May 4, 2015

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General Confusion

“To be a good General, you must know mathematics.”



If macro markets haven’t been confusing you as of late, give me a buzz. This 5’9 General needs to know the math that gave you clarity!


Napoleon went on to say that mathematics “serve to direct your thinking in a thousand circumstances” (Napoleon, pg 11). And in attempting to risk manage Global Macro markets, it’s tough to disagree with that.


The math simply gets tougher when correlations start to break-down. While they are not collapsing across durations (yet), correlations between the US Dollar, Rates, and Equities definitely don’t look like USD vs. Commodities do. That’s new. Welcome to a new week.


General Confusion - a.nap


Back to the Global Macro Grind


I’ll get into the point about correlations in a minute, but first let’s look at the FX move, in context:


  1. US Dollar Index dropped another -1.7% on the week, taking its 1mth correction to -2.9%, but still +5.6% YTD
  2. Euros (vs. USD) got squeezed +3.0% wk-over-wk, taking its 1mth rally to +4.1%, but still -7.4% YTD
  3. Canadian Dollar inched up another +0.2% on the week, taking its 1mth bounce to +3.8% (still -4.4% YTD)


In other words, whether it was priced in what became the most Consensus Macro FX position (short Burning Euros post the drop to $1.05 vs. USD in March) and/or a Commodity Currency like CAN/USD, that was one heck of a 1-month move.


The impact on macro markets, however, was not homogenous from a correlation perspective:


  1. CRB Commodities Index +1.7% last wk = +5.5% 1-month, but -0.9% YTD
  2. Oil (WTI) up another +3.5% last wk = +14.3% 1-month = +6.3% YTD




  1. Gold 0.0% last week = down -2.8% in the last month to -0.9% YTD
  2. UST 10yr Yield = +20 basis points last wk to 2.11% = down -6 basis points YTD


It’s pretty easy to argue that Gold doesn’t work when Bond Yields rise as market #history suggests that the absolute return of Gold then has to compete with higher yields. It’s harder to argue why USD and Bond Yields moved in the opposite direction.


So let’s go there and put the US 10yr Treasury Bond Yield move in the context of Global Yields:


  1. Germany’s 10yr Yield was +22 basis points (bps) on the wk to +0.36%
  2. Netherland’s 10yr Yield was +22bps wk-over-wk to +0.52%
  3. Austria’s 10yr Yield = +23bps wk-over-wk to +0.50%
  4. Belgium’s 10yr Yield = +22bps wk-over-wk to +0.65%
  5. Canada’s 10yr Yield = +22bps wk-over-wk to 1.66%
  6. Australia’s 10yr Yield = +15bps wk-over-wk to 2.68%


Not only was that a completely correlated move across bonds markets (un-correlated to the USD Down move), it was the biggest week-over-week percentage gain in Global Yields, ever.


And while I’m sure the next thing an absolutist will say is “but it’s from a low level”, that doesn’t matter when most of the institutionalized world runs money and chases returns, on a relative basis!


Yes, math majors who specialize in mean reversion history will also keenly note that “ever” is a long time. And for that reason alone I think it’s fair to say that US Bond Yields weren’t charging to lower-highs on bullish US economic data.


To the contrary, actually, the ISM report for the US that was reported on Friday was still plenty slow at 51.5 APR vs. the same in MAR (and it didn’t snow in April). Moreover, the employment component of the ISM slowed to sub 50 at 48.3.


That makes this week’s US jobs report all the more important as almost everyone I talk to thinks that the non-farm payrolls recover month-over-month (even though almost none of the Global Macro data did!).


Confused yet?


Just to add some Consensus Macro color to where the crowd is positioned coming into this week, here’s the most recent CFTC (non-Commercial) futures and options positioning:


  1. Russell 2000 net SHORT position at its lowest level of 2015 at -5,486 contracts (6mth avg -25,989)
  2. 10YR (US) Treasury net SHORT position at its lowest level of 2015 at -115,917 contracts (6mth avg -158,559)
  3. Crude Oil net LONG position tracking around its highest level of 2015 at +371,486 contracts (6mth avg +306,931)


This tells me (partly) why the Russell 2000 was the dog of the US major indices last week (many covered shorts high and are now too long small/mid caps lower) and what Bond Bears really think (i.e. they don’t think rates go up a lot from here).


