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China, #Deflation, UST 10YR

Client Talking Points

China

After telling the world “volatility in the Chinese stock market is over”, central planners got tagged with a -6.2% drop in the Shanghai Comp overnight – rest of Asia slowing, faster, too – in the last month: Taiwan -9.6%, Singapore -8.8%, Thailand -8.3%

#Deflation

Reflation (and high beta, high leverage, style factors) helped US equities bounce off last Wednesday’s lows, but were right back in the soup this morning with both WTI and Copper making fresh 3-month lows – and the Fed is going to “hike” into this? 

UST 10YR

With a yield of 2.14% this morning does the round trip and then some – so what the market is telling you is that even if the Fed does hike into a slowdown, probability is rising that growth and inflation slow at a faster pace – I remain bullish on the Long Bond.

Asset Allocation

CASH 59% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 25% INTL CURRENCIES 7%

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

Reminder: the @Hedgeye Macro Show is being moved to 9am today-Thurs of this week to accomodate @KeithMcCullough's apprearce on @FoxBusiness

@HedgeyeDDale

QUOTE OF THE DAY

“I didn’t get over 1300 walks without knowing the strike zone.”

           -Wade Boggs

STAT OF THE DAY

With a 719–477–45 record as of the conclusion of the 2014 football season, West Virginia University ranks 14th in victories among NCAA FBS programs, as well as the most victories among those programs that never claimed nor won a National Championship.


CHART OF THE DAY: Consensus Is Bear'd Up On Stocks

Editor's Note: The chart below was featured in this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information on how you can become a subscriber.  

 

CHART OF THE DAY: Consensus Is Bear'd Up On Stocks - z darius Chart of the Day


Messy Process

“It’s a messy process that involves doing a few things at once.”

-Patrick Lencioni

 

That was a solid leadership quote from a popular book I’m flipping through called The Advantage – “Why Organizational Health Trumps Everything In Business.”

 

Cheesy? Yes. Hence the flipping! But with the summer of 2015 coming to an end, I’m clearing my book shelf for what should be a scintillating September. Infrequently in my career have both complacency and short interest been so high.

 

Complacency: yesterday’s Total US Equity Market Volume (including dark pool) continued to crash (-26% vs. its 1yr average). Short Interest? I’ll get into how I look at that in the grind.

Messy Process - Volume cartoon 08.12.2014

 

Back to the Global Macro Grind

 

But first, since I’m getting back into the swing of things this morning, allow me to review a few critical #process points that make my risk management conclusions less messy:

 

  1. VOLUME – when price is rising on A) decelerating volume and B) rising volatility, that’s bearish
  2. OPTIONS – one key way we measure “short interest” is via non-commercial futures and options contracts

 

It’s taken me almost 17 years to refine the price/volume/volatility signal – and while I continue to refine it (and will until I retire), I feel as good as I’ve ever felt about our ability to #FadeBeta.

 

“Fading beta” means (sometimes) taking the opposite side of a market’s daily direction. This typically happens (in Real-Time Alerts) when PRICE is hitting either the low or high end of my immediate-term TRADE risk range.

 

You can also “fade options” activity by measuring the z-score of Global Macro positions. What I mean by that is buying/covering a market when A) PRICE = low-end of the range and B) the net SHORT position = high end of its range.

 

If you did that in US Equities (at last week’s lows), well done. Here’s how the net SHORT positions piled up:

 

  1. SP500 (index + Emini) net SHORT position was -146,132 contracts (that’s a 1yr z-score of -1.79x)
  2. Russell 2000 net SHORT position was -38,214 contracts (that’s a 1yr z-score of -0.47x)

 

In other words, after growth, inflation, revenue/earnings, etc. data slowed (at an accelerating rate both locally and globally) in July, US stocks corrected, and Consensus Macro players got shorter, lower, instead of getting longer.

 

Then, the no-volume (squeeze) bounce. And voila!

 

Inclusive of the Russell 2000 bouncing +1.6% off that 1205 AUG low last week (it was -7% from its YTD high prior to the bounce), last week’s US stock market bounce featured Style Factors that had been leading the market lower for a month:

 

  1. LEVERAGE – High Debt/Enterprise Value Stocks were +1.2% after being -3.6% in the month prior
  2. BETA – High Beta Stocks (another style factor) were +1.0% after being -5.6% in the month prior

 

And you saw some no-volume follow through on the same yesterday as well with High Beta Biotech (IBB) Stocks leading the day at +2.1% as the Russell 2000 added 1.0% to that bounce from 1205 to 1225.

 

But what’s next?

 

Well, if high-debt-leverage to commodity #Deflation and high-beta levered to too-high-growth-expectations got Consensus Macro run over after chasing their May-June 2015 highs, I think we have to ask ourselves what’s changed this morning?

 

In perpetually monitoring that, the Top 3 Things in my notebook this morning are as follows:

 

  1. CHINA – after telling the world “volatility in the Chinese stock market is over”, central planners got tagged with a -6.2% drop in the Shanghai Comp overnight – while mainstream isn’t on this, the rest of Asia is slowing, faster, too – in the last month: Taiwan -9.6%, Singapore -8.8%, Thailand -8.3%, Indonesia -7.0%, South Korea -5.8%
  2. #DEFLATION – “reflation” (and high beta, high leverage, style factors) helped stocks bounce off last Wednesday’s lows, but are right back in the soup this morning with both WTI (Oil) and Copper making fresh 3-month lows
  3. UST 10YR – yield of 2.14% this morning does the round trip (from June) – so what Mr. Macro Market is telling you is that even if the Fed does hike into a Q3 slowdown, probability is rising that growth and inflation slows faster in Q4!

 

Yes, my #process involves doing more than a few things at once. It’s taken me a long time and a lot of mistakes to get it to where it is now. No, it’s not perfect. But it sure beats the messy macro “process” of chasing charts (i.e. last price).

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.10-2.20%

SPX 2071-2109
RUT 1198-1231
Oil (WTI) 41.04-43.58
Copper 2.28-2.38

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Messy Process - z darius Chart of the Day


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The Macro Show Replay | August 18, 2015

 


August 18, 2015

August 18, 2015 - Slide1



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.

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