RTA Live: April 20, 2015

Hedgeye CEO Keith McCullough answers your questions about Real-Time Alerts.




Takeaway: Sequentially better but...


The past week’s data was sequentially better but the YoY growth remained very negative, -40% YoY.  We do expect easier comps the remainder of the month which could pull the full month GGR decline into the high 30s%.


From a stock perspective, our concern remains with the grind mass segment. Grind mass appears to be stabilizing but at a level lower than anticipated by the Street. Indeed, hotel room demand is waning and promotional activity may be ticking up to entice more spending. Lower grind mass equals lower margins and likely, another round of estimate cuts.  


Please see our detailed note:

Euro, DAX and UST 10YR

Client Talking Points


Expectations for a more dovish Fed at the April 29th meeting took the Euro +2% vs USD last week. The Euro tapped the top-end of its current 1.05-1.08 risk range, and now the EUR/USD backs off -0.5% to 1.07.


If you didn’t know European stocks love Down Euro, now you know. Down Euro this morning = +1.1% DAX (to +20.6% year-to-date), with EUR/USD range bound within a bearish TREND, European stocks (especially German and Dutch) remain bullish from an intermediate-term TREND perspective.


The UST 10YR Yield is at 1.87%, down 31 basis points year-to-date as lower-for-longer continues to get priced in. The German 10YR is at 0.07% and the Swiss 10YR is at  negative -0.21% this morning.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MTW revised down its 2015 guidance for the Foodservice Equipment segment and preannounced a weaker than expected 1Q 2015. Sales in the quarter are a noteworthy miss, but we do not believe that the release has relevance for our sum-of-the-parts valuation thesis, and see many reasons to anticipate stronger operating results in 2H 2015.  Basically, we think investors stand to be paid for suffering through this volatility, with potential share price upside on separation ranging from the high 20s to low 40s. Near-term profit weakness is partly why the shares are ‘cheap’, and we think holders may be compensated well for the volatility. The shares are currently trading lower on a weaker than expected 1Q15, but 2Q15 should show improved Crane segment results and 2H should show better Foodservice Equipment results.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. The housing data was mixed in the latest week with the April homebuilder confidence survey (NAHB HMI) putting in a strong sequential improvement, while March Housing Starts were a bit soft. The National Association of Home Builders (NAHB) released its April Housing Market Index survey (HMI) – essentially a survey of builder confidence. The print was strong as it showed a nice bounce across all three survey categories: traffic of prospective buyers, current conditions, and expectations 6 months out. Housing Starts were up sequentially in March, but by less than the market expected. Total Starts rose by 2% to 926,000 (seasonally-adjusted annualized rate) from 908,000 in February.


On the domestic fixed income front we’re looking at lower yields for longer. Lower yields benefit those slow-growth fixed income cash flows tied to the treasury curve (yields down, bonds up). TLT sets-up nicely in a slow-growth, deflationary setting because inflation missing=expectation for even easier policy=more central-planning cowbell=lower yields for longer.

Three for the Road


Our Q2 Macro Theme of #DemographicYields (lower-for-longer) firmly intact @HedgeyeDDale



Sometimes you don’t realize your own strength until you come face to face with your greatest weakness.

Susan Gale


2 million high school aged kids in the U.S. smoke electronic cigarettes, according to the CDC.

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CHART OF THE DAY: Counter-Trend Macro Correlations

CHART OF THE DAY: Counter-Trend Macro Correlations - 04.20.15 chart


Editor's Note: This is a brief excerpt and chart from today's Morning Newsletter. Click here for more information on how you can subscribe.


If you look at the Correlation Risk (USD vs. everything Commodities) on a 1-month basis, it’s been significant, even though the USD hasn’t corrected much on a percentage basis. Here are the 1-month moves:


Character Breakfast

“Character is inspired; it is not imparted.”

-Laura & Malcolm Gauld


While I didn’t subject my son to a “character breakfast” with Cinderella @Disney last week, I think he built some in realizing that his little sister was less scared than he was on Space Mountain.


