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Burning Yen

Client Talking Points

YEN

Yet another down day for the Japanese Yen to new year-to-date lows and the Nikkei ramp on that remains epic – Japanese stocks are up for the 10th day in a row (that hasn’t happened in 27 years) to +18.7% year-to-date vs SPX +3.1%.

YIELDS

Global Bond Yields have returned to the long-term bond investor TREND of falling as Global Growth Expectations slow. The Swiss 10YR is down -2 basis points back to -0.06% and the German 10YR is down -3 basis points to 0.53%. We suggest you stay with those Long Bonds in the U.S. at 2.14%. 

CHINA

What’s a -6.5% down day at the Shanghai Composite Casino amongst friends? The Chinese will definitely need another round of rumoring tonight – that’s all there is to do as China’s population gets older at its fastest rate, ever #GrowthSlowing.

Asset Allocation

CASH 46% US EQUITIES 5%
INTL EQUITIES 10% COMMODITIES 13%
FIXED INCOME 24% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
VNQ

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.

ITB

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.
TLT

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

TWEET OF THE DAY

GOLD: immediate-term upside in my risk range to $1209/oz

@KeithMcCullough

QUOTE OF THE DAY

If you cannot do great things, do small things in a great way.

Napoleon Hill 

STAT OF THE DAY

2 billion videos are watched daily on Snapchat by 13 to 34 year olds (according to Snapchat).

 

The Macro Show - CLICK HERE to watch today's edition at 8:30am ET.


CHART OF THE DAY: A Century of Economic Cycles

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

 

CHART OF THE DAY: A Century of Economic Cycles - z 05.28.15 chart

Click image to enlarge

 

...Tops, as you know, are processes, not points. So are cycles. And you can call me crazy staying in certain markets for another 3 weeks. You can call me lazy if I go to 65% Cash after that too.

 

But this isn’t my first bull/bear cycle battle and I’m thinking that if these keep coming around every 6-7 years, I have few more good fights with long-term “growth” consensus left in me.

 


Lazy or Crazy?

“What a pity the man wasn’t lazy.”

-Talleyrand

 

That’s what a “theologist” who spent his time politicking instead of battling on the front-lines had to say about a General (Napoleon) who fought 60 wars (only lost 7) and died by the age of 51.

 

When battling it out in macro market moves like these every morning, I don’t think the first word that comes to mind in describing me would be lazy. That said, I think a good case can be made that if I keep doing this I could go crazy.

 

Darius Dale and I spent all of yesterday (and into the early eve at a dinner) debating Global Macro issues with Institutional Investors in New York City. It was a mental grind. And we liked it.

 

Lazy or Crazy? - macro call cartoon

Grab some coffee and click here to watch Keith on The Macro Show at 8:30am ET

 

Back to the Global Macro Grind

 

Of the many strategies we’ve heard from investors, the one we hear about the least is the laziest one of all – i.e. the do nothing strategy. As in literally buy everything right now and then go away for the summer and don’t touch your portfolio.

 

I guess the other thing you could do is sell everything and go away for a while too. Is that crazy? Or is that just not an option? At the end of the day, the art of managing money is having moneys to manage. Being “fully invested” means we get to go crazy, together.

 

#fun

 

So let’s get a little nuts this morning and strap on the 3 week portfolio pants ahead of the Fed meeting on June 17th:

 

  1. Don’t buy more Long-term Bonds (you should have been buying them, lower, for the last 6 weeks)
  2. Buy Gold (because we like to buy low, and Gold hasn’t done anything but trade in a thick chop for 6 weeks)
  3. Buy US stocks that look like Bonds (Yield Chasing proxies like Utilities, REITS, etc.) that have corrected in 2015

 

I know. I’m the former 2 and 20 guy who has this crazy strategy of buying on red and selling on green. So let’s get out there and sell some of those Japanese stocks that we have in the International Equity exposure now that they have been up for 10 straight days.

 

After 10 days in a row, do you buy or sell? In Japan, that hasn’t happened in 27 years so I don’t think it’s an entirely crazy idea to book some gains; particularly since the aforementioned 3-week-portfolio implies another US Dollar selloff.

 

Down Dollar? Pardon? Yep. When the Dollar signals immediate-term overbought, the current macro playbook says:

 

  1. Burning Japanese Yens are usually signaling oversold
  2. The Weimar Nikkei is usually signaling immediate-term overbought

 

That is all. So simple a guy who has taken an 80 mph slap shot off the top of the head (with no bucket on) can do it. #stitches

 

If you don’t like my playoff hockey shtick, and you’re more into the “long-term” thoughtful thing … and you want to do nothing into Friday’s GDP slowing report and/or next week’s potential train wreck of a US jobs report, that is up to you.

 

Just be aware that the longer-term call (let’s say the next 6-12 months) is probably the easiest it’s been to make (relative to the short-term call) since the summer of 2007.

 

Remember that?

 

Yep, that’s the last time that my model started to signal #LateCycle for the US employment and consumption cycle. And the #LateCycle call before that was in the summer of 2000.

