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CHART OF THE DAY: The Bond Battler $TLT

CHART OF THE DAY: The Bond Battler $TLT - z 05.05.15 chart

 

Editor's Note: This is a brief excerpt and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. If you'd like to stay a couple steps ahead of consensus, we courage you to subscribe.

 

If you can take a punch (both in this game and the one I used to play on the ice), your career will last longer. Here’s what the body blows have looked like on rallies (in Long Bond Yield terms) for the last 6 months:

 

  1. December 2014, US 10yr Treasury Yield rallies to 2.28% on expectations of accelerating Q1 US growth
  2. March 2015, UST 10yr Yield rallies to 2.25% post another #LateCycle US Jobs report
  3. May 2015, UST 10yr Yield rallies to 2.14% on…

...Yep. I’ll take the bi-monthly black eyes for staying long Treasuries (TLT). For the next 3-6 months we think year-over-year US growth continues to slow. Staying with the process isn’t always easy. But we’ve got to be tough.

 


The Bond Battler

“You got to be tough.”

-Hemingway

 

In classic Ernest Hemingway terms (tight and to the point), that’s what a young man by the name of Nick was told by an old street fighter after he got busted by a brakemen (thrown off a train) up near Macelona, Michigan. #BlackEyes

 

The short story is called The Battler – and it’s a beauty for those of us who have to (and love to) grind it out every day. Win, lose, or draw – there’s a lesson to be learned from every experience.

 

After being bearish on Treasury Bonds in 2013, I’ve been battling it out on the long side of these barbarous low-volatility-high-return Long Duration Bonds for going on 17 months now. Every time bond yields bounce to lower-highs, I hear it from every corner of the Twitter-sphere. You got to be tough to fight off the perma Bond Bears.

The Bond Battler - 3  yield Godot 07.27.2014

 

Back to the Global Macro Grind

 

Being deaf would probably help me too.

 

If all I did was what you should do when you are trying to handicap the probability of Long-term Bonds rising/falling (front-run the rate of change in growth/inflation), I’d concern myself less with daily moves. But some of you pay me to fight. So fight today, I will.

 

“They all bust hands on me – but they couldn’t hurt me.” –Hemingway

 

If you can take a punch (both in this game and the one I used to play on the ice), your career will last longer. Here’s what the body blows have looked like on rallies (in Long Bond Yield terms) for the last 6 months:

 

  1. December 2014, US 10yr Treasury Yield rallies to 2.28% on expectations of accelerating Q1 US growth
  2. March 2015, UST 10yr Yield rallies to 2.25% post another #LateCycle US Jobs report
  3. May 2015, UST 10yr Yield rallies to 2.14% on…

 

On what?

 

  1. Global Bond Yields having their biggest 6-day % move (off the all-time lows)?
  2. The Almighty Bond “Bubble” finally popping, for real this time, because it’s “expensive”?
  3. Expectations of a mean reversion back to #LateCycle jobs gains in the US (May 8th report)?

 

Triple Crown fans, if we’re betting on expectations, I’ll take all 3 for the trifecta. And I’ll fade #3, staying long The Battler (Long Bond) to win at Friday’s run for the roses.

 

I obviously get that all 3 of the aforementioned expectations can come to fruition. But I also get this thing called probability that I won’t fade unless I have fundamental reason to do so.

 

It’s been what, 37 years, since Affirmed won the Triple Crown? While it hasn’t been that long for Bond Bears to get paid (2013), don’t forget that the key wager then was that US growth would accelerate from 2012. And it did.

 

Put another way, until our models signal real US #GrowthAccelerating (year-over-year), we’re probably staying with our biggest asset allocation horse.

 

Since I gave the bears some air-time, don’t forget to contextualize what actually happened after those December and March Lower-Highs for 10yr yields:

 

  1. JAN-FEB 2015 = re-test of the all-time lows at 1.67% after bad US GDP data
  2. APR 2015 = two separate selloffs to 1.84% after a bad March Jobs report

 

In other words, “long-term investors” (i.e. those who understood that Global Growth and Inflation expectations were too high) who have remained bullish on Long Duration Bonds have been paid to take a few punches from the pundits.

