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CHART OF THE DAY: Are You Long Inflation Expectations? (Hope Not)

Editor's Note: The chart and excerpt below are from this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe today. 

 

CHART OF THE DAY: Are You Long Inflation Expectations? (Hope Not) - Z 07.27.15 chart

 

...Uh, maybe we should be long, “decoupling”? Nope. We’ll stick with the #Quad4 asset allocations, which should have you long low-beta and yield chasing sectors (short Commodities). Currently I like Healthcare (XLV), REITS (VNQ), and Utilities (XLU); not the following...

 


Debt Deflation Knives

“Second prize is a set of steak knives.”

-Alec Baldwin

 

That, of course, was one of the best one-liners from the 1992 classic Chicago real-estate brokerage movie, Glengarry Glen Ross (which was based on a 1984 Pulitzer Prize winning book by David Mamet).

 

Baldwin played Blake and the aforementioned quote came during his epic “motivational” speech to the sales-force. As many of you economic-cycle fans will recall, it’s always toughest to create sales and demand, when growth is slowing (1 was no different).

 

Debt Deflation Knives - z ab stk

 

“So,” it’s probably not different this time. The cover of The (now for sale) Economist is trumpeting “The Empire of The Geeks” (Silicon Valley) at another #bubble peak for “growth” assets. Instead, they should be asking themselves if this is a 1999 or 2007 cyclical slow-down.

 

Back to the Global Macro Grind

 

When the cycle slows, those who rotate out of #LateCycle styles of investing like:

 

A)     Inflation expectations

B)      Cyclicals (think peak growth and margin expectations)

 

Get 1st place… and those who are long:

 

A)     “Reflation” (commodities, currencies, and countries linked to inflation expectations)

B)      “Global Growth is back” (energy, basic materials, industrials, etc.)

 

Get to own the falling steak knives…

 

Here’s how that marked-to-market Global Macro score looked last week (in the context of the last month):

 

  1. Commodities (CRB Index) down another -4.4% wk-over-wk = down -8.5% month-over-month
  2. Oil (WTI) down another -6.0% week-over-week = crashing -20.5% month-over-month
  3. Gold down another -2.1% week-over-week = down -7.6% month-over-month
  4. Copper down another -4.5% week-over-week = down -9.2% month-over-month
  5. Canadian Dollar (vs. USD) -0.6% week-over-week = down -5.1% month-over-month
  6. Canadian Stocks (TSX Composite) -3.1% wk-over-wk = down -5.1% in the last month

 

Blame Canada? Nah. In US Dollars, let’s keep going on these hot-commodity-currency-country-links to inflation expectations:

 

  1. Russian Ruble -2.5% week-over-week = -down 6.8% month-over-month
  2. Russian Stocks -5.8% week-over-week = down -8.9% month-over-month
  3. Brazil’s Real -4.9% week-over-week = down -7.6% month-over-month
  4. Brazilian Stocks -5.9% week-over-week = down -8.5% month-over-month
  5. Nickel -1.8% week-over-week = down -11.6% month-over-month
  6. Rubber -2.2% week-over-week = down -14.0% month-over-month

 

Nickel and Rubber? Two of the BRIC’s (Brazil, Russia, India, China)? Damn those people who have to sell things in #deflating prices and/or have to buy/consume things in devalued currencies. #Deflation during a global growth slowdown has to be bullish, right?

 

Right. Right. Steak knives for everyone with a “diversified” asset allocation pie-chart last week! The Latin American “emerging markets” (MSCI) Index was -7% last week (-11.2% in the last month), and Chinese stocks were -8.5%, overnight. Booyah!

 

Uh, maybe we should be long, “decoupling”? Nope. We’ll stick with the #Quad4 asset allocations, which should have you long low-beta and yield chasing sectors (short Commodities). Currently I like Healthcare (XLV), REITS (VNQ), and Utilities (XLU); not the following:

 

  1. Inflation expectations (5yr breakevens) dropped another -13bps = down -28 bps in the last month (1.42%)
  2. Energy (XLE) and Basic Material (XLB) stocks down -4.0% and -5.4% (-9.1-9.3% in the last month) respectively
  3. Industrial stocks (XLI) deflated another -3.7% to -6.5% YTD (down -4.5% month-over-month)

 

If you’re levered long to inflation expectations another way to look at your risk is from a Style Factor perspective (mean performance of the Top Quartile vs. Bottom Quartile in S&P 500 companies):

 

  1. LEVERAGE: High Debt (to Enterprise Value) stocks were down -3.3% last week and are down -7.0% in the last 3 months
  2. BIG BETA: High Beta stocks dropped -4.2% last week and are down -8.7% in the last 3 months

 

In other news, our long-standing (back to the beginning of 2014 when TLT was at $108) best way to be positioned for growth and inflation slowing (Long-term Treasuries) had a great week last week.

