We're Keeping Our Exposure Low

After six tries in as many months, the UST 2YR yield ripped through 0.75% resistance to 0.82%.


What does it mean?


Moreover, what did it mean when it ripped to this same level in October 2011 (see chart below), before crashing to 0.16%? Looked like a big asset allocation move to me.


German and Swiss 10s are at their 1-month highs as well.


We're keeping our exposure low heading into this very risky Fed event day. Reacting at extremes? It has not worked.


We're Keeping Our Exposure Low - z sod


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CHART OF THE DAY: Confused? Stick With What You Know

Editor's Note: The chart and brief excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. For more information on how you can subscribe click here.


CHART OF THE DAY: Confused? Stick With What You Know - z zod 09.16.15 chart


...And, while I can assure you that I’m more confused today than I was on Friday (in terms of how this all plays out in the very immediate-term), I’m still as confident as I can be in both the gift of life and staying true to our process.

Get The Drill?

“I’m not confused, I’m just well mixed.”

-Robert Frost


Wow. What a macro move that was yesterday!


While I have a lot on my plate personally this morning (God willing, the pending birth of our 4th child), markets have a lot to deal with, generally. I haven’t seen this kind of confusion ahead of a Fed meeting since this entire 0% rates experiment started.

Get The Drill? - Bull and bear extra cartoon


Back to the Global Macro Grind


To review what happened intraday (on slow Total US Equity Market Volume of -8% and -11% vs. the 1-mth and 1-yr averages, I might add) yesterday – here’s how I scored it:


  1. US Equity Futures were DOWN after Chinese stocks retested the lows on a -3.5% drop
  2. US Economic Data SLOWED (Retail Sales and Industrial Production for AUG)
  3. USD and Rates DROPPED on the econ DATA, US equity futures RALLIED on “Dovish Fed”

*Then, intraday, FX and Rates REVERSED, taking USD, YIELDS, and STOCKS straight up on the day


The “reasons” on the reversal were many. Being the guy who can’t front-run your desk with mine (I don’t have one), I tend to get a lot of real-time, trusting, client intel on what people think is going on. Here were the big ones yesterday:


  1. “The Chinese are selling Treasuries” (implying they had to defend their stock market and raise money to do it)
  2. “A big asset allocation trade” (out of bonds into stocks)
  3. “That was the low in US economic data” (US data should accelerate to the downside in Q4, not bottom in Q3)


I could go on and on with the less impressive rumorings, but you get the point – these are not only dramatic reasonings, but highly debatable ones that I think macro markets have been pricing in, for a long time now.


What makes the debate intense are the performance problems out there. With a large % of “Long Onlys” underperforming their “bench” (and that equity benchmark being down YTD) and plenty of hedgies losing moneys, that is what it is.


For those of us writing this strategy letter (who haven’t had to make excuses for the last 3 months), we’re happy to be well mixed after a tough day of trading, and readying our good wife to give birth!


What to do from here?


  1. Answering that question with more questions is where I’m going and I’ll…
  2. Probably do a whole heck of a lot of nothing… as I
  3. Wait and watch for this Federal Reserve EVENT RISK to play out


In terms of this move in rates, for those of you who follow my signaling product (Real-Time Alerts), you know that, fortuitously, our risk management #process signaled to get out of some Treasury exposure, on Friday (TLT was at $122).


Since I’m short on time this morning here were the highlights of that “call”:


“With TLT doing it's job (again) +1% on the day in another down US stock market tape, this is not an easy signal for me to send out - and maybe that is precisely the point... I spend a lot of time thinking about what our GIP Model (Growth, Inflation, Policy) is signaling. When we have heightening convictions on what we call a Phase Transition(going from bearish to bullish TREND or vice versa), we make that call. Updated examples of that are as follows:

1. GROWTH - signaled bullish (growth accelerating) coming out of 2012, then bearish (slowing) here in 2015

2. INFLATION - signaled #Deflation in Q3 of 2014 and have not yet signaled anyPhase Transition from that TREND

The problem with making a call on POLICY (from here into the Fed meeting next week) is that I have no idea what the Fed is going to do. My confusion on POLICY risk should not to be confused with:

A) What they should have done - started raising rates in SEP 2013, so that they'd have room to cut, eventually and/or

B) What they should do now - nothing as tightening into a slowdown isn't modern day monetary policy rules 

What scares the hell out of me is that they still don't know what they want to do - and they have to decide within a week.

