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Another Head-Fake?

Client Talking Points

YIELDS

German 10YR Bund Yields just ramped +20%, in a day – yes, from 0.49% to 0.59% is “from low levels”, but that’s not the point – rate of change matters most in macro and this move moved the entire FICC complex, dropping SPX futures fast too. We highly doubt ECB President Mario Draghi lets this manifest into a breakout in Yields at the ECB meeting tomorrow; fade it.

OIL

Yields Up, Euro Up, Dollar Down = Oil Up. WTI is up +1.3% this morning re-testing $61 – we still like Oil and Gold on the long side ahead of what could be a bad U.S. jobs report Friday (which could also drop 10YR UST back towards 1.99%). 

INDIA

India cut rates by 25 basis points to 7.25% and the BSE Sensex drops -1.6% on that! How do you like us now central planning fans? Australia down -1.7% is having a tough time convincing people that rate cuts and easing are the path to economic prosperity too. India continues to signal bearish TREND @Hedgeye with Global #GrowthSlowing.

Asset Allocation

CASH 47% US EQUITIES 4%
INTL EQUITIES 10% COMMODITIES 13%
FIXED INCOME 23% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
PENN

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.

ITB

Housing went 3 for 3 as the Trinity of Fundamental Data Points released in the latest week continued to reflect accelerating rates of improvement across both the New and Existing markets. New Home Sales in April rose +6.8% month-over-month to +517K.  More notably, sales were up a remarkable 26% on a year-over-year basis as NHS re-converged back to the trend in New Home construction. Pending Home Sales rose +3.4% sequentially in April, accelerating to +14% year-over-year with the Index making a new 101-month high.  Pending Home Sales represent signed contract activity and are a historically strong lead indicator of Existing Home Sales.  The MBA’s weekly Mortgage Purchase Application Index re-captured the 200-level, rising +1.2% week-over-week and accelerating +250bps sequentially to +13.1% year-over-year.  

TLT

We believe the U.S. economy is past peak in rate-of-change terms and sliding down the slope to an eventual cliff (i.e. recession). That’s our call and we’re sticking to it. Friday’s negative revision takes our full-year estimate for real GDP growth down to +2% (from +2.3% prior). Both the Fed and Street are up at +2.5%, both of which continue to careen down from perpetual expectations of rainbows-and-puppy dogs (i.e. 3-plus percent growth) earlier this year. We reiterate our call to be long of long-duration in its many forms:  TLT, VNQ, EDV, and GLD (gold has historically performed well in down-dollar and down-interest rate environments and we think the June 17th FOMC statement has a high probability of being dovish and dollar-bearish).

Three for the Road

TWEET OF THE DAY

NEW VIDEO McCullough: Front-Run the Sell-Side Herd and Get Paid https://app.hedgeye.com/insights/44401-mccullough-front-run-the-sell-side-herd-and-get-paid … via @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

Don't watch the clock; do what it does. Keep going.

Sam Levenson

STAT OF THE DAY

The Chinese Shanghai Composite Index continues,  up +1.7% overnight to up +6.4% in 2 days, +52.1% year-to-date.


Invite | Avian Flu ― Thought Leader Call with Dr. Thomas Elam

Please join us on June 3, 2015 at 11:00am EST for a call discussing the Avian Flu (AI) and the effect it is having on the food and restaurant industries with Dr. Thomas Elam.

 

AI has reached epidemic levels and as we have been keeping you updated, we are bringing in a thought leader to speak to the effects AI is having on the food and restaurant industry. 

 

Dr. Thomas Elam, President of FarmEcon LLC will be meeting with us to discuss the topic and provide his insights that have been built up over his 40 year career. Dr. Elam has been recognized for his knowledge on the industry in numerous publications and written in-depth research on the topic. Dr. Elam brings a real business mind to the conversation, having been a professor of both economics and statistics. His education includes a BS degree in Economics with a minor in mathematics from Union University, Jackson, TN (1969), he also earned MS (1971) and PhD (1973) degrees in Agricultural Economics from the University of Tennessee, Knoxville.

 

He retired in 2003 and established a consulting practice, FarmEcon LLC. In November, 2006 Dr. Elam was recognized by Poultry USA magazine as one of the top 20 consultants to the U.S. poultry sector. Since 2003 Dr. Elam has worked on over 300 client projects, made over 100 personal appearances, and authored numerous articles on livestock, poultry and grain outlook.

 

Eggs are an important input for many products besides just table eggs, such as, baked goods, pasta, chocolate, ice cream, cosmetics, etc.

 

There are many companies currently being affected by AI:

 

Positively affected: GIS, K, ADM, CALM


Negatively affected: MCD, PNRA, POST, HRL, TSN, DIN, DNKN, NESN, BDBD


In this call we will discuss what losing 25% of your breaking eggs supply will do to food and restaurant industry supply chains and when it will make an impact on the bottom line.

