USD, Oil and UST 10YR

Client Talking Points


A big 6-day move gave chart-chasers another round of whiplash, and now the bounce (in Euros +0.4%) vs USD. We think another round of Down Dollar can continue into this bomb of a GDP report on Friday (which the government is working on re-calibrating the calculation!).


WTI oil was up +1.4% on the USD arresting its ascent – get the Dollar right and you’ll get most things Commodities right. The CRB Index tested the low-end of our 221-227 risk range yesterday and bounced too. WTI oil has immediate-term upside to $61.34. 


We’re not sure how many more times perma Bond Bears can ring the ‘end of the world’ sirens, but that was a stiff 20 basis points drop from yet another lower-high for the 10YR Yield in early May – post yesterday’s -2.3% year-over-year Durable Good print,  we’re staying with the #LateCycle slowing call.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). Unless the Fed wants to show the world it has the power to go both ways on rates, we don’t think the Fed will ever be able to justify hiking interest rates. We expect an unarguable slowing of the current economic cycle by Q4 of this year. If you think domestic economic growth is slow now, just wait until the U.S. economy faces very difficult growth and inflation comps in the second half of 2015.


Housing got its mojo back in May, rebounding strongly over the last couple of weeks alongside the moderation in rates and ongoing strength in reported price/volume data. Below is a round-up of the data thus far in 2Q:

  • Housing Starts:  New 7-year high in the latest month
  • Purchase Applications (existing market):  2Q15 Tracking +14% QoQ and +13% YoY, on pace for best quarter in two years.
  • Pending Home Sales (existing market):  PHS are up an average of +11.8% year-over-year the last two months
  • New Home Sales (new market):  NHS are up an average of +22.5% year-over-year the last two months
  • HPI:  After a year of discrete deceleration in home price growth in 2014, 2nd derivative HPI has seen 3 consecutive months of acceleration through the latest March data.

The strength of the labor market continues to be a good indicator of our positioning in the current cycle:

  • Seasonally adjusted jobless claims came in at 274k last week vs. 270K est.
  • Despite the slight miss, the rolling 4-week SA figure dropped to 266.3k (lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266.3k) We all know what happened afterwards…..

Three for the Road


Finland's unemployment rate rises to 9.6% from 9.4%



Today is only one day in all the days that will ever be. But what will happen in all the other days that ever come can depend on what you do today.

Ernest Hemingway 


According to according to WPP and Millward Brown's annual "Brand Z" rankings Marlboro is the world’s 10th most valuable brand, commanding 43.8% of the U.S. cigarette market.

CHART OF THE DAY: #DemographicYields In Decline (35-54 Year-Olds)

Editor's Note: Below is an excerpt and chart from today's Morning Newsletter by Hedgeye CEO Keith McCullough. Click here to subscribe. 


CHART OF THE DAY: #DemographicYields In Decline (35-54 Year-Olds) - z blurb


CHART OF THE DAY: #DemographicYields In Decline (35-54 Year-Olds) - z 05.27.15 chart

Prepare To Win

“Everyone wants to win, but not everyone is willing to prepare to win.”

-Bobby Knight                       


While Knight had his issues (don’t we all?), he didn’t have as many as most do in implementing a winning #process. At Indiana, Bobby Knight won 902 NCAA games, 11 Big Ten Championships, and 2 National Championships.


The New York Rangers have that same quote on the wall of their dressing room at their training facility in Tarrytown, NY. After routing Tampa Bay last night, the Rangers won their 9th out of their last 10 games when facing Stanley Cup elimination.


Preparing to win starts with reducing mistakes. If you don’t make a habit of making big ones, you’ll take up the probability of your success. Whether you’re on the court, the ice, or in the market – winning happens when preparation meets opportunity.


Prepare To Win - z r


Back to the Global Macro Grind


Were you prepared for US #GrowthSlowing? How about another sharp reversal (to the downside) in rates? Yesterday’s US Durable Goods report slowed to -2.3% year-over-year. Bond Yields fell, hard. At 2.14% the 10yr US Treasury Yield is down YTD.


Getting up early and grinding through the #process isn’t a given but, for me at least, that’s the easy part. The hardest part is contextualizing the short-term within longer-term durations. That’s where my team and I spend the most time preparing.


