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Constructively Dissatisfied

This note was originally published at 8am on May 18, 2015 for Hedgeye subscribers.

“You are, in a word, constructively-dissatisfied.”

-Jim Casey

 

After editing the founder of UPS’s famous business-building quote I am, in two words, constructively dissatisfied this morning. It’s the last citation I wanted to highlight for you from one of the better books I’ve read this year, Learn or Die, by Edward Hess.

 

Per Casey via Hess, here’s the UPS DNA: “Learn, Improve and Adapt” and there are “four primary strands: 1. Mutual Accountability 2. Constructive Dissatisfaction 3. Process Improvement and 4. Employee Centric Culture.” (pg 180)

 

Casey’s people-model isn’t perfect. No one’s is. But it certainly worked for him and his team. For me, it’s transparency, accountability, and trust. And I can’t give lip-service to that. My teammates and I need to live that out loud, every day.

 

Constructively Dissatisfied - ztree

 

Back to the Global Macro Grind

 

Let’s say I was constructively dissatisfied with how last week went for Global Macro markets. Constructive because I think we made the right research pivot on Dollar Down, Commodities Up. Dissatisfied because devaluing the Dollar isn’t the answer for America’s stagnating economy.

 

On the heels of an ugly Retail Sales slow-down to 0.9% year-over-year growth (and the worst US Consumer Confidence report of the year via the University of Michigan), this is what the big macro stuff did last week:

 

  1. US Dollar Index -1.8% on the week (and now -5.3% in the last month)
  2. Euro (vs. USD) +2.3% on the week (and now +7.2% in the last month)
  3. Commodities (CRB Index) +1.0% on the week (+6.9% in the last month)
  4. Oil (WTI) +0.5% on the week to $59.69 (+15% in the last month)
  5. Gold +3.1% on the week to $1225

 

That last one (Gold) was the best performing of the Dollar Down inverse-correlation-love lot … primarily because there was this extra-cherry on top that Gold loves more than anything else. It’s called Down Rates.

 

Down Rates finally did what they usually do and correlated positively with Down Dollar on slowing US economic data, with the 10yr US Treasury Yield dropping from an intra-week-freak-out-high of 2.36% to 2.14% as economic gravity won, again.

 

On Friday, the Down Dollar, Down Rates move looked a lot like 2011 all over again. Remember that? Markets did. Financials (XLF) -0.4% on the day vs. Utilities (XLU) +1.3%. It’s the Fed is going to stay Lower-For-Longer move that Hilsenrath confirmed in the WSJ this morning.

 

Back to the week-over-week moves and how those synched in the land of Global Equities:

 

  1. US Financials (XLF) were down in an up tape, -0.2% on the week, staying in the red for the YTD at -0.1%
  2. US Healthcare (XLV) continued to outperform beta, +1.1% on the week to +8.6% YTD
  3. European Stocks (EuroStoxx600) flashed another bearish divergence vs Global Equities -0.9% wk-over-wk
  4. Germany’s DAX lagged its European continent bogey, falling -2.2% on the week
  5. Emerging Market Stocks (MSCI Index) flagged another bullish divergence vs Global Equities +0.8% on the week

 

Yep, Down Dollar = Up Euro à Emerging Market Equities beat European Equities.

 

If you didn’t pick-up on the year I called out, let me hammer the num-lock pad on that one more time: 2011. That was a big year for both Gold and Emerging Markets. It was also a very bad year for Europe and US Financials.

 

2011 was the year of stagflation being priced into US Federal Reserve Policy. It was the year where the initial Quantitative Easings didn’t provide the centrally planned elixir of a real US growth “recovery” … and The Bernank had to deliver more QE Cowbell.

 

As markets front-ran the next QE, the US Dollar burnt to a crisp (not mentioned once by big Ben in any of his statements, but it was a 40 year low) and Gold hit its all-time highs. US interest rates hit all-time lows and the Financials posted their widest losses vs. Utilities, ever.

 

Constructively dissatisfied with that?

