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Russell 2000, Japan and UST 2YR

Client Talking Points

RUSSELL 2000

The Russell 2000 got crushed into week’s end, taking it's correction  to -6.9% from its year-to-date high (much worse than SPX -2.5% from its year-to-date high). Small cap and high beta Style Factors are -7.7% and -9.3%, respectively, in the last 3 months – not bullish growth signals.

JAPAN

Japan is up +0.4% overnight and up for the 4th consecutive day –signaling almost as overbought now as the Russell 2000 is oversold, but this continues to be or favorite Global Equity market at +7.4% in the last 3 months vs. the mess that is the aforementioned factors in the U.S.

UST 2YR

The UST 2YR Yield is up at 0.74% this morning and this has been the alleged “breakout” level all year long (failed here every time); if the Fed breaks it out, they could easily be the catalyst for a flattening and/or recession – that’s what Mr. Market told you post jobs report.

Asset Allocation

CASH 60% US EQUITIES 6%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 22% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
HOLX

HCA had some potentially chilling commentary on their earnings call this week and introduced a new term, #ACATaper. The pace of growth in the U.S. Medical Economy has been on a tear as the newly insured rolled into physician offices and hospitals. We’ve been highlighting in recent weeks the transition from an #ACATailwind to #ACAHeadwind, or as someone on the HCA call named it, the #ACATaper.   

 

In an analysis of the demographics of the newly insured, Pap testing, HPV, and mammography were at the top of the list of products that would be positively impacted by the ACA.  As we reach the #ACATaper stage, will HOLX take a hit to their Diagnostic segment? It is possible, in our view, but so far a minor risk.  As we learned last week from a lab operator, Qiagen is likely to continue to cede their 14% HPV testing share to HOLX. So while the #ACATaper appears to be finally here, there are offsets. 

 

On a disappointing note, our 3D Tomo Tracker update for July came in at 24 facilities. Down sequentially from June, and down from a peak of 54 in May. Our forecast algorithm, which is based on these updates, remains unchanged. While 20 is low, it is probably a blip in the longer term adoption cycle.  

PENN

PENN has emerged as the first domestic gaming growth story in 10 years with a new casino in Massachusetts this year and one in San Diego next year. Meanwhile, regional gaming trends have stabilized, providing near term earnings visibility and upside. Upcoming catalysts include the monthly release of State gaming revenues for July, including Massachusetts, and positive earnings revisions.

TLT

Sometimes the macro rotation and allocation playbook is relatively straightforward. As growth slows and "reflation" deflates, you want to be buying A) Long-term Bonds and B) stocks that look like bonds. Bond proxies and defensive yield consistently outperform alongside the dual deceleration in demand and prices and Utilities and REITS remain the go-to sectors for growth slowing, defensive yield exposure.  

Three for the Road

TWEET OF THE DAY

VIDEO | History: Why People Are Angry  https://app.hedgeye.com/insights/45717-video-history-why-people-are-angry

@KeithMcCullough

QUOTE OF THE DAY

The time to repair the roof is when the sun is shining.

John F. Kennedy

STAT OF THE DAY

SeaWorld experienced an 84% drop in profits in the second quarter compared to the year before (still reeling from “Blackfish,” the documentary that raised questions about its treatment of animals) attendance dropped by 100,000 people, about 1.5%.


CHART OF THE DAY: Deflation Expectations (They're Rising Again)

Editor's Note: This is a chart and brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information and how you can subscribe.

 

...Yep. That’s kind of a depressing note to kick off another week in a world that continues to be dominated by both #LateCycle growth slowing and #Deflation. But it is what it is. Hope is not a risk management process.

 

Post Friday’s US jobs report, I still think the Federal Reserve risks being THE catalyst for a curve flattening (recession). If they’re hostage to a political calendar and raise rates during a cyclical and secular slowdown, that is...

 

CHART OF THE DAY: Deflation Expectations (They're Rising Again) - Chart of the Day


Hostage To A Hike?

“Their waiting blurred the calendar.”

-Wallace Stegner

 

Life, like economies, can be cyclical. Then there’s the secular stuff that just won’t go away. As Stegner wrote in The Angle of Repose, we can be “imprisoned” by our circumstances, “vacillating between hope and disappointment.” (pg 437)

 

Yep. That’s kind of a depressing note to kick off another week in a world that continues to be dominated by both #LateCycle growth slowing and #Deflation. But it is what it is. Hope is not a risk management process.

 

Post Friday’s US jobs report, I still think the Federal Reserve risks being THE catalyst for a curve flattening (recession). If they’re hostage to a political calendar and raise rates during a cyclical and secular slowdown, that is.

Hostage To A Hike? - Fed cartoon 01.28.2015

 

Back to the Global Macro Grind

 

Cyclically, both non-farm and private payrolls slowed sequentially and in year-over-year rate of change terms in July. I still think the cycle peak for US employment was in Q1. It’s now Q3, and counting. Given July’s #Deflations, Q3 is shaping up slower than Q2.

 

On the jobs data, rates were down (10yr UST Yield 2.16% = Long-term Treasuries + Utilities (XLU) up). I guess some (especially Long Bond Bears) were surprised by that move. No one should be – the Bernanke/Yellen Fed has never tightened during a slowdown.

 

That certainly doesn’t mean Yellen can’t pull a 2011-style Trichet (former ECB czar) and just “do it, because it’s time.” That would sadden me as I was genuinely starting to think that she and her colleagues are “data dependent.”

