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USD, UST 2YR and China

Client Talking Points


In the end, Americans should like our long-term #StrongDollar theme, but not all macro markets and corporates will in the meantime – this is the tug-of-war and #deflation is winning it. That said the USD is signaling immediate-term TRADE overbought at $1.08 vs Euro today, so be careful with grossed up Energy/Metals shorts.


This is the 4th time the chartists have called for a “breakout” in the 2YR at 0.73-0.75% (since March) and every time that’s been wrong as both growth and inflation data slowing continue to back Fed Fund Futures off the SEP rate hike – we’re one bad jobs report away from rates breaking down faster (again).  


Slower-for-longer (pretty obvious from a bottom up or top down research perspective)? But how about lower-for-longer for the propped up A-Shares? Couldn’t hold anything more than a 1-day gain with the Shanghai Composite down another -1.7% overnight, continues to signal bearish TREND in our model with no support to 3,441.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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 But on the positive side Qiagen continues to cede share with an out of date test and the alternatives are primarily Roche and Hologic, but not Cepheid’s system.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).

  • 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


VIDEO: This is What Deflation Leads You To $TLT https://app.hedgeye.com/insights/45640-mccullough-this-is-what-deflation-leads-you-to… via @hedgeye



Only the wisest and stupidest of men never change.



The average American spends about 70 hours a year on lawn and garden care, according to the American Time Use Survey.

Big Summer Blowout!

“Hoo-hoo! Big summer blowout!”



Forget the blowout in #Deflation-linked currencies, commodities, stocks, bonds, etc. this morning and focus your mind on the old-new bull case that didn’t work. “Gas prices are low” is back. Everyone who loved US growth with high gas prices loves a big summer blowout!


Disney (DIS) reported blowout earnings last night (sort of), but everyone and their brother’s sister owns the Low-Beta-Big-Cap-Chart (Style Factors that are working) at this stage of the game, so the stock is indicated down -6% on that. Stocks do correct.


I have (going on) 3 daughters  (1 son), so I’m a big Frozen fan (sort of). Sadly, my son and I both know every word to some of your favorite Frozen songs. To commemorate our wedding anniversary today, I used my wife Laura’s favorite movie scene as my opening quote.


Big Summer Blowout! - 08.05.15 chart2


Back to the Global Macro Grind


Big summer blowout in Oil, Russian Rubles, Linn Energy (LINE) – and Apple! And while I wasn’t brave enough to signal buy on “valuation” in any of the #Deflation-links, yesterday I did dip a toe in the water in AAPL as it was signaling immediate-term TRADE oversold.




Don’t worry, I’m going to keep the most over-owned stock in human history (that’s what I called it when it broke the @Hedgeye TREND risk line of $126) on as short a leash as my man Oaken did his cabin inventory. Being long AAPL from here isn’t going to be easy.


Since the bull case for AAPL is efficiently “covered” by the Old Wall, let’s apply some Style Factoring to the analysis this morning:


  1. LOW-BETA – yes, relatively speaking to DIS at 1.1, it has a 0.9 Beta
  2. SIZE – does the mother of all market caps have “Big Cap”? obviously, yes
  3. SECTOR – oops, Tech (XLK) is bearish TRADE and TREND @Hedgeye (mainly because AAPL is)


AAPL is the heaviest weight in the XLK (Tech Sector ETF promoted on the inside cover page of Barron’s this weekend) and it’s bearish TRADE and TREND right now whereas MSFT and GOOGL are bullish on both of those risk management durations.


In other words, that’s why I said being long AAPL for anything more than a Real-Time Alert TRADE signal isn’t going to be easy. It’s always easier for me to be long companies like GOOGL (Low-Beta at 1.0, Big Cap, #NiceChart!) whose recent earnings release was a good thing.


When a company’s most recent report was a bad thing, then “longer-term” investors are hostage to all of the other bad macro things that could affect the price/volume/volatility of the stock (until they report their next quarter).


Moving along to that darn China thing (yep, it’s a Style Factor in your portfolio too), the Chinese dudes who have been trying to ban everyone from selling saw more selling overnight. This puts the Shanghai Composite in the following multi-duration @Hedgeye frame:


  1. CONTEXT: down -1.7% overnight (post a +3.7% up day prior, but a down -10.1% week prior to that)
  2. TRADE = bearish, with no immediate-term support to 3441 (closed at 3694)
  3. TREND = bearish, with intermediate-term resistance up at 4271


This is another major reason why owning AAPL is less easy than it was when the chart “looked good.” China is a very “bad macro thing” affecting the emotional break-downs of moving monkeys chasing AAPL’s “200-day.”


How bad is that thing btw? China, I mean. Since these dudes make up the numbers, can you have any confidence that you know the answer to that risk management question? Why can’t China be to 2015 what Lehman was to world markets in 2008?


Back to the big summer blowout in “gas prices” thing. As you can see in today’s Chart of The Day, back by popular client demand is the refreshed Hedgeye Squeeze Index, which reminds you that gas prices are only 6% of the median US consumer’s expenditures.


If you want US consumers (the median, who only makes < $50,000/year – no that’s probably not you) to accelerate real (inflation adjusted) spending, what you really need is a big generational blowout in their #1 cost-of-living (hint: shelter = 26%).


Oaken, bro – give me a price check on that. CoreLogic’s report on US Home Prices was +1.7% month-over-month (reported yesterday), taking year-over-year US #HousingInflation to +6.5%. That’s the 4th straight month of acceleration, in rate of change terms.


