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#Deflation

Client Talking Points

VIX (& VOLUME)

Unbelievably low volume at the all-time retest of the SPY highs yesterday (Total U.S. equity market volume -21% and -24% vs. the 1 month and 1 year averages, respectively) and unless it’s different this time, making sales with front month VIX < 12 continues to work. 

RUSSELL 2000

Down -0.5% vs. SPX +0.1% yesterday and we think a lot of this can be explained by the S&P 500 having a big net short position (-119,800 non-commercial CFTC contracts) vs. RUT having a relatively too bullish one at -7,533 contracts.

GLOBAL EQUITIES

Everything commodity-deflation linked hammered; please stay clear of those “reflation” ideas – long our favorite equity market (Japan +6 days in a row, +3.3% month-over-month vs. Russia and Brazil -7.4% and -3.3% month-over-month, respectively).

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET.

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

VIDEO: Being Long Gold is a Disaster https://app.hedgeye.com/insights/45308-mccullough-being-long-gold-is-a-disaster … via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

hink of giving not as a duty but as a privilege.

John D. Rockefeller Jr.

STAT OF THE DAY

A large fire consuming 3,500 acres broke out around I-15 in California on Friday, destroying 20 vehicles and 4 homes.


July 21, 2015

July 21, 2015 - Screen Shot 2015 07 21 at 6.53.22 AM


WTW: Covering Short

Takeaway: No fundamental change to thesis. WTW just isn't interesting anymore.

We shorted WTW back in January 2014 when the jury was still out on its questionable prospects within a rapidly evolving industry.  That debate is over.  Now it's just a question of whether the company will go bankrupt.  

 

As a reminder, WTW is dangerously approaching the point where it costs more to acquire its members than the gross margin it earns from them.  If that ever happens, it’s basically game over.  WTW’s 2015 target of $290M in cash can only go so far with an annual debt service of roughly $120M.  For more detail, see the note below.

 

WTW: Chapter 11?

02/27/15 08:46 AM EST

[click here]

 

 

Let us know if you have any questions or would like to discuss in more detail. 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

Thomas Tobin

@HedgeyeHC 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

EVENT: Internet FOCUS LIST Quarterly Update

Takeaway: Please join us for our call Thursday, July 23rd at 1:00pm EDT. Dialing instructions will be published Thursday morning.

We will be hosting our quarterly INTERNET FOCUS LIST Update Call this Thursday.  We will be reviewing the major themes and incremental developments to our Best Idea Short theses (YELP, P), our Short thesis on TWTR, and our Bearish thesis on BABA (covered).  The emphasis of this call will be to highlight our view over various durations as well as the upcoming catalyst calendar; identifying the major risks and catalysts to each position over the near-to-intermediate term.  In addition, we will preview our new Best Idea Long thesis on LNKD ahead of our upcoming Blackbook.

 

Please join us for our call Thursday, July 23rd at 1:00pm EDT.  Dialing Instructions will be published Thursday morning.

 

KEY TOPICS WILL INCLUDE

  • Review of major themes and incremental developments to our thesis on YELP, P, TWTR, and BABA.
  • Highlighting our view over various durations as well as the upcoming catalyst calendar: Risks & Catalysts to each position over the NTM.
  • We will also provide an overview of our new Best Idea Long thesis on LNKD

 

Hesham Shaaban, CFA

@HedgeyeInternet 



Dangerous New Highs for the Market?

After nearly two months under water, the benchmark S&P 500 has finally made a new all-time high. While optically impressive, there are a myriad of quantitative signals underneath the hood that do not support chasing the market here.

 

Immediate-term TRADE Duration Risk: The SPX is at the top end of its immediate-term risk range of 2,091-2,130.

 

With nearly 2% downside, 0% upside and the VIX nearing the low end of our 11.29-14.59 immediate-term risk range, investors would do well to book gains in U.S. equities here (i.e. reduce gross and/or tighten net exposures). As Keith highlighted on today’s Macro Show, if 2,091 breaks, there’s no support to 2,035.