 

The yield on a 10yr US Treasury Bond is down to 2.25% this morning and I still think that 1.75% happens before 2.75% does. I also love being long Low-Beta vs. short things that are highly levered to falling #DebtDeflation knives.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.21-2.34%

SPX 2069-2098
RUT 1
Nikkei 202
VIX 12.53-14.58
USD 96.61-98.35
Oil (WTI) 47.07-50.49

Gold 1067-1117

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Debt Deflation Knives - Z 07.27.15 chart


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

7/24/15 SBUX | BEAST MODE

7/24/15 MCD | Right on Track

7/23/15 DFRG | HOPE IS NOT A PROCESS

7/22/15 CMG | Is a Friend to Investors not a Faux

7/21/15 FUNDAMENTAL WALK THROUGH | SBUX

7/20/15 MCD | FRANCHISEE NUMBERS SPEAK LOUDER THAN WORDS

 

RECENT NEWS FLOW

Friday, July 24

BWLD | Downgraded to neutral from buy at Dougherty & Co.  


Thursday, July 23

DNKN | In case you missed DNKN CEO blasting the NY wage board during their earnings call, here is a good summary (click here for article)

BWLD | Increases their credit facility from $100 million to $200 million (click here for 8-K)

SBUX | SBUX and PEP sign agreement to bring Starbucks ready-to-drink beverages to Latin America (click here for article)

 

Wednesday, July 22

DRI | Bondholders protest plan to spin off real estate (click here for article)

NY Board recommends phasing in $15 hourly wage (click here for article)

 

Tuesday, July 21

MCD | Might take all-day breakfast national (click here for article)

Lawmakers, White House explore tax revamp for U.S. firms with large overseas presence (click here for article)

 

Monday, July 20

DNKN | Announces plans for 26 new restaurants in Fresno and San Francisco (click here for article)

 

SECTOR PERFORMANCE

Casual dining and quick service stocks, in aggregate, underperformed the XLY last week. The XLY was down -0.4%, top performer from casual dining was RT posting an increase of 10.8%, while CMG led the quick service pack up 10.5%.

 

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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The Macro Show Replay | July 27, 2015

 

 

 


July 27, 2015

July 27, 2015 - Slide1

 

BULLISH TRENDS

 

July 27, 2015 - Slide4

July 27, 2015 - Slide2

July 27, 2015 - Slide3

 

 

BEARISH TRENDS

 

July 27, 2015 - Slide5

July 27, 2015 - Slide6

July 27, 2015 - Slide7

July 27, 2015 - Slide8

July 27, 2015 - Slide9

July 27, 2015 - Slide10

July 27, 2015 - Slide11

July 27, 2015 - Slide12

July 27, 2015 - Slide13


YELP: Thoughts into the Print (2Q15)

Takeaway: We're expecting mgmt to fall on its sword, but the buy side may be too. The latter is a mild risk, but not enough to consider covering.

KEY POINTS

  1. 2Q15 PRINT = DISASTER: We suspect the reason why YELP left 2015 guidance in tact after missing 1Q revenues and guiding light for 2Q15 was because it was shopping itself, and it's much easier to do so when chalking up its recent weakness as temporary.  We suspect that will come back to bite them on this print.  YELP will need a massive acceleration in new account growth and record low attrition to hit consensus Local Advertising estimates, particularly in 2H15.  We're expecting YELP to miss 2Q Local Advertising estimates, guide light for 3Q15, and cut 2015 guidance. 
  2. BUT AN EXPECTED DISASTER? We're getting minimal buy-side pushback lately, and the sell-side isn't stepping up to endorse the name pre-print as they usually do.  The stock is down an additional 10% since the news broke that YELP is supposedly not shopping itself anymore (after selling off ~10% that day).  YELP is now lower than it was post 1Q15 release, and short interest is now back to pre-takeout rumor levels.  We're not expecting a squeeze on anything short of a beat and raise, but need to flag the risk regardless.  
  3. THIS ISN'T TEMPORARY: We’re expecting mgmt to use lingering issues with its 1Q15 salesforce territory redistribution as the scapegoat. The issue is the model itself, which is predicated on hiring enough new sales reps to drive new account growth in excess of its rampant attrition.  YELP's TAM isn't large enough to support its model, which has manifested into a persistent decline in salesforce productivity, and is now devolving into a mounting exodus of its sales reps (see note below).  That latter means that the model is unraveling, and the story is going to get much uglier than we initially expected.  

 

Let us know if you have questions, or would like to discuss further.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 

YELP: The New Major Red Flag (1Q15)

04/30/15 08:53 AM EDT

[click here]

 


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