Rate Hiking

“Getting to the top is optional. Getting down is mandatory.”

-Ed Viesturs


Thinking about hiking? Some people love (d) the idea. You know, hiking into a global and local slow-down. Sounds like a great idea, until the stock market goes down on that news too.


Since Janet Yellen has no experience hiking interest rates, I thought I’d channel some of the wisdom of the only American to have reached the top of all 14 of the world’s greatest mountain peaks – Ed Viesturs.


The Fed should have been raising rates when US economic growth was accelerating (mid-2013 to late 2014). It missed its window to act objectively. The bond market hasn’t believed Yellen can raise rates (all year-long). And it doesn’t today either.

Rate Hiking - 3  yield Godot 07.27.2014

Back to the Global Macro Grind


After crashes across many macro markets continued last week, the IMF decided to fade Janet this morning and cut their Global Growth forecasts (again) for both 2015 and 2016.




Yes, as in > 20% declines from the cycle/bubble peaks (there have been 3 major ones to climb going back to 1). While being long at the top of Biotech #Bubble was optional, getting drawn-down (-22%) since July’s peak was mandatory.


While the SP500 tried having a rate hike party on last Friday’s open, neither the Russell 2000 nor the Nasdaq were buying into the hype/hope, at all. They looked a lot more like Chinese, German, and Emerging Market stocks – not good.


Rate hike or no rate hike? Who cares – stocks are now going down on both.


In US stock market terms, here’s how the week-over-week looked within the context of the last 3months:


  1. SP500 -1.4% week-over-week, -8.1% in the last 3 months
  2. Russell 2000 -3.5% week-over-week, -12.5% in the last 3 months
  3. Nasdaq -2.9% week-over-week, -8.3% in the last 3 months
  4. Healthcare (XLV) -5.7% week-over-week, -12.1% in the last 3 months
  5. Basic Materials (XLB) -4.0% week-over-week, -18.9% in the last 3 months
  6. Utilities (XLU) +1.2% week-over-week, +2.9% in the last 3 months


That’s the first time that Healthcare (led by the Biotech crash) has been worst with Utilities first, in a long time. That’s mainly because everyone owns Healthcare now, and there was a lot of performance chasing to that relative strength top.


When money managers are forced to chase performance, stocks (and their style factors) accumulate a lot of consensus beta risk. Bearish market beta then starts to eat that alpha, alive.


If you look at the US Equity Style Factors that did the worst last week, they continue to look a lot like what we’ve been trying to keep you away from for the last 3 months:


  1. High Beta Stocks were down another -3.0% week-over-week (-15.5% in the last 3 months)
  2. Small Cap Stocks were down another -2.9% week-over-week (-13.9% in the last 3 months)

*Mean performance of the Top Quartile of SP500 performance vs. Bottom Quartile for the given style factor


The alternative to chasing “reflation” beta (Energy, Industrials, Basic Materials, etc.) and/or wicked high #Bubble beta (Social Tech, Biotech, Technical “Charts”, etc.) has been:


  1. Long-duration Bonds
  2. Low-Beta Stocks
  3. Stocks with liquidity (and low-beta) that look like bonds


Yes. I sound like I am repeating myself this morning. Because my competition, who has been long “reflation” and rates rising (Industrials and Financials) is repeating themselves too. And I’ll keep doing that until #LateCycle stops slowing.


Back to the concept that a rate hike “is just 25 basis points” and “we should just do it”, only people who don’t do Global Macro can be complacent about what an abrupt #StrongDollar move does during an economic slowdown (hint: it’s deflationary):


  1. Emerging Market Stocks (MSCI) were -5.3% last week, crashing -20.5% in the last 3 months
  2. Latin American Stocks (MSCI) were -8.6% last week, crashing -27.3% in the last 2 months
  3. UST 5yr-forward Break-Evens dropped -11bps to 1.09%, crashing -61bps in the last 3 months


With “inflation” expectations crashing, the Fed would definitely have to stretch way outside of its mandate/framework to reach for the top of those “rate hike” expectations in December.


On the growth front, you’re one more rate of change slowing US jobs report and/or a big Q3 GDP slowdown away from the bond market (and stock markets, worldwide) reminding you that taking rates down is mandatory as the cycle slows.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.07-2.21%

RUT 1122-1160
EUR/USD 1.10-1.14

Gold 1130-1160


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Rate Hiking - z cod 09.28.15 chart

Cutting Global Forecasts

Client Talking Points


A one-day move higher (off the lows) in USD and rates does not a credible rate hike make – no follow through so far on that with Janet Yen actually +0.2% vs USD this morning (Nikkei doesn’t like that, down another -1.3%).


Bond market doesn’t believe Yellen – neither does the growth data. 0.69% UST 2YR and 2.16% UST 10YR both remain bearish TREND signals for yields as Utilities (XLU) continue to breakout (+1.2% in a down tape last week, +2.9% in the last 3 months).


Biotech stocks (IBB) moved into crash mode on Friday (-22% from the July peak) joining China, Germany, Spain, Oil, Emerging markets, etc. in what is the most visible slow-moving-train-wreck Keith has seen in High Beta in his career. Latin American Stocks (MSCI) -27.3% in last 3 months.


**Tune into The Macro Show with special guest Hedgeye Restaurants and Consumer Staples analyst Howard Penney at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald’s clearly continues to be well-liked by our Restaurants research team and is a near perfect fit into our macro team’s current "style factor" preferences. This stock is high cap with a low-beta, coupled with a company turnaround story that is currently well underway. We believe this stock will do well through this tumultuous time in the market.


As previously mentioned, the company has all day breakfast starting on October 6. We anticipate this development as not only driving increased visits from existing customers, but also new customers that maybe don’t wake up early enough to get breakfast by 10:30am (or simply just people that enjoy eating breakfast items outside of the morning!)


As Sector Head Todd Jordan notes, "PENN should benefit from the release of state gaming figures over the next few weeks. Recall that August was weaker than many thought. While we predicted this particular slowdown, our model is showing a sharp September rebound.


September revenues should rebound and serve as a catalyst for the stock going into Q3 earnings. On the research side we have not altered our views of PENN’s long term growth story. We continue to see more upside from current price levels. 


Is the U.S. economy still showing signs of a cyclical slowdown? Yes.  If you, like us, remain skeptical on the said policy path from our omnipotent central planners, and you believe growth continues to slow, then we respectfully submit that you sit on your GLD and TLT allocations.


3 GDP comps are difficult. And, once the data comes out, we think expectations will be downwardly revised again. In other words, wait for yet another Fed punt on a 2015 hike.

Three for the Road


JAPAN: Nikkei draw-down continues, -1.3% overnight, -7.8% in the last month



The winner's edge is not in a gifted birth, a high IQ, or in talent. The winner's edge is all in the attitude, not aptitude. Attitude is the criterion for success.

Dennis Waitley


33 million Americans, 10.4% of the U.S. population went without health insurance for the entirety of 2014.

The Macro Show Replay | September 28, 2015


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September 28, 2015

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Monday Mashup

Monday Mashup - CHART 1





9/15/15 August Restaurant Sales and Employment Trends




Friday, September 25

MCD | McDonald’s launches organic burger in Germany (ARTICLE HERE)


Thursday, September 24

MCD | McDonald’s named two new executives, David Fairhurst named chief people officer and Chris Kempczinski named EVP of strategy. Fairhurst an internal promote, has moved up the ranks, while Kempczinski is an external hire who previously worked at Kraft Foods (ARTICLE HERE)


Tuesday, September 22

DRI | Darden reported 1Q16 numbers that impressed, leading it to outperform the XLY by 2.9% last week. All brands had comps that beat expectations. Olive Garden, the company's most important concept, had traffic up for the quarter, but was very lump, -1.4% in June, +3.9% in July and -1.2% in August, not exactly giving us confidence in the recovery of the brand (ARTICLE HERE)


Monday, September 21

JACK | Announced a new $200mm share repurchase program (ARTICLE HERE)



Casual Dining and Quick Service stocks that we follow, balanced out to match the XLY last week, with Quick Service coming in slightly above and Casual Dining slightly below. The XLY was down -1.0%, top performers on a relative basis from casual dining were DRI and TXRH posting an increase of +2.9% and +2.7%, respectively, while NDLS and ZOES led the quick service group this week up +12.3% and +9.8%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3



The XLY has fared better than most other sectors in the YTD time period and as of late especially. In the last five trading days, while the SPX was down -1.4% the XLY was down only -1.0%, outperformed by XLK (Technology), XLP (Consumer Staples), XLF (Financials), and lastly XLU (Utilities).