Will that decision be based on what the US Equity Futures do in the next 3 hours or 3 days of trading? Or will it be based on "proving they can" despite Fund Fund Futuressaying they shouldn't? Consensus Macro may not, but we know growth (globally and locally) is slowing. We don't know what Janet Yellen is going to do with that. So I'd rather take down some Treasury Bond market exposure to an open-the-envelope event, then revisit on the event.”


Yep. I just quoted myself.




And, while I can assure you that I’m more confused today than I was on Friday (in terms of how this all plays out in the very immediate-term), I’m still as confident as I can be in both the gift of life and staying true to our process.


Sometimes it gives us conviction. Sometimes it gives us pause. Waiting and watching for something you cannot control is a humble position to take. But after my first 3 kids (and 3 #LateCycle slow-down calls in the last 15 years), I get the drill.


UST 10yr Yield 2.12-2.29%

VIX 21.03-29.07
USD 94.68-96.48
Oil (WTI) 43.19-48.90


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Get The Drill? - z zod 09.16.15 chart

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Macro Reversals

Client Talking Points


After 6 tries in 6 months, the UST 2YR Yield ripped through 0.75% resistance to 0.82% - what does it mean? Moreover, what did it mean when it ripped to this same level in OCT 2011, before crashing to 0.16%? Looked like a big asset allocation move to us – German and Swiss 10s at their 1 month highs as well – we’re keeping exposure low into this very event risk Fed day; reacting at extremes has not worked.


Ironically, nothing in equity volatility space really changed on the latest U.S. stock market rip. Our immediate-term risk range for VIX is still implying 21-29 and intermediate-term it’s 18-41. The rates move wasn’t driven by good economic data – and if a Fed Hike was leaked, why is Oil +1.7% this morning (and Oil & Gas stocks +1.8% yesterday)?


The most unnerving part about the equity/commodity move is that A) it still had a lot of Dovish Fed expectations embedded in it and B) it came on very slow volume (Total U.S. Equity Market Volume -8% vs. the 1 month average); bearishness (net SHORT position in SPX Index futures/options contracts) alone could have explained the pop – but there’s a lot going on here, so we’re going to wait/watch.


**Tune into a special Housing edition of The Macro Show with Housing analysts Josh Steiner and Christian Drake - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MCD is one of Sector Head Howard Penney's favorite names. He thinks McDonald's is finally emerging from the doldrums and is doing everything they need to do to fix the company domestically.


Penney believes there is not only a huge inflection point coming for the profitability of the company, but also for their sales. He thinks this means Wendy’s, Jack In the Box, Sonic will suffer a bit as MCD begins to take its market share back.


Bottom Line here? September regional gaming revenue growth should accelerate meaningfully from August and provide a catalyst for the stock. Our bull thesis on PENN appears very much intact.


In a higher volatility, growth-slowing environment, you want low-beta exposure (stocks that move less than the market) and a larger allocation to long-term Treasuries.


In the recent Macro Overlay video series exclusively for Investing Ideas subscribers, Keith rank-orders our top investing ideas positions from a fundamental macro and style factor perspective (low-beta, big cap liquidity, slower growth):


  1. Treasuries (TLT)
  2.  “Something that looks like Treasuries” (EDV)
  3. Gold (GLD)
  4. Low-Beta, Big-Cap liquidity: McDonalds
  5. Low-Beta, Big Cap Liquidity: General Mills

Three for the Road


NEW VIDEO (1:30 min)

The Death of U.S. Exceptionalism… via @KeithMcCullough



Concentration is the secret of strengths in politics, in war, in trade, in short in all management of human affairs.

Ralph Waldo Emerson


Total U.S. Equity Market Volume yesterday was down -8% and -11% vs. the 1-month and 1-year averages.


United Natural Foods (UNFI) is on our Hedgeye Consumer Staples Best Ideas list as a LONG.