 

If you’re a money manager, maybe not. “Fighting” an easier Fed (read: pushing out the dots, from here, would be an easing, on the margin) has proven to be elusive for most who have expressed their bearishness in 2009-2015 Zero Hedge Bear terms.

 

But if you’re looking for mutual accountability between policy makers and economic outcomes, you can UPS that request in the mail and kiss it goodbye. Until we have real leadership in this country that gets the difference, in real Dollars, it’s The People’s purchasing power that loses.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.95-2.22%

SPX 2100-2131
RUT 1211-1251
USD 92.84-94.44
EUR/USD 1.10-1.14
Oil (WTI) 55.97-61.57

Gold 1198-1231

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Constructively Dissatisfied - z 05.18.15 chart


CHART OF THE DAY: Consensus Calling for 3% #GDP (Seriously?)

Editor's Note: The chart and excerpt below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Get ahead of consensus each morning and subscribe today. 

 

CHART OF THE DAY: Consensus Calling for 3% #GDP (Seriously?) - z 06.01.15 chart

 

...In other words, consensus doesn’t believe that the US government can make up another version of GDP fast enough and has expressed #GrowthSlowing explicitly by being A) less bearish on bonds and B) more bearish on stocks.

 

And if you’re sitting there saying to yourself that this is actually bullish for both stocks and bonds, you’re probably right. All you need is one more bad jobs report and both the Fed and US government is going to guide you to believing that sucking is the new bull case.


Sucking & Guiding

“We are here to guide the public opinion, not to discuss it.”

-Napoleon Bonaparte

 

By evidence of both his actions and the aforementioned quote, by the time of Napoleon’s self-organized coronation at Notre-Dame on December 2nd, 1804 he wasn’t the same man of The People. Sadly, with most things political power, some level of liberty was lost.

 

It wasn’t always that way in France. After replacing the aristocracy (The Directory), Napoleon introduced “nobility based on merit – one in which 20% came from the working classes; 58% from the middle classes…” (Napoleon, A Life – pg 465)

 

Two hundred years later, America is much more like France that it has ever been. After a negative -0.7% GDP report on Friday, both the US government and the un-elected Federal Reserve will be guiding mainstream media opinion this morning, not discussing it.

 

Sucking & Guiding - GDP cartoon 05.29.2015

 

Back to the Global Macro Grind

 

So let’s discuss why the US economic data continues to slow here in 2015. The government has not yet been able to centrally plan away the calendar. It’s June, and it’s not snowing anymore.

 

Just to get you caught up on the Q2 (non-weather adjusted) US economic data:

 

  1. US Retail Sales (which represents almost 25% of the GDP report) slowed to 0.9% year-over-year in April
  2. US Durable Goods slowed to -2.3% year-over-year in April
  3. The Chicago PMI got wrecked (that’s a May print) to 46.2 vs. 52.3 in April

 

To be fair, Chicago’s not all about the Blackhawks right now. The windy city’s debt just got downgraded to junk. And, to be doubly fair, the US Housing data (pending home sales reported last week +3.4% in April) has been as good as the #LateCycle data = bad.

 

Yeah, being long #LateCycle stuff like inflation expectations and industrial stocks has really sucked for the past few weeks. Then again, that asset allocation has really really really sucked since, well, around this time last year.

 

Even though the US Dollar slowed its bounce on the bad US GDP report on Friday, bigger picture, it was up for the 2nd straight week, +0.9% to +7.4% for 2015 YTD – and here’s what else happened in macro markets on that:

 

  1. Burning Euros and Yens dropped -0.2% and -2.1%, respectively (YTD = Euro -9.2%, Yen -3.6%)
  2. Commodities (CRB Index) was -1.1% on the week to -2.9% YTD
  3. Energy (XLE) and Industrial (XLI) stocks led USA losers -1.0% and -1.9% wk-over-wk, respectively

 

Did I say being long the Industrials during a #LateCycle slowdown sucked? Yep. Big time. Why on earth would you be long anything that is trading on peak-margins as A) the cycle is clearly slowing and B) the US Dollar is strengthening?

