“The credit belongs to the man who is actually in the arena…”
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.”
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:
- US Dollar Index flat week-over-week and +2.7% in the last 3 months
- Euro (vs. USD) flat week-over-week and -2.1% in the last 3 months
- Japanese Yen -0.1% week-over-week and -3.6% in the last 3 months
- Canadian Dollar -0.3% week-over-week and -7.7% in the last 3 months
- Russian Ruble -5.3% week-over-week and -16.3% in the last 3 months
- CRB Commodities Index -1.2% last week and -11.7% in the last 3 months
- Oil (WTI) -2.6% last week and -24.1% in the last 3 months
- Gold +0.8% last week and -7.6% in the last 3 months
- Copper -1.2% last week and -18.5% in the last 3 months
- 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:
- US Energy Sector (XLE) was the only one to close down wk-over-wk and is -16.1% in the last 3 months
- Emerging Markets (MSCI) and EM LATAM (MSCI) deflated another -1.8% and -0.7%, respectively
- 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:
- Utilities (XLU) +6.10%
- 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:
- 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
- SIZE: Large-Cap was up another +1.5% last week and was +1.9% for July
- 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%
Oil (WTI) 46.05-48.69
Best of luck out there today,
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Client Talking Points
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.
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).
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.
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Top Long Ideas
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.
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.
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).
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
QUOTE OF THE DAY
The price of greatness is responsibility.
STAT OF THE DAY
Ronda Rousey knocked-out her opponent Bethe Correia in 34 seconds in a UFC match Saturday.
7/30/15 BLMN | ANOTHER BACK HALF MISS?
7/30/15 PNRA | THE EVOLUTION CONTINUES
7/29/15 BWLD | COVERING THE SHORT
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)
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.
From a quantitative perspective, the XLY remains bullish on a TRADE and TREND duration.
CASUAL DINING RESTAURANTS
QUICK SERVICE RESTAURANTS