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Deflation's Arena

“The credit belongs to the man who is actually in the arena…”
-Teddy Roosevelt

 

After all, it is we, the men and women of the Global Macro gridiron, “who strive valiantly; who errs, and comes short again and again, because there is no effort without error or shortcoming”…

 

We might not get everything right. But we tend to not implode on the big risks when consensus does.. and, at a bare minimum, our place on Wall Street “will never be with those cold and timid souls who know neither victory nor defeat.”

 

Deflation's Arena - 08.03.15 chart large

 

Back to the Global Macro Grind

 

Yep. That’ll fire me up on any Monday morning – never mind one in the arena of August heat. Your summer has been a relatively victorious one if you stayed clear of what many hoped was a “reflation” TRADE morphing into a legitimate TREND.

 

Here’s last week’s Currency/Commodity score, with a 3-month overlay to contextualize it:

 

  1. US Dollar Index flat week-over-week and +2.7% in the last 3 months
  2. Euro (vs. USD) flat week-over-week and -2.1% in the last 3 months
  3. Japanese Yen -0.1% week-over-week and -3.6% in the last 3 months
  4. Canadian Dollar -0.3% week-over-week and -7.7% in the last 3 months
  5. Russian Ruble -5.3% week-over-week and -16.3% in the last 3 months
  6. CRB Commodities Index -1.2% last week and -11.7% in the last 3 months
  7. Oil (WTI) -2.6% last week and -24.1% in the last 3 months
  8. Gold +0.8% last week and -7.6% in the last 3 months
  9. Copper -1.2% last week and -18.5% in the last 3 months
  10. 5yr UST Break-evens -3bps wk-over-wk to 1.40% (-38 bps in the last 3 months)

 

I know. Break-evens aren’t currencies or commodities, but since I like to play dirty sometimes I thought I’d slip that in there (mainly because that macro read-through on inflation expectations is highly instructed by FX and Commodity deflations).

 

The read-through to Global Equity markets was dominated by rising #Deflation expectations too:

 

  1. US Energy Sector (XLE) was the only one to close down wk-over-wk and is -16.1% in the last 3 months
  2. Emerging Markets (MSCI) and EM LATAM (MSCI) deflated another -1.8% and -0.7%, respectively
  3. Russian Stocks (RTSI) carried XLE-like negative alpha wk-over-wk (again) and are -16.6% in the last 3 months

 

Fortunately, I think the Fed gets this. That’s why the #1 change in their language last week was their concern on losing their almighty illusion of growth (inflated asset prices). That’s mainly why the doves took home the Low-Beta cake staying with the Long Bond too.

 

For those of you who took advantage of the correction in both Long-term Treasuries (TLT) and US Equities that look like bonds, well done. Oh my face was “marred by dust and sweat” (no blood) on that front. And I’m damn proud we stuck with the #process too.

 

Utilities (XLU) ripped higher into Friday’s month-end markup, taking their July absolute and relative gain vs. Energy (XLE) to:

 

  1. Utilities (XLU) +6.10%
  2. Energy (XLE) -7.69%

 

So, in terms of what happens next, this week’s US jobs report (Friday) should matter to what’s been working for the last week and month. Consensus is still looking for another > 225,000 (only because estimates anchor on what happened last time).

 

While the rate of change in Non-Farm Payroll gains has been slowing since FEB, pro-cyclical economists haven’t had to react to jobs prints that have looked as nasty as Texan deflation has. Alas, this is a cycle – give it time…

 

Away from capitalizing on #Deflation what else continued to work both last week and in July? From a Macro Style Factor perspective:

 

  1. BETA: Low-Beta was up another +1.9% last week (vs. the Dow +0.7% and SP500 +1.2%) and was +3.2% for July
  2. SIZE: Large-Cap was up another +1.5% last week and was +1.9% for July
  3. SHORT INTEREST: Low-Short-Interest was +1.3% wk-over-wk and +2.0% for July

 

