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USD, Reflation and Gold

Client Talking Points

USD

USD on the lows here with EUR/USD signaling immediate-term overbought (as are most of the reflation trades) at $1.13; like the June drop in USD, this one is ripping one heck of a reflation trade to lower-highs with the big move behind us now.

REFLATION

For the MONTH to-date, Energy stocks (XLE) which remain in long-term TAIL risk crash mode are +13.4% and Basic Materials (XLB) are +10.7% (vs. Healthcare +2.9%). Since most of the big $$ couldn’t have been positioned to miss the #Deflation and capture all the #Reflation, this makes this trade as emotional as they get – it has nothing to do with demand.

GOLD

Fortuitously, we expressed our bearish Employment cycle view in long Commodities/Gold terms (we didn’t have it in us to signal buy on Energy stocks) but now that trade is signaling immediate-term TRADE overbought inasmuch as the stocks keying off them are. We’d book some Gold gains and short Oil here on USD oversold.

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough and Director of Research Daryl Jones at 9:00AM ET - CLICK HERE

 

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 30% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
GIS

Our Consumer Staples team remains positive on General Mills coming out of the 2Q15 earnings call. We have been LONG GIS for the last six months and continue to have a favorable view of the company due to the following reasons:

  • Sequential improvement in cereal
  • Growth in Natural & Organic categories
  • Snacking
  • Cost cutting initiatives
  • M&A activity
PENN

Many of the regional gaming states will release September revenues next week and as we’ve written about, they should look a lot better than August. Overall same store revenue declined 5% in August (we had predicted –2%) but most of the decline was due to the calendar and a difficult comparison. For September we are projecting an increase of 2% YoY

 

Our Missouri tracker is forecasting September gaming revenues to be up 3.6% YoY. This is a 6% sequential improvement from August's YoY change of -2.5%. Meanwhile, Pennsylvania slot revenues were up 4% in September. Our thesis for a sequential rebound in September remains intact. We like PENN on the long side from these levels.

TLT

It was an important couple of weeks for those who were still wrestling with our lower-for-longer views. The brevity of the macro moves post-report Friday proves just how non-consensus that call remains in a year where the S&P 500 is down -8%. The scary thing with regard to Janet’s credibility is that bad news is now being priced in as bad news. Moreover, we believe this late-cycle weakness is likely to remain ongoing. 

Three for the Road

TWEET OF THE DAY

The @hedgeye global GDP growth estimate is half of consensus.  Yes, friends, winter is coming.

@HedgeyeDJ

QUOTE OF THE DAY

I never decide whether it's time to retire during training camp.

Bob Christian

STAT OF THE DAY

The National Retail Federation forecasts Holiday Sales to increase 3.7%, vs. +4.1% last year.


October 9, 2015

October 9, 2015 - Slide1

 

BULLISH TRENDS

October 9, 2015 - Slide2

October 9, 2015 - Slide3

October 9, 2015 - Slide4

 

 

BEARISH TRENDS

October 9, 2015 - Slide5

October 9, 2015 - Slide6

October 9, 2015 - Slide7

October 9, 2015 - Slide8

October 9, 2015 - Slide9

October 9, 2015 - Slide10

October 9, 2015 - Slide11


REPLAY | 4Q15 MACRO INVESTMENT THEMES CALL

Yesterday the Hedgeye Macro Team, led by CEO Keith McCullough, hosted its quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 4Q15 and the associated investment implications.

 

We encourage you to check out the Video Replay (below); the Audio Replay and Presentation Materials can be accessed via the links underneath.

For the audio replay click here.

To access the presentation materials click here.

 

Q4 2015 MACRO THEMES OVERVIEW:

  • #SuperLateCycle (USA): Slowing growth typifies the twilight of an economic expansion and negative 2nd derivative trends are creeping in across much of the domestic fundamental data. From labor and manufacturing markets to consumer and business confidence, leading indicators are beginning to roll as the late-cycle moves past peak. We'll detail why Slower-And-Lower-For-Longer remains the call. 
  • #GlobalSlowing: With the Street, IMF, World Bank and OECD all still forecasting global growth of around 3% for 2015, we find it appropriate to reiterate our call for global growth to come in at or below half that rate. Moreover, while China's August CNY devaluation effectively made our #EmergingOutflows theme a consensus bearish cog in the global economic outlook, we do not think investors are appropriately positioned for a likely trend of negative revisions to the respective growth outlooks in the U.S., Eurozone and Japan throughout the balance of the year.
  • #Crashing: Definitive crashes have occurred across many global macro markets in recent months. Those market participants on the wrong side of growth slowing and deflation are feeling the most pain. Crashing inflation expectations are perpetuating the pain across all asset classes and sectors levered to unrealistic growth expectations (energy, industrials, materials), as well as across the high-yield bond market, commodity markets, commodity currencies. Is the U.S. equity market next in line?

  - Hedgeye Macro


the macro show

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Risk Managing the Shift to #Quad3 – Especially in Energy

Conclusion: One mother of a short-squeeze does not a trend make, but both our fundamental research output and quantitative risk management signals suggest overweighting energy into/through year-end is the most appropriate debate investors should be having right now.

 

Earlier today on our Q4 2015 Macro Themes presentation, Keith reiterated that we are firmly in “do nothing” mode with respect to energy. In money management speak, that equates to us having a neutral exposure to the sector vs. the benchmark (long-only) or a net exposure of zero (hedge fund).

 

As the originators of the #Quad4, #GlobalDeflation view that helped clients position for the [subsequent] crashes in energy, commodities and inflation expectations, globally, this shift to neutral is extremely noteworthy – as is the fact that the net exposure to commodities in our model asset allocation is at the highest level since the June lower-high in global reflation expectations.

 

Since most investors are not positioned for energy to lead the market higher, we thought we’d offer our detailed thoughts on this developing risk. Specifically, at 7.3% of float, energy is the most heavily shorted sector in the S&P 500. That ratio is 297bps above the aggregate market and the next closest sector, consumