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More Cowbell?

“I gotta have more cowbell.”

-Christopher Walker

 

As many of you know, every year central-market-planners descend from upon high to the Teton Mountains in Jackson Hole, Wyoming. This is where ideologies associated with being able to bend economic gravity live large. #TaxPayerVaca

 

Technically speaking, it’s illegal for members of various un-elected and inaccurate forecasting agencies to leak what will ultimately become breaking news (cuts, easing, devaluations, etc.), but I did get an exclusive peak at the after party last night.

 

Do not forward this to anyone. Here it is: https://www.youtube.com/watch?v=GCd0OjjCz88 Many thanks to our man on the ground, Will Ferrell, and his version of the Blue Horseshoe Oyster Band for bringing us the catalyst for the next bull market. 

More Cowbell? - Central banker cartoon 03.03.2015

 

Back to the Global Macro Grind

 

Not to downplay what appears to be the most ominous setup in my macro model since 2008, I think it’s important to start to analyze this tragedy using some humor. Otherwise, the sadness of the situation could very well overcome me.

 

And I mean that sincerely. As I look at what I call the downside of the “probable range” in Global Equity markets this morning, for the first time in my career I don’t think I want to be right.

 

That’s a tough thing for me to write because the goal of the game is to be right. We’ve spent the last 7-8 years trying to evolve the Global Macro risk management #process to the point where many aren’t unprepared for this. Unfortunately, many are.

 

Rather than depress you with words, let me just show you the numbers my models showed me:

 

  1. SP500 has immediate-term downside of -8.3% to 1822
  2. Russell 2000 has immediate-term downside of -6.3% to 1080
  3. Germany’s DAX has immediate-term downside of -8.1% to 9506
  4. Japan’s Nikkei has immediate-term downside of -9.5% to 17304
  5. China’s Shanghai Comp has immediate-term downside of -19.3% to 2607

 

If I keep going, I’ll feel ill. And not for me. I mean for the many who have depended on the Fed, ECB, BOJ (and now Chinese) to bail them out of the idea of economic gravity slowing, deflating, etc.

 

But, but – GDP was +3.7% yesterday. Yep. In sequential (SAAR) terms vs. a sequential bomb of Q1 GDP. But the real bomb is going to be the Federal Reserve raising interest rates into a potential Q3 GDP print of 0.1%.

 

That’s right, 0.1%. We always model a high and a low range estimate in the Hedgeye Predictive Tracking Algorithm Model for any country’s GDP. And after updating the model for yesterday’s real-time data, here are those two scenarios:

 

A)     HIGH: Q3 2015 GDP (E) 1.5%

B)      LOW: Q3 2015 GDP (E) 0.1%

 

While we don’t think you should look at any country’s economic growth in Q/Q SAAR terms (year-over-year rate of change is a much more accurate representation of the cycle’s reality), you actually have to because both non-macro people and the media do.

 

My greatest fear is that the Fed doesn’t yet look at it the way we (and many of our Institutional Clients) do. My fear looks just like the SP500 did at its 1867 close on Tuesday. Imagine the Fed was raising rates into that?

 

And trust me, I get it. For God’s sake I’d write about why the Fed should have been raising rates during our #GrowthAccelerating call of 2013 just about every other Early Look. I also drove the #StrongDollar, Strong America thesis. But I also get that:

 

A)     The Fed missed their window to raise rates

B)      The modern day Fed has NEVER tightened into a slowdown

C)      No one knows how low equity markets can go in that scenario

 

Reminder: my scenario includes:

 

  1. The Street LOW forecasts on Q3 GDP (we’ve had them all year)
  2. An expectation of pervasive #Deflationary forces
  3. Downside to Q3/Q4 revenue and earnings expectations

 

So I don’t expect to see consensus and/or the Fed to see what I see this morning.

