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CHART OF THE DAY: The Mother of all Demographic Secular Slowings

Editor's Note: The following chart and excerpt are from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe. 

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...And the last two cycle tops didn’t have this mother of all demographic secular slowings (which actually makes it different, for the worse – see Chart of The Day for the demographic tail wagging this global demand dog).


CHART OF THE DAY: The Mother of all Demographic Secular Slowings - z ben 08.24.15 chart


“Mr. Worldwide to infinity, you know the roof on fire”



Since this morning isn’t going to be fun for anyone but Long Bond bulls (TLT), I thought I’d start my morning with a McCullough Clan household favorite and try to change the mood up a little:


“We gon’ boogie oogie oogie, jiggle, wiggle and dance”


My 19 month-old girl can cut a rug to #Fireball like you wouldn’t believe (she calls it “Ball, ball”). And if you didn’t know that the roof of global growth expectations is on fire, you haven’t been reading my rants for the past 3 months. Markets are crashing.

Fireball! - Bubble bear cartoon 09.26.2014

**Keith is LIVE on The Macro Show at 9am ET this morning. Click here for access.


Back to the Global Macro Grind


Crash? Yep. In big macro stuff, this slow-moving train wreck of willfully blind US and global growth expectations has been very obvious. You should not be surprised, whatsoever, by the following this morning:


  1. Oil crashing (down another -3% this morning, -38% in the last 3 months)
  2. China crashing (down another -8.5% overnight, -31% in the last 3 months)
  3. Emerging Markets crashing (-21.3% on MSCI and -23.4% LATAM in the last 3 months)


Oh, and Bond Yields (on the long-end of the curve) have crashed (again) in the last 3 months too. From 2.54% on the 10yr UST Yield to 2.01% this morning as inflation expectations crash (5yr UST Break-Even collapses to 1.14%, -52bps in 3 months).


But the Fed should definitely raise rates, eh? “It’s just 25 basis points, Keith.” Yep. I know. Have at it … and let me know how that goes for everything that’s rate sensitive now that … you know, everything else is like “the roof on fire”!




I sincerely don’t mean to make fun of the situation market’s are in. But I do. I haven’t heard this many “it’s different this time” narratives since the 2000 and 2007 cycle tops.


And the last two cycle tops didn’t have this mother of all demographic secular slowings (which actually makes it different, for the worse – see Chart of The Day for the demographic tail wagging this global demand dog).


Oil, Chiner, EM – yep. You get that. But who gets #EuropeSlowing? Last week alone, here was the European Equity score:


  1. Euro Stoxx 600 Index -6.5% and -11.4% in the last 3 months (plus what it’s down this morning)
  2. Germany’s DAX down another -7.8% last week and -14.7% in the last 3 months
  3. Russian Stocks (RTSI) down another -8.7% last wk and -27.2% in the last 3 months


Germany and Russia slowing, at the same time? Probably just another glitch in a chart or something. “Don’t pay so much attention to the data” in Europe, ok? The secular (demographic) headwinds there are even stronger than USA’s.


Back to the US story, ex-long-Energy (XLE -8.4% wk-over-wk and -21.1% in the last 3 months) here’s what Style Factors in the SP500 got crushed the most last week:


  1. High Beta Stocks -7.8% on the week and -15.6% in the last 3 months
  2. Top 25% Sales Growth Stocks -6.4% on the week and -8.2% in the last 3 months
  3. Top 25% EPS Growth Stocks -6.4% on the week and -8.7% in the last 3 months


In other words, with the SP500 -5.8% last week and -7.6% in the last 3 months, the aforementioned “Growth” Style Factors underperformed the market’s beta… and the question remains whether or not being long “growth” starts to look like being long “value” (i.e. #Deflation Risk) has for the next 3 months?


As a reminder, the base effect (comparative period, year-over-year) for US GDP growth gets tougher in the 2nd half of 2015 vs. the 1st half. That means, if you held all other risks equal, the probability is higher that growth slows in Q3 and Q4 than Q2. That’s one of the biggest reasons why our US GDP forecast is ½ that of our top macro research competitor for Q3.


Not that “the data” or being right matters, but what happens if we continue to be right on growth and inflation AND the Fed decides to “tighten because it’s time”? While I’m praying they don’t make that policy mistake, anything can happen – and if they do, “we gon’ drink drinks and take shots until we fall out, like the roof on fire.” #Fireball


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.01-2.14%

VIX 20.80-31.51
EUR/USD 1.11-1.15
Oil (WTI) 39.01-41.93


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fireball! - z ben 08.24.15 chart

The Multi-Standard Deviation Zone

Client Talking Points


Not an inappropriate word to use given that on the 3-month duration alone, Oil (-37%), China (-31%) Emerging Markets (-26%), and Long-term Sovereign Bond Yields have crashed. This is a literal crashing of both U.S. and Global growth expectations – we’re still at ½ of consensus forecasts.


Oh definitely – they should hike. “It’s just 25 basis points, Keith” – yep. Have at it. Let’s see what happens. This risk of being too tight during both the cyclical and secular slowdown was only obvious to those who had the bearish growth and inflation views. Jackson Hole = Thursday.