In other words, if you were long something boring with non-cyclical cash flow, low-short-interest (2%), and a big market cap ($35B) like General Mills (GIS), you were up +1.9% on that in July. That’s not flashy, but it helped us achieve the goal – victory in the arena.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.18-2.28%

SPX 2067-2130
VIX 11.89-14.31
USD 96.58-97.96
EUR/USD 1.08-1.10
Oil (WTI) 46.05-48.69

 

Best of luck out there today,

KM

 

Deflation's Arena - 08.03.15 chart1 image normal


August 3, 2015

August 3, 2015 - Slide1

 

BULLISH TRENDS

August 3, 2015 - Slide2

August 3, 2015 - Slide3

August 3, 2015 - Slide4

BEARISH TRENDS

August 3, 2015 - Slide5

August 3, 2015 - Slide6 

August 3, 2015 - Slide7

August 3, 2015 - Slide8

August 3, 2015 - Slide9

August 3, 2015 - Slide10

August 3, 2015 - Slide11
August 3, 2015 - Slide12


Welcome to August

Client Talking Points

VIX/VOLUME

Sub 12 in the front-month VIX has been a clean cut sell signal for U.S. Equities post every rally to lower-highs in 2015. What was most interesting about last week’s month-end markup was Friday’s total U.S. Equity volume -13% and -21% vs. the 1 month and 1 year averages.

OIL

After a -2.6% #Deflation move last week, WTI drops another -1.5% this morning to $46.40, taking its 1-month crash to -26%. We have no idea how consensus is complacent about this after being too complacent on last year’s initial crash (Russia’s Ruble and stock market continue to crash too).  

UST 10YR

With both Global Growth & Inflation Slowing what does consensus chase (other than charts)? The Long Bond. Yep. AFTER the non-consensus 1 month move from 2.54% to 2.19%, CFTC futures/options net position moves back to net LONG +58,783 contracts.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Hedgeye CEO Keith McCullough.

Asset Allocation

CASH 50% US EQUITIES 4%
INTL EQUITIES 8% COMMODITIES 0%
FIXED INCOME 23% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
HOLX

HOLX’s earnings release were as good as we expected, and in some spots, much better than our optimistic view. Given the move in the price, we did begin to do some work on Hologic’s Diagnostic segment. We touched base with a lab Director who currently does his testing on Hologic/Gen-Probe’s Panther system. During the call management made some positive comments about uptake of the systems and rising utilization per box. Our contact suggested the benefit from the Affordable Care Act was substantial  over the last 12 months, pushing volume up to a mid-teens growth rate, but that trends were flattening. But on the positive side Qiagen continues to cede share with an out of date test and the alternatives are primarily Roche and Hologic, but not Cepheid’s system. The bottom line is that we may be too conservative with our estimates for Diagnostics, which we’ve been assuming treads water from here.  However, we’re starting to think there is some incremental acceleration that’s possible, which would be welcome news indeed. 

PENN

After attending PENN’s analyst day at the Plainridge Casino in Massachusetts our Gaming, Lodging & Leisure Team struggled to find any negative takeaways. The property opened very strong in late June, and the strength continued in July. We are now raising our win per day per slot assumption to $500 from $400. Terrific highway access, a lower gaming tax rate and garage parking provide a competitive advantage in what seems to be a deeper market than the consensus view. Our 2015 and 2016 estimates are materially above the Street for EBITDA and EPS. Most importantly, we think PENN should generate an ROI of 28% on Plainridge, much higher than the Street anticipates.

TLT

As largely expected a sequential acceleration in GDP from Q1 to Q2 on a seasonally adjusted annual basis pulled forward the market’s expectation for a rate hike which = USD strength. The USD finished positive on the week (+0.50% on Thursday’s print alone).