 

CALL DETAILS:

US Toll Free:

US Toll:

Confirmation Number: 39899343

Materials: Coming Soon

 


Invite | Avian Flu ― Thought Leader Call with Dr. Thomas Elam

Please join us on June 3, 2015 at 11:00am EST for a call discussing the Avian Flu (AI) and the effect it is having on the food and restaurant industries with Dr. Thomas Elam.

 

AI has reached epidemic levels and as we have been keeping you updated, we are bringing in a thought leader to speak to the effects AI is having on the food and restaurant industry. 

 

Dr. Thomas Elam, President of FarmEcon LLC will be meeting with us to discuss the topic and provide his insights that have been built up over his 40 year career. Dr. Elam has been recognized for his knowledge on the industry in numerous publications and written in-depth research on the topic. Dr. Elam brings a real business mind to the conversation, having been a professor of both economics and statistics. His education includes a BS degree in Economics with a minor in mathematics from Union University, Jackson, TN (1969), he also earned MS (1971) and PhD (1973) degrees in Agricultural Economics from the University of Tennessee, Knoxville.

 

He retired in 2003 and established a consulting practice, FarmEcon LLC. In November, 2006 Dr. Elam was recognized by Poultry USA magazine as one of the top 20 consultants to the U.S. poultry sector. Since 2003 Dr. Elam has worked on over 300 client projects, made over 100 personal appearances, and authored numerous articles on livestock, poultry and grain outlook.

 

Eggs are an important input for many products besides just table eggs, such as, baked goods, pasta, chocolate, ice cream, cosmetics, etc.

 

There are many companies currently being affected by AI:

 

Positively affected: GIS, K, ADM, CALM


Negatively affected: MCD, PNRA, POST, HRL, TSN, DIN, DNKN, NESN, BDBD


In this call we will discuss what losing 25% of your breaking eggs supply will do to food and restaurant industry supply chains and when it will make an impact on the bottom line.

 

CALL DETAILS:

US Toll Free:

US Toll:

Confirmation Number: 39899343

Materials: Coming Soon

 


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

EVENT: YELP SHORT Best Idea Update Call

Takeaway: Join us on Thursday, June 4th at 1:00pm EDT as we update our bearish thesis and assess the M&A landscape.

We will be hosting an update call to their SHORT Yelp (YELP) Best Idea.  YELP's business model is unsustainable, and is already breaking down.  Further, a new major red flag has emerged, which we believe is what prompted YELP to shop itself.  We don’t believe YELP will find a buyer, but we obviously can’t rule it out either.

    

Join us on Thursday, June 4th at 1:00pm EDT as we update our bearish thesis and why we see an additional 35%+ downside from here.

 

 

KEY TOPICS WILL INCLUDE  

  • Extreme Attrition Rate: Overwhelming majority of customers are churning off annually.
  • Insufficient TAM: YP.com is not the low-hanging fruit, it's a pipe dream.
  • New Major Red Flag: The story is going to turn much sooner, and get much uglier, than we initially expected
  • Is There a Buyer? Assessing the M&A landscape in terms of both ability and willingness of potential suitors

 

Hesham Shaaban, CFA

@HedgeyeInternet 

 


CHART OF THE DAY: Policy Mistakes (Remember Jean-Claude? No, Not Van Damme)

Editor's Note: The chart and excerpt below are from today's Morning Newsletter written by Hedgeye macro analyst Darius Dale. Click here to learn more about how you can subscribe. 

 

...History has spoken loudly for Mr. Greenspan with respect to determining whether or not the Federal Reserve’s actions (or lack thereof in many cases) contributed to the most severe financial crisis since the Great Depression. And while they may not readily admit it, policymakers – like investors – do indeed make mistakes.

 

CHART OF THE DAY: Policy Mistakes (Remember Jean-Claude? No, Not Van Damme) - z Chart of the Day

 


Policy Mistakes

“Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

-Alan Greenspan

 

In a solemn testimony to Congress way back in October 2008, former FOMC Chairman Alan Greenspan had that to say in response to the following question from Representative Henry A. Waxman (D-CA), which was in reference to the low interest rates and lax regulatory oversight of the securitization market which perpetuated the housing bubble:

 

“Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

 

History has spoken loudly for Mr. Greenspan with respect to determining whether or not the Federal Reserve’s actions (or lack thereof in many cases) contributed to the most severe financial crisis since the Great Depression. And while they may not readily admit it, policymakers – like investors – do indeed make mistakes (see: Chart of the Day below).

 

Policy Mistakes - z g1

 

Back to the Global Macro Grind

 

If you’re in the camp that a rate hike(s) would be a dangerous mistake(s) for the FOMC to make at any point over the intermediate term, then you, like us, are definitely not in line with Wall St. consensus which came into the year expecting ~3% real GDP growth, ~2% core inflation and ~3-4% annual wage growth – for the sixth straight year, might we add.

 

If you’re in the aforementioned camp, you probably also agree with our lower-for-longer thesis on interest rates and expect the yield curve to flatten [perhaps materially] if the Fed embarks on what it believes to be a “policy normalization” cycle.

 

Recall that the 10Y Treasury Yield rallied +69bps in the three months preceding the first of 17 rate hikes back in June ’04. It proceeded to retrace all but 2bps of that rally over the NTM.