After a neck wrenching week of family fun on the rides, it’s good to be back in my un-buckled seat this morning! I hope you’ve had some quality time away from the screens with your family this Spring break too.


The aforementioned quote comes from a good parenting book I read last week called The Biggest Job We’ll Ever Have. It’s an especially relevant book for those of you who are into self-reflection and improvement – we can all build character by doing, every day.


Back to the Global Macro Grind


I don’t unplug from markets very often, but when I do… I like it when they don’t do a whole heck of a lot that surprises me. I left you suggesting that I think the Fed gets easier at their April meeting. I’ll come back to you this morning reiterating the same thing.


Character Breakfast - Yellen dove 09.17.2014


Amongst other things, a more dovish Fed does a few big things to macro markets – and they are not the same things:


  1. Down Dollar – that’s a counter-TREND move for Commodities and their linked-securities
  2. Down Rates – that’s a continuation of a bullish TREND for Bonds


Breaking that down in week-over-week, in rate of change terms:


  1. US Dollar Index dropped -1.9% last wk to +7.9% YTD
  2. UST 10yr Yield dropped another -3 basis points last wk to 1.87% (-31 basis pts YTD)


In Correlation Risk terms, what that translated into was:


  1. Euro (EUR/USD) counter-TREND bounce of +1.9% wk-over-wk (but still -10.7% YTD)
  2. CRB Commodities Index and Oil (WTI) +3.1% and +8.6%, respectively, on the week


US and European Equities did not enjoy inflation expectations bouncing:


  1. SP500 and Dow Jones Industrial Index were both -1.3% on the week to +1.1% and 0.0% YTD, respectively
  2. EuroStoxx600 and the DAX corrected -2.2% and -5.5% to +17.9% and +19.2% YTD, respectively


Net, net, net, both the TREND move in super-sized asset allocations to US Fixed Income continued to beat US Equities YTD, while a big league counter-TREND move in USD driven Correlation Risks frustrated #Deflation bears who didn’t dynamically reset esposures.


If you look at the Correlation Risk (USD vs. everything Commodities) on a 1-month basis, it’s been significant, even though the USD hasn’t corrected much on a percentage basis. Here are the 1-month moves:


  1. US Dollar Index -2.2%
  2. EUR/USD +2.0%
  3. CRB Commodities Index +7.1%
  4. Gold +4.8%
  5. Copper +6.1%
  6. Oil (WTI) +24.1%


Yep, that’s right. You can tell yourself all the stories you want about supply/demand in Oil related markets, but the reality is that the #1 driver of macro inflation expectations remains an easier Fed. Those expectations turned on a dime on that last lousy US jobs report.


What’s next?  The point I was trying to make before I left for vacation was pretty simple: “Some of my very short-term views are at odds with my longer-term ones – and others (rates) are aligned.” (apologies for quoting myself)


In other words, you’re one better jobs report away from both the USD and rates bouncing again. But, there’s this thing called the Fed meeting (April 29th) and a weak headline Q1 GDP report (reported on the same day), before the April jobs report (May 8th).


Yeah, inflation expectations bounce when the Dollar goes down and dovish central planning expectations go up. You already know that. So sending me a chart of something like break-evens bouncing reflects that people who manage risk in real-time get that too.


US 5-year break-evens bounced (just like everything Commodities did) +9 basis points last week to 1.7% and look a lot like Oil does on a 1-month basis (+32 bps is a big bounce!). But if you look at the TREND, they’re still down -25 basis points year-over-year.


My sense is that not everyone nailed all of these moves. If success was imparted on your portfolios, well done. This hasn’t been easy. Trying to risk manage all of these calendar catalysts, inflation/deflation expectations, etc. (across multiple durations) builds character.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.85-1.95%

SPX 2066-2093
DAX 113
USD 97.01-98.74
EUR/USD 1.05-1.08
Oil (WTI) 49.05-57.69


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Character Breakfast - 04.20.15 chart

Always Learning

This note was originally published at 8am on April 06, 2015 for Hedgeye subscribers.

“Organizations cannot learn unless the individuals within them learn.”

-Edward Hess


“Always Learning” is a nicer title for the morning after the long weekend than the title of the most recent book I cracked open: Learn Or Die, by Edward Hess.


For those of you who missed the Late-cycle slow-down in the US labor report on Friday, Global Macro markets did not. It’s a big Rates Down, Dollar Down (Commodities Up) morning here in America that we need to risk manage.


We’re on the right side of the rates move, so my primary focus will be risk managing the losing side of the Currency move. Will a bearish TRADE in the US Dollar disrupt our bearish intermediate-term TREND view of Commodities? Learning starts by questioning what it is that we believe.


Always Learning - 44


Back to the Global Macro Grind


When it comes to running money or an independent research firm, I think Hess asks the right question as an opening volley to the aforementioned book: “Learn or Die: Is this just a snappy title or is it a business truth?”


Having run both a buy-side and research company, I’d say that it is an absolute truth. Everyone makes mistakes. Not everyone can recover from not learning from those mistakes.


Since what I believe about Global Macro markets today can easily change tomorrow, I try to put myself in a position of perpetually being open to the idea that Mr. Market’s immediate-term TRADE can change the direction of our intermediate-term TREND views.


With that in mind, the easiest call to reiterate this morning is the one where both the TRADE and TREND agree: lower-for-longer on US interest rates. Here’s how that looked both week-over-week, and in the context of the intermediate-term TREND:


  1. US 2yr yield dropped -12 basis points last week to 0.48% (-19 bps YTD) and remains bearish TREND
  2. US 10yr yield dropped -12 basis points last week to 1.83% (-33 bps YTD) and remains bearish TREND


Whereas the toughest call to make is the counter-TREND move (which was caused by the same employment #GrowthSlowing factor – a weak jobs report) in the US Dollar. Here’s how I’d contextualize that, across durations:


  1. US Dollar Index -0.5% on the wk to 96.80 (+7.2% YTD with bullish intermediate-term TREND support of 93.71)
  2. CRB Commodities Index +0.4% last wk to 216 (-6.0% YTD with bearish intermediate-term TREND resistance of 239)


What makes easy even easier (and tough tougher) is Consensus Macro positioning (in non-Commercial CFTC futures and options positioning terms) right now:


  1. Long Bond (10yr US Treasury) net SHORT position still way too short at -134,579 contracts
  2. EUR/USD net SHORT position at its highest short position of 2015 at -225,776 contracts


In other words, Bond Bears got squeezed on Friday inasmuch as Euro Bears did – and now one major question is will there be follow through on either and/or both? The other, of course, is what do slowing growth expectations mean for US stocks?


If you’re purely playing this from a Correlation Risk perspective (like many of the machines are), answering the question on US Equities is tough too. That’s because shorter-term durations have an inverse correlation, whereas longer-term ones have a positive correlation.


Here’s what I mean by that:


  1. US Dollar Index 30-day correlation to the SP500 is -0.70
  2. US Dollar Index 180-day correlation to the SP500 is +0.73


I could be wrong on this, but what I believe Mr. Market is trying to tell us with that juxtaposition is that for the US stock market to go up longer-term, growth expectations need to stabilize and strengthen. That only happens with a #StrongDollar – not a weak one.


But, if growth expectations continue to fall, at an accelerating rate:


  1. US interest rates will fall
  2. US Dollar will fall
  3. And as expectations for an easier Fed rise, stocks could bounce like commodities just did


If I haven’t confused you yet on the potential for multiple scenarios playing out, across multiple durations, let me speak to you every other day as rates, currencies, stocks, and commodities whip around! This is going to be fun.


In the meantime, the only big macro call that I’ll stay with is being long Long-term Bonds. While I’m always learning about theoretical scenarios where the easiest call to make can be wrong, the only thing that’s been dead wrong there is the Rate Hike consensus.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.80-1.93%
SPX 2039-2076
RUT 1226-1273
USD 96.60-98.80
EUR/USD 1.07-1.10
Oil (WTI) 46.48-51.06
Gold 1181-1227


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Always Learning - 04.06.15

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