Monday Mashup - CHART 4



From a quantitative perspective, the XLY looks bearish from a TRADE and TREND perspective, TRADE support is 74.02.

Monday Mashup - CHART 5



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Monday Mashup - CHART 9

Monday Mashup - CHART 10

Monday Mashup - CHART 11


Keith’s Three Morning Bullets

IMF cutting global growth forecasts (again) as macro markets continue to crash:


  1. USD – a one-day move higher (off the lows) in USD and rates does not a credible rate hike make – no follow through so far on that w/ Yen actually +0.2% vs USD this morning (Nikkei doesn’t like that, down another -1.3%)
  2. RATES – bond market doesn’t believe Yellen – neither does the growth data; 0.69% 2yr and 2.16% 10yr both remain bearish TREND signals for yields as Utilities (XLU) continue to breakout (+1.2% in a down tape last wk, +2.9% in the last 3 months)
  3. CRASHES – Biotech stocks (IBB) moved into crash mode on Friday (-22% from the July peak) joining China, Germany, Spain, Oil, Emerging markets, etc. in what is the most visible slow-moving-train-wreck I have seen in High Beta in my career; Latin American Stocks (MSCI) -27.3% in last 3 months


SPX immediate-term risk range = 1; UST 10yr 2.07-2.21%


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



Retail Ideas | Quick Incremental Thoughts

Takeaway: A quick overview of our incremental thinking on our top ideas, long and short. RH, KATE, PIR, NKE, RL, KORS, FL, HIBB, KSS, TIF, W, TGT

Retail Ideas | Quick Incremental Thoughts  - Retail IDeas



RH: TAIL = $11 EPS and $300 stock. TRADE looks strong with Chicago opening this week, then Modern, Teen, and 175k add sq ft by Jan. This model is primed.


KATE: We think the downward spiral in sentiment is over. People are looking to own KATE again. Business is outstanding. $1.10 in EPS next yr makes this name cheap now.


PIR: One of best value stocks we can find. Capex cut, working cap improving, now 500bp of margin to recapture, which then drives top line. $2-3 down/$10-13 up.


NKE: This qtr was its best in history. But there’s likely more to come. We’ll outline puts and takes in our Nike Black Book Monday, October 12th.


RL: RL moved up to our Long list. We don’t think it will ever go below $100 again. If/when management gets the org plan right, the stock is over $200. With the stock at $108, that’s a big deal.


KORS: Does not have the momentum that KATE does, and never will (again). But evolving into more of a RL model. That’s a long transition. But at 9x EPS, we’ll assume that risk.


WWW: Under review.



FL: The fact that people took NKE’s results as a positive for FL is mind boggling. It’s the exact opposite. NKE DTC grew by $358mm. FINL inventories up 11% on 3% sales growth. NKE up 20% at KSS. FL has no room for error. We’re been waiting for the time on FL. We think it’s now.


HIBB: After all its problems, numbers are STILL too high. Oversaturated in core market, marginalized (by DKS/Academy) in new markets. No arm. Peak margins. Nothing but downside.


KSS: Richards and I debated pulling the plug given that this short has worked. But if our ‘credit cannibalization’ thesis is right, then estimates and the stock are going much lower.


TIF: If you don’t like the US macro setup, which we don’t, then TIF is your poster child short. It blew up twice this year – there’ll be a third.  ’16 estimates are still high by $0.25-$0.50.


W: While there’s the potential for this rapid grower to print a profit by way of lower SG&A – and send the bears running for cover…the fact is our research suggests a single channel model in this space is destined to fail.


TGT: WMT is down 30% TYD and is at 13x EPS. TGT outperformed by 40% and is at 16x earnings. We’re concerned about how WMT will ultimately drive profits this holiday to offset labor costs – which won’t make TGT’s life easy. TGT also anniversarying a solid 4Q ly. Not a juicy short here, but we’ll hang onto it.

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.