 

Wanna get really nuts? Let’s go all cyclical on the pro-cyclical “jobs are good” consensus:

 

  1. The last time US Jobless Claims were this “good” (on a 4 week rolling avg) was April 15 of the year 2000
  2. The SP500 imploded from 1356 to 776 (-43%) to the October 2002 cycle low
  3. The Nasdaq crashed from 3321 to  1114 (-66%) to that same October 2002 low

 

#Sweet

 

I guess being lazy on the cycle work would be classified as big battles lost by the perma bulls who bought the 2000 and 2007 US economic cycle tops.

 

Tops, as you know, are processes, not points. So are cycles. And you can call me crazy staying in certain markets for another 3 weeks. You can call me lazy if I go to 65% Cash after that too.

 

But this isn’t my first bull/bear cycle battle and I’m thinking that if these keep coming around every 6-7 years, I have few more good fights with long-term “growth” consensus left in me.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND view in brackets):

 

UST 10yr Yield 1.98-2.20% (bearish)

SPX 2108-2139 (bullish)
DAX 119 (neutral)
Nikkei 20081-20683 (bullish)
VIX 12.75-14.45 (bullish)
USD 95.05-98.33 (bullish)
EUR/USD 1.08-1.15 (bearish)
YEN 121.09-124.16 (bearish)
Oil (WTI) 57.09-61.40 (bullish)

Natural Gas 2.80-3.10 (bullish)

Gold 1180-1209 (bullish)
Copper 2.72-2.81 (neutral)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Click image to enlarge

Lazy or Crazy? - z 05.28.15 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 78.51%

Avian Flu Update After Talking with Industry Professionals

Takeaway: Just when we thought AI was taking a break another outbreak was reported.

The Avian Flu (AI) has been wreaking havoc on the egg and poultry industry this year.  As I was researching our previous note on AI on Tuesday (printed on 5/27/15) it was looking that poultry farmers were getting a break with no reported infections for five days.  But that optimism was short lived as another outbreak was detected in Nebraska and Iowa, affecting 293,200 chickens and 20,700 turkeys respectively in each state.

 

Wholesale egg prices continue to rise, nearly doubling versus pre-AI prices. As we previously reported companies are looking elsewhere for eggs, mainly international and alternative egg-substitutes.

 

INTERNATIONAL SUPPLY

Importing eggs is more complicated than it seems, and given the U.S.  has always been an efficient producer, few countries are pre-approved for egg importing. French and Dutch farmers are acting fast to try to take advantage of the U.S. AI outbreak, working with their embassy’s in the U.S. to expedite the approval process.

 

You may be thinking, what is the difference between a U.S. and a European egg? When you travel to Europe you will notice in a majority of supermarkets that the eggs are not refrigerated, while in the U.S. they are always refrigerated.  This is because eggs have a natural protectant on them called a cuticle, which acts as a shield to keep bacteria out. In Europe they are required to not clean the eggs and leave the cuticle intact, while in the U.S. all eggs must be washed in 90⁰F water and sprayed with sanitizer. Given this difference there will have to be a change in process to export the eggs to the U.S. but European companies want to take advantage of this opportunity.

 

After speaking with industry professionals we have determined that the egg prices in Europe are usually priced at about a 20% premium in a non-AI environment, and that to do all the additional cleaning and ship the fresh eggs across the pond would cost an additional 20% on top of that.  We have provided our math in the below chart for a visual:

 

Avian Flu Update After Talking with Industry Professionals - Avian Flu Chart 1 5.28.15

 

COMPANY UPDATES

POST provided an update on the recent AI outbreak that is affecting their business.  They are now stating that a third of company owned chickens in Nebraska has tested positive for AI.  Bringing the total affected supply to ~35% of the company’s volume commitments.  Post management has determined that this amount of loss constitutes a force majeure event for the Michael Foods egg business.  They have started to take drastic measures to minimize the financial impact such as, discontinuation of certain products and price increases. 

 

HRL has stated that their Jennie-O turkey supply has been greatly impacted by the AI outbreak in Minnesota and Wisconsin and could inhibit their ability to fully meet orders, and will assuredly raise prices.  Thanksgiving feels far away but when you calculate the time to clean facilities and get birds to a mature size, it doesn’t seem possible that they will be able to fully rebuild their supply.

 

OUTLOOK

As the summer approaches we will begin to see a slow down as the AI and all flu’s for that matter don’t survive well in high temperatures.  One concern is when migrating birds from northern states start to fly back south in the fall we may have a relapse of AI, but not to the same extent we are seeing now.


The Macro Show Replay | May 28, 2015

 


May 28, 2015

May 28, 2015 - Slide1

 

BULLISH TRENDS

May 28, 2015 - Slide2

May 28, 2015 - Slide3

May 28, 2015 - Slide4

May 28, 2015 - Slide5

May 28, 2015 - Slide6

May 28, 2015 - Slide7

May 28, 2015 - Slide8

 

BEARISH TRENDS

 

May 28, 2015 - Slide9

May 28, 2015 - Slide10

May 28, 2015 - Slide11


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