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China, Europe and Oil

Client Talking Points

CHINA

Well-timed centrally planned market bounce by the Chinese (if you A. aren’t allowed to sell and/or B. could go to jail for doing so, that’ll work) – they called sellers “hostile short sellers”, but we have a feeling the guys without high-school educations aren’t that sophisticated. The Shanghai Composite Index bounced +5.8%, it only needs another +37% to get back to 1-month breakeven. 

EUROPE

Greek banks are now closed until Monday (the stock market too) – and, again, that’s clearly one way for central planners of risk to stop markets from going down - #halt them! We care a lot more about levels here in the DAX, CAC, IBEX (and way too bullish 2nd half 2015 European growth estimates) than the “off the lows moves”.

OIL

WTI Oil bounced +1.1% but is still down -16% since the May “inflation is back” highs. If you’re looking for compromise in Europe, we think that = Down Euro, Up Dollar, Down Oil (down Junk Bonds, EM, etc.) so keep this ongoing #deflation of the reflation in focus – bounces have been selling opportunities.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET with Director of Research Daryl Jones and Macro Analyst Ben Ryan.

Asset Allocation

CASH 49% US EQUITIES 4%
INTL EQUITIES 9% COMMODITIES 3%
FIXED INCOME 30% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
KATE

We’re all-in on Kate Spade at current levels. The Hedgeye Retail team believes that comps are accelerating into the double digits in 2H, and we think that KATE’s margin guidance for this year will prove conservative. Ultimately, we think that numbers this year are 10% too low – a delta that widens to 20%+ next year, and to 50%+ by 2018 when we think KATE has $2.50 to $3.00 in earnings power. Using decelerating multiples as growth accelerates and the P&L matures gets us 50%+ upside in a year and a 2-3-bagger by 2018.

PENN

Our Gaming, Lodging and Leisure team reiterates its high-conviction thesis on Penn National Gaming. PENN remains one of our favorite names on the long side. It maintains the best new unit growth story in domestic gaming. PENN's property in Massachusetts has had an excellent start. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.

TLT

The Hedgeye Growth, Inflation, Policy (GIP) model is signaling a move into QUAD 3 for the second half of 2015. This is a set-up for the domestic economy where growth is slowing and inflation is accelerating. We reiterate our intermediate to long-term bullish bias on long-duration Fixed Income and gold. Our back-testing results cast a favorable outlook for Long-Term Treasuries, REITs, and Gold with a favorable set-up as seen in the first three charts below. When growth is slowing (QUAD 3 and QUAD 4), long term rates tend to move lower.  The logic is simple:

  • #GrowthSlowing: As growth slows, a revision in forward-looking growth expectations manifest in lower yields
  • #InflationAccelerating: Commodity prices have made a significant move off of the 2015 lows as seen in the last chart below, and we expect the follow-through to play out in Q3 inflation readings. CPI readings track the commodity price sample used in chart #4 below very closely and CPI compares are easy in 2H 2015 vs. more difficult GDP comps (QUAD 3)       

Three for the Road

TWEET OF THE DAY

VIDEO: A Demographic 'Train Wreck' In China https://app.hedgeye.com/insights/45106-mccullough-a-demographic-train-wreck-in-china… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

No man will make a great leader who wants to do it all himself or get all the credit for doing it.

Andrew Carnegie

STAT OF THE DAY

81% of MCD restaurants are franchised, with a goal to move to a 90% franchise system. MCD receives two payments from franchisees, Royalty (~4% of sales) and Rent (~9% of sales, when MCD owns the real estate).


CHART OF THE DAY: Here's What #LateCycle Looks Like YTD

Editor's Note: This is a brief excerpt and chart from today's morning strategy note written by Hedgeye CEO Keith McCullough. Click here to learn more about subscribing.

*  *  *  *  *

...One of my Canadian buddies (and top competitors) was nice enough to acknowledge that yesterday and throw in the towel on the “reflation and global growth is back – so buy the Industrials and Financials” call.

 

Cheers to that and the following YTD returns at the sub-sector level for classic #LateCycle S&P sectors:

 

  1. Energy Stocks (XLE) -8.1% YTD
  2. Industrials (XLI) -5.5% YTD
  3. Financials (XLF) -2.3% YTD

CHART OF THE DAY: Here's What #LateCycle Looks Like YTD - z 07.09.15 Chart


Don't Halt!

“Don’t halt before you are lame.”

-English Proverb

 

The ole English proverb had that one right, didn’t it?

 

At one point yesterday (lunch time on the East Coast), Greek, Chinese, and US stocks were all halted, at the same time. And I’m sure it was just the risk manager in me, but I couldn’t for the life of me understand how that was bullish.

 

Notwithstanding that the tail-wagging-the-dog on all of this is called Global #GrowthSlowing, US equity traders were in no mood to have NYSE’s management team leave them hanging on the #halt. Old Wall boys, that was lame.

Don't Halt! - HALT cartoon 07.08.2015

 

Back to the Global Macro Grind

 

After they un-halted the darn thing (NYSE – New York Stock Exchange) the selling continued, tagging the SP500 with one of its worst 1-day drops in a year, -1.7%.

 

The almighty 200-day Moving Monkey snapped and the SP500 moved to -0.6% YTD amidst a -3.9% correction from the all-time closing highs of 2130. #OhSnap!