The main challenge with modeling accurate risk management levels right now is that volatility is undergoing a major Phase Transition across durations – hard to explain in 140 characters or less but very easy to see the series of higher-highs going back 2 years.



**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

One of the ways that McDonald's is going to take market share back is through one of the most popular items on its menu—the Egg McMuffin. "I honestly believe that if there is a silver bullet, it’s all day breakfast for McDonald’s," says Restaurants Sector Head Howard Penney. "And I do believe they’re going down that road and they will do it."


Penney adds that we’ll probably know more about that at the November analyst meeting and what the breakfast potential will be. There’s obviously a lot of things that go around MCD doing breakfast (e.g. shrinking other parts of the menu, etc).


"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," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. 


It was a very good week for those sitting behind the long-bond coming out of the FOMC minutes release on Wednesday. During a tumultuous 5-day stretch in which the S&P 500 fell over -5%, subscribers who followed our recommendation on TLT were sheltered from the market storm and gained almost +2%. Moreover, during the past month, TLT has gained +5.7% versus a -6.8% loss for the S&P 500 (a 1,200 basis point difference). In other words, it has paid handsomely to buck the consensus tide.

Three for the Road


RUSSIA: down another -4.7% this morning - clearly a sign of Global Growth ramping



Destiny is not a matter of chance, but of choice. Not something to wish for, but to attain.

 William Jennings Bryan


The Russian ruble plunged 2.3% Monday hitting a seven-month low.

GPS | Key Issue At $32

Takeaway: The triangulation of EBIT, financial engineering, and the stock is all we really care about. Right now it's looking slightly net negative.

We'll start with a question. What does it tell you about a company when financial engineering alone contributes 13 percentage points to earnings, and EPS growth is STILL down 8% y/y, and the stock is off 20% during the quarter? It tells us that owning this name as either a) a stand-alone retailer, or b) a cash-rich financial engine, are both probably #failed strategies.  We generally want to be long GPS when EBIT is accelerating to the upside (even if it is ‘less bad’), and share count is accelerating to the downside. Yes, the exact inverse holds true on the short side – incrementally eroding EBIT with fewer shares having been repurchased on the margin over the preceding 3-6 months.  Looking in the rear-view, EBIT has collapsed – off 21% this quarter, the worst rate in nearly 4-years. But so has the stock, down 20% since May and 25% for the year-to-date.


Looking forward – which is a heck of a lot better than looking back – we think GPS will miss both 3Q and 4Q expectations set last week. But that still only gives us a 9-10% EBIT erosion in back half, which pales in comparison to the -21% we just witnessed in 2Q. Some will argue otherwise, but this is actually an improvement on the margin. The offset is that the share count, which has been down 6% y/y over each of the past four quarters, should ease to the -4/-5% range. That’s bearish on the margin. 


All in, we think those two factors are probably a push, but we still come out negative on the margin given that we think expectations are too high for this year (and next), and that GPS will miss. Is it a raging short at 11x earnings and 42% ROE? Not really. But ROE will come down over time as there’s less operating cash flow to buy back stock. But if GPS misses 2H we’re far more inclined to think it sees $27 before $35.  If the research changes and leads us to another -20%+ EBIT quarter (or if the stock trades up on our current model), we’ll get much louder on the short side of this name.


GPS | Key Issue At $32 - gps1

We Made the Market Call

We Made the Market Call - Bull and bear cartoon 7.08.2014

Baseball Hall of Famer Dizzy Dean famously said, "It ain't braggin' if you done it." It's in this spirit which we showcase the fact that Hedgeye's macro team led by CEO Keith McCullough has been proactively heralding the huge risk and related market implications of growth slowing around the globe. It was this reality which played the lead role in this week's market carnage which sent the S&P 500 spiraling down almost -6% for the week.


It has been a contrarian call all along. Our team of analysts made it. 


Here's a small sampling of what people are saying right now about us following the market madness. (Make sure to continue reading below where we show two important charts which we've been flagging for our subscribers.)


We Made the Market Call - z plug11


We Made the Market Call - z plug 1


We Made the Market Call - z plug 2


We Made the Market Call - z plug 3


We Made the Market Call - z plug 4


We Made the Market Call - z plug 5


We would also like to mention that our completely non-consensus call on the long bond (via TLT) -- a call that was consistently derided by so many mainstream pundits -- has turned out (yet again) to have been a monstrously good one.


Subscribers who followed our recommendation were sheltered from this week's market storm and gained almost +2%. During the past month, TLT has gained +5.7% versus a -6.8% loss for the S&P 500 (a +1,200 basis point difference). 


We Made the Market Call - z BOND


Two key charts we've been flagging:


Click to enlarge

We Made the Market Call - z mac 2


We Made the Market Call - z mac 1


And a couple more cartoons for good measure:


We Made the Market Call - Growth cartoon 06.03.2015


We Made the Market Call - Lower for longer cartoon 05.28.2015


our Risk-Manager-In-Chief citing deflationary risk 9/14:


Bottom line? It pays to listen to Hedgeye.


Subscribe here.

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