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EUR, Japan and Inflation

Client Talking Points

EUR

Expect weakness in the EUR/USD ahead of the indecision on the Spanish Parliament (tomorrow) and German and Dutch Parliaments (Wednesday) voting on Greece’s 3rd bailout package. Germany is pressing hard to get the IMF on board to cover the liability. We maintain that both ECB head Mario Draghi and German Chancellor Angela Merkel are incentivized to maintain a weak euro.

JAPAN

The Nikkei rallied +0.5% overnight on the strength of a better-than-expected 2Q GDP report. The headline figure came in 20bps above consensus expectations of a -1.8% QoQ annualized decline, while the YoY rate of change accelerated to +0.7% from an upwardly revised -0.8% in 1Q. Japan remains our favorite international equity allocation and continues to outperform, down -0.9% WoW vs. a -3.1% drop for the EuroStoxx 600 Index, a -5.1% plunge in the DAX, a -4.2% fall in the CAC, a -2.9% drop in the FTSE 100, a -2.9% drop in the Hang Seng and a -2.1% decline in the KOSPI. Japan continues to outperform international peers from a fundamental perspective as well: underlying dividend growth in 2Q was up +16.8% in Japan vs. only +10% and +8.6% in the U.S. and Europe, respectively.

INFLATION EXPECTATIONS

Everything leveraged to inflation expectations continues to underperform. The U.S. dollar finished down over 1%, and not even inversely correlated commodities could catch a bid ex. Gold and Silver. The CRB finished down -0.2% on the week (-9.8%) to finish below its 2009 crisis lows. And by the way, 5YR forward break-evens have made a series of lower lows from the June reflation trade, head-fake high.  

Asset Allocation

CASH 58% US EQUITIES 4%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
MCD

"We are very bullish on McDonald’s," says Restaurants Sector Head Howard Penney. "We like where this company is going. We like the new CEO and the changes they’re making."

 

Penney notes that there are a lot of things going on inside the company which we can’t see that are extremely meaningful to where this company will be in 12-18 months.

 

"I’ve said this a dozen times recently, but 2015 will be the last year McDonald’s trades at an average price below $100," he says. 

PENN

"As we predicted, regional gaming revenues surged in July which gives us confidence in our Q3 EPS estimate of $0.23, which is $0.04 above the Street," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. "We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story."

TLT

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

  1. The Fed runs the risk of tightening into a late-cycle slowdown which could ultimately flatten the yield curve (BULLISH for TLT, EDV, VNQ).
  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 as the yield curve is the best proxy for forward looking growth expectations. 

Three for the Road

TWEET OF THE DAY

JAPAN: our fav Intl Equity market closes +0.5% on the session after holding @Hedgeye support

@KeithMcCullough

QUOTE OF THE DAY

If passion drives you, let reason hold the reins.

Benjamin Franklin

STAT OF THE DAY

Michael Jordan has made $536.6 million from sponsorships from 2000 to 2012. According to Jordan, the vast majority of it came from Nike.


Monday Mashup

Monday Mashup - CHARt 1

 

RECENT NOTES

8/11/15 LNCE | GOING IN LONG

8/10/15 LWAY | Sitting on a Gold Mine with no Tools

8/10/15 WWAV | KEEP RIDING THIS WAVE

8/6/15 WWAV | EARNINGS PREVIEW & POTENTIAL ACQUISITION

8/05/15 K | IS CEREAL RESUSCITATING THE COMPANY?

8/4/15 BETR | It’s Already Popped

 

RECENT NEWS FLOW

Friday, August 14

SYY | Issues statement on Trian Partners announcement (click here for article)

TSN | Reducing beef production capacity due to continued lack of available cattle (click here for article)

 

Thursday, August 13

GMO’s | Not everyone knows what GMO’s are but 87% of consumers think non-GMO is healthier (click here for article)

GIS | Wheaties brand extending into craft beer, although not expected to pick up sales of Wheaties cereal, it is an interesting collaboration between two Minneapolis based companies (click here for article)

 

Wednesday, August 12

FLO | Announced a definitive agreement to acquire Dave’s Killer Bread for $275mm (click here for article)

DF | Insider trading probe at DF involving ex-Chairman and golfer Phil Mickelson (click here for article)

KHC | Announced the cut of 2,500 jobs in North America (click here for article)

POST | The company priced $800mm aggregate principal amount of 7.75% senior notes due 2024 at par and $400mm aggregate principal amount of 8.00% senior notes due 2025. Additionally, POST is offering 5.85mm shares at a price of $60 per share (click here for article)

 

Tuesday, August 11

HSY | Launches tender offer for 8.80% debentures due 2021 and 7.20% debentures due 2027 (click here for article)

 

SECTOR PERFORMANCE

Food and organic stocks that we follow outperformed the XLP last week. The XLP was flat last week, the top performer from our list was Post Holdings (POST) posting an increase of +14.1%. Worst performing company on our list was once again Amira Natural Foods (ANFI), which was down -18.4%.

