Takeaway: We reiterate our bullish bias on Japanese equities amid a powerful trifecta of supportive factors.

Below watch a video update of our intermediate-to-long term thesis on the Japanese economy and its financial markets.


CLICK HERE to download the associated presentation in PDF format (11 slides).


As always, feel free to ping us with questions.


Best of luck out there,




Darius Dale


Keith's Macro Notebook 4/23: VIX | UST 10YR | Gold

Hedgeye's Macro Analyst Darius Dale shares the the top three things in CEO Keith McCullough's macro notebook this morning.

Retail Callouts (4/23): SKX, TJX, ZQK, SPLS, EBAY

Takeaway: Removing SKX from our short bench.


Retail Callouts (4/23): SKX, TJX, ZQK, SPLS, EBAY - 4 20 chart2





SKX - Removing From Short Bench


Takeaway: We’re removing SKX from our Short Bench. We added the name to the Bench on Monday after we flagged it as a negative on our SIGMA screen this past week. As a reminder, this analysis triangulates the P&L and balance sheet to hone in on which companies are likely to beat on the Gross Margin line, and of course...which companies are going to miss. We were looking for 1) the SIGMA trajectory coming out of 1Q15 and 2) the quality of the print. Both of which looked good enough for us to pull this name off our radar screen on the short side for now.

Retail Callouts (4/23): SKX, TJX, ZQK, SPLS, EBAY - 4 23 chart1





EBAY - Ebay lays out post-split vision for marketplace and PayPal



TJX - TJX chairman Cammarata to retire, CEO Meyrowitz will succeed him



ZQK - Quiksilver Investor Renews Calls for Retailer to Pursue Sale



SPLS - Staples Acquires Makr to Make More Design Services Happen



ABG Acquires Jones New York And Taps Mark Weber, Former CEO LVMH, Inc., As Strategic Advisor



Bill Langsdorf Named to Lead Former Wet Seal



Kering - Puma Appoints General Manager for EMEA



M - Macy's gets intimate with Heidi Klum



Ikea changes the rules on high-tech furnishings



Metro interested in some Target Canada stores



Sears Hometown and Outlet CEO to leave Aug. 1


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U.S. Stocks Battle Back

Client Talking Points


A critical component to our model is how we model historical volatility (as a leading indicator), and it’s signaling a range of 12.07-14.32 on front-month right now – that’s bullish for equity beta. We’ll see if the Fed is the catalyst the market has been sniffing out (SPX only -0.5% off her all-time high as of yesterday’s close).


Very loud chorus of Bond Bears yesterday (Gross on German Bunds, and in the U.S. some said the Housing data was “too good”, so the Fed would hike?); all that did was tap the top-end of our 1.84-1.99% immediate-term risk range for 10YR UST – buy more bonds at the top-end of the yield range.


Another clean cut way to play an easier Fed (Down Dollar) and rates at the top-end of the range is obviously buying Gold at the low-end of its $1181-1208 range – we haven’t been a Gold Bull lately, but we have no problem changing our mind, from a time/price.

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


VIDEO (4mins on Fox) Here's How We're Playing 'Rates Down'



The genius thing that we did was never give up.



The first YouTube clip was shared 10 years ago.

CHART OF THE DAY: Homebuilders + Long Bonds (No Cognitive Dissonance Here)

CHART OF THE DAY: Homebuilders + Long Bonds (No Cognitive Dissonance Here) - 04.23.15 chart


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


...I remain bullish on both Long-Duration Bonds (TLT, EDV, MUB, etc.) and Housing (ITB, DHI, MTG, etc.), 


Our Starting Point

“The fact is our starting point.”



I’m not a big Aristotle fan, but I like some of his simpler quotes. In Global Macro risk management (and in life), I like to boil things down as simply as I can, or I don’t feel like I understand them well enough.


The aforementioned quote is one that Ed Hess used to introduce Chapter 7 of Learn or Die, “Critical Thinking Tools.” In both the chapter and the book, Hess leans on Dr. Gary Klein’s RPD (Recognition-Primed Decision) Model.


Klein has developed three tools that can increase the probability that we’ll be able to “see” and process new or disconfirming data and mitigate our cognitive blindness and dissonance (pg 75).” Being a data driven #process guy, I’m all for trying that.

Our Starting Point - 10 yr yield cartoon 04.20.2015 normal


Back to the Global Macro Grind


Our starting point is last price. I know that sounds simple. It should. Our best starting point for evaluating new, confirming, and/or disconfirming “data” is to get Mr. Macro Market’s cumulative opinion on whatever that data is perceived to be.


“Klein found that people in high-velocity environments, where speed of decision making is important, generally don’t take the time to generate alternatives and then weigh the pros and cons of each (or engage in a probability evaluation). Instead, they engage in fast pattern matching.” (pg 76)


Sound familiar? We’ve all done this at some point in our careers. Some people in this profession probably still do it in trying to process every macro headline, every day!


“So”, try not to do that.


Let’s start this morning with some fast pattern matching (and see if any of it matches):


  1. Both US Existing Home Sales and weekly US mortgage demand data surprise to the upside (again)
  2. SP500 reverses its early morning losses to close within 0.5% of her all-time highs
  3. Bond Bears claim Housing data is “too good”, so the Fed needs to raise rates (rates rise, bonds fall)


Throw a little extra headline sauce in there like “Bill Gross Says Short Of A Lifetime” (yesterday he was talking his book to all mainstream media outlets who would listen) on German Bunds, and you saw the worst down day for the G-10 Bonds, in a month.


But, if you’re not flash crashing your P&L with every tick of the New Tape (Twitter)… and you take a step back (breathe)… does that sequence of pattern matching with very immediate-term price action make sense?


Do people who shorted Bunds and Bonds on the lows yesterday actually think that:


A)     The Fed is going to change their statement on April 29th due to the Existing Home Sales print and/or

B)      Thwart one of the few things they can currently take political credit for (#HousingAccelerating) by raising rates?


I remain bullish on both Long-Duration Bonds (TLT, EDV, MUB, etc.) and Housing (ITB, DHI, MTG, etc.), so you can argue that I am dead wrong on this due to my own cognitive blindness. But that’s what makes a market.


Another thread of short-term pattern-matching that was bearish for sovereign bonds yesterday goes something like this:


  1. “The European economy is booming”
  2. German economic growth will force Draghi to back off QE
  3. European Bond Yields can only rise now, as a result


Oh, then there’s this stuff called the global (not local) economic data this morning:


  1. Chinese and Japanese PMIs for APR slow (again) to 49.2 and 49.7, respecitvely
  2. Germany’s PMI slowed (for the 1st time in months) to 51.9 APR vs. 52.8 last
  3. France’s PMI (which never accelerated to begin with) slowed, again, to 48.4 in APR vs. 48.8 last


In other words, the Italian (Draghi) needs to provide the French with moarrr cowbell!


In psychology, Cognitive Dissonance is the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, ideas, or values, at the same time…” –Wikipedia


The fact is that Bond Bears need one very simple thing to be as right as we were on US #RatesRising in 2013 – and that’s real economic #GrowthAccelerating. Meanwhile (not to be confused with centrally planned stock market ramps), Global Growth continues to slow.


We believe that, with neither growth nor inflation accelerating (intermediate-term TREND), the Long Bond Bears will continue to lose money. Our starting point on that Macro Theme is what Mr. Macro Market has been discounting now, for 15 months.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-1.99%
SPX 2090-2117

EUR/USD 1.05-1.08
Oil (WTI) 50.04-57.78
Gold 1181-1208


Best of luck out there today – Go Rangers!



Keith R. McCullough
Chief Executive Officer


Our Starting Point - 04.23.15 chart

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