 

We bracketed “perhaps materially” earlier to highlight our #LateCycle Slowdown theme. As recently detailed in an institutional research note, trends across a variety of economic indicators put the U.S. economy roughly ~12 months away from recession.

 

While that may sound like good news to investors, our predictive tracking algorithm has YoY real GDP growth slowing throughout the balance of 2015. In lay terms, we believe the U.S. economy is past peak in rate-of-change terms and, much like in early 2007, the consistent and fervent missing of expectations for economic data appears set to continue on a trending basis throughout this period.

 

We underline “on a trending basis” to give a sincere golf clap for yesterday’s MAY ISM Manufacturing and APR Construction Spending beats. Additionally, the details of both reports were quite good on an absolute basis.

 

In the interest of not having perma bond bears tune us out, we’ll just ignore yesterday’s miss in Real PCE growth. Who cares about household consumption anyway? It’s only 69% of GDP.

 

For what it’s worth, the Atlanta Fed’s “GDPNow” model revised down its estimate for real consumption growth in 2Q by -50bps to +2.1% on yesterday’s print, but, again, I digress…

 

Another very important reason we consider it a mistake for the Fed to embark on what we believe to be a misguided “policy normalization” cycle is the current entropy of domestic and global demographic trends. Without recreating the wheel, here is the CliffsNotes version of our deep dive on this subject:

 

  1. Aging has a statistically significant inverse relationship to both real GDP growth and inflation.
  2. Both the U.S. and global economy are aging at their fastest rates ever. In the U.S.’s case, the rate of change in aging itself is +172% faster in the five years ended 2017 than it was in the five years ended 2011.
  3. The flip side to accelerated domestic and global aging is slowing growth – and even outright contraction – in the world’s core consumption demographic, which, both empirically and theoretically, happens to be the 35-54 year-old population. In the U.S. in particular, the YoY rate of change turned negative in 2008 and is projected to remain negative through 2019. This compares to growth rates of +3.0% and +0.6%, on average, in 1990-99 and 2000-09, respectively.
  4. As a result of this entropy, we believe both the U.S. and global economy are firmly entrenched in the process of seeing both potential growth and potential inflation – if there is such a thing – decline.
  5. To the extent this hypothesis is indeed correct, we think the aforementioned consensus expectations are materially off base in that they are based off of models which do not take into account the aforementioned demographic changes.

 

So it’s up to you whether or not you choose to overweight the steep increase in the Prices Paid component of yesterday’s ISM Manufacturing report or the deceleration in the YoY rate-of-change in Core PCE, which is the Fed’s preferred inflation gauge; you can’t do both:

 

  • MAY ISM Prices Paid: 49.5 from 40.5 prior. While still in contraction territory, 49.5 represents the highest reading since OCT ’14 and the +9pt MoM increase represents the fastest MoM increase since AUG ’12.
  • APR Core PCE: +1.24% YoY from +1.32% prior. The +1.24% increase represents the slowest rate of inflation since FEB ’14 and marks the 38th consecutive month below the Fed’s +2% target.

 

Here are three more lines in the sand investors must draw if they are to effectively handicap interest rate risk from here:

 

  1. Do you side with the Fed’s [on-target] 5Y-Forward Breakeven Rate of 2% or do you believe the TIPS 5Y Breakeven Rate of 1.6% to be a more prescient indicator of inflation?
  2. Do you side with the +34bps back-up in the 10Y Treasury Yield since its April 3rd higher-low at 1.84% or do you believe the -1bps decline in the DEC ’15 Fed Funds Futures Implied Yield over that same time frame to be a more prescient indicator of the Fed’s likely path of policy? It’s worth noting that since April 3rd, the implied probability of “liftoff” has declined -420bps, on average, across the five remaining FOMC meetings in 2015 with the December 16th meeting being the highest at 53%.
  3. Do you side with Bloomberg Consensus real GDP growth estimates which call for acceleration in QoQ SAAR terms throughout the balance of the year or do you believe Hedgeye Risk Management’s real GDP growth estimates which call for deceleration in YoY terms throughout the balance of the year to be a more prescient indicator of the direction of interest rates?

 

All told, the Hedgeye Macro Team reiterates its intermediate-to-long term bullish bias on bonds and bond-like equities.

 

Regarding the latter, we think the $3.5B in YTD redemptions from REITS and Utilities funds is somewhat reminiscent of investors broadly selling the 2009 lows in the broad equity market – specifically in the sense that we believe such selling is predicated on consensus fear (rate hikes now vs. Great Depression redo then) and not on thoughtful analysis of the underlying fundamentals (i.e. the economic cycle).

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.99-2.28% (bearish)

SPX 2098-2122 (bullish)

USD 94.65-98.19 (bullish)
EUR/USD 1.08-1.12 (bearish)

Oil (WTI) 58.09-61.49 (bullish)

Gold 1175-1214 (bullish)

 

Keep your head on a swivel,

DD

 

Darius Dale

Associate

 

Policy Mistakes - z Chart of the Day


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