As for people who are in the business of being bullish on Oil. There are many. There are also many, many, more Americans whose confidence and real-spending power slows alongside rising gas prices and a general confusion about markets vs. economic reality.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.86-2.12%

SPX 2087-2117
VIX 11.77-14.84
USD 94.25-96.71
EUR/USD 1.05-1.13
Oil (WTI) 54.62-60.15


Best of luck out there this week,



General Confusion - 05.04.15 chart

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  • Revenue run rate equal to 2011
  • Final 2014 div/share of $0.62
  • Permission have been granted to resume construction work two days ago on Casino Jai Alai. New timeline will take around one year.  Total capex: HK$1bn. 130 rooms and 45 gaming tables. 
  • Hard to conclude GGR has bottomed
  • Lisboa Palace: still expect 1H 2017 opening
  • Capex 2015: $HK7.1 bn ($HK5.8 bn due to Lisboa Palace) 
  • Lower occupancy at Grand Lisboa due to junkets giving back some room inventory (5%/21 rooms). Signing more rooms to mass and premium mass. 
  • Galaxy Macau Ph 2: 
  • Dividend payout policy: no less than 50% of net profits.  70% payout is still sustainable.
  • Have not seen an acceleration of Junkets closing 
  • Visa cap: do not see any further tightening of visa. 21m as a cap is talked about. 
  • Smoking ban: still govt discussions being made on smoking lounges
  • Cost control due to tough conditions:  costs held stable QoQ.  Pulled $23m in labor/opex costs out in Q1.  
  • 5% corporate pay raise in Q1. Living subsidies also increased in Q1. 
  • Gaming volumes picked up in recent weeks in April.
  • Premium mass impacted by visa restrictions
  • Slowdown impact (in that order):  Premium mass, grind mass, and slot win
  • Rest of 2015 capex (HK$1.3bn): Grand Lisboa- some slot upgrades and maintenance capex
  • Want to inject more some VIP tables into mass. 
  • % promo expenses/revenues:  flat QoQ
  • Grand Lisboa 1Q VIP win %: 3.26%
  • Have not heard of Mainland govt loosening policies due to poor economic data

REPLAY: McCullough's Fed Day Analysis


Hedgeye CEO Keith McCullough hosted live analysis of the latest FOMC statement exclusively for our institutional macro research subscribers this past Wednesday. In addition to responding real-time to the Fed’s statement, Keith also fielded questions submitted from subscribers. By the end of the half-hour session, he had covered many of the major risks he currently sees for investors.


For more info on our institutional research, contact

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EWG, ZOES, VNQ, EDV, ITB, TLT, MUB, RH

a Note From Hedgeye CEO Keith McCullough


Investing Ideas Newsletter       - 567


What a week! I came into the week thinking that the US stock market could have one more thrust ahead of the Fed meeting on Wednesday. It did and the SP500 closed right on the pin, at the prior all-time closing high of 2117, on Monday.


Then the FOMC statement ... “on the news” my Global Macro market volatility signals started to accelerate and I started to take some names off our Investing Ideas list (after adding to the list before the market’s recent rally).


Contrary to conventional belief, timing matters. And we have a better than bad track record of getting you out of things before it’s too late.


So, that’s what I think you should be doing again – taking down some of your gross exposure to the long side of US Equities.


There are no rules against buying back whatever you sell, at lower- prices. Hopefully our risk management #process signals when to get back in again too.


I think there’s going to be a lot of chop out there this spring/summer. That should provide plenty opportunities for those of us who are long patience.


Enjoy your weekend,



Investing Ideas Newsletter       - Fed cartoon 04.30.2015


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 removed Goldman Sachs (GS) and Manitowoc (MTW) this week.


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


Investing Ideas Newsletter       - Z LEVS

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



We think people are missing the magnitude of earnings growth at Restoration Hardware, the sustainability of that trajectory over a long period of time, and ultimately the degree to which that will accrue to equity holders.


The question is not whether the stock will go to $110 vs $120 (where we see most price targets), but whether it will get to $200 vs $300.


Shares traded down this week ~5%, compared to the XRT at 3% and other names in the Home/Furnishings space like (ETH, PIR, WSM and HD) down 2.5%-4%. Even the best stories are not linear. There will be bumps along the road.


But, we think the catalyst calendar looks healthy starting with the 1Q15 print set to be release in early June. Following that, RH is set to pick up the cadence of its store opening, with 4 new stores set to be open in the back half of the year. This remains our favorite name in retail.


Builder performance was choppy in the latest week alongside beta volatility and investor attempts to square the net impact to housing from rising rates and ongoing improvement in housing fundamentals. 


Normal oscillations in interest rates have only a marginal effect on the actual decision to purchase a home but they do have a direct impact on affordability – or, put differently, how much home one can purchase assuming a static income level.


In the table below, we show how housing affordability changes alongside changes in interest rates.  A general rule of thumb is that each percentage point change in interest rates equates to a ~10% change in affordability.  As can be seen in the table below, 30-year mortgage rates averaged 4.17% in 2014.  At the time of our quarterly housing themes call on march 26th, rates had averaged 3.69% in 2015 (they are currently 3.86%), implying a 6.4% improvement in affordability.   


The takeaway is fairly straightforward: as it stands currently, rates remain a tailwind to affordability relative to last year and would require a significant, expedited increase to have a material negative impact on housing activity in the immediate/intermediate term. 