 

But, but… according to consensus, jobless claims are “good.” C’mon now – that’s not true. They are actually fantastic! And that’s the point about the cycle. See slide 13 of our #LateCycle Macro deck – they are as good as they get.

 

In that same slide deck (slides 12-17) our Macro Research Team reviews the mean reverting #history of the labor cycle, reminding you what that economic indicator is – one of the latest and lagging indicators there are.

 

Yep. I’ll take the bi-monthly black eyes for staying long Treasuries (TLT). For the next 3-6 months we think year-over-year US growth continues to slow. Staying with the process isn’t always easy. But we’ve got to be tough.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.86-2.17%

SPX 2096-2126
RUT 1
VIX 11.73-14.70
EUR/USD 1.06-1.13
Oil (WTI) 54.85-60.39
Copper 2.79-2.97

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Bond Battler - z 05.05.15 chart


May 5, 2015

May 5, 2015 - Slide1

 

BULLISH TRENDS

May 5, 2015 - Slide2

May 5, 2015 - Slide3

May 5, 2015 - Slide4

May 5, 2015 - Slide5

 

 

BEARISH TRENDS

May 5, 2015 - Slide6

May 5, 2015 - Slide7

May 5, 2015 - Slide8

May 5, 2015 - Slide9

May 5, 2015 - Slide10

May 5, 2015 - Slide11
May 5, 2015 - Slide12


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REPLAY | The Macro Show

We apologize for the sound issues on this morning's Macro Show.

 

 

The Macro Show is Hedgeye's dynamic pre-market rundown highlighting the most important global macro developments where CEO Keith McCullough shares 15 minutes or less of prepared market analysis and commentary and then answers your questions in a live Q&A session.

 

 

 



MCD: Investors Left Playing the Waiting Game

Takeaway

Although heavy on content, McDonald’s Turnaround Plan was rather light on detail.  Management announced several initiatives that should keep investors content over the next few months, but the lack of color surrounding operational initiatives was disappointing.  CEO Steve Easterbook made it clear that there is more to come and held out a few carrots (potential for additional refranchising, leverage, and real estate scrutiny) for investors to nibble on.  With that being said, it is abundantly clear that the road to recovery will be a long, bumpy one.  We’re staying on the sidelines, for now, until management devises a strategic, actionable, and well-articulated plan to fix the operations of the business.

 

The Main Event

McDonald’s unveiled a reorganization of its business this morning in a video sent out by CEO Steve Easterbrook.  The company will transition to a new organizational structure within the following market segments: U.S., International Lead Markets, High-Growth Markets, and Foundational Markets.  The new structure will be supported by streamlined teams and fewer layers, which should allow for better focus within closely aligned markets.  By restructuring the company, management hopes to eliminate its cumbersome and stagnant decision making process.

 

McDonald’s also announced it will accelerate its refranchising efforts, with the intention of bringing its franchise/company owned mix to 90%/10% by the end of 2018.  The two initiatives combined should begin yielding $300 million in annual G&A savings by the end of 2017.  In addition, the company will return $8-9 billion to shareholders in 2015 and plans to reach the top end of its 3-year $18-20 billion cash return range by end the end of 2016.

 

New Market Segments

U.S.

  • Accounts for more than 40% of operating income
  • Will be led by current USA President Mike Andres

International Lead Markets

  • Australia, Canada, France, Germany and the U.K.
  • Accounts for approximately 40% of operating income
  • Will be led by current Europe President Doug Goare

High-Growth Markets

  • China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands
  • Will be led by current APMEA President Dave Hoffman

Foundational Markets

  • Remaining markets in the system
  • Will be led by current APMEA CFO Ian Borden

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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