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The Macro Show Replay | July 20, 2015

 


CHART OF THE DAY: In Case You’re Keeping Score On The “Inflation is Back” Trade...

Editor's Note: The chart and excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. For more info on how you can subscribe click here.

 

CHART OF THE DAY: In Case You’re Keeping Score On The “Inflation is Back” Trade... - ZZ 07.20.15 chart

 

In case you’re keeping score on the “inflation is back” trade, it’s not:

 

  1. US 5-year Forward Break-Evens dropped another 7 basis points last week to 1.56% (-18bps in the last month)
  2. Lumber and Paladium prices got pounded for -5.1% and -4.8% weekly losses (-8% and -14% respectively mth/mth)
  3. Energy (XLE) and Basic Materials (XLB) stocks were -1.4% and -0.1%, respectively, in an up US Equity tape

 


Birdies and Bogeys

“Their only fault is that they give no possible excuse for a missed putt.”

-Bobby Jones

 

Today is the final day of The Open Championship at St. Andrews in Scotland where 22 year old Irish amateur Paul Dunne is going to put his best foot forward to be the 1st amateur to win the event since Bobby Jones did it in 1930.

 

Birdies and Bogeys - Bobby Jones Hoylake 450 341

 

At that level of golf (or competing at these levels in Global Macro markets), trying your best is rarely enough. On that score, I think Jack Nicklaus put it best after losing “The Duel In The Sun” to Tom Watson @Turnberry at the 1977 Open:

 

“I’m tired of giving my best and not having it be good enough.”

 

Back to the Global Macro Grind

 

Nicklaus’ was just being moody. His best was enough in 1978 when he won his 3rd Open Championship (also at St. Andrews, by 2 strokes), cementing himself as one of the all-time greats of the game.

 

I’m personally awestruck by greatness. It’s something we don’t see in our profession every day, but it’s certainly something we can find both in ourselves and the company we keep.

 

Whether it’s at the beach with your loved ones or in running your respective responsibilities at work today, give it your best to be the best that you can be. It’s not always going to be good enough, but it’s always worth the effort.

 

Last week’s US Dollar victory didn’t make winners of everything inversely correlated to it:

 

  1. US Dollar Index up another +1.9% on the week, taking it to +3.8% in the last month
  2. The Euro (vs. USD) was devalued by Draghi for another -3% weekly loss (-4.5% month-over-month)
  3. Canadian Loonies lost another -2.4% of their value, falling to -10.4% YTD
  4. Commodities (CRB Index) deflated another -1.7% (-4% in the last month, and -6.7% YTD)
  5. Oil (WTI) continued to get crushed by #StrongDollar (-3.5% on the wk, -15.7% month-over-month)
  6. Gold deflated another -2.2% taking its month-over-month loss to -3.8%

 

When I woke up this morning Gold was getting triple-bogey’d to its lowest level since February of 2010, reminding perma-Gold Bulls that #StrongDollar is nothing less than formidable as a #deflationary headwind.

 

But what if you just like being long things like Gold and Copper (the Doctor was down another -1.6% last week, taking its YTD loss to -11.7%) irrespective of 2-3 club wind? Mr. Macro Market will be happy to mark your score for you on that. Respect the wind.

 

And while it’s too bad there is no central-planning committee to #halt the entire commodities complex and their respective asset price links, there are plenty of bears still making money on inflation expectations gone bad.

 

In case you’re keeping score on the “inflation is back” trade, it’s not:

 

  1. US 5-year Forward Break-Evens dropped another 7 basis points last week to 1.56% (-18bps in the last month)
  2. Lumber and Paladium prices got pounded for -5.1% and -4.8% weekly losses (-8% and -14% respectively mth/mth)
  3. Energy (XLE) and Basic Materials (XLB) stocks were -1.4% and -0.1%, respectively, in an up US Equity tape

 

The “tape” wasn’t just up last week, for “New Tech” it was straight up! What Google (GOOGL +17%) did on the day on Friday was the equivalent of being -10 under (on the day) @TheOpenChampionship, in #alpha terms.

 

Our congratulations to anyone who A) had that position on in size (before the move) and/or B) who bought the Nasdaq the whole way down (as it was down 6 of the 7 weeks prior!). In sharp contrast to being long anything #CommodityDeflation:

 

  1. S&P Tech ETF (XLK) was +4.8% on the week, taking it back up to +5.1% YTD (after going flat on the 6 week correction)
  2. Nasdaq (QQQ) was +4.3% week-over-week to a healthy +10.1% for 2015 YTD

 

Since we missed the cut both ways on that (we didn’t have a call on Tech, either way) we’ll salute whoever did. That was just an awesome week of returns. We still like Healthcare stocks (XLV +12.6% YTD) and re-issued the buy signal in Housing (ITB) too.

 

With rates down last week (-5 basis points for the US 10yr Yield to 2.35% last week on slowing top-down growth and inflation data) and costs for both builders and consumers deflating, I like ITB (US Housing) into the following catalysts this week:

 

  1. Existing Home Sales (June) on Wednesday
  2. New Home Sales (June) on Friday

 

Against the long Housing birdie putts, I still like short the Financials (which I had dead wrong last week – double bogey in spite of the rates call being right) and short the Industrials (XLI), which continue to be par for the 2015 US equity course.

