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CHART OF THE DAY: The Risk Of Raising Rates Right Now

Editor's Note: Below is an excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. If you're interested in getting a step ahead of consensus each morning click here to learn more. 

 

CHART OF THE DAY: The Risk Of Raising Rates Right Now - z chart of day 07.17.15 chart

 

...Not only are whoever these “economists” are now completely ignoring Mr. Macro Market’s opinion (Fed Fund Futures imply less than a 15% chance of a SEP hike), but they are at complete odds with me on the risk of raising rates into a slowdown.

 

At least since the last two Wall Street tops (2000 and 2007), the Fed has only eased during slowdowns. Remember the man before Draghi at the ECB helm, Jean-Claude Trichet? He raised rates in 2011 and pretty near blew up the capital market world.

 

Ah, what do I know about buying cyclicals and/or tightening at the end of a cycle? It’s probably different this time. Post a 6yr equity ramp shouldn’t you pay 351x earnings for Netflix or chase QQQs?

 

I’m hearing the charts “look good.” They did in 2000 and 2007 too.

 


Giving Back

 “We make a living by what we get. We make a life by what we give.”

-Winston Churchill

 

I’ve been grinding on one steamer of a roady this week (96 degrees in a suit in Dallas yesterday), so now I’m looking for some love. I’m proud to announce that our team’s charity outreach program is hosting its 2nd annual Hedgeye Cares Charity Golf Challenge on Tuesday, July 21st at GlenArbor Golf Club in Bedford, NY. 

 

For a 2nd straight year we’re honored to be donating 100% of the proceeds from the tournament to support our area’s underprivileged youth through the Bridgeport Caribe Youth Leaders (BCYL), a 501(c)(3) organization. Here’s a short video we put together featuring kids in the program explaining how BCYL has changed their lives and what BCYL has meant to them: https://www.youtube.com/watch?v=t5NgER166I0.

 

We’re also extremely thankful to The Lincoln Motor Company for its title sponsorship for a second year running.  Lincoln is a great American luxury brand that recognizes the importance of giving back to communities across the country and makes a significant effort to give back.  To learn more and to Check out the All-New 2016 Lincoln MKX and the Continental Concept, visit www.lincoln.com.

 

Giving Back - Golf Challenge

 

It’s not too late to support our tournament and donate to BCYL. For more details on how you can contribute please email Josefine Allain at . We still have a few foursomes left (I cannot confirm or deny that there will be NHL hockey talent at the event - so please be aware of errant 315 yard drives).

 

You can also follow all of the day’s action (from Lincoln test drives before tee-off to photos from the course) on twitter via the handles @LincolnMotorCo and @Hedgeye. Thanks again to all of our event sponsors and participants for their generous donations! 

 

Back to the Global Macro Grind

 

Slow --> Halt --> Ramp!

 

  1. USD – Draghi did the double-whatever-it-takes yesterday and the Euro dove to the low-end of my immediate-term $1.08-1.11 risk range; that finally puts USD Index immediate-term TRADE overbought in what continues to look like a #deflationary redo for certain asset prices, earnings, etc.
  2. #Deflation – most obviously you can see this in both commodities themselves this week and their equity market links – Copper and Russia (stocks) both down -0.5-1% again this morning and a lot of these “inflation expectations” things are close to 3 month lows with USD at 3 month highs
  3. EQUITIES – European and Chinese halts worked (Greece is still halted) and the US Equity ramp came right after SP500 (Index + Emini) net SHORT position (CFTC futures/options contracts) peaked at -162,467 at the July US equity market low! Risk ranges are now as wide as they’ve been all year

 

What does a widening risk range mean?

 

It means my risk management model is signaling a wider range of probable immediate-term outcomes. In other words, it usually portends rising volatility (since volatility is the variance of a price series over time) from this VIX 12 level.

 

There’s also a widening range of consensus opinion (vs. mine) on A) whether the Fed hikes in 2015 or not and B) whether or not moving forward with that would be a good or bad thing.

 

Here’s the latest Wall Street Journal Poll:

 

  1. 82% of economists polled see a SEP hike (vs. 72% last month)
  2. 15% of economists polled see a DEC hike (vs. 9% last month)
  3. 71% see it as a “risk” that the Fed hikes “too late”; 29% see it as a risk that they hike “too early”

 

Wow. Not only are whoever these “economists” are now completely ignoring Mr. Macro Market’s opinion (Fed Fund Futures imply less than a 15% chance of a SEP hike), but they are at complete odds with me on the risk of raising rates into a slowdown.

 

At least since the last two Wall Street tops (2000 and 2007), the Fed has only eased during slowdowns. Remember the man before Draghi at the ECB helm, Jean-Claude Trichet? He raised rates in 2011 and pretty near blew up the capital market world.

 

Ah, what do I know about buying cyclicals and/or tightening at the end of a cycle? It’s probably different this time. Post a 6yr equity ramp shouldn’t you pay 351x earnings for Netflix or chase QQQs?

 

I’m hearing the charts “look good.” They did in 2000 and 2007 too.