Sure, my boys reiterated our bullish 2015 housing call on that data point. But you can’t climb this mountain and come out of the US cost-of-living cabin feeling like everything was on sale. Boo-hoo!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.14-2.29%

SPX 2068-2119
VIX 11.86-15.24
USD 96.99-98.34
EUR/USD 1.08-1.10
Oil (WTI) 45.01-47.54


Best of luck out there today,



Big Summer Blowout! - 08.05.15 chart1




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.

The Macro Show Replay | August 5, 2015


August 5, 2015

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Kellogg Company (K) is on our Hedgeye Consumer Staples SHORT bench.


We are tempted to press the short, but few names in the space make good shorts in this market.  On the LONG side, your best bet for a large cap, low-single digit top-line growth, dividend company within the consumer staples space continues to be General Mills (GIS), which has much broader growth potential.


We have been vocal about our LONG thesis on the cereal market and its return to positive growth. We do not picture the category as a major growth driver for a particular company, more as a complement, providing consistent low-single digit sales growth. That is what we have with Kellogg, who just reported 2Q15 results yesterday. The street was overly bearish on the company going into the quarter resulting in an estimate beat, but still considerable declines in operating profit year-over-year.



Management isn’t setting the bar too high, even with the sluggish 1H of the year it won’t be difficult to achieve flat sales for the full year. If we continue to see the same softness in volumes and sales, these longer-term targets will start to seem unachievable. We continue to be bearish on K, but can’t find the conviction to call it a true SHORT yet. We do however continue to get excited about the cereal categories resurgence after every earnings call we listen to from one of the category leaders; POST is up next, on Friday, August 7th.



K’s reported 2Q15 currency-neutral comparable diluted EPS of $0.97 versus consensus estimates of $0.92, representing a -4.9% decrease YoY. Currency-neutral comparable net sales came in above estimates, reporting $3,685mm versus consensus estimates of $3,466mm, representing a +0.1% increase YoY. Although net sales saw a slight uptick, notably volume for the company was down -0.4%. Currency-neutral comparable operating income of $529mm beat consensus estimates of $507mm, representing a -6.8% decrease YoY.






(Represents ~65% of total consolidated net sales)

The region struggled across the board, led by U.S. Morning Foods and U.S. Snacks, reporting net sales declines of -2.3% and -1.8%, respectively. The total segment net sales declined -1.8%, leading to a -12.7% decline in operating profit. Operating profit declines were led by North America Other (includes the U.S. Frozen Foods, Kashi and Canadian businesses) down -22.4%, followed by U.S. Snacks, down -18.7%, U.S. Morning Foods down -5.5% and lastly U.S. Specialty down -5.3%. North America is clearly still struggling to grow sales, other things affecting the quarter were increased distribution costs, timing of production and incentive compensation. Although all segments in North America showed net sales declines, management stated that “sales increased…in the Frozen Foods and Canadian businesses.” Management was upbeat about the progress made in cereal, but there is still more to do, as they put it.  Currently management is confident in the improvements they have made to the product offering, and continue to improve. Cereal consumption seems to have stabilized and was flat in Q2, Kellogg branded sales were essentially flat, with the top six brands growing share and sales. Currently 75% of cereals are made without artificial colors and more than half without artificial flavors, they plan to transition to 100% on both by 2018. U.S. is down -1.8% as a result of continued weakness in wholesome snacks, and continued distribution losses on this businesses. U.S. specialty sales were down -1.2% in the quarter, as business is experiencing share losses in foodservice. Kashi has continued its descent in 2Q15, and they continue to invest in the brand, is it a dead better-for-you brand? Possibly, it will have to turn soon, or all the investment made in the brand will be for nothing.



(Represents ~19% of total consolidated net sales)

The Europe team is working through a rather difficult operating environment, but surviving. Net sales for the region were -2.5% in the quarter, while operating profits increased 5.6%. These positive results were driven by improved COGS and the timing of investments made in brand building. Pringles is a winner in all regions, growing net sales at a double-digit rate in the UK and Germany. Cereal is struggling international, a little more than the U.S.



(Represents ~9% of total consolidated net sales)

Latin America has experienced robust sales growth, with net sales up 14.5% and operating profit up 8.9%, driven in large part by the Pringles brand, as well as investments in renovating other brands. This region provided another glimmer of hope for the cereal business, seeing moderate volume and price growth. Consumption of Pringles was also strong for the quarter, leveraging Copa America partnership to drive sales. Latin America, more than any other region was assisted by pricing/mix, which represented 13.4% of the 14.5% increase in net sales.



(Represents ~7% of total consolidated net sales)

Asia Pacific is crossing over some easy comparisons, but they are experiencing strong growth as well. Net sales are up 6.8% in the region with operating profit up 76%, still only representing $10mm in operating profit as shown in the chart above.



Management reaffirmed guidance for the full year 2015, which consists of the following:

  • Net Sales = Approximately flat
  • Operating Profit = -2% to -4%
  • EPS = Flat to -2%
  • Operating Cash Flow = Approximately $1bn
  • Total capital spending = 4% to 5% of sales
  • Share repurchases in 2015 = $700mm to $750mm


Additionally, management provided early guidance for the 2016 fiscal year, which was unusually early; they usually wait until at least Q3. Seemed that they were trying to shift focus away from current poor performance and urge investors to look out 2-3 quarters. In 2016 management hopes that current initiatives both cost savings and investments will start to make a stronger impact leading to flat to slightly up sales, getting them back on their long-term growth model.






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