Elsewhere across Housing Macro, the fundamental data continued to roll in strong: 


Pending Home Sales: 

PHS rose +1.1% sequentially in March, marking the 3rd consecutive month of positive growth and taking the Index to a new 22-month high.  On a year-over-year basis, pending home sales grew a notable +11.2% and should continue to post strong rates of improvement as we traverse easy compares into 3Q.


Purchase Application: 

Mortgage Purchase demand was flat at +0.0% week-over-week, leaving the index level unchanged at 205.4 – the highest level in 22-months.  More notably, on a year-over-year basis, purchase activity accelerated to +20.8%, marking the fastest rate of growth since October of 2012.


Household Formation:

The Census Bureau released its quarterly Housing Vacancy and Homeownership data for 1Q15 on Tuesday.  The survey data estimated that the total number of households grew by an average of 1.48MM in 1Q15 vs. the year ago period.  It’s worth noting that the strength observed in 1Q15 follows the estimated 1.65MM yearly change in 4Q14 which was the strongest since 2Q05 and the first real inflection/acceleration in 8 years. It appears the maturation of the employment recovery and improving labor/income dynamics is, indeed, (finally) beginning to manifest in improving  household formation trends. 


Case-Shiller HPI: 

The Case-Shiller 20-city series showed home prices grew +5.0% year-over-year in February, accelerating +50bps relative to the 4.5% growth reported in January. More broadly, after bottoming out at mid 4% year-over-year growth late last year, all three primary price series (CoreLogic, Case-Shiller, FHFA) have inflected in recent months and have moved back above 5% growth.  As we’ve highlighted, 2nd derivative acceleration in home prices is positive, contemporaneous relationship between price growth and housing related equity performance.


Click image to enlarge. 

Investing Ideas Newsletter       - z Housing Affordability


Our restaurants team has no material update this week to their long call.  While the stock has been negatively impacted by recent weakness across the entire restaurant space, our long-term bull thesis remains firmly intact.


This week’s GDP report was soft on an annualized quarter-over-quarter basis, printing a meager +0.2% annualized growth. On a year-over-year basis, GDP growth accelerated to +3% against easy comps from last year.


The weak report was driven by an uptick in the savings rate that ate into household spending growth. With the USD strength and big route in commodities since the middle of last year, energy-related investment was cut in half and the trade gap widened.


All-in-all, Q1 domestic data confirmed the lower-for-longer thesis.

The Fed reacted by giving a more dour outlook for economic growth, citing a decline in business investment, and continued to direct attention to more weakness in inflation and labor market readings.


As Keith McCullough wrote in Thursday’s Morning Newsletter, “rate lift-off is data dependent on the labor market.”


The initial market reaction post-statement was the opposite of what one would expect from a more dovish policy statement in that it did not bode well for long-term bond prices. However, a couple of days of trading don’t hinder a long-term fundamental investment thesis. If next week’s Non-Farm Payrolls report is a miss, rates could fall right back down to 1.86% very quickly, which is the low end of our immediate-term risk range. 


Investing Ideas Newsletter       - zen1


Insomuch as the April Jobs Report may prove to be a bearish catalyst for Treasury bonds, slowing growth data over the next two quarters should prove decidedly bullish. Fighting buy-side consensus on the long side of Treasury bonds been a great call thus far so we’d be booking gains and taking down our gross exposure to this asset class on the next immediate-term pop.


Ultimately, we think our #LowerForLonger theme prevails, but volatility is likely to pick up in the interim.


Click on images to enlarge.

Investing Ideas Newsletter       - fren


Investing Ideas Newsletter       - fren2

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The Euro remains BEARISH on A TREND duration, and as outlined last week by @HedgeyeEurope, a weaker EURO is bullish for German Equities (EWG):


“QE is only just beginning; the Euro will continue to weaken; Germany will disproportionately benefit due to exports; and asset classes like equities will inflate due to money creation (the German economy sits in the sweet spot to benefit from a weaker euro as its exports account for a monster 47% of German GDP).”


We shorted the Euro via FXE in our real-time alerts product on Wednesday on a weaker USD post GDP miss and FOMC statement. We continue with the stance that the Eurozone’s equity markets do not like a strong euro. 


Investing Ideas Newsletter       - zen3



The DAX is up 17% YTD, and we continue to think that over the TREND/TAIL it will pay to obey the commands of the central planners, in particular by being long of German equities.


From a quantitative perspective, the DAX recently broke its immediate-term TRADE line of support (to become resistance), but remains firmly above its intermediate-term TREND and long-term TAIL levels, a bullish signal.  


Investing Ideas Newsletter       - zen2



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under armour: the decision tree

Retail Sector Head Brian McGough thinks UA is hitting the point where it needs to pick between growth and ROIC. In a tape that rewards growth, returns likely coming down.

Investing Ideas Newsletter       - z u5


Senior Macro Analyst Darius Dale reiterates our intermediate-to-long term bullish bias on Japanese equities and view any near-term weakness as a buying opportunity.

Investing Ideas Newsletter       - z j


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