 

To get the US Dollar and Rates right, you do have to get the rate of change in US growth (and its expectations) right. But you can’t ignore what all of these other slowing global economies are seeing from a currency devaluation perspective all the while.

 

The Brazilian Real, for example, lost another 2.7% of its value last week (it’s -16.6% YTD vs #StrongDollar) and the flailing Russian Ruble had a run of the mill -4.5% currency valuation draw-down.

 

Right. Right. #LetsNotDiscussThis

 

Instead, let’s discuss what everyone and their revisionist macro brother was chasing in terms of a narrative (when the German Bund Yield tapped 0.75% three weeks ago; this a.m. = 0.49%) – that “inflation is back and accelerating”, or something like that…

 

  1. Break-evens (5yr US) dropped 8 basis points and are now down -13bps in the last month to a paltry 1.61%
  2. US 10yr Yield fell another 9 basis points on the week to 2.12% (another -10% correction, on bond yield terms)

 

I know, I know. Do not tell the Bond Bears that they got plugged calling the mother-of-all-tops in the Long Bond (again). We’re having too much fun front-running this epic mismatch between #GrowthAccelerating expectations and economic reality.

 

From a sentiment perspective, at least the shorts have been covering their Long Bond positions – here’s the latest Consensus Macro report, in non-Commercial CFTC futures/options contract terms:

 

  1. Long-Term Treasury (10yr) net SHORT position has been cut in half from -163,965 (6 month avg) to -81,045
  2. US Equities (SP500 index + Emini) net SHORT position has shot up to -56,264 from a +26,103 6 avg (6 months)

 

In other words, consensus doesn’t believe that the US government can make up another version of GDP fast enough and has expressed #GrowthSlowing explicitly by being A) less bearish on bonds and B) more bearish on stocks.

 

And if you’re sitting there saying to yourself that this is actually bullish for both stocks and bonds, you’re probably right. All you need is one more bad jobs report and both the Fed and US government is going to guide you to believing that sucking is the new bull case.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.99-2.19%

SPX 2101-2122
USD 96.02-98.39
EUR/USD 1.07-1.13
Oil (WTI) 56.99-61.31

Gold 1173-1200

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sucking & Guiding - z 06.01.15 chart


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The Macro Show Replay | June 1, 2015

 


PENN: ADDING TO BEST IDEAS

Takeaway: A true growth story in regional gaming, finally, ripe with catalysts, same store and new unit growth, and accelerating cash flow

A CALL TO ACTION

We’re adding PENN to the Hedgeye Best Ideas list as a long.  We see stability in regional gaming revenues over the next several months providing some much needed earnings visibility.  PENN maintains the best new unit growth story in domestic gaming with the opening of the Plainridge casino in Massachusetts in June and the Jamul casino in Q2 2016.  Both properties should well exceed current Street estimates for win per slot and EBITDA.  PENN has a proven track record as the best regional casino operator and recently proved its prowess at successfully opening racinos (casinos at racetracks) with estimate beating Dayton and Mahoning commencing slot operations last year.

 

The upshot: if we're close to being right on our significantly higher 2015 and 2016 EPS projections ($0.60 vs $0.47 and $1.00 vs $0.74, respectively), PENN has a lot of upside.

 

PENN: ADDING TO BEST IDEAS - 6 1 2015 6 57 09 AM


June 1, 2015

June 1, 2015 - Slide1

 

BULLISH TRENDS

June 1, 2015 - Slide2

June 1, 2015 - Slide3

June 1, 2015 - Slide4

June 1, 2015 - Slide5

June 1, 2015 - Slide6

June 1, 2015 - Slide7

June 1, 2015 - Slide8 

 

BEARISH TRENDS

 

June 1, 2015 - Slide9

June 1, 2015 - Slide10

June 1, 2015 - Slide11
June 1, 2015 - Slide12

June 1, 2015 - Slide13


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