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Bunds, Euro and Asia

Client Talking Points

BUNDS

German Bunds just crashed (yield on the 10YR just quintupled in 8 trading days, from 0.14% to 0.76%) – this is actually wild to watch this morning, so it will be interesting to see how U.S. markets/futures react once everyone gets to work – paging Dr. Draghi….

EURO

The Euro is straight back up to tagging the top-end of a $1.06-1.14 range vs. USD and European stocks do not like that. Both the EuroStoxx50 and German DAX are breaking down through @Hedgeye TREND supports, which is new (only thing that likes this is Oil).

ASIA

There was a nasty 3-day drop for the Shanghai Composite Casino, down another -2.8% overnight (-8% in 3 days). Australia was down again, despite the rate cut. India dropped -3.1% year-to-date, and the Japanese Nikkei was -1.3%, breaking our TRADE support line of 19,682.

Asset Allocation

CASH 57% US EQUITIES 4%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
RH

We think people are missing the magnitude of earnings growth at Restoration Hardware (RH), 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. 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.  

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. 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. 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.

TLT

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.

Three for the Road

TWEET OF THE DAY

The Macro Show, Live with (me) at 8:30AM ET https://app.hedgeye.com/insights/43964-the-macro-show-live-with-keith-mccullough-at-8-30am-et… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it’s the only thing that ever has.

Margaret Mead

STAT OF THE DAY

U.S. sales of sportswear apparel is $91 billion, sales are up 9.8% compared to last year.


CHART OF THE DAY: Weakening US Economic Data - #ADP Style

CHART OF THE DAY: Weakening US Economic Data - #ADP Style - z 05.07.15 chart

 

Editor's Note: This is an excerpt and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. If you're looking for a reliable way to stay ahead of consensus we encourage you to learn more and subscribe.

 

"...Despite weakening US economic data (see the rate of change in the ADP jobs report in today’s Chart of The Day), Treasuries have been down for 7 straight days. #EuropeanYieldRamp is the main reason why.

 

To be fair to the revisionist historians, they think this is all supply and demand and/or “fundamentally” driven by things like “higher inflation expectations.” I don’t. This is an outright panic-shift in market expectations."

 


God's Bunds?

“God understands more about financial markets than many who write about them.”

-Jean-Claude Juncker, May 6th, 2014

 

Now that German Bund Yields have quintupled, in 8 trading days, I’m thinking God understands more about financial markets and economic cycles than many who try to centrally plan and smooth them.

 

For those of you who don’t know who Jean-Claude Juncker is, he’s the former Prime Minister of Luxembourg (1) and residing President of the European Commission. This guy is a hard-core Eurocrat.

 

It might just be me, but I was under the impression that these dudes in Europe thought they had this all under control. Didn’t Draghi promise investors “whatever it takes”? If this bond market move is God’s work, Europeans better pray for it to stop.

God's Bunds? - Draghi cartoon 03.05.2015

 

Back to the Global Macro Grind

 

That wasn’t a typo – at one point this morning German Bund Yields flash-crashed, or something like that, to 0.76% on the 10 year. Only last week it was trading at 0.14%. That’s a five bagger!

 

Since I’m bullish on US Treasuries, that’s not good. Despite weakening US economic data (see the rate of change in the ADP jobs report in today’s Chart of The Day), Treasuries have been down for 7 straight days. #EuropeanYieldRamp is the main reason why.

 

To be fair to the revisionist historians, they think this is all supply and demand and/or “fundamentally” driven by things like “higher inflation expectations.” I don’t. This is an outright panic-shift in market expectations.

 

To review where some big market expectations were 10-30 trading days ago:

  1. Draghi was going to keep rates low (in some cases negative), for as long as it takes
  2. European growth was being engineered by this lower-for-longer rate policy
  3. Down Euro was damn good for German, Dutch, etc. “exporters”… and their “stocks”

 

Then, z-z-z-ooom! (or ka-boom, depending on what you’re long)

  1. Euro stopped going down (USD stopped going up) as both US jobs and GDP reports slowed
  2. Oil started to rip on Down Dollar (and a circular supply narrative)
  3. And out of nowhere, despite Down Dollar, European rates started to rip higher

 

This morning alone:

  1. German 10yr Yield = +15 bps to 0.75%
  2. France 10yr Yield = +14 bps to 1.05%
  3. *Japanese 10yr Yield = +8 bps to 0.43% (one of the biggest daily % moves in a decade)

 

And US centric navel gazers are freaking out because US 10yr Treasuries moved 2 basis points off a base of 2.26%. If I’ve said this to investors who have emailed/called me in the last 48 hours 100 times, I’ve said it 1,000 times - #EuropeanYields!

 

If central planners didn’t give markets the “all-clear” expectation, absolutists who say “well, this isn’t much of a move from such low levels” might have a reasonable point. But that’s not how macro market risks evolve.

 

There is a massive amount of leverage that is betting on #LowerForLonger in Europe/Japan, and risk models move in percentage terms, not “valuation” opinions. Forget the +25% move in 30 minutes in German Bund Yields, they’re +514% in eight days. #Again!

 

So what is a man or woman to do when neither stocks nor bonds work?

