RTA Live: June 11, 2015

Here is the replay of today's edition of RTA Live.


Bunds, USD and Japan

Client Talking Points


But today isn’t about the Fed; it’s about this epic Global Yield move that continues to be perpetuated by daily ramps in the 10YR German Bund Yield (up +4 basis points today to 1.02%). This even has JGB 10YR Yield up +4 basis points on the day to 0.54% (but you won’t see a Japanese “rate hike” narrative like you’re seeing as consensus chases momentum in the U.S. on that).


There is nothing like a few solid down days for the U.S. Dollar ahead of the Fed meeting to get Oil to re-test the top-end of our current 58.81-61.98 risk range for WTI… then the USD bounces, and Oil pulls back a full 1% - this component of the correlation trade remains #on.


Instead of burying our heads in the bond yield sand, we did make the call to re-short the Yen (vs USD) yesterday inasmuch as we reiterated the call to buy Japanese equities at the low-end of our risk range. The Nikkei was up +1.5% overnight vs. something like India which was down -1.9%. There are plenty of long/short ideas out there in Global Macro to stay with.



**The Macro Show - CLICK HERE to watch a replay of today's show with guest analysis from Gaming, Lodging, and Leisure Sector Head Todd Jordan. Todd gave an update to his Macau outlook and discussed the risk profile given the current supply and demand imbalance.


Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Penn National Gaming is a true growth story in regional gaming, finally, ripe with catalysts, same store and new unit growth, and accelerating cash flow.  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. 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 takeaway on Purchase Activity was mixed as demand declined -3.0% sequentially but accelerated from +13.1% to +13.9% on a year-over-year basis.  More broadly, and inclusive of the latest week, purchase demand in 2Q continues to reflect both sequential and year-over-year improvement with demand growth for the quarter currently tracking +13.6% QoQ and +12.8% YoY. No major callouts in the latest week as the larger trend towards ongoing improvement in purchase activity in 2Q remains intact. 

CLICK HERE to watch Housing Sector Head Josh Steiner gives a brief update on our call on ITB.


Considering we are already well passed an above average length expansion, and moving into the second half of 2015 growth and inflation comps (i.e. the base effects) become very difficult, growth is likely to continue to slow. We put the likelihood of a rate hike in 2015 as highly unlikely and continue to expect rates to move to make a series of lower-highs through the balance the year (bullish for EDV, TLT, and VNQ. When forward looking growth expectations are downwardly revised and the Fed kicks the can on rate hike expectations, rates and the dollar move lower. Gold has historically performed well in an environment of falling rates and a declining U.S. dollar and we don’t expect anything different this time around. Supporting our view, both gold (GLD) and treasuries (TLT, EDV) remain BULLISH on an intermediate-term TREND duration (3-months or more).   

Three for the Road


World Bank cuts US GDP from 3.2% to 2.7% (and they are still too high) @HedgeyeDDale



Leadership is the capacity to translate vision into reality.

Warren Bennis


The Royal Institution of Chartered Surveyors reported on Thursday that the stock of homes per surveyor has fallen 12% this year to 52 properties, the lowest since records began in 1978.


Takeaway: This 1Q FY16 story line was one of improved margins and increased disclosure.

Adding KKD back to the LONG bench of the Hedgeye Restaurant Best Ideas List!


Last night, KKD reported Q1 FY16 earnings, with top line revenue of $132.5mm vs consensus of $135.3mm.  The slight miss on the revenues was over shadowed by a bottom line beat, Q1 adjusted EPS was $0.24 vs consensus $0.22. The market reacted positively to the results, in pre-market trading this morning the stock is up about 6.9%.


IMPROVED MARGINS - This 1Q FY16 story line was one of improved margins and increased disclosure. Management introduced a couple new metrics to evaluate performance, one being ‘Company Stores Contribution’ which is equal to Company Stores revenues less COGS; labor and benefit costs; vehicle costs; occupancy and other store related costs and excludes D&A expenses; marketing expenses and segment G&A expenses. This is a non-GAAP measure but seems to be a true look at the base business performance without all the noise, this metric was up 270 basis points YoY to 18.5%. Results were driven by positive SSS growth and more strategic use of promotional incentives.


