prev

#CommodityCorrelations, Greece, Japan

Client Talking Points

#CommodityCorrelations

Welcome to chaotic macro. With cross-asset volatility rising and sideways FX trading, inverse commodity correlations to the USD have broken down over the last 1-3 months. Things like crude oil and copper, which typically sniff out the direction USD, are registering r-squared correlations of +.54 and -.14 to the USD on a 1-month basis and -.22 and +0.64 on a 3-month basis. History suggests this won’t last for an extended period of time, but strap your seatbelts for more non-linear volatility in the interim.      

Greece

All eyes are on Greece’s Sunday referendum vote (as it relates to credit proposals boiled down to YES you want to stay in the Eurozone, or NO you don’t).  Both Tsipras and Varoufakis have upped the ante by saying they will resign if there is a YES vote. We expect ~70% probability of YES, but if a NO comes through expect it to wreck havoc on the markets on Monday. 

Japan

The Nikkei closed up nearly +1% today, reversing week-to-date weakness on one of the three prongs in our bullish “win-win-win” thesis: subdued survey-based measures of inflation expectations. Specifically, the BoJ’s Tankan Survey showed little change to firms’ FY16 price expectations and its Consumer Survey showed no change to consumers’ price expectations one and five years out. The BoJ has too much demographic hay to bale to meet its inflation target, which effectively means QQE in perpetuity. We reiterate our intermediate-to-long term bullish bias on Japanese equities. 

Asset Allocation

CASH 48% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 7%
FIXED INCOME 27% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
ZOES

We came out of the earnings report being very positive about management doing all the little things right. They continue to prove that they are some of the best operators in the industry. Importantly, many small cap restaurant companies with an undisciplined unit growth strategy experience significant labor inefficiencies as they expand. ZOES is in a different class of companies.  In a quarter where ZOES opened 12 new company-owned restaurants they managed to decrease both COGS and labor. We view ZOES as one of the best small cap growth names.  The company is set-up for long-term success for the following reasons:

  1. Superior brand positioning
  2. Management philosophy and execution
  3. Unit opening geographic profile
  4. Early-stage average unit volumes and returns
PENN

PENN’s new property, Plainridge Park in Massachusetts, had a strong opening. We expect slot win per day of $400, above Street expectations. In addition, June state gaming revenues will begin to roll out in 1-2 weeks. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.

TLT

After a Fed-fueled week of strength in slow-growth, yield-chasing asset classes and long duration fixed income, both the Dollar and interest rates re-couped their losses from Fed Week. The dollar declined, rates increased, and as a result, those long of gold took some pain. Will this continue? Will a long, sustained rate liftoff ensue? We don’t think so. We continue to repeat that the chance of further downward revisions to forward looking growth estimates from the Federal Reserve and consensus macro is much more likely than not. The attempted suspension of economic gravity from policy makers weakens the currency and puts pressure on bond yields. We remain long of this set-up with gold and long-duration fixed income.

Three for the Road

TWEET OF THE DAY

CHART OF THE DAY: Is #Greece Just The Tip Of Europe's Iceberg? app.hedgeye.com/insights/44990… via @Hedgeye

QUOTE OF THE DAY

“People who say it cannot be done, should not interrupt those who are doing it.”

– George Bernard Shaw

STAT OF THE DAY

Joey Chestnut (USA) successfully ate 61 hot dogs last year at Nathan's Hot Dog Eating Contest.


We're Just One Bad Jobs Report Away From Significant Volatility

Not only is volatility back, but now it’s obviously back.

 

We're Just One Bad Jobs Report Away From Significant Volatility - z rough

 

We’ve had a huge move in volatility that’s been associated with multiple factors, not the least of which is global growth slowing fully-loaded with Europe, China and the U.S. slowing all at the same time paired with the epic political Gong Show in Europe with Greece leading the charge. The more you get of all that back-and-forth, the more volatility you get.