While that ramp to 2.36% in the UST 10yr Bond Yield got my attention, it also prompted me to take a step back and remind myself of our most differentiated research views. To remind Longer-term Risk Managers on those, they are as follows:


  1. #DemographicYields – with the USA, Europe, Japan, and China all seeing their core consumption cohorts ((35-54 year-old populations decline on an annual basis - see Chart of The Day for the USA one – yes, it’s secular)
  2. #LateCycle – not to be mistaken with something early-to-mid cycle like #Housing, classic late cycle sectors of the US economy are in month 73 of an expansion but now slowing in rate of change terms (wages, labor, capex, earnings)
  3. Long-term Global Growth Expectations have been, and remain, too high – so central planners around the world are going to have to react to #GrowthSlowing with more cowbell which will, in due course, perpetuate volatility


That last part (volatility) is what crushes the un-prepared. As in the permas – the complacent. Those who bought both the 2000 and 2007 highs in the US Equity market thinking there was a “new normal” in volatility – or something like that.


It’s The Cycle stupid.


And remember, stupid is as stupid does (I am a knucklehead hockey player don’t forget) when it comes to believing that the Fed, ECB, BOJ, PBOC, etc. can “smooth” both cycles and the market volatilities they breed.


But, but, “Keith, housing is strengthening.” #Agreed. So why don’t you strap on your active manager pants and buy early-to-mid cycle recovery exposure to US #HousingAccelerating (our Q1 2015 Macro Theme) instead of freaking out when rates rise?


Of course consensus doesn’t want to buy Long-Bonds or Housing or REITS A) after it missed them into their 2015 highs and B) when everyone and their Bond Bear brother is still underwater betting on “rate liftoff.”


So don’t be consensus.


Do you think that Ranger Coach, Alain Vigneault, was consensus when he took former NHL MVP, Martin St. Louis, off the Rangers 1st line in an elimination game last night and replaced him with a rookie?


In my proprietary Money Puck model (I.e. in rate of change terms) J.T. Miller has been the best Ranger (relative to ice-time) in the playoffs. He had his opportunity to play on the big line last night and had 4 points. Huge game! #Timestamped


Back to the Fed, rates, and Housing… do you really think that Coach Yellen is going to thwart the only major component of the US economy that has bullish rate-of-change momentum with a pre-emptive rate hike?




Even the Fed isn’t that pro-cyclical when it comes to their job protection. I actually think they are going to celebrate the success of Devaluing The Dollar and keeping rates low (forever?) because, alongside the stock market, that’s all they have.


Back to beating the US stock market in 2015, if you really are paid to win (both relative and absolute) in this game I think you’ll continue to avoid making big mistakes by being either underweight or net short:


  1. The Financials (XLF) which are still -0.6% YTD
  2. Industrials (XLI) which are now chasing them as relative losers, -0.5% YTD


If you’re long both of those, you’re A) losing and B) betting on:


A)     US and Global Growth Accelerating (at the end of a cycle)

B)      The Fed raising rates in September


You don’t have to “bet” on random mean reversions like those if you have a repeatable #process that probability-weighs the accelerations and decelerations in both growth and inflation, across durations.


Everyone in this game wants to make money, but not everyone can win when consensus doesn’t.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.97-2.21%

SPX 2098-2121
VIX 12.95-14.37
EUR/USD 1.08-1.15
Oil (WTI) 57.36-61.34

Gold 1185-1212


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Prepare To Win - z 05.27.15 chart

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Aging Cycles

This note was originally published at 8am on May 13, 2015 for Hedgeye subscribers.

“Growing old is not upsetting; being perceived as old is.”

-Kenny Rogers


It’s hard to believe that legendary singer-songwriter, Kenny Rogers, is 76 years old. I can still remember my Dad playing his 8-tracks in our pickup-truck on the way to a day on the worksite.


I’m 40 years old now, and I’m pretty sure that if my old man told me to get up and dig 18 post holes tomorrow morning I’d pull every muscle in my back. There are millions of hard working men my age who can still bang that out, no problem.


While I agree that age is an attitude, there’s one component to it that we can’t control: #time. I’ve been to Chicago, NYC, CT, and Boston in the last 48 hours – and that’s all I’ve been talking about. This economic cycle is running out of time.


Aging Cycles - z time


Back to the Global Macro Grind


I’ve spent a lot of time on the road, debating with investors and … in the words of one of my favorite Rogers songs (The Gambler) “readin’ people’s faces… knowin’ what the cards were, by the way they held their eyes…”


And, while I am sure I mis-read plenty of people, I don’t think that’s one of my weaknesses. After Darius and I slap our current 99 slide-deck on the table, the investor can see all of our aces – and I’m not bad at hearing what they say back.


The best cards the buy-side plays on us are bottom-up ones. Almost every great stock picker has an ability to communicate a corrolary from the perspective of a company they either just talked to and/or are invested in.


The least impressive cards they show us are in quantifying what that means within the macro cycle. In fact, many aren’t focused on cyclical risk management, and by their investing nature don’t consider a business being “good” as bad.