  • U.S. GDP reported Thursday for Q2 came in at +2.3% on a Q/Q seasonally-adjusted annual rate and the market took it as a positive print à rate hike expectations pulled forward.
  •  Remember that 1) Consensus focuses on this SAAR number and 2) The GDP acceleration came off of an awful Q1 print (Q1 revised to a measly +0.60% for Q1 vs. initially reported -0.20%)
  • On a Y/Y basis (crazy Hedgeye speak) GDP for Q2 actually decelerated to +2.3% YY vs. 2.9% prior
  • With very difficult base effects in our model for 2H 2015 GDP we expect Q2 data (especially the GDP print) to provide support for the USD
  • Our expectation for Y/Y GDP in Q3/Q4 are +1.6% Y/Y (+1.4% Q/Q SAAR) and +1.5% Y/Y (+1.7% Q/Q SAAR) respectively; These prints (Q3 will come in October) will stoke a relatively more dovish FED for a short time (USD headwind) but until then we’ll ride the Q2 data train.  

Three for the Road

TWEET OF THE DAY

VIDEO: Demographics Expert Neil Howe Returns for Rapid-Fire Discussion on Election, Housing, and More https://app.hedgeye.com/insights/45589-demographics-expert-neil-howe-returns-for-rapid-fire-discussion-on-ele… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

The price of greatness is responsibility.

Winston Churchill

STAT OF THE DAY

Ronda Rousey knocked-out her opponent Bethe Correia in 34 seconds in a UFC match Saturday.


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The Macro Show Replay | August 3, 2015

 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

7/30/15 BLMN | ANOTHER BACK HALF MISS?

7/30/15 PNRA | THE EVOLUTION CONTINUES

7/29/15 BWLD | COVERING THE SHORT

7/27/15 MCD | THE GAME CHANGER | ALL DAY BREAKFAST (ADB) SURVEY RESULTS

7/24/15 MCD | RIGHT ON TRACK

 

RECENT NEWS FLOW

Friday, July 31

RUTH | Delivered a nice quarter on Friday, with SSS growth of 4.2% versus consensus estimates of 3.3%, built by a traffic increase of 0.7% and an increase in average check of 3.5% (click here for press release, or here for news article)

 

Thursday, July 30

FRGI | Reported 2Q15 results, SSS increased 4.3% at Pollo Tropical versus consensus estimates of 5.1% and 5.6% at Taco Cabana versus consensus estimates of 4.4% (click here for press release, or here for news article)

 

Wednesday, July 29

WEN | Testing antibiotic-free chicken in certain markets (click here for article)

JMBA | Provided an update on refranchising efforts, expects to be 90% franchised organization by the end of 2015 (click here for article)

PNRA | Reported strong 2Q15 results, and an even better outlook for the next 12-18 months, refer to our earnings summary here for more detail

 

Tuesday, July 28

Minimum wage increases continuing to spread across the country (click here for article)

 

Monday, July 27

DRI | Names Todd Burrowes, former RT COO, as president of LongHorn Steakhouse (click here for article)

PLKI | Focusing on value, bringing back Rip’n Chick’n for only $3.99 (click here for article)

 

SECTOR PERFORMANCE

Casual dining and quick service stocks, in aggregate, outperformed the XLY last week. The XLY was up 1.7%, top performers from casual dining were BWLD and FRGI posting an increase of 13.6% and 13.1%, respectively, while SHAK and PNRA led the quick service pack, up 18.6% and 9.7%, respectively.

Monday Mashup - CHART 3

Monday Mashup - CHART 4

 

QUANTITATIVE SETUP

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

Monday Mashup - CHART 2

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 5

Monday Mashup - CHART 6

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 7

Monday Mashup - CHART 8


Demographics Expert Neil Howe Returns for Rapid-Fire Discussion on Election, Housing, and More

In a special two-part edition of Hedgeye's Real Conversations, Hedgeye CEO Keith McCullough welcomes back demographer, author, and historian Neil Howe to discuss politics, central planning, and millennials.

 

Armed with his unrivaled expertise on demographics, Neil breaks down how the 2016 Republican field stacks up to the current Democratic candidates and what the upcoming election will look like compared to 2008.

 

 

In Part 2, Neil discusses what the Federal Reserve will likely do versus what it should do, what massive corporate earnings might actually represent, and the sector that is responsible for positive GDP growth in the U.S.


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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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