STRONG SAME-STORE SALES - System-wide same-store sales (SSS) increased 5.2%, including 4.3% comp at domestic company stores and 5.8% comp at domestic franchised locations. International which is entirely franchised had a disappointing quarter, with SSS down 1.7% in constant dollars but it is trending in the right direction. The comp was driven by average check which accounted for 4%, of which most was attributed to mix due to significantly less discounting, traffic was about flat.






UNIT GROWTH – The bull case for KKD is centered around the significant global unit growth opportunity for the company.  The biggest driver of revenue in 1Q FY16 was the significant increase in systemwide store counts, which speaks to management’s aggressive expansion strategy to spur growth in the business. Systemwide store count rose 17.3% in the quarter eclipsing the 1,000 store mark finishing the quarter with 1,003 Company and franchise stores worldwide.




Management slightly adjusted the lower end of full year 2016 EPS guidance, bringing it up a penny to $0.80 to $0.85. This is mainly attributed to share buy backs as they have not adjusted the net income projections.  Additionally, management indicated during the call that they will “continue to opportunistically repurchase stock this year.”


Summarized outlook for the remainder of FY16:

  • 10-12 net new Company shops
  • 15-20 net new domestic franchise shops
  • 95-110 net new international franchise shops
  • Capital expenditures of between $35 million and $45 million including ongoing investments in technology
  • Continued growth in domestic SSS
  • A reduction in agricultural commodity and fuel costs compared to fiscal 2015
  • Negative effects of a stronger U.S. dollar


Management succeeded on many fronts this quarter taking advantage of key holidays such as Valentine’s Day, Super Hero Day and National Donut Day. Furthermore management is dedicated to expand beverages success launching new frozen coffee beverages in three flavors, mocha, vanilla and caramel. In terms of expansion they announced three development agreements in Cambodia, Guatemala and South Africa and opened stores in six new countries.


We believe in this growth story especially as international SSS trend towards positive territory. Management has admitted to mistakes in the domestic real estate market and is using these learnings for future expansion.  We are confident in the plan and believe in the strength of the brand, we will continue to watch this one and look for an opportunity to get more aggressive on the name.



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 80.52%
  • SHORT SIGNALS 78.68%

CHART OF THE DAY: An Unsustainable (And Dangerous) Decoupling

Editor's Note: Below is a chart and excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here if you're ready to subscribe and want to stay a step or two ahead of consensus.


Click to enlarge

CHART OF THE DAY: An Unsustainable (And Dangerous) Decoupling - z Chart of the Day


Probably the sharpest bond guy I met with yesterday (incidentally, he carries one of the biggest bats in the bond buying game) A) agreed with me on the Rate Mistake call and B) took the reason for a potential Fed mistake one step further:


“My main concern isn’t that you’re wrong on the economy  - it’s that you’re right (it’s #LateCycle slowing) and she (Yellen) takes this Global Bond Yield move as a signal that the coast is clear to get one-and-done (rate hike) on the tape.”


Rate Hike Apologists

“It is dangerous for a bride to be apologetic about her husband.”

-Wallace Stegner


There are a lot of ways I can go with that quote this morning, but I’ll keep it above the belt. I read it as I was flying to LA from San Francisco last night. And I couldn’t stop thinking about Janet & Ben.


While Yellen isn’t married to Bernanke, she is wed to the policy expectations framework he created. While anything is possible when it comes to un-elected decision making on interest rates, I highly doubt she raises rates for the sake of the apologists.


Apologists? Yes. As in the every-other-meeting I’ve been in this week where a sophisticated Institutional Investor asks me “isn’t it just time she raises rates?” I promptly say no. Raising rates into a slowdown could easily perpetuate the next US recession.