 

I look at the models we have built to proactively predict the #LateCycle slowdowns of 2007 and 2015. They look at whatever they are looking at. And every strategist who has had growth and inflation wrong in 2015 is looking for more cowbell.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.19%

SPX 1
VIX 20.56-44.64
Oil (WTI) 37.55-43.74

Gold 1105-1168

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

More Cowbell? - z ben 77 08.28.15 chart


The Macro Show Replay | August 28, 2015

 


Ominous

Client Talking Points

EURO

So far, the Eurocrats have not delivered enough #cowbell at Jackson Hole and the EUR/USD has stopped going down on that +0.3% – ECB executive board member Benoit Coeure’s comments were half baked and ECB Vice President Vitor Constancio is there to speak for Mario Draghi – market expectations matter here… Constancio is not Draghi!

DAX

When we say ominous, we’re saying what our model sees, which is -7% of immediate-term downside in an index as what we call the “probable range.” European data this morning continues to be what it’s been, slowing – Spain’s CPI back in the red at -0.4% from +0.1% #Deflation.

S&P 500

First time we made SPY SHORT one of our Top 3 Macro Themes was July of this year (we were bullish on it in 2013) and the volatility signal here makes us actually feel like we don’t want to be right – there’s -8% of immediate-term downside in our probable range to 1822.

 

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

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 2%
FIXED INCOME 28% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

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).

PENN

"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. 

TLT

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

TWEET OF THE DAY

Process (4min VIDEO): How We Do Asset Allocation https://app.hedgeye.com/insights/46053-process-how-we-do-asset-allocation… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

In the land of the blind, the one-eyed man is king.

-Desiderius Erasmus Roterodamus

STAT OF THE DAY

The percentage of recent college graduates in jobs that don’t require their degree rose from 34% in 2001 to 44% in 2012.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%

August 28, 2015

August 28, 2015 - Slide1

 

BULLISH TRENDS

August 28, 2015 - Slide2

August 28, 2015 - Slide3

 

 

BEARISH TRENDS

August 28, 2015 - Slide4

August 28, 2015 - Slide5

August 28, 2015 - Slide6

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August 28, 2015 - Slide10


GIS | Time to Close this Deal

General Mills (GIS) is on our Hedgeye Consumer Staples Best Ideas list as a LONG.

 

The widely rumored sale of Green Giant by General Mills continues to swirl. The latest is that B&G Foods (BGS) is taking a serious look into the asset. Frankly, we don’t care who buys it as long as it is a half way decent price. Our LONG bull call on GIS is partially dependent on them shedding non-core assets and acquiring high growth businesses. We believe this could be the first of multiple divestitures that GIS executes throughout the next couple of years. In our GIS Black Book we highlighted management identified non-core assets that could be up next.

 

GIS | Time to Close this Deal - CHART 1

 

The selling price of Green Giant is expected to be in the range of $600mm-$800mm pre-tax. We are expecting a hefty tax bill given the likely large step up in asset valuation that will need to occur.  This will still give them the ability to reinvest further into growing the top line or buy a small snacking business. We have talked a lot about the potential snacking assets out there right now and we think this would be the best use of cash.

 

Talking with many industry professionals it seems as though sales are starting to stabilize. More specifically, cereal, something that everyone seems to think is all GIS has, (in reality its only 20-25% of net sales in any given year) will start to see growth return. The cereal category has bottomed and we feel that there will be a year-over-year increase in the category as GIS and the competition have invested heavily to revive the category.

 

At the end of the day, rumors are exactly that, rumors, but this sale seems to be coming to fruition, baring complete disconnect on price. To reiterate, this is the first deal of many that GIS has to execute in order to transform their portfolio for growth into the future.

 

We continue to view GIS as one of the best large cap companies in the staples space. They just announced that they will be releasing 1Q16 results on September 22nd before the market opens. We expect to see continued sequential improvement as they have cleaned up ingredient decks and streamlined the business.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 

 


Process: How We Do Asset Allocation

 

On RTA Live, Hedgeye CEO Keith McCullough responds to a user question on how to incorporate all of Hedgeye's retail products (with a specific emphasis on the Daily Asset Allocation).

 

Subscribe to Real-Time Alerts today for access to this and all other episodes of RTA Live

 

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