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Equities and Bond Yields

Client Talking Points

JAPAN

Bank of Japan (BOJ) Governor Kuroda was up all night talking and talking about his central planning and while he didn’t do anything, JGBs (10yr) did – they are down 5 basis points to -0.39% (their biggest move higher in a month); the Yen is down -0.4% vs USD. And the Nikkei likes this, up +0.8% to +13.9% year-to-date (of the majors, Nikkei looks better than both the DAX and S&P 500 right now).

10YR UST

Global Yields are down -3-5 basis points this morning; the UST 10YR is -4 basis points at 2.19% (which is right around where it started the year – fun trip); immediate-term risk range is still very wide at 1.95-2.31%; that’s a leading indicator for more bond market volatility. 

S&P 500

All-time closing high of 2121 yesterday for the S&P 500 and while we certainly didn’t call for that, that doesn’t mean we don’t think you keep selling  on green ahead of what we’re expecting to be a volatile/illiquid summer; especially bearish on Consumer stocks – U.S. Retail (XRT) -0.7% on the up day as the consumption data rolls over from #LateCycle highs.

Asset Allocation

CASH 58% US EQUITIES 2%
INTL EQUITIES 5% COMMODITIES 5%
FIXED INCOME 27% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
VNQ

All-time closing high of 2121 yesterday for the S&P 500 and while we certainly didn’t call for that, that doesn’t mean we don’t think you keep selling  on green ahead of what we’re expecting to be a volatile/illiquid summer; especially bearish on Consumer stocks – U.S. Retail (XRT) -0.7% on the up day as the consumption data rolls over from #LateCycle highs.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. It was a relatively light data week for housing with weekly mortgage application data and the March employment report offering incremental updates on the current state of housing demand.  On the market side, interest rate volatility remained a concern for the public homebuilders but one we believe remains shorter-term in nature absent another expedited, step function increase in interest rates. We think the rate related pressure will be largely transient unless we see a further back-up in mortgage rates on the order of +50-100bps from here – a potentiality we would not view as probable at this point. On the fundamental side, the drumbeat of improvement remains ongoing.

TLT

The U.S. dollar has gone on a big reversal since the Fed’s March 18th meeting. Since the meeting, the dollar has moved lower and rates higher. This short-term move in rates has caused confusion with respect to our lower for longer call. Put simply, we have been wrong on the direction of our four macro tickers in the newsletter. A continuation of this trend will force us to re-evaluate the longer term call.

 

Three for the Road

TWEET OF THE DAY

Japanese Gov Bond Yields (10yr) have their biggest pullback day of the month -5bps = 0.39%

@KeithMcCullough

QUOTE OF THE DAY

Man is not the creature of circumstances. Circumstances are the creatures of man.

Benjamin Disraeli

STAT OF THE DAY

A report released today by the Bureau of Justice Statistics (BJS) shows there were 15.1 police officers per 10,000 U.S. residents in 2013 which is down from 15.4 police officers per 10,000 residents in 2007.  


CHART OF THE DAY: U.S. Dollar TREND (3 Months or More) vs. TAIL (3 Years or Less)

Editor's Note: The chart and blurb below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Learn more and subscribe today.

 

CHART OF THE DAY: U.S. Dollar TREND (3 Months or More) vs. TAIL (3 Years or Less) - z 05.15.15 chart

 

...Since I write every day, I spend a lot of time trying to contextualize the TRADE (3 weeks or less) within the TREND (3 months or more). But especially during times like these, it’s critical to attempt to have a view of what TRENDs are doing within long-term TAILs....

 

 


Ceaseless Attention

“In order to lead an army, you have to ceaselessly attend to it.”

-Napoleon Bonaparte

 

The way my typical day goes is as follows: ceaseless attention to Global Macro market moves, news, and analysis in the morning – meetings in the afternoon – and, family, hockey, and #history (in that order) in the eve.