 

Instead of naval-gazing at how many points the futures are up or down, watch the breakdown in either the Trade or the Trend line of volatility. The intermediate-term trend (which has been bullish for volatility) has been well supported now for over a year. That’s a year. Not a week or a month... a year. 11.34 is the intermediate term trend line of support for volatility.

 

Then you have the intermediate-term breakout line currently at 14.21. The VIX closed at 18 and change on Tuesday and we’re going to go back and forth and back and forth.

 

As I’ve said multiple times, we are one bad jobs report away from seeing significant volatility in US equities market.  Don’t forget we’ve seen significant volatility in U.S. equity markets whenever the growth data has been decisively negative. “Decisively negative” has happened multiple times, don’t forget. And that’s really what the late-cycle bulls have to see—they have to see something that can’t be obfuscated.

 

We're Just One Bad Jobs Report Away From Significant Volatility - zz 06.30.15 chart

 

Incidentally, at the end of a cycle being "good" is what you should expect from the economic data. That's the point. It's when it's about to go from “good to bad” that you really see the drop off. What you tend to see is the breakout in volatility associated with people being too long or too complacent on U.S. equities.

 

As far as U.S. equities are concerned, I would simply point out that halfway through the year, this is the worst start to the year we've seen in five years. Yet you're still seeing headlines from Bloomberg saying that Wall Street economists are looking for a fantastic recovery in the second half of 2015. Well, it better be. Because the reality is that it probably won’t be. These people have been routinely wrong on both their growth and S&P-500 forecasts.

 

We expect them to continue to be wrong.

*  *  *  *  *

 

Editor's Note: This is a small sample of our research here at Hedgeye. We invite you to learn more about our various product offerings by clicking here.


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

The Macro Show Replay | July 2, 2015

Today's edition of The Macro Show features deep-dive analysis of housing, Canadian banks, and jobs report from Josh Steiner and Christian Drake.

 

 


HOLX | 3D UPDATE | SOFTER JUNE BUT ON PACE TO BEAT

HOLX remains a Best Idea Long

 

s-curve working Well

The s-curve model continues to forecast facility conversion to 3D with low variance between actual and predicted values.  Monthly average variance is 0.13% with a standard deviation of 0.09%.  The current 3D facility conversion percentage is 12.3% on the 14.737 total MQSA certified facilities.

HOLX | 3D UPDATE | SOFTER JUNE BUT ON PACE TO BEAT - HOLX s curve June15

 

June PLACEMENTS slow, but quarterly pace accelerating

Monthly facility conversions slowed in June 2015 after posting a record in May 2015. The quarterly average continues to accelerate consistent with recent conference comments from management.

HOLX | 3D UPDATE | SOFTER JUNE BUT ON PACE TO BEAT - HOLX 3D monthly June15

 

consensus Breast Health too low

Our revenue build uses the inputs from our 3D Tracker and the s-curve forecast to arrive at a facility count.  Consensus assumes little to no sequential growth in Breast Health over the coming quarters.

HOLX | 3D UPDATE | SOFTER JUNE BUT ON PACE TO BEAT - HOLX rev build June15

 

Please call or email with questions.

 

Thomas Tobin
Managing Director 

@HedgeyeHC

 

Andrew Freedman

Analyst

@HedgeyeHIT 

 

 

 


CHART OF THE DAY: Recession Watch (Keep An Eye On This Key Indicator)

Editor's Note: This is an excerpt and chart from today's morning strategy note written by senior macro analyst Darius Dale. Click here to subscribe.

 

...[T]he indicator that is probably the most consistent is Initial Jobless Claims. Specifically, the rolling six-month average in this series has oscillated in a band of ~300k to ~600k over the previous three economic cycles. Even more consistent is its signaling capability as it relates to timing the onset of recession. Specifically, a recession has commenced 18 months, 19 months and 20 months after this indicator has breached 300k to the downside and/or toughed as it did at 305k in April of 2006.

 

CHART OF THE DAY: Recession Watch (Keep An Eye On This Key Indicator) - z Chart of the Day


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next