 

For those of you who still pay attention to both the data and how macro markets are interpreting it, here’s what happened in FICC (Fixed Income, Currencies, Commodities) last week, within the context of the last 3 months:

 

  1. FX (wk-over-wk): Canadian Dollar -0.4%, Brazil’s Real -2.5%, Russia’s Ruble -3.6%
  2. FX (in the last 3 months): Canadian Dollar -7.7%, Brazil’s Real -13.8%, Russia’s Ruble -21.5%
  3. Commodities (CRB Index) down another -2.1% wk-over-wk, deflating -12.6% in the last 3 months
  4. Oil (WTI) #deflated another -6.7% wk-over-wk, crashing -27.8% in the last 3 months
  5. Copper dropped another -1.3% wk-over-wk, moving into crash mode, -20.1% in the last 3 months
  6. Break-evens (5yr UST) down another 11 basis pts wk-over-wk and -39bps in the last 3 months to 1.29%

 

And sure, the Fed can start to ignore all of the deflationary expectations and data inasmuch as they want to hope for magical wage inflations and capex cycles, but that’s precisely THE risk. They haven’t communicated changing that data dependent mandate, yet.

 

Mr. Macro Market’s read-through to Global Equity markets was as plainly obvious as it was to the US Equity market:

 

  1. Energy Stocks (XLE) led losers, closing down another -3.4% on the week, taking 3-month deflation to -16.7%
  2. Basic Material Stocks (XLB) dropped another -1.6% on the week, taking 3-month deflation to -10.9%
  3. Emerging Market Stocks (MSCI) fell another -1.8% on the week, taking 3-month deflation to -13.6%
  4. EM Latin American Stocks (MSCI) lost another -4.2% on the week, taking 3-month deflation to -18.0%
  5. Brazil’s Stock market (Bovespa) dropped another -4.5% on the week, taking 3-month deflation to -14.7%
  6. Utilities (XLU) appreciated +0.9% on the week, taking the 3-month gain to +1.5%

 

All the while, our favorite Global Equity market (see Q3 Macro Themes deck - Japan’s Nikkei) added another +0.7% of absolute weekly performance, taking its 3-month appreciation to +7.4%. There’s always a bull market somewhere!

 

The thing about Japan is that central-planners there have vacillated “between hope and disappointment” (for 20 years) before finally accepting that they have nothing sustainable that would deliver their people the threat of a “hike.”

 

Well, to be fair, even though some of the un-elected at the Fed might like to think so, we aren’t “their people.” We are simply The People who will be hostage to a hike. Best of luck to all my friends in Texas and in the Dakotas on that front.

 

US stocks obviously get this. Signaling immediate-term TRADE oversold on Friday, they’ve been down for 11 of the last 14 days and the Russell 2000 is in the midst of a -6.9% correction (vs. SP500 -2.5% from its YTD high and the Dow now -2.5% for 2015 YTD).

 

As we all await the blurring September “rate hike” calendar, the question remains, however: does the Fed get it?

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.14-2.25%

SPX 2067-2096
RUT 1199-1227
Nikkei 209
EUR/USD 1.08-1.10
Oil (WTI) 42.89-46.41

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Hostage To A Hike? - Chart of the Day


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The Macro Show Replay | August 10, 2015

 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

8/7/15 BOJA | BO’S DILEMMA

8/6/15 MCD | GETTING MORE BULLISH

8/6/15 WEN | Performing Well for Now

8/5/15 CHUY | COVERING THE SHORT

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

 

RECENT NEWS FLOW

Friday, August 7

NDLS | Downgraded to neutral from overweight at Piper Jaffray, target cut to $12 from $19

 

Thursday, August 6

MCD | Announced the cut of 225 jobs, as part of previously announced $300mm cost saving initiative. We expect to see more of these announcements come out over the coming months (click here for article)

MCD | Expanding table service to the UK market (click here for article)

WEN | Upgraded to overweight from neutral at JP Morgan, target is $12

 

Wednesday, August 5

WEN | Reported 2Q15 EPS of $0.08 versus consensus estimates of $0.09 (click here for press release)

 

Tuesday, August 4

BLMN | Reported 2Q15 results, posting EPS of $0.28 beating consensus of $0.27. (click here for press release)

CHUY | Reported 2Q15 results, reported EPS of $0.32 beating consensus of $0.25. (click here for press release)

 

Monday, August 3

JMBA | Entered into a 25 unit development agreement in Manhattan and Long Island markets (click here for article)

DPZ | Opened its 12,000th store in the world, in Oklahoma City (click here for article)

 

SECTOR PERFORMANCE

Casual dining and quick service stocks, averaged out to matching the XLY last week. The XLY was down -2.4%, top performers from casual dining were CHUY and DENN posting an increase of 14.9% and 8.0%, respectively, while TAST and SHAK led the quick service pack up 15.0% and 7.7%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks bearish from a TRADE perspective, but bullish in the 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


August 10, 2015

August 10, 2015 - Slide1

 

BULLISH TRENDS

August 10, 2015 - Slide2

August 10, 2015 - Slide3

August 10, 2015 - Slide4

 

BEARISH TRENDS

August 10, 2015 - Slide5

August 10, 2015 - Slide6

August 10, 2015 - Slide7

August 10, 2015 - Slide8

August 10, 2015 - Slide9

August 10, 2015 - Slide10

August 10, 2015 - Slide11
August 10, 2015 - Slide12

August 10, 2015 - Slide13

 


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