Rate Hike Apologists - Yellen cartoon 09.17.2014NEW


Back to the Global Macro Grind


Probably the sharpest bond guy I met with yesterday (incidentally, he carries one of the biggest bats in the bond buying game) A) agreed with me on the Rate Mistake call and B) took the reason for a potential Fed mistake one step further:


“My main concern isn’t that you’re wrong on the economy  - it’s that you’re right (it’s #LateCycle slowing) and she (Yellen) takes this Global Bond Yield move as a signal that the coast is clear to get one-and-done (rate hike) on the tape.”




This is where the political and market pressures on this un-elected institution (The Fed) meets its maker – the data. I actually think Janet Yellen is much more “data dependent” than The Bernank ever was. She doesn’t need to apologize for that.


Neither do I need to apologize for all of us hanging on any tweet that leaks when the Fed is going to move. This is the centrally planned macro market America asked for. It’s our job to attempt to risk manage it.


So let’s give that a try and outline 3 baseline scenarios ahead of the Fed meeting next week:


  1. Yellen signals that after having missed their window to hike in 2013, “it’s just time” to raise
  2. Yellen signals that since the US economic data continues to slow, there’s no rate hike on the table until 2016
  3. Yellen signals that she remains “data dependent” (i.e. repeats what she said at the March 18th meeting)


While I believe scenario #3 is the most probable, Consensus Fear is that Scenario #1 is more probable than it was 10 days ago when the 10yr US Treasury Yield was 2.10%.


And, yes, since it’s all about the rate-of-change in probabilities, the proclivity for a bureaucrat to chase last price (2.49% on the US Treasury Yield) is rising right now, not falling.


What if Yellen opts for the rate hike? I think the Dollar rips and stocks, bonds, and commodities get slammed. But having watched all of these macro markets move for the last 3 weeks (all down) prior to yesterday’s bounce, you already know that.


Then what?


She’ll have to cut! Yep, raise and cut. Huh? Correct – you can’t just chase bond yield charts and their correlated moving monkey averages and dismiss what I started this rant with this morning – the policy expectations framework that Janet & Ben created.


To review the Fed’s “data dependent” framework in its simplest of terms:


  1. As the data accelerates, expectations for higher interest rates do (see 2013 for details)
  2. As the data slows, expectations for lower interest rates do (see Q4 2014 to Q1 2015)


This is the bed that Bernanke built. And from what I can see, Janet isn’t apologizing for it. As a result, until she says otherwise, my expectation is that she is going to sleep in that bed, waking up every morning to the rate-of-change in the data.


In other news, the World Bank is the latest central planning outfit to cut both its US and Global Growth Estimates for 2015. They, of course, just pushed out the estimates for 2016 – which means they’ll inevitably have to cut those (again) too.


And in terms of non-rate-spike related ideas, I signaled to short the Yen yesterday and buy more of that Weimar Nikkei. The Japanese know very well what Slower-For-Longer looks like – they won’t divorce themselves from that rate policy anytime soon.


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


UST 10yr Yield 2.09-2.55% (bearish)

SPX 2075-2125 (neutral)
RUT 1 (neutral)
Nikkei 20049-20713 (bullish)
VIX 13.02-15.42 (bullish)
USD 94.06-95.84 (neutral)
EUR/USD 1.09-1.14 (bearish)
YEN 122.49-125.46 (bearish)
Oil (WTI) 58.81-61.98 (bullish)

Nat Gas 2.56-2.92 (neutral)

Gold 1168-1198 (bullish)
Copper 2.67-2.77 (bearish)


Best of luck out there today,



Click to enlarge

Rate Hike Apologists - z Chart of the Day

Lazy or Crazy?

This note was originally published at 8am on May 28, 2015 for Hedgeye subscribers.

“What a pity the man wasn’t lazy.”



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.




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




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 11440-11889 (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,



Keith R. McCullough
Chief Executive Officer


Click image to enlarge

Lazy or Crazy? - z 05.28.15 chart

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