to Mr. Kroc about anything.  In the 1970’s, as the corporate bureaucracy started to grow, the franchisees were left to the devise of various corporate regional managers.   At that time, franchisees felt the need to form the first McDonald’s Operator Association (MOA).  Senior management (Ray Kroc and Fred Turner) resisted this idea of an independent group and instead formed a panel sponsored by the corporation called the NOAB (National Operator Advisory Board).  During the rapid growth years, the NOAB essentially functioned as designed, until the first major McDonald’s restructuring/downsizing under CEO Jack Greenberg.  At this time, the NOAB was renamed the NLC (National Leadership Council) and was significantly reduced in size and scope.  Since the Jack Greenberg days, the perception of its “elected” franchisee members have been those closely aligned to the company and did not truly represent franchisee interests.

 

Given the changing dynamics of the advertising marketplace, the critical issue facing the new CEO is how to make OPNAD more effective.  OPNAD is a voluntary U.S. cooperative of McDonald’s owner/operators known as the Operator’s National Advertising Fund.  McDonald’s and the owner/operators combine their marketing dollars to fund national television advertising.  Given that OPNAD was formed in 1967 and the inefficient use of advertising dollars, the question is should the company restructure similarly to how the company purchases media?  For many years, every store paid 1% of sales into OPNAD plus another 2-3% locally.  This went to 2% in the early 1990’s and to around 1.6% today.  With a more regional approach to marketing, that probably needs to come down and the franchisees are talking about bringing some money home to spend locally.

 

Innovation, Innovation, Innovation

Over the past five to seven years, the company has lost its tolerance for risk.  They must become more innovative with every aspect of the enterprise.

 

Create Your Taste

Innovation has its limits – McDonald’s needs to stop the madness.

 

Mobile Ordering

Mobile ordering – which is very advanced in the restaurant space – is a great example of how slow the company is to innovate and change.  It’s appalling to see how far behind McDonald’s is.  This is a real black eye for the company and especially the Board of Directors.  The company recently said a global app should be ready to launch in the next few months, though the launch date and exact functionality of the application will be the decisions of McDonald’s management in each country.  The app will likely rollout in the U.S. sometime this summer.  The lack of technological innovation is just one of many areas that can be tied directly to failure at the board level to drive shareholder value.

 

We look forward to seeing what the new MCD will look like.  But until then, the stock will tread water.

 

MCD: Boom, Like That - 999


Cartoon of the Day: The Occasional Bounce

Cartoon of the Day: The Occasional Bounce - Oil cartoon 04.09.2014a

 

Despite a recent uptick, oil prices are still down around 50% from June of last year. We still don’t like it. 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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