 

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

 

UST 10yr Yield 2.20-2.46% (bearish)

SPX 2038-2130 (neutral)
RUT 1 (neutral)
Nikkei 20105-20759 (bullish)
VIX 11.01-20.06 (bullish)
USD 96.40-97.91 (bullish)
EUR/USD 1.08-1.11 (bearish)
YEN 122.41-124.56 (bearish)
Oil (WTI) 50.06-53.64 (bearish)

Nat Gas 2.66-2.94 (bearish)

Gold 1140-1161 (bearish)
Copper 2.45-2.59 (bearish)

 

Best of luck out there today,

KM

 

Click image to enlarge 

Giving Back - z chart of day 07.17.15 chart

 


July 17, 2015

July 17, 2015 - Slide1

 

BULLISH TRENDS

July 17, 2015 - Slide2

July 17, 2015 - Slide3

July 17, 2015 - Slide4

 

BEARISH TRENDS

July 17, 2015 - Slide5

July 17, 2015 - Slide6

July 17, 2015 - Slide7

July 17, 2015 - Slide8

July 17, 2015 - Slide9

July 17, 2015 - Slide10

July 17, 2015 - Slide11

 


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Cartoon of the Day: 7.0!

Cartoon of the Day: 7.0! - China GDP cartoon 07.16.2015

"Magically, the Chinese reported an alleged 7.0% GDP for Q2 after 7.0% in Q1 - not 6.8; not 7.2 - straight 7.0..." -Hedgeye CEO Keith McCullough in a tweet yesterday after China's head-scratching GDP report.


HOLX: Adding Hologic to Investing Ideas

Takeaway: We are adding Hologic to Investing Ideas today.

Please note we are adding Hologic (HOLX) to Investing Ideas today. Below is a brief explanation from Hedgeye CEO Keith McCullough. Our Healthcare team led by Tom Tobin will provide additional color going forward.

 

HOLX: Adding Hologic to Investing Ideas - z gg

 

Buy signals in HOLX have been hard to come by (the stock hasn't gone down much), but a sell-side firm downgraded it today so it's tapping the low-end of our immediate-term risk range. Tom Tobin remains The Bull.

 

On Wednesday July 22 we are hosting a conference call and live studio event for institutional subscribers to review our outlook for HOLX.  We first added HOLX to the Hedgeye Best Idea List as a long in April 2014 when the stock was in the low $20s.  

 

Since then, our original thesis has played out, with the stock doubling as we predicted, and many of the fundamental and sentiment drivers maturing on schedule.   We will review the path into the $50s on our call next week ahead of HOLX earnings report July 29.

 

Buy red,

KM


REPLAY: IS CONSENSUS RIGHT ON CHINA?

Earlier this afternoon, we hosted a live conference call on China which detailed our revised outlook for the Chinese economy, our expectations for monetary and fiscal policy, as well as the associated investment implications.

 

Watch the video replay of the presentation below.

 

CLICK HERE to download the associated presentation in PDF format.

 

KEY TAKEAWAYS:

 

  • Section One: Correction or Collapse? (slides 4-33)
    • Summary: China’s secular growth outlook is likely more dour than the average “China bear” is willing to admit, which implies the recent margin-fueled melt-up in Chinese equities is little more than a bubble that has now popped. Conversely, the outlook for capital markets reform in China is supportive of expectations for much higher share prices over the intermediate-to-long term. While we view these conflicting forces as a fair fight, we are inclined to side with the stated reform drive of Chinese policymakers and believe the key decision an investor has to make with respect to adopting a bullish or bearish stance on Chinese equities from here is how much they believe in the efficacy of the “Beijing Put”. All told, we are happy sheep – for now at least.
  • Section Two: Asset Class “Re-Rotation” Risk (slides 34-63)
    • Summary: Our analysis is picking up on a positive inflection in the Chinese property market. To the extent this nascent recovery is sustained, we expect two things to occur: 1) mainland Chinese investors are likely flow capital back into real estate in lieu of stocks, at the margins; and 2) Chinese economic growth is likely to stabilize and potentially inflect higher from a cyclical perspective. The latter is key risk for the Chinese equity market(s) in terms of reduced expectations for fiscal and monetary stimulus.
  • Section Three: RMB Internationalization Impact (slides 64-73)
    • Summary:  Ahead of this year’s likely rebalancing, Chinese policymakers have lobbied strongly in favor of the yuan to be included in the IMF’s Special Drawing Rights (SDR) basket. Regardless of any near-term success with this initiative, we believe Chinese policymakers are serious regarding their pledge(s) to accelerate capital account reform. We believe an incrementally deregulated Chinese capital account will prove to be a positive influence upon both the Chinese and global economy.
  • Associated Investment Implications (slide 74)
    • Summary: Over the intermediate term, we think H-Shares represent an active opportunity on the long side but are cognizant of the elevated spillover risk resulting from another potential leg down in the A-Shares. Longer term, however, we think both markets are poised to trade materially higher amid the confluence of key capital markets and capital account reforms. Meanwhile, China’s secular growth outlook should continue to impart deflationary pressure upon commodity prices and the nominal exchange rates of commodity-producing nations.

 

As always, please feel free to follow up with any questions. There are lots of moving parts here to discuss.

 

Kind regards,

 

The Hedgeye Macro Team


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