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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


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


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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.

 

 


OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate

Takeaway: WTI moved above and held its TREND line of resistance in the last week. We now look to the USD for more directional clarity.

Below we outline the quantitative signals and less importantly the fundamental story that supports the counter-TREND move in oil since the Fed’s March 18th meeting.

 

Without a near-term central-planning catalyst we view Friday’s non-Farm payrolls report as a key indicator for the direction of the USD which is near testing its intermediate-term TREND level of support at $93.12. Inverse correlations to commodities have also reverted to more normalized levels over the near-term, making the direction of the currency in the aftermath of Friday’s report telling for developing a more finite view on oil prices.

If you didn’t have a chance to view this morning’s macro call live or catch up with the Early Look commentary from KM, it’s worth a read as we verbally debated the meaning of the extended counter-TREND moves in commodities, the dollar, and interest rates:

 

"From SEP 2014 to FEB 2015, Oil Volatility (OVX) went from 17 to 63 = +270%.

From FEB 2015 to now, OVX dropped from 63 to 36 = -42%."

Hedgeye Macro Show  

 

With WTI moving above its own TREND resistance level, our risk ranges remain very wide over the intermediate-term with the shorter-term market signals more confirming of a move higher. The market signals that have accompanied the move higher are similar to the November-January signals that accompanied the move lower.

Specifically, oil is making a series of higher lows and higher highs in the last several weeks on healthy volumes and tighter ranges, or compressing volatility (both realized and implied). Since March 17th (pre-Fed meeting), here’s how the signals shake-out:

  • Price: Positive daily returns skewed to the upside
  • Volume: Ratio of Green Day Volume/Red Day Volume= 1.2
    • 22 days of positive returns: 832,903 ADTV (Contracts)
    • 11 Days of Negative Returns: 699,022 ADTV (Contracts)
    • Volatility: historical volatility has compressed along with OVX despite healthy volumes (See the link to our Slide Deck and Commentary from April 24th below).     

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - WTI Levels

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - USD Levels

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - USD correls

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - WTI HVG

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Skew

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Implied vol

 

On April 24th we blasted a video and slide deck outlining these conflicting signals in more detail:

1) Conflicting quantitative signals in oil markets (Against our bearish call)

2) The importance of yielding to top-down macro over the push-and-pull of global supply/demand narratives. The replay link and slide deck are included below.

Audio

Slides  

------

On the fundamental side of global energy markets we re-iterate that supply/demand adjustments will continue to smooth on a lag. Although much lower on the compendium of important factors to our process, the fundamental supply/demand picture DOES suggest more support for oil prices than it did in January:

  1. Domestic crude production has gone from a linear increase, to decelerating, to now topping IN REACTION to a financial market fueled sell-off (Note below that the supply/demand picture is not that much different than it was last summer). The extra YY incremental barrels are without a doubt fueled by the U.S. shale boom, making the U.S. production slowdown a meaningful psychological catalyst supporting prices.
  2. Crude oil rigs in service, albeit not a proxy for production, are 42% of the October highs (679 vs. 1609).
  3. Last week was the first inventory flush in Cushing since the end of November and this week marked the first aggregate inventory flush since January 2nd

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Global Production Monitor

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - U.S. Production Delta

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Crude production table

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Production vs. WTI Price

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - Production vs. Rig Count

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - DOE crude Inventories

 

------

Oil prices will continue to move up and down and back again but all-in-all our historical cycle suggests anchoring on the direction of major currency moves is the most-sound tools for developing the right bias to risk manage the longer duration moves in commodities. Friday’s jobs report will be an important jobs report and one the Federal Reserve will be watching closely.

 

OIL: Re-Visiting Conflicting Signals and Communicating the Internal Debate - cycle

 

 

Ben Ryan

Analyst

 

 

 

 

 


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