While our #process is easier to understand by using today’s Chart of The Day (a sine curve), let me just make this macro Risk Manager point one more time in plain english:


  1. When #LateCycle macro indicators go from good to less good, that’s bad
  2. When #EarlyCycle macro indicators go from bad to less bad, that’s good


In other words, if a company’s revenues and earnings have been accelerating to their all-time highs, then start to slow, sequentially – that’s less good. And it will likely go from good to bad if the macro cycle turns, at the same time.


But, but, business is good and it’s a “great company.” Roger that. And only the super-duper-great ones can trump cyclical slow-downs. The time to buy a great company like Starbucks (SBUX) was in 2009, at $5.76/share (split adjusted). Not now.


By the time a company tells you things are slowing, markets have usually front-run them. This is called discounting the future, and most of you who have been at this for a while get that.


In Boston today, I’ll be focusing on the #LateCycle data showing things like:


  1. US Corporate Profits as a % of GDP being “past peak”
  2. How the beloved “Earnings” consensus trumpets peak #LateCycle too
  3. And how SP500 Operating Margins look, in context (hint: rolling off peak)


You did not want to be the bottom-up investor who missed the peak-and-rolls off the 2000 or 2007 peaks (in either margins or the earnings that manifested from them).  


You don’t want to be assigning peak multiples to cyclical companies whose revenue growth rates and margins have peaked and rolled either (hint: the stock gets more “expensive” on the way down, when EPS get cut).


Unless, of course, it’s “different this time”… (which people pitch to me all the time). If that’s your bottom-up call, just know that that perception is as timeless as economic cycles themselves.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.91-2.32%

SPX 2079-2117
RUT 1209-1244
VIX 13.03-15.79
USD 94.09-95.89
EUR/USD 1.09-1.13
Oil (WTI) 55.62-61.12


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Aging Cycles - z 05.13.15 chart

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Avian Flu Continues to Spread, Causing Major Food Manufacturers and Restaurants to Look Elsewhere

Takeaway: USDA reported that the avian flu has forced the extermination of roughly 41 million infected birds.


As of the last detection period on 5/21/15, the USDA reported that the avian flu has forced the extermination of roughly 41 million infected birds. Iowa, the largest egg producing state is also the hardest hit by the flu with roughly 27 million birds affected, 5.7 million at one farm alone. This amount of loss has started to affect egg prices, and manufacturers are starting to rethink their supply chain and ingredient sourcing.


The big question is, how long will this last? The U.S. EPA sets strict guidelines on the disposal of infected birds, and states that it will take roughly 3 months from disposal to cleaning the facility. Then the birds themselves take 4-5 months to get to size at which they begin to lay eggs.  So, some of this facilities won’t be able to get back in full production mode for at least 7 months.  I would say that is an optimistic timetable given it doesn’t take into account the risk of infection re-occurring.  



Hampton Creek a company that focuses on plant-based egg alternatives is supplying General Mills (GIS) and many other food suppliers with their powdered egg substitute. A product Josh Tetrick, CEO of Hampton Creek claims is cheaper, healthier and far better for the environment than traditional eggs. Josh was recently quoted in saying that about a dozen major companies have contacted him trying to get their hands on Hampton Creek products.


Archer Daniels Midland (ADM) has also received many inquires about its plant-based egg substitute.


This is not an easy switch for food manufacturers, as they switch ingredients it requires testing, recipe changes and label changes, all of which take time and cost money.



U.S. based companies have also started to look abroad to meet their egg needs. The strong dollar is making it possible for U.S. based manufacturers to look over to Europe to find alternatives. This has never been an option before given how efficient the U.S. is at making eggs.



One of the biggest winners in all of this is Hampton Creek, who's product line began with egg-free mayonnaise and has begun to branch out into egg free baked goods and various mixes. Josh Tetrick CEO stated, “We are prepared for this moment…and we are going to take advantage of it…this is a moment to make this dang food system better.”


As we previously reported, Post Holdings (POST) has stated, “…the ongoing AI outbreak constitutes a force majeure event in respect to its Michael Foods egg business…” The flu will be at least a $20 million impact to them, and we expect this number to rise as a large number of company owned hens were infected in Nebraska after this number was reported.


Spokesperson for IHOP a unit of DineEquity (DIN) stated, “At present, we have not had any issues regarding the availability of eggs for our restaurants, but like the rest of the industry, we continue to monitor this situation closely.”


McDonald’s (MCD) spokeswoman spoke of her company’s preparedness, “we proactively developed contingent supply plans, and we do not anticipate an impact in our ability to supply eggs to our restaurants and serve our customers.”


Dunkin’ Brands (DNKN) said it will let franchisees decide whether to swallow cost increases or pass them on to customers.



Avian Flu Continues to Spread, Causing Major Food Manufacturers and Restaurants to Look Elsewhere  - Avian Flu Chart 2

Source: Restaurant Research

Daily Trading Ranges

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