 

The compare and contrast of the macro morning to a history book at night couldn’t be more drastic. Before bed last night I was enthralled in early 19th century European history (Napoleon, A Life). This morning I feel like I’m watching a version of it 200 years later.

 

I don’t do it because it’s cool. I do it because I love it. I do this because I’ve realized that every book I read reminds me how much I don’t know. And since I’m leading an independent army against an Old Wall guard that seems to know everything, there’s work to do.

 

Ceaseless Attention - 80

 

Back to the Global Macro Grind

 

Can you contextualize immediate-term market moves within the intermediate-term? How about the long-term? What is the long-term? Is it 3 years or 200? If you could know everything about everything, across durations, I’m betting you would.

 

Since I write every day, I spend a lot of time trying to contextualize the TRADE (3 weeks or less) within the TREND (3 months or more). But especially during times like these, it’s critical to attempt to have a view of what TRENDs are doing within long-term TAILs.

 

We define longer-term TAILs as having a duration of 3 years or less. I use that time horizon because A) I really suck at calling things 3 years out and B) unless they have permanent Buffett-like capital, mostly everyone else does too.

 

So today, to keep it simple, I just wanted to give you my TREND vs. TAIL views, across Global Macro:

 

  1. US Dollar = bearish TREND; bullish TAIL
  2. The Euro = bullish TREND; bearish TAIL
  3. Japanese Yen = bearish TREND and TAIL
  4. US 10yr Treasury = bullish TREND and TAIL
  5. US 30yr Treasury = bullish TREND and TAIL
  6. Japanese Government Bond (10 yr) = bullish TREND and TAIL
  7. SP500 = bullish TREND and TAIL
  8. Russell 2000 = bearish TREND; bullish TAIL
  9. US Equity Volatility (VIX) = bullish TREND and TAIL
  10. Nikkei = bullish TREND and TAIL
  11. German DAX = bullish TREND and TAIL
  12. BSE Sensex = bearish TREND; bullish TAIL
  13. CRB Commodities Index = bullish TREND; bearish TAIL
  14. Oil (WTI) = bullish TREND; bearish TAIL
  15. Gold = bullish TREND; bearish TAIL

 

I better stop there, or I am going to confuse you. I used to get confused by intermediate-term TREND views disagreeing with longer-term TAIL ones. But after building, breaking, and re-building my #process, I don’t dwell on the non-linearity of it all as much.

 

Most of our confusions have to deal with our own emotional baggage. We are humans, after all. And when something goes one way for a period of time that we think we understand – then it goes the other (that we don’t understand), we get frustrated.

 

That makes our collective challenge to see the macro market for what it is, as opposed to what we’d like it to be. This is not easy. And it gets a heck of a lot harder if we don’t do the longest of long-term #cycle work to contextualize the “de-couplings.”

 

I wrote about why I think USD continues lower from an intermediate-term TREND perspective yesterday (Commodities, Oil, Euro, etc. higher), but I didn’t spend any time on why it could strengthen after easier Fed policy and slower growth is baked into consensus.

 

The longer-term case for:

 

A) US Dollar Index to put in a long-term-higher-low at around 89-90 on the USD Index (EUR/USD 1.19-1.20)

B) Commodities (CRB) Index to put in a long-term-lower-high in the 248-253 range

C) Oil (WTI) to start to fade and fail at lower-long-term-highs of $69-71

 

Is as follows:

 

  1. Currency War (centrally planned FX devaluations to create growth and inflation) will see Japan, Europe, and the USA fail
  2. As each of the 3 majors sees growth and/or inflation slowing, they’ll take their turn with more of what has not worked
  3. In the end, the US has the best demographics of the 3, so they’ll have the best real growth of the 3 (and strongest currency)

 

The most important words in those 3 points are “they’ll take their turn.” In almost every macro strategist/economist piece there is either a complete disregard for that and/or a blind faith that real economic growth will be born out of these policies to begin with…