We recently presented a Black Book on our UNFI LONG thesis (click HERE for replay). We believe in the strong growth prospects that this company has and that the risks to the business have been overblown.





There were no surprises in this announcement as everything came in in-line with the numbers that were preannounced a few weeks ago. Although, notably there was a CFO change, as Mark Shamber will be leaving the company, to be replaced by Mike Zechmeister General Mills’ Yoplait Division Finance Officer. Revenue for the quarter was $2.06bn matching consensus estimates of $2.06bn. UNFI reported 4Q15 EPS of $0.72 also matching consensus estimates of $0.72.


Notably, gross margin for 4Q15 was down 109bps YoY to 15.3%. The decrease was primarily attributable to the dilution from Tony’s, the declining value of the Canadian dollar, lower fuel surcharges and a shift in mix of sales. The company will be lapping the effect of the Canadian dollar during 2Q16 around the November or December timeframe.


We are looking at fiscal 2015 as a rebuilding year for UNFI, as they invested in growing their infrastructure, fully integrated the Tony’s business and lost a big contract with Albertsons. We believe that their newly built capacity in shelf-stable and perishable, will afford them the ability to go out and obtain large accounts across the country.


The outlook for 2016 is just confirmation of the previously announced guidance, estimated sales in the range of $8.51 to $8.67, an increase of about 4% to 6%. Adjusted earnings per diluted share for fiscal year 2016 are expected to be in the range of $2.86 to $2.98, an increase of 0.4% to 4.6%.



UNFI saw strong organic growth in 4Q15, Supernatural (Whole Foods Market) organic sales increased by 10%, Supermarket organic sales grew 2.6%, Independent channel grew 3.6% organically, lastly, Foodservice sales were up 23.7% organically, showing that this small business could prove as a strong growth opportunity for the company.


Management spoke to their robust distribution system that they have invested in over the last five years. They are prepared to fill this capacity with new customers, and to grow relationships with current customers.


The success of this company is dependent on organic growth but equally as important is growth through M&A. This is a hot topic on calls, analysts often asking: What are you looking at? How are valuations looking? UNFI management talks more openly about M&A than most companies. When asked about the size of a potential M&A deal and a playbook for success, on this call Steve Spinner (CEO) responded simply with “go large.” The larger companies have infrastructure and processes already in place making them much easier to acquire than smaller companies.


From the way Steve was talking about current M&A discussions they are having, we get the feeling that they are weeks away from announcing something. We know given their history that they are very smart with their cash and will stay within their guidelines when acquiring a company. And potential sellers know this because they have been so firm in the past, if owners want to sell, UNFI is the only game in town to sell to.



Whether Mark Shamber’s exit was a forced one or a personal decision doesn’t really matter to us. Mike Zechmeister is a great choice to fill in this role and a big win for UNFI. His resume from General Mills speaks for itself, working across the company in all major roles over the last 25 years, from Sales, Treasury, VP Finance Pillsbury and most recently the VP Finance in the Yoplait Division. Finance has a big voice at the table at General Mills and he led the charge to return the Yoplait division back to growth.  


I (Shayne Laidlaw) worked with Mike personally during my first year at General Mills and I can’t say enough about what a great leader he is. He is one of the smartest people you will find in not only finance but at the entire company, he leads with a no nonsense mindset which drove strong results at GIS. Mike will be able to bring his widespread experience from GIS and arguably a higher level of experience to the CFO role at UNFI.


Besides the obvious on his resume, Mike brings the process knowledge that General Mills instills in all its leadership. He has strong experience in refrigerated production and distribution, as well as experience with Holistic Margin Management (HMM), GIS’s cost savings initiative, which he can help bring to UNFI.


From a personal decision stand point I have not spoken with Mike yet but he is not a person that would take a role with a sinking company. He obviously sees potential in the business going forward, and I would definitely trust his judgement.



This story is still unfolding but everything seems to be headed down the right path. We strongly believe in UNFI’s ability to grow sales organically, and M&A will supplement this growth along the way. We believe current valuations are a generational opportunity to buy this stock, as risks to the business have been far overblown.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



The Macro Show Replay | September 16, 2015


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