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China, USD and Volatility

Client Talking Points


When in doubt, devalue! Yep, we taught them that (after Japan, Argentina, Zimbabwe, etc. tried the same for the sake of “exports”) – biggest devaluation move in 20 years begs the basic question – how made-up is the 7.0 GDP story in China with exports -9%?


Cross-asset class volatility and foreign currency correlation risks should ramp on China trying to centrally-plan markets, but this is coming off a relatively big down day for USD after Fed’s Fischer acknowledged economic gravity. The EUR/USD 1.10 is at the top end of our 1.08-1.10 range.


Inasmuch as UST 2YR resistance of 0.75% has held all year long, so has 11.34 @Hedgeye TREND support for front-month VIX – total U.S. Equity market volume (including dark pool) was -24% vs. its 1 year average on yesterday’s no volume “reflation” day.


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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 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.


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


Van Sciver: Fade Caterpillar's "Barron’s Bounce" | $CAT https://app.hedgeye.com/insights/45748-van-sciver-fade-caterpillar-s-barron-s-bounce-cat… @HedgeyeIndstrls




Talent is cheaper than table salt. What separates the talented individual from the successful one is a lot of hard work.

Stephen King


57% of teens say they have met a friend on the Internet and more than 50% of that group say they’ve done it more than five times.

CHART OF THE DAY: The Slowing ... It's Secular (Long-Term Chart of Global Yields)

Editor's Note: Below is a chart and brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe and stay ahead of consensus.


...As you can see in today’s Chart of The Day (Long-term chart of Global Yields) China telling the “truth” (sort of) by their actions only confirms what long-term investors have had right on growth and inflation for a long time now – the slowing is secular.


CHART OF THE DAY: The Slowing ... It's Secular (Long-Term Chart of Global Yields)  - Chart of the Day

Landing On Their Head

“That is why, no matter how desperate the predicament, I’m always straightening my derby hat and fixing my tie – even though I have just landed on my head.”

-Charlie Chaplin


After making up a 7.0 GDP number in Q2, the Chinese have quite publicly landed on their head. And, as you’re all accustomed to by now, the only ideological central-plan for that in this day and age is a currency devaluation.


Must “stimulate” exports, right? Never mind what might happen to all your customers (Singapore, Taiwan, Indonesia – stock markets all -4-6% in the last month) and/or local consumers (less purchasing power) – it’s for The People, right?


Definitely. For sure. Now that most of the majors (Japan, Europe and China) have answered the bell on a global cyclical slowdown meeting their secular (demographic) ones, the only one left to devalue (again) is the USA.

Landing On Their Head - China GDP cartoon 07.16.2015


Back to the Global Macro Grind


If Abenomics (BOJ) + Draghi’s (ECB) “Whatever It Takes” (and almost 600 rate cuts around the world in response to growth and inflation slowing) = US Dollar’s biggest 6-12 month ramp in modern history, what’s China devaluing by 2% going to do?


I don’t know. Do you?


This is where embracing the uncertainty of it all comes into the #process. While the absolute devaluation (to 6.2298 Yuan vs. 6.1192 Yuan) is small (2%), the non-linearity of the move is probably what matters here. The Chinese are panicking.


In addition to the FX moves overnight, this is what Mr. Macro Market told us:


  1. Shanghai Composite down, literally, 1 basis point (-0.01%) on the “news” – nice job dudes
  2. Indonesia and Singapore stock markets were -2.7% and -1.4% on the news, respectively
  3. KOSPI and Taiwan saw their stock markets decline (again) and are -3.6% and -5.8% month-over-month
  4. Oil (WTI) failing to have more than a 1-day bounce, -0.5% to $44.73 (no support to $42.62)
  5. Gold sees some follow through, +0.8% to the top end of my $1080-1118 risk range


Global Rates backed off on the implicitly bearish #ChinaSlowing news too:


  1. US 2yr Treasury Yield backed off the 0.75% level of resistance it has failed at, every time, in 2015
  2. US 10yr Treasury Yield back down to 2.17% and remains bearish TREND @Hedgeye
  3. German 10yr Bund Yield failed at its long-term TAIL risk level of 0.76% and has fallen to 0.66% last
  4. Swiss 10yr Bond Yield has retraced all the way back down to -0.17%
  5. Japanese 10yr Government Bond Yield of 0.39% is -4 and -12 bps lower than where it was 1mth and 1yr ago


In other words, the most fundamental reality in Global Macro today remains the same as it was yesterday. As both Global Growth and “reflation” slows, #Deflation linked assets get cheaper and slow-growth ones (Long Bonds) get more expensive.


