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Consensus Positioning, China, Eurozone

Client Talking Points

Consensus Positioning

The market reacted to the currency devaluation move out of Beijing this week by tagging the USD Wednesday as rate hike expectations were taken down. The dollar is actually down on the week vs. the devaluation and more of what you saw on Wednesday with XLE leading S&P sectors is a risk that will have to be tactically managed over the next few months as consensus is positioned for deflation/rate hike. Consensus is positioned long dollars, extremely short of gold, long treasuries, short-crude. We continue like treasuries on either side of the relative policy moves from the Fed.


To recap. an awful month of data for July which has implications for commodity trade globally, factory output slowed sequentially Y/Y, fixed asset investment growth touched a 15-year low, property investment growth slowed to the lowest level since March 2009, industrial production yesterday was a big miss, slowing to +6.0% Y/Y vs. +6.6% est. (+6.8% June), exports declined -8.6% Y/Y in July, Chinese steel output declined -4.6% Y/Y (down -1.8% Y/Y through the first 7 months of the year). Expect more of something from Beijing, whether it’s stimulus measures or more devaluation.         



Our Top Q3 Global Macro theme of #EuropeSlowing remains intact following the release of Q2 2015 GDP this morning:  the Eurozone missed expectations (+0.30% Q/Q vs +0.40%); Germany improved from the prior quarter but missed expectations (+0.40% Q/Q vs +0.50%); and France saw a huge negative divergence, recording 0.0% (exp. +0.20%) vs last quarter of +0.60%. We continue to recommend remaining short of the EUR/USD (etf FXE).

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


I'm getting ready to publish my near "Dirty Dozen" restaurant companies that should never have gone public! This is going to be a classic!



“The secret of getting ahead is getting started.”

                   -Mark Twain


Tim Tebow accounted for 55 touchdowns during his Heisman Trophy-winning season (2007), the most ever for a player in the SEC.

CHART OF THE DAY: Swimming Naked? Oil Industry Employment

Editor's Note: The chart and excerpt below are from this morning's Early Look written by Hedgeye analyst Ben Ryan. For more information how you can subscribe to the Early Look click here.


With growth slowing, an FX catalyst, and secular headwinds globally coming to fruition at the same time, our expectation is that we will continue to see who  in commodity-leveraged industries is “swimming naked” as Warren Buffett likes to say. It’s only a matter of time before the carnage in the energy space flows through to the real economy (see Chart of the Day below).


CHART OF THE DAY: Swimming Naked? Oil Industry Employment - z bizness 08.14.15 chart

Prepare For the Worst

“Efficiency is doing better what is already being done.”

-Peter Drucker


Prepare For the Worst - Peter Drucker


While Peter Drucker has been referred to as the “founder of modern management,” Peter Thiel might say that running in circles trying to do better than what is “already being done” is at the top of the list of societal inefficiencies. In his book Zero to One, Thiel gives one simple rule to prospective entrepreneurs:


If you want to create and capture lasting value, don’t build an undifferentiated commodity business.

In reality, 1) we’re not all entrepreneurs, 2) Many of us exist in highly-competitive, commoditized businesses; and 3) a majority of us aren’t operating with a monopolistic shield (although this is arguably the goal).


To merge two varying ideologies of optimal advancement that scream generational mismatch, if you are in fact selling what many others are selling, hopefully you’re the leanest, most flexible operator. Accepting that the future is unpredictable and that prior plans will undoubtedly change is the first step to survival.    


Over-investment at peak margins is an ever-occurring historical phenomenon.  For recent examples take a look at iron ore or potash capacity additions circa 2004 through the financial crisis commodity-bubble highs:

  • Cap-ex less D&A for the largest miners increased nearly 6x from 2004-2012 (see a chart of iron ore on how that story ends)
  • Iron ore production increased nearly 170% from 2000-2012
  • Potash production capacity has increased 60% since 2000 on double digit Y/Y cap-ex spend growth from the largest producers from 2004-2013. Until the “emerging market demand for better food” story actually manifests, we consider this a slow to no growth, elastic demand story. Canpotex monopoly cartel or not, margins are still high which pulls the cost curve lower with the potential for prices to follow.     

Whatever your view on the reasons for a capital spending boom the implications are straightforward:


1) Over-Production

2) Lower price floor


Bottom line: people are just get better at producing commodities.


Back to the Global Macro Grind...

After a 2-step FX devaluation out of China this week and a parliamentary approval for a third Greek bailout package (shocker) ahead of Mario Draghi’s main event in Jackson Hole, the market is sniffing out what has been a de facto tightening from the relative central policy abroad.


We consider Beijing’s move on Tuesday and Wednesday a quasi-acknowledgement of economic reality which is warranted after an awful month of July data if you contextualize top-down macro on a rate-of-change basis:

  • Industrial production missed estimates, printing +6.0% Y/Y in Jul. vs. +6.6% est. (+6.8% prior)
  • Fixed asset investment hit a 15-year low
  • Property investment growth slowed to +4.3% Y/Y which was the lowest reading since March 2009
  • Factory output slowed Y/Y sequentially
  • Exports declined -8.6% Y/Y vs. -1.5% est. (+2.8% in June) à Chinese crude steel output -4.6% Y/Y (-1.8% Y/Y through first 7-months of 2015)

The devaluation pushed bets on the probability of a September lift-off back below 50% and tagged the dollar -1.1% on Wednesday. 


