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Cowbell & Cannons!

This note was originally published at 8am on June 05, 2015 for Hedgeye subscribers.

“To cannon, all men are equal.”

Napoleon Bonaparte


If the 2015 “call” on macro markets has been that bad news is good, what happens when bad news is bad? Yesterday was ugly, globally. Darius Dale did a good job outlining why from a global #GrowthSlowing perspective.


But what about from a “liquidity” perspective? It’s one thing for strategists to be telling you that European Yields are rising because “inflation is back.” It’s entirely another for others to say that’s happening because growth is too.


If both of those lines of reasoning are wrong, and the real reason is the beginning of a liquidity event coupled with #LateCycle growth slowing… to most portfolios, this is going to feel like cannons. Unless it’s different this time, Volatility ↑ + Illiquidity ↑ doesn’t end well.


Cowbell & Cannons! - z canon

***Click here to watch The Macro Show at 8:30am ET with Director of Research Daryl Jones.


Back to the Global Macro Grind


By characterizing European growth and #Deflation risks the way he did, I think un-elected-central-planning-overlord Draghi made his first huge mistake on Wednesday. He tried to talk down stock and bond market volatility, so both ripped!


I’ll say this until I’m dead (so bear with me in the meantime): in the long run, central planners cannot smooth economic gravity and/or control market volatility.


On that front, one of the biggest mistakes Bernanke made between 2006-2011 (too high on growth expectations; too low on volatility expectations) was the same one Draghi is making right now.


If I’m right on Slower-For-Longer (on growth), but wrong on Lower-For-Longer (on rates), that may very well mean we have finally reached the beginning of the end of bad-news-is-good.




A)     That would mean real-time growth forecasts and expectations are getting cut (like they are starting to now)

B)      And markets are starting to believe central planners have lost control of the short-term control mechanism for that


To be crystal clear on what that control mechanism is – it’s cowbell and cannons.


Cannons, as in unadulterated and obliterating launches of money printings and bond buyings. Cowbell, as in “whatever it takes” when German Bund Yields (10yr) double, in 72 hours!


In the absence of both, what do you get? (see your portfolio returns from yesterday for details)


While many of you have rightly risk managed markets since 2009 by understanding the basic mechanisms of bad news = more cowbell/cannon = good (for stocks), here’s the last month in Global Equities:


  1. Dow Transports -3.6% month-over-month
  2. Hang Seng -3.5% month-over-month
  3. South Korea’s KOSPI -4.6% month-over-month
  4. Poland’s stock market -5.7% month-over-month
  5. Brazil’s stock market -5.9% month-over-month
  6. Argentina’s stock market -8.8% month-over-month


Bull markets in Global Growth? Cherry picking? Not really. If this table of 6 channel checks isn’t in your “global growth is accelerating” note to clients, at least we agree to agree you’re obfuscating reality in order to appeal to the bullish proclivities of your base.


The best month-over-month performer in Global Equities is the Shanghai Composite Index at +16.9%. So, if you want to really make some perma bulls some money, you should just call it A) what it is and B) what it has been – Moarrr Cowbell!


At this point, the Chinese are coming out with it daily. That’s right Chinese margin broker. You go bro! That’s how you do this. We taught you how to do this. You get it. So pump it!


Japanese stocks keep working because the BOJ gets the joke too. In both Europe and the USA (where secular demographic slowing is as obvious), extending and pretending that “growth is back” is only going to turn the cannon on the Fed and ECB themselves.


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


UST 10yr Yield 2.02-2.39% (bearish)

SPX 2085-2111 (bullish)
RUT 1236-1264 (neutral)
Nikkei 20363-20649 (bullish)
VIX 13.51-15.75 (bullish)
USD 94.88-96.80 (neutral)
EUR/USD 1.07-1.14 (bearish)
YEN 123.66-125.62 (bearish)
Oil (WTI) 56.80-61.48 (bullish)

Natural Gas 2.53-2.69 (bearish)

Gold 1170-1205 (bullish)
Copper 2.65-2.79 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Cowbell & Cannons! - z 06.05.15 chart

June 19, 2015

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Cartoon of the Day: Got Dots?

Cartoon of the Day: Got Dots? - Dove cartoon 06.18.2015


In today's morning note, "Look At That Dot," Hedgeye CEO Keith McCullough reiterates why his dot is further out on rate hikes than consensus.

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Darius Dale on Fox Business: Fed Unlikely To Raise Rates This Year

Hedgeye Senior Macro Analyst Darius Dale explains to Maria Bartiromo why the Fed is unlikely to raise interest rates this year and what investors should do in response on Fox Business' Mornings with Maria.

The Macro Show Bonus Video: Howard Penney Talks Restaurants and Consumer Staples


In this 5-minute presentation available only to The Macro Show viewers, Hedgeye Restaurants & Consumer Staples Sector Head Howard Penney presents an update on his sectors and previews his institutional conference call on White Wave $WWAV.

Retail Callouts (6/18): PIR - Binary Outcome From Here?

Takeaway: PIR is shaping up to be a binary outcome – Mgmt. vs the Street. We’re yet not sure where we come out, but it’s now high on our vetting list.


PIR - Seems Binary; Worth A Deeper Look

The earnings algorithm was nothing short of messy with a 2% comp and 3% sales growth deleveraging to -50% EPS growth.  But with short interest at 3yr highs and expectations cut in half from where they were 6 months ago, an inline earnings number is enough for a rally on the print. We can poke holes in this story all day, but we need to candidly ask ourselves what management knows about the cost cutting and margin opportunity that the Street does not. While short interest more than doubled since the end of March to 15%, PIR continued to  lever up to buy stock, with share count down 7% yy, and net debt to capital at 21% (vs -2% last year). This seems like a binary story to us -- -and we're not yet certain about which way it'll go. But this seems to us like a ratan balloon being held underwater -- it's only a matter of time before either the bulls or bears win in a meaningful way. We're adding this to our queue of names to vet more thoroughly, and will be back with a more concrete view by duration.


Other Factors That Caught our Attention  

E-comm was up almost 100% in the quarter. With DTC penetration at 17%, up from 9% last year (and 4% two years ago), the quick adoption rate by the PIR customer looks promising at face value. But, PIR’s customer base is right in the Wayfair wheelhouse (amongst a litany of other competitors) and you have to believe that PIR’s merchandise assortment is enough to keep the customer coming back for more.  Management would point to the fact that in-store online order rates were up 600bps YY to 31% as a way to prove that the brand is properly engaging with the customer across channels. We still have our doubts.

The sales to inventory spread improved marginally from where’s it been over the past 2 quarters, but the company still has a lot of wood to chop to hit its goal of a positive spread by years end. With promotional activity up YY in 1Q, we would have expected a slightly better improvement. Now the company will be forced to step up its promotional game through the balance of the year. Consensus gross margin expectations for the rest of the year call for 30bps of deleverage which seems optimistic with inventory at its current levels and e-commerce adoption rates and in-home fulfillment accelerating.

Retail Callouts (6/18): PIR - Binary Outcome From Here? - 6 18 chart1






Retail Callouts (6/18): PIR - Binary Outcome From Here? - 6 18 chart2


RAD - 1Q16 Earnings

Retail Callouts (6/18): PIR - Binary Outcome From Here? - 6 18 chart3


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