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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


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.


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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



Investing Ideas Newsletter

Takeaway: Current Investing Ideas: HOLX, DE, VIRT, PENN, GIS, VNQ, EDV & TLT

Investing Ideas Newsletter       - Slow growth snails cartoon 07.14.2015

 

Below are Hedgeye analysts’ latest updates on our EIGHT current high-conviction long and short investing ideas as well as CEO Keith McCullough’s updated levels for each.  

 

Please note we added Hologic and removed Kate Spade this week.

LEVELS

Investing Ideas Newsletter       - Z MO 7 17 2015 4 39 44 PM

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

IDEAS UPDATES

holx

Hedgeye Healthcare Sector Head Tom Tobin is hosting a call with our institutional subscribers this coming Wednesday to discuss Hologic’s path to $50... and higher.

 

Tobin 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 ahead of HOLX earnings report July 29.

 

ROOM TO RUN, EVEN FROM HERE

 

The sensitivity table below makes use of our s-curve forecast model that is based on MQSA and our monthly count of 3D facilities published in the Tomo Tracker.  As we've published recently, consensus Breast Health revenue numbers are low compared to our model.  However, despite the large gap between our estimate and consensus, we view our estimates as conservative. 

 

As the table shows, if we accelerate the pace of adoption by even very small increments, the impact to revenue, EPS and valuation is substantial.

 

Investing Ideas Newsletter       - z chart 6

 

3D TOMO TRACKER

Below are the monthly 3D Tomo Tracker update charts through June.   Our data on the facility counts with a 3D Tomo system allow us to update and forecast 3D adoption.  Our s-curve model currently has a variance of 0.13% between predicted penetration and actual facility adoption between September 2012 and June 2015.  As seen in the revenue build table below, we believe Breast Health will drive substantial upside in the coming quarters beginning F3Q15 (Jun).

 

Investing Ideas Newsletter       - z chart 7

 

Investing Ideas Newsletter       - z chart 8

virt

Shares of newly public proprietary trader Virtu continue to broadly drift higher as the drama in the European Union pushes up volatility measures spurring trading volume. That being said the market has awarded VIRT stock a valuation that ignores the fact that while more volume does beget more opportunities for the firm’s algo book, that volume is simply not riskless and that eventually VIRT will have more trading losses in its operations.

 

This will not be comforting for investors as the company has no tangible equity capital as of last quarter and thus any trading deficit will have to be financed with overnight credit lines (of which the firm only has $70 million committed currently). We think the stock is trading solely on its historical track record of only 1 day of trading losses in the four year period from 2009 to 2012 disclosed in its recent S-1 IPO filing.

 

While an undoubtedly venerable statistic, we think the firm benefited from a very low volatility environment during that time and that increased vol in the current period will create a choppier revenue distribution for VIRT. We see fair value in the mid teens or 30-40% downside, as the current exchange type valuation (which are companies with riskless trading operations) normalizes lower.

 

VIRT is currently trading in line with exchange sector because of its recently disclosed historical daily trading track record. We think this track record benefited from abnormally low volatility and as vol normalizes higher, that the firm will experience more losing trading days which will compress the firm’s current excessive valuation.

 

Investing Ideas Newsletter       - Z CAST 

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.

GIS

The General continues to make tough calls as they work to further streamline their manufacturing footprint as part of Project Century. This 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.

 

Investing Ideas Newsletter       - z ccc

 

FY16 Hedgeye Guidance ―

Looking into FY16 we are excited about the possibilities. Management is working hard on their “Consumer First” initiative and making great changes to current product while also introducing new products.  Below is not a comprehensive list but some of the biggest things that we are looking forward to this year:

  1. Yoplait in China
  2. Gluten-Free Cheerios
  3. No artificial colors or flavors in the cereal
  4. Granola innovation / Muesli
  5. Greek Plenti / Whips
  6. Original yogurt sugar reduction
  7. Renovation on Grain Snacks
  8. Strong push on Natural & Organic products
  9. Delivering Value to consumer on brands like Totino’s and Hamburger Helper
  10. Bringing U.S. innovation International

 

Bottom line is they are still struggling; we don’t want to shy away from that. But the core of the portfolio is growing and management seems to be working tirelessly on implementing changes to grow the rest of the portfolio, especially cereal.  We also still believe that to have continued growth into the future a sizeable acquisition or divestiture would be beneficial to the business. 

de

 

The only thing worse than forecasting a stock is forecasting a stock based on a commodity that is dependent on the weather.  Flooding and drought conditions in key farming areas has helped to reduce expected crop yields, pushing grain prices higher in recent weeks.

 

More importantly, the Association of Equipment Manufacturers’ monthly retail tractor sales showed continuing deterioration for the month of June as seen in the chart below.

 

While higher crop prices is the key short-term risk to our bearish DE view, US growing conditions are likely still pretty favorable.  The next USDA crop progress report is due out on Monday, July 20th.

 

Investing Ideas Newsletter       - z chart10

TLT | VNQ | EDV 

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.

 

Weakness in retail sales, small business confidence, and UofM confidence is significant because household spending (consumer-led GDP contributor) had been a positive surprise for May. Gains in personal income and spending growth helped combat what has (and continues to be) an awful looking investment and manufacturing picture in the U.S. (early cycle): Industrial Production, factory orders, durable goods, Manufacturing PMI.

 

We are now learning that the positive, consumer-driven data for May will not turn into a new trend. If anything, it’s the opposite despite (late-cycle strength is normal):

  • Headline Retail Sales declined -0.3% sequentially from May to June
  • On  a longer-term duration which is more telling, headline retail sales decelerated on both a 1Y and 2Y basis in June (See chart below for the deteriorating trend)
  • Small Business Confidence, meanwhile, declined -4.2 pts in June with the Expectations and Job Openings readings leading the decline
  • NFIB optimism sits at its lowest levels since March of Last year
  • UofM Consumer Confidence declined to 93.3 in a preliminary July estimate; this was down from 96.1 in June (nearly 3%)

As for rate hike expectations, Hedgeye Macro analyst, Christian Drake, said it best in a research note to institutional clients this week:

 

“In short, middling-to-down is not what Team Janet wants to see - particularly with sirenic hopes of a September lift-off still lingering and a sustained attempt at policy normalization stirring restlessly in the queue.”  

 

Investing Ideas Newsletter       - z re 1

 

Investing Ideas Newsletter       - z re 2

 

 

 


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.

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