 

Look up the Wall Street Journal article this morning on US “Economist’s Expecting Recovery”:

 

  1. US economic growth to magically re-accelerate to +3.0% year-over-year in 2nd half of 2015
  2. US non-farm payrolls (NFP) to average 223,000 for the rest of 2015
  3. A “Strong Dollar” to weaken, which was the “headwind” to the US economy in Q1 2015

 

Meanwhile, the Hedgeye Predictive Tracking Algorithm has US GDP growth at +1.8% year-over-year growth in 2H 2015 and we could easily see non-farm payrolls at half of that expectation, in our most bullish case.

 

If I rattled off the Japanese and European “economist” expectations, the only ones that are in the area code of close are Japan’s. But that’s only because they have been forced to predict that none of this “growth” policy has worked for 20 years!

 

I realize this is the longest Early Look of the year. My apologies for that. If you’d like to ceaselessly stare at the S&P Futures, please refer to our risk ranges. Buy at the low-end (sell at the high-end) of the range, but please pay attention to TRENDs and TAILs too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.95-2.31%

SPX 2098-2129
RUT 1
Nikkei 19199-20024
VIX 12.11-15.67
EUR/USD 1.10-1.14
YEN 118.77-120.58
Oil (WTI) 55.67-61.60

 

Best of luck out there today and enjoy your weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ceaseless Attention - z 05.15.15 chart


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

May 15, 2015

May 15, 2015 - Slide1

 

BULLISH TRENDS

May 15, 2015 - Slide2

May 15, 2015 - Slide3

May 15, 2015 - Slide4

May 15, 2015 - Slide5

May 15, 2015 - Slide6

 

BEARISH TRENDS

May 15, 2015 - Slide7

May 15, 2015 - Slide8

May 15, 2015 - Slide9

May 15, 2015 - Slide10

 

 


MACAU LEGEND 1Q 2015 CONF CALL NOTES

Takeaway: Mass promotional pressures are intensifying on the Peninsula. Chairman David Chow thinks Galaxy/MSC will each get 150 additional tables.

CONF CALL

  • Negatively impacted across all 3 segments: VIP, premium mass and mass
    • No indication on when they will improve. Maybe no improvement until end of 2016.
  • New supply will add pressure on margins.
  • Junkets at Landmark are well capitalized
  • Will continue to expand self-run business at New Legend
  • Mass market:  more competition in rebates on the Peninsula
  • Do not expect to have any labor issues with construction of new projects
  • Harbourview hotel: 389 rooms (59 suites)
    • Only 50% rooms open in 1Q. Now all rooms open.
    • 80% occupancy in weekends/holidays - all rooms at non-comp
    • F&B trending nicely
  • Legend Palace Hotel: Waiting for construction license...expect hotel to be completed 2Q 2016
  • Legendale Hotel: 500 rooms, expect to be completed by end of 2017
  • Increased marketing/promotional costs for New Legend/Babylon which hurt margins in 1Q 2015.
  • Expect more business to come at Babylon (moved 20 VIP tables there but not in play yet as they need to hire people)
  • Want to grow direct VIP business

 

Q & A

  • David Chow:  300 table quota for 2015.  CoD and Galaxy Phase II may get 150 tables each.  Macau Legend asking for some tables too. Macau government want visitor diversification, less reliance on China. 
    • Cap on Mainland tourists? China government do not want to control people or markets. China govt will give more money to SMEs and the stock market. 
  • New revenues in 1Q:  HK$29m contribution from New Legend, HK$14m contribution from Harbourview hotel
  • One junket closure (worked exclusively at Macau Legend) (150 staff moved to Babylon): negative impact of HK$10m in 1Q. One-off expense in Harbourview hotel opening in 1Q.
  • Expect more tables will be available for the Babylon casino
  • Revisiting corporate costs in the business. Tightening their costs.
  • No change in capex targets for the hotel projects


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