  1. Raise Cash – we’ve been moving towards our highest Cash position (57%) of the year in the Asset Allocation Model
  2. Wish that you’d raised more Cash… and
  3. Call yourself as dumb as I feel for not selling US Bonds when the #process said buy more

 

To review the #process. We believe that you:

 

A)     Buy long-term Treasury bonds when growth is slowing

B)      Sell them when growth, in rate of change terms, is accelerating

 

And since I personally didn’t get the memo from God on the Euro Bond Yield move, I am going to evolve the #process and implement prayer this morning. Because, to be honest with you, other than raising cash, I don’t know what else to do.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.86-2.29%

SPX 2063-2096
RUT 1
DAX 11101-11304
VIX 13.32-16.51
EUR/USD 1.06-1.14
Oil (WTI) 54.13-61.92

Gold 1169-1203

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

God's Bunds? - z 05.07.15 chart


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 80.33%
  • SHORT SIGNALS 78.49%

May 7, 2015

May 7, 2015 - Slide1

 

BULLISH TRENDS

May 7, 2015 - Slide2

May 7, 2015 - Slide3

 

BEARISH TRENDS

May 7, 2015 - Slide4

May 7, 2015 - Slide5

May 7, 2015 - Slide6

May 7, 2015 - Slide7

May 7, 2015 - Slide8

May 7, 2015 - Slide9

May 7, 2015 - Slide10


GIS – THE ACTIVIST PLAYBOOK

Takeaway: General Mills is a great company.

The following is a summary of our 92 page Black Book on General Mills.  We are LONG General Mills and believe there are multiple ways to win

  1. The current management transforms into an Activist management team - 15% chance
  2. Fundamentally – Gluten Free Cheerios is  a home run – 20% chance
  3. Management sells the company – 15% chance
  4. An Activist shareholder takes a position  – 50% chance

We summarize the key takeaways into three main points:


GIS NEEDS TO BE REINVENTED!

The opportunity to create significant shareholder value from repositioning the company is significant. The recent performance suggests that management may be too stuck in the past to reshape the company in a way that will accelerate top line growth. There have been a number of events over the past few years that suggest the timing is optimal for an activist to come on and re-shape management and the board.

 

TRANSFORMATIONAL TRANSACTION

GIS has done a lot of things to stave off an activist attack, but it will all be for nothing if they do not execute on their growth plan. GIS is a great company with strong brands. Its business practices and backward looking are insular. Reshaping the portfolio of brands, CPW and G&A cuts are just some of the ways to create significant shareholder value.

 

MANY WAYS TO WIN

GIS needs to reshape the company to stay as a premier global food company.  Alternatively, GIS would make a solid acquisition target, especially for PepsiCo. GIS needs to accelerate its growth and management is struggling to do it internally. In our view, selling the company to PepsiCo would be an ideal scenario for all stakeholders. Or reinvent the company through meaningful acquisitions and divestitures.

 

THE HEDGEYE GIS ACTIVIST PLAYBOOK

Our playbook for GIS is focused on a few key moves, which involve transitioning the company to a more progressive global food company:

  1. The GIS Board is past its sell-by date
  2. Rationalize SKUs
  3. Brand portfolio rationalization
  4. Streamline SG&A
  5. Restructure CPW JV
  6. Transformational transaction

OVERVIEW OF GIS

The company generated $17.9bn in FY14 across its three reportable business segments:

  • U.S. Retail ($10.6bn)
  • International ($5.4bn)
  • Convenience Stores & Foodservice (C&F) ($1.9bn)

The company is focused on five key platforms globally:

  1. Ready-to-Eat (RTE) Cereal
  2. Super-Premium Ice Cream
  3. Yogurt
  4. Convenient Meals
  5. Sweet & Savory Snacks

Respected management team, although they seem to be complacent with the current status of the business.

 

GIS – THE ACTIVIST PLAYBOOK - Chart 1 5.6.15

 

HISTORICAL TRANSFORMATION

GIS has taken themselves from a Consumer Goods conglomerate to a more focused pure play packaged food company.

 

GIS – THE ACTIVIST PLAYBOOK - Chart 2 5.6.15

 

CEREAL IS A GREAT CATEGORY

The cereal category is not dead; it is merely at a point of maturity.

 

GIS – THE ACTIVIST PLAYBOOK - Chart 3 5.6.15

GIS – THE ACTIVIST PLAYBOOK - Chart 4 5.6.15

GIS – THE ACTIVIST PLAYBOOK - Chart 5 5.6.15

 

THE GROWTH MODEL HAS LITTLE FOUNDATION

The company's long-term “growth” model is unachievable given the current structure of the company.  The key “growth” brands represent only 45% of the global portfolio. 

 

GIS – THE ACTIVIST PLAYBOOK - Chart 6 5.6.15

GIS – THE ACTIVIST PLAYBOOK - Chart 9 5.6.15

 

TRANSFORMATIONAL TRANSACTION

We have a detailed Black Book coming out that will highlight the transaction of PepsiCo acquiring General Mills.

 

GIS – THE ACTIVIST PLAYBOOK - Chart 7 5.6.15

 

WHAT IS GIS WORTH

GIS has a lot of value that needs to be unlocked. Divesting underperforming slow growth brands will enable further growth and value for shareholders.

 

GIS – THE ACTIVIST PLAYBOOK - Chart 8 5.6.15

 

 

Let us know if you have any questions, or would like to discuss in more detail.

 

Howard Penney

@HedgeyeHWP

 


REPLAY | The Macro Show with Keith McCullough

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

 

 


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