 

Will give it our best this week and maintain a 0% net asset allocation to Commodities. Thanks to all of you who are giving so generously to the Hedgeye Cares Charity Golf Challenge (tomorrow) sponsored by The Lincoln Motor Company too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.20-2.46%

SPX 2091-2130
USD 97.04-98.25
EUR/USD 1.07-1.10
Oil (WTI) 50.09-53.68

Nat Gas 2.65-2.95

Gold 1111-1151

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Birdies and Bogeys - ZZ 07.20.15 chart


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

July 20, 2015

July 20, 2015 - Slide1

 

BULLISH TRENDS

July 20, 2015 - Slide2

July 20, 2015 - Slide3

July 20, 2015 - Slide4

 

BEARISH TRENDS

July 20, 2015 - Slide5

July 20, 2015 - Slide6 

July 20, 2015 - Slide7

July 20, 2015 - Slide8

July 20, 2015 - Slide9

July 20, 2015 - Slide10

July 20, 2015 - Slide11


The USD, Gold and the DAX

Client Talking Points

USD

After appreciating another +1.9% last week, the #StrongDollar is now +3.8% in the last month and while the EUR/USD (and entire commodity complex) doesn’t like that, European Stocks do – Mario Draghi delivered the devaluation and should stay with it. 

GOLD

Getting crushed this morning, down another -1.7% (after dropping -2.2% last week) to $1115, its lowest level since FEB 2010; this is a fairly straightforward Global #Deflation signal. The U.S. 5YR forward Break-evens are down another -7 basis points last week to 1.56%.

DAX

Up +0.9% and +6.7% month-over-month post central planning ramp; risk range is wicked wide at 10,584-11,896 and the economic data continues to slow, in rate of change terms (producer prices -1.4% year-over-year JUN vs -1.3% MAY).

Asset Allocation

CASH 55% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 26% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
GIS

The General continues to make tough calls as they work to further streamline their manufacturing footprint as part of Project Century. Last week, announcing the closure of two plants, one in West Chicago, IL and the other in Joplin, MO, eliminating approximately 620 positions in the process. West Chicago produced cereal and dry dinner products for the U.S. Retail organization, while the Joplin facility was acquired as part of the Annie’s acquisition and produced snacks. Because of union negotiations management is expecting these actions to be fully executed by fiscal 2019. We view this as a big positive for the company as they go to a more nimble asset light model, which will save on capex and allow it to be allocated to higher growth product platforms.

PENN

According to Gaming, Lodging and Leisure Sector Head Todd Jordan, additional state gaming agencies have reported revenues for the month of June. The good news here is that Penn National Gaming remains on track to beat second quarter estimates this Tuesday July 23rd. In addition, PENN will be hosting an investor day on July 24th. We will be there and communicate any noteworthy color and developments. Bottom line? The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming.

TLT

After an awful retail sales print on Tuesday, the confluence of growth slowing data reared its ugly head Friday with a +0.1% year-over-year headline CPI print for June and a UofMich consumer sentiment reading that declined to 93.3 from 96.1 in May. Note that a +0.1% inflation rate is a heck of a long way from the Fed’s 2% target. These two prints were successful in taking the 10-Year Treasury yield down 10 basis points from Monday’s highs to finish the week at 2.35%. We remain one of the lonely bulls on Treasury bonds (bearish on yields) via TLT, EDV, VNQ.

Three for the Road

TWEET OF THE DAY

FRANCE: the CAC was +4.5% last wk, is +1% this morning and +7.5% month-over-month

@KeithMcCullough

QUOTE OF THE DAY

It takes less time to do a thing right than to explain why you did it wrong.

Henry Wadsworth Longfellow

STAT OF THE DAY

China’s gold reserves are up +57% from June 2009 to 1658 tons at the end of June 2015.


Monday Mashup

Monday Mashup - CHART 1 

 

RECENT NOTES

7/16/15 JUST CHARTS| BWLD | SHORT

7/15/15 June Restaurant Sales and Employment Trends

7/15/15 YUM | Delivered a Mixed Bag of Results

7/12/15 JUST CHARTS | YUM

7/10/15 DFRG | COVERING THE SHORT

 

RECENT NEWS FLOW


Friday, July 17

DPZ | Downgraded to sector weight from overweight at KeyBanc, citing valuation as a reason.

 

Thursday, July 16

MCD | Survey: McDonald’s operators report weakening finances. This survey only includes 29 franchisees representing 208 restaurants, so it is not representative of the broader population of franchisees. (Click here for article)

SBUX | Management says they will open 15 new locations in low income and predominantly minority neighborhoods. (Click here for article)

DPZ | Announced retirement of CFO Michael Lawton and promotion of Jeffrey Lawrence to EVP and CFO. (Click here for article)

 

Wednesday, July 15

CMG | Will launch their new game “Friend or Faux,” on July 21, that compares its ingredients to its competitors in the limited-service segment. (Click here for article)

 

Tuesday, July 14

PNRA | Upgraded to overweight from underweight at Piper Jaffray, price target is $200.

YUM | Reported 2Q15 EPS of $0.69 beating consensus estimates of $0.64. YUM remains on the Hedgeye Restaurants Best Ideas list as a LONG. (Click here for article)

BWLD | BWLD upgraded to outperform from market perform at Raymond James, price target is $195. BWLD is a new edition to the Hedgeye Restaurants Best Ideas as a SHORT. Please refer to our Just Charts analysis here for more of an explanation.

SBUX | Expanding to South Africa in 2016. (Click here for article)

 

SECTOR PERFORMANCE

Casual dining and quick service stocks, in aggregate, underperformed the XLY last week. The XLY was up 1.91%, only BWLD beat it, out of the casual dining stocks that we follow, rising 1.93% last week.

Monday Mashup - CHART 2

 

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY remains bullish on a TRADE and TREND duration.

 Monday Mashup - CHART 4

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 5

 

Monday Mashup - CHART 6

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 7

 

Monday Mashup - CHART 8


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