 

Dangerous New Highs for the Market? - SPX

 

Intermediate-term TREND Duration Risk: Our Tactical Asset Class Rotation Model (TACRM) is now generating a “DECREASE Exposure” signal for U.S. equities. Currently, TACRM is generating a commensurate bearish signal for each of the six primary asset classes tracked by the model (slide 6).

 

Sell everything? As predicted in our previous refresh, the recent bullish-to-bearish reversals in Emerging Market Equities, Foreign Exchange and Commodities were, in fact, a harbinger for similar breakdowns across the Domestic and International Equities asset classes. Our recent decision to add SPY to the short side of our thematic investment conclusions confirm how we are thinking about this risk in real time. At the bare minimum, it implies investors would do well to reduce their gross exposure and/or tighten up their net exposure to global asset markets.  

 

CLICK HERE to learn more about TACRM, what these signals imply and how best to incorporate them into your investment process.

 

Long-term TAIL Duration Risk: Market breadth is broadly deteriorating and in dangerous territory.

 

One of the conventional “isms” of stock market analysis is that benchmark indices tend to peak very late into the economic cycle – well after broad-based signs of deterioration have emerged at the single-stock level.

 

In the face of a #LateCycle slowdown, benchmark indices are able to continue higher due to the fact that investors increasingly crowd into large-caps and/or stocks that have idiosyncratic growth opportunities that are less tethered to the [deteriorating] economic cycle, at the margins. Ultimately the cycle always prevails (see: 2000-2002 or 2007-2009), but positive absolute returns can be sourced from an increasingly narrow group of stocks and/or style factors well into the start of any given bear market.

 

Dangerous New Highs for the Market? - SPX 2000 02

Source: Bloomberg L.P.

 

Dangerous New Highs for the Market? - SPX 2007 09

Source: Bloomberg L.P.

 

There’s a number of ways to measure market breadth on a trending basis (e.g. % of stocks making new highs, % of stocks correcting, % of stocks crashing, etc.), but for the sake of simplicity we track the percentage of stocks below their respective 50-day and 200-day moving averages in the Russell 3000 Index – which, at covering about 98% of the investable public equity market, makes it the broadest measure of the U.S. stock market.

 

On this measure, broad U.S. equity market breadth is as poor as it has been at any local peak since 10/9/07 – the previous cycle’s all-time high closing price for the SPX – surpassing the deterioration we saw at the 5/21/15 high, which was very much on par with the 7/19/07 local peak.

 

Current:

Dangerous New Highs for the Market? - BMBI 7 20 15

 

October 9th, 2007:

Dangerous New Highs for the Market? - BMBI 10 9 07

 

May 21st, 2015:

Dangerous New Highs for the Market? - BMBI 5 21 15

 

July 19th, 2007:

Dangerous New Highs for the Market? - BMBI 7 19 07

 

While not useful as a timing indicator, the aforementioned deterioration does imply the duration and scope for prospective returns are substantially worse than many investors may assume given consensus expectations for the length and strength of the current economic cycle, which we can loosely infer from consensus expectations for U.S. monetary policy.

 

Checking back in with TACRM, we are seeing market leadership increasingly concentrated amongst the exact style factors we’d expect to outperform in the latter innings of an economic and market cycle: large-caps (defensive safety and dividends), healthcare (increased consumption and the ability to maintain pricing power during economic downturns) and growth (many biotech and new tech companies don’t have earnings to speak of, therefore investors don’t have to worry about earnings misses derailing the momentum of the respective charts).

 

Dangerous New Highs for the Market? - 8

 

All told, we hope you find these quantitative signals helpful with respect to your individual investment mandate. As always, feel free to email us with questions.

 

Best of luck out there,

 

DD

 

Darius Dale

Director


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