 

After “High-Beta” as a Style Factor led last week’s decline (High Beta SP500 stocks -2.3% last week vs. Low Beta +0.5%), they went right after that beta (again) into yesterday’s bell with the following 3 moves falling fastest:

 

  1. Oil & Gas Stocks (XOP) -3.7%
  2. Biotech Stocks (IBB) -2.9%
  3. Semis (SMH) -2.6%

 

So much for guys nailing it buying “cheap Oil & Gas stocks” that are levered to #deflation. In risk management speak, those are called “negative divergences” (i.e. they were down more than the market bogey was).

 

Reality is that no matter what you think about Greece or some guy losing his right hand for putting in a sell order in China today, the internals of the US stock market have looked a lot worse than the bogey (SP500) for some time now.

 

One of my Canadian buddies (and top competitors) was nice enough to acknowledge that yesterday and throw in the towel on the “reflation and global growth is back – so buy the Industrials and Financials” call.

 

Cheers to that and the following YTD returns at the sub-sector level for classic #LateCycle S&P sectors:

 

  1. Energy Stocks (XLE) -8.1% YTD
  2. Industrials (XLI) -5.5% YTD
  3. Financials (XLF) -2.3% YTD

 

In that order, what are the catalysts to get those “underweights” in your portfolio to stop contributing to YTD relative  performance vs. the bogey (SP500 -0.6% YTD)?

 

  1. Down Euro? Nope. That = #StrongDollar, Down Oil/Gas, Down Levered Energy Tickers
  2. #SecularStagnation? Nope. China, Europe, and USA slowing all at the same time in 2H 2015
  3. How about a rate hike? Nope. Fed Fund futures just smashed that SEP “rate hike” trade

 

Oh, right. That Fed policy thing happened too yesterday where the Fed Minutes revealed more of what you already know – and that’s that Greece, China, Jobs, #Deflation (any or all of them really) #halt rate hike rhetoric, in a hurry.

 

If all you did after last week’s US Jobs Report (right before it Fed Funds Futures were implying a 40% probability of a SEP rate hike, today that’s back down to 10% with the UST 10yr at 2.23%) was:

 

  1. Downshift to Low-Beta Stocks (sell high-beta, buy low-beta)
  2. Buy Treasury Bonds (any duration)
  3. Buy stocks that look like bonds (Utilities, REITS, etc.)

 

You’ve absolutely crushed it this week. And we salute you for making that risk managed pivot.

 

If, instead, you’re betting on:

 

  1. A big breakout in the Euro (Down Dollar)
  2. Reflation and Global growth accelerating
  3. And a rate hike in September

 

I sincerely wish you the best of luck.

 

But, fair warning: if you are an analyst and/or PM working on a multi-PM platform, your boss might just #halt your adding to that position as centrally-planned-markets continue to try to bounce “off the lows.”

 

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

 

UST 10yr Yield 2.18-2.32% (bearish)

SPX 2035-2075 (bearish)
RUT 1 (bearish)
Nikkei 192 (bullish)
VIX 16.65-20.76 (bullish)
USD 95.74-97.42 (bullish)
EUR/USD 1.09-1.12 (bearish)
YEN 120.85-122.97 (bearish)
Oil (WTI) 50.34-55.38 (bearish)

Nat Gas 2.63-2.78 (bearish)

Gold 1150-1185 (neutral)
Copper 2.44-2.59 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Don't Halt! - z 07.09.15 Chart


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The Macro Show Replay | July 9, 2015

 


July 9, 2015

July 9, 2015 - Screen Shot 2015 07 09 at 7.18.31 AM


REPLAY | LONG MCD BLACK BOOK PRESENTATION

Long MCD – 7/8/15 Call Replay and Slides

Link to Audio Replay

Link to Video Replay

Link to Slide Deck

(If you have any issues accessing the replay, please email )

 

Our LONG thesis on McDonald’s is focused on three key points:

 

REPLAY | LONG MCD BLACK BOOK PRESENTATION - Chart 1 Slide 5

 

MCD has given up a lot of share to competitors as they have made many self-inflected wounds. We think that with the new CEO and the right initiatives in place they will reverse this trend, and steal back the share they lost.

 

REPLAY | LONG MCD BLACK BOOK PRESENTATION - Chart 2 slide 36

 

Sales trends have been dismal over the last few years, and if you had to choose one thing to blame it on it would MCD’s lack of value. MCD has drifted away from providing value to their customers, but they are returning to the value message now with national advertising.

 

REPLAY | LONG MCD BLACK BOOK PRESENTATION - Chart 3 slide 56

 

The menu was getting too complicated, it is very apparent that as the menu increases in size, sales decline.

 

REPLAY | LONG MCD BLACK BOOK PRESENTATION - Chart 4 slide 63

 

Reducing CAPEX is going to be a big accelerator of growth. We used SBUX as an example, once they cut CAPEX, focused on their current stores and closed underperforming ones, you see a drastic increase in EBITDA growth. We expect to see the same from MCD as they close stores and reduce CAPEX.

 

REPLAY | LONG MCD BLACK BOOK PRESENTATION - Chart 5 Slide 78

 

We see very minimal downside in the stock given it has been trading so far below its peers for the last 3-5 years.

 

REPLAY | LONG MCD BLACK BOOK PRESENTATION - Chart 6 Slide 104


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