As you can see in today’s Chart of The Day (Long-term chart of Global Yields) China telling the “truth” (sort of) by their actions only confirms what long-term investors have had right on growth and inflation for a long time now – the slowing is secular.


As for the US stock market, don’t forget that no “surprise” (non-linear) central-planning move happens in a vacuum. Since yesterday was a “reflation” day, today is most likely going to be a deflation day. What I mean by that is:


  1. Energy Stocks (XLE) bounced +3.2% on Down Dollar yesterday, but remain bearish TREND @Hedgeye
  2. Utilities (XLU) corrected -0.4% on Up Bond Yields yesterday, but remain bullish TREND @Hedgeye


That gave the SP500 its 4th up day in the last 15, but it came on crashing US Equity Volume (Total US Equity Market Volume, including dark pool, was -24% vs. its 1yr average).


Since I covered every short position in Real-Time Alerts on Friday (they all signaled immediate-term oversold), I saw plenty of short selling opportunities yesterday. Given the China news, my 2 favorite SELL signals yesterday were CAT and Industrials (XLI).


If you want to make money in this market, I say you keep moving out there. When someone asked me yesterday what I’ve been doing differently in Real-Time Alerts (24 booked gains in a row), I said I was just seeing the big picture clearly.


As most of you know, 16 years of risk managing markets doesn’t always go this smoothly. But when it does, and we’re not consensus, it sure beats landing on my head.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.25%

SPX 2076-2118
USD 96.35-98.46
Oil (WTI) 42.62-46.19

Gold 1080-1118


Best of luck out there today,


Keith R. McCullough
Chief Executive Officer


Landing On Their Head - Chart of the Day

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The Macro Show Replay | August 11, 2015


August 11, 2015

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HIBB | The Beginning of the End?

Takeaway: We have a hard time modeling a scenario where HIBB does not get cut in half. $1.50 in EPS vs Street at $3.85. Still one of our top 3 shorts.

HIBB, one of our top Retail Shorts, preannounced a miss after the close. There’s a number of things that concern us.

1) Comps came in at -1.1% for the quarter. The company was +low double digits through the first 21 days of May. That suggests that June and July were horrible.

2) This is the first time in 23 quarters where the 2-year comp trend for HIBB went negative.

3)  Even worse is that management notes ‘underlying business softness’ as one of the factors. That’s actually pretty unusual for HIBB. Whether business is good or bad, the company usually has a firm grasp on what’s driving its sales. This time, there’s a notable lack of rationale or understanding for such a significant turn in trends.

4) There was also no guidance provided beyond the quarter. In the past, HIBB would usually provide a full-year update as well.

5) Our sense on this is that HIBB is feeling the brunt of why we’re bearish…

a) It has no e-commerce business, and that’s where the incremental growth in the industry is coming from. Simply put, HIBB is finally starting to lose share to dot.com.
b) It is feeling the pain of overlap with Dick’s, Academy, and Sports Authority as HIBB grows outside of the Bible Belt (bad idea) and as those other retailers grow in HIBB’s home turf.

6) Nike is absolutely killing it just about everywhere in the US -- except at Hibbett? That makes zero sense to us as Nike is about 60% of Hibbett’s footwear wall.

7) The question for us at this point is whether this turn of events will finally cause HIBB to accelerate its decision to start up an e-commerce business.

a) If the answer is Yes, then we think there’ll be about a 3-5 point hit in margins for 2-years before we see any notable revenue benefit.
b) It the answer is no, then expect continued ‘unexpected’ top line weakness and earnings misses.


From where we sit, both outcomes are bad. But knowing this management team, we think they need to get one or two more black eyes before stepping up and making the big investment in e-comm. 


Either way, we think that the end-game is margins getting cut in half, and about $1.50 in earnings in three years. That’s a pretty massive statement given that the consensus is at $3.85. What kind of multiple do you put on a name with shrinking earnings and 60% downside to consensus? Even if we generously say 15x a trough-ish EPS number, we’re talking about a $22 stock. The stock is trading after-hours at $43. If you’re tempted to cover – don’t.



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.