The ensuing reflation trade (XLE led sector performers at +1.8%) is the biggest risk to those positioned for deflation via commodities and related derivatives. Consensus remains positioned for deflation. We reiterate our view but remain cautious and weary of a snap-back reflation trade:


TTM Z-scores of non-commercial net-long futures and options positioning from the CFTC:

  • USD (Consensus LONG) : 0.64X
  • GOLD (Consensus SHORT): -1.88X
  • EURO (Consensus LONG): 1.37X
  • CRUDE OIL (Consensus SHORT): -1.17X
  • 10-YEAR Treasuries (Consensus LONG): 1.5X

Reflation trade aside, central bankers remain in a box on the harsh reality that they can’t print growth, and the rotation to growth-slowing asset classes remains persistent with one of our top long sector ideas in utilities (XLU) leading S&P sectors month-to-date (+3.7%).


The set-up for the September meeting is as follows:


1) The Fed runs the risk of tightening into a late-cycle slowdown which could ultimately flatten the yield curve.


2) Slower growth and deflationary headwinds are acknowledged and the can is kicked on a rate hike which should also be good for bonds. Until growth inflects positively, you’ll see TLT in our investment conclusions.

The largest discrepancy in our Growth, Inflation, Policy model vs. consensus and central bank estimates is our full-year inflation forecast.


Full-year 2015 CPI Forecasts:

  • Hedgeye Predictive Tracking Algorithm: +0.2%
  • Bloomberg Consensus Forecasts: +0.3%
  • Central Bank Forecasts: +1.4%

As is often the case, the Fed overshoots on its inflation forecasts. Their forecasts may have lost some credibility, but the point is that they’ll have to acknowledge overstated forecasts. Whether it comes at the September meeting or after Q3 data is released, we expect them to ultimately talk down the currency, and judging by consensus positioning, this is NOT consensus.     


With growth slowing, an FX catalyst, and secular headwinds globally coming to fruition at the same time, our expectation is that we will continue to see who  in commodity-leveraged industries is “swimming naked” as Warren Buffett likes to say. It’s only a matter of time before the carnage in the energy space flows through to the real economy (see Chart of the Day below).


The over-investment in commodity related industries from ~2004-2010 is unraveling. If you have to be invested 2H 2015 is probably the time to find the most conservative management teams and the lowest cost producers with the best asset base over rolling the bones on those riskier names most levered to a reflation trade.


One of the big surprises for those not in the weeds on a daily basis has been the resiliency in U.S. shale production. Hedging, long-term drilling contracts, etc. aside, the best producers have made rapid advancements from a cost-perspective. The forward curve reflects this psychological shift that was met by skepticism during the first leg down to the March lows.


“Our after-tax rate of return at $65 oil were better than at $95 oil three years ago. We are pleased to report that we have further improved these well economics, even as oil prices have declined. Through improved well productivity and lower cost, our key oil plays now earn a 30% after-tax rate of return with a flat $50 oil price.” - EOG Q2 2015 Conference Call


Unless you have a crystal ball, keep evolving and stay lean.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.14-2.25%

SPX 2072 - 2111
RUT 1196 - 1244
Nikkei 205
EUR/USD 1.08 – 1.12
Oil (WTI) 41.59 – 46.65


Good luck out there today,


Ben Ryan



Prepare For the Worst - z bizness 08.14.15 chart

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The Macro Show Replay | August 14, 2015


LEISURE LETTER (08/14/2015) - G13.SI, RCL



August 28: 10:00am: PENN - Meeting with Management at Plainridge Park 


G13.SI - Genting Singapore resumed their buyback program today, buying back 9.2 million shares. 


Travellers International Hotel Group - Philippines casino developer and operator Travellers,  reported a 46.4-percent decline year-on-year in net profit for the three months to June 30. Such profit was PHP622.32 million (US$13.47 million) in the second quarter of 2015, compared to PHP1.16 billion in the year prior.  GGR for the period was down 10.4% YoY to PHP5.71 billion. Promotional allowances – which include revenue share with junket operators – jumped to PHP1.07 billion in the second quarter of 2015, compared to PHP304.27 million a year earlier.



RCL - Royal Caribbean is revamping its shore excursion program to appeal to passengers' special interests from adventure to family and food to animals.

As part of the new program, the line's 2,800-plus shore excursions have been grouped into seven special interest categories: Active Adventures, Family Connections, Royal Tour Challenge, Culture and Sights, Culinary Delights, Caring Discoveries and the Royal Premium Tour Collection. 



RMB Devaluation - The devaluation of the renminbi should do Macau little harm in the long run because the city still functions as an attraction for tourists from around the world and is trying to make its economy more diverse, the Monetary Authority of Macau says.  But a written statement issued by the authority emphasizes what may happen in the more distant future, saying Macau’s efforts to get more visitors from other places and to make its economy less dependent on gaming would continue.



Regional Gaming Revenues:


Connecticut - July GGR: -0.89% YoY 

August 14, 2015

August 14, 2015 - Screen Shot 2015 08 14 at 6.56.02 AM

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