Monday Mashup - CHART 2

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP remains bullish on a TRADE and TREND duration.

Monday Mashup - CHART 3

 

Food and Organic Companies

Monday Mashup - CHART 4

Monday Mashup - CHART 5

 


MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT

Takeaway: The PBOC's pledge to allow its currency to depreciate sparked global concerns over the country's economic growth.

Key Takeaway:

Global markets were jolted last week as China's move to allow its currency to depreciate brought concerns over its growth to the forefront. The country's interbank rate in particular flashed red, rising 14 bps week over week. Additionally, CDS widened globally, especially in emerging markets, in response to the PBOC's move.

 

China's interbank rate, a gauge of systemic stress in the Chinese banking system, has been steadily rising for over a month. As we have pointed out, that stress and slowing Chinese growth are currently our biggest concern with regard to global financial risk.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM19

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 0 of 12 improved / 4 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Negative / 4 of 12 improved / 8 out of 12 worsened / 0 of 12 unchanged

 • Long-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM15 2

 

1. U.S. Financial CDS -  Swaps widened for 18 out of 27 domestic financial institutions. China allowing its currency to depreciate last week sparked global concerns over slow Chinese growth and left U.S. financial CDS wider by 2 bps at the median.

 

Tightened the most WoW: HIG, ALL, AXP

Widened the most WoW: RDN, CB, MET

Tightened the most WoW: ACE, AXP, CB

Widened the most MoM: GNW, MET, RDN

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM1

 

2. European Financial CDS - Swaps were mixed in Europe last week. 17 CDS' tightened while 20 widened. Greek bank CDS tightened between 321 and 3083 bps as European finance ministers approved an €86 billion bailout for the country on Friday.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM2

 

3. Asian Financial CDS - Swaps in Asia widened across the board as China's move to allow its currency to depreciate caused global concerns over the country's growth. CDS for the IDB Bank of India and the Bank of China widened the most, by 12 bps to 220 and by 10 bps to 121, respectively.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM17

 

4. Sovereign CDS – Most sovereign swaps were flat last week. Spanish sovereign swaps, which widened by 3 bps to 98, were the biggest mover for the week.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM18

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM3

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM4

 

5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Thai sovereign swaps widened the most, by 22 bps to 134. Meanwhile, Brazilian swaps tightened by -21 bps to 305.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM16

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM20

 

6. High Yield (YTM) Monitor – High Yield rates rose 14 bps last week, ending the week at 7.21% versus 7.06% the prior week.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM5

 

7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 6.0 points last week, ending at 1870.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM6

 

8. TED Spread Monitor – The TED spread fell 1 basis point last week, ending the week at 24 bps this week versus last week’s print of 25 bps.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM7

 

9. CRB Commodity Price Index – The CRB index fell -0.9%, ending the week at 198 versus 200 the prior week. As compared with the prior month, commodity prices have decreased -7.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM8

 

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 14 basis points last week, ending the week at 1.67% versus last week’s print of 1.53%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM10

 

12. Chinese Steel – Steel prices in China rose 0.3% last week, or 6 yuan/ton, to 2355 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 148 bps, 3 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM13

 

14. XLF Macro Quantitative Setup –  Our Macro team’s quantitative setup in the XLF shows 0.7% upside to TRADE resistance and 1.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR | PBOC'S DEVALUATION BRINGS CHINESE RISK TO THE FOREFRONT - RM14 2

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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CHART OF THE DAY: Reflation-Trade (Head Fake)

Editor's Note: Below is a chart and brief excerpt from this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here if you're interested in learning more and how you can subscribe.

 

...Yes, it is rather damning for the USD to have one of its biggest down weeks of the summer and see both the commodities index and oil continue to crash/deflate (for those who remain long of them, that is).

 

CHART OF THE DAY: Reflation-Trade (Head Fake) - 08.17.15 chart


Fed Fishing?

“Many men go fishing all of their lives without knowing it’s not the fish they are after.”
-Henry David Thoreau

 

In case any of you emailed me and got a “Gone Fishing” auto-reply, I checked out on Tuesday night of last week to go on what has become an annual Hedgeye Fishing Trip to my homeland on Lake Nipigon. It was epic.

 

Fed Fishing? - z dj

 

Got volume? Often called the “Sixth Great Lake”, Lake Nipigon is massive. It has a surface area of 1,872 square miles and average and max depths of 180 and 541 feet, respectively (Wikipedia).

 

So now I’ll try to make the literary-transition from a place where there were no other humans to where there was no volume. On Friday, Total US Equity Market Volume was down -22% and -33% vs. its 1-month and 1-year averages. Wow.

 

Back to the Global Macro Grind

 

Buying markets on slow-to-no-volume UP days is not what I do. I like to buy/cover on capitulation (low-end of my immediate-term risk range) DOWN days. For many things High Beta #Deflation, that day was Wednesday of last week.

 

By week’s end, what the growth bulls call “reflation” finally had an up week. Not up huge, but up. And that’s mainly because the US Dollar ended up closing down -1% (US Dollar Index) on the week.

 

If you look at the week-over-week moves in Global FX vs. the month-over-month, here’s what that added up to:

 

  1. US Dollar Index -1.0% on the wk = -0.1% month-over-month
  2. Euro (vs. USD) +1.3% on the wk = +0.9% month-over-month
  3. Canadian Dollar +0.3% on the wk = -2.8% month-over-month
  4. Brazilian Real +0.7% on the wk = -9.9% month-over-month
  5. Russian Ruble -1.4% on the wk = -13.1% month-over-month

 

In other words, the closer a country’s leverage is to what’s been crashing for the last 1-3 months (commodity “reflation” expectations, Oil, etc.), the less of a “bounce” it got on Down Dollar last week.

 

Here’s how Commodities themselves did last week:

 

  1. CRB Commodities Index -0.2% on the wk = -9.8% month-over-month
  2. Oil (WTI) down another -4.1% on the wk = -21.3% month-over-month
  3. Gold finally had a real up wk of +1.9% = -3.6% month-over-month
  4. Silver was +2.5% on the wk = -0.8% month-over-month
  5. Copper was +0.6% on the wk = -7.5% month-over-month

 

Yes, it is rather damning for the USD to have one of its biggest down weeks of the summer and see both the commodities index and oil continue to crash/deflate (for those who remain long of them, that is).

 

That said, if you pivoted, hard (on Wednesday), and bought/covered anything US Equities that was in the midst of a -7% (Russell 2000) to -15% (Energy Stocks) draw-down, you crushed it last week.

 

Even though the world couldn’t find it in them to buy Brazilian Stocks (down another -2.1% on the wk, and down -10.7% in the last month), hedge funds that were short US Energy and Utility stocks evidently had to buy/cover, for a trade:

 

  1. Energy Stocks (XLE) were +3.4% on the wk, but are still down -7.0% in the last month
  2. Utilities (XLU) were +2.7% on the wk, and continue to have a big relative move +6.1% in the last month

 

You see, the one thing that the Utilities (XLU) long position has going for it that “reflation” bulls don’t is called … drumroll … #Deflation! Yep, as both US growth and global inflation expectations fall, so do sovereign bond yields.

 

With the US 10yr Treasury Yield down another -3 basis points this morning, it’s almost down as much in the last month as inflation expectations themselves:

 

  1. US 10yr Treasury Yield -24 basis points in the last month to 2.17%
  2. US 5yr Break-Evens -33 basis points in the last month to 1.28%

 

And sure, there’s something like “82% of economists polled” at some Old Wall media outlet still looking for a “rate hike” in September. And maybe this un-elected Fed is under enough political pressure to do just that…

 

And… if they do that, as both growth and inflation expectations continue to map their respective cyclical and secular slow-downs, they run the very obvious risk of being THE catalyst for the next Dollar Up, #Deflation of levered asset prices.

 

I’m betting many at the Federal Reserve have spent their entire central-planning lives not knowing that they are the catalyst some of us are still looking for.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.12-2.24%

SPX 2071-2106
VIX 12.03-14.32
EUR/USD 1.08-1.11
Oil (WTI) 41.35-44.11

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fed Fishing? - 08.17.15 chart


The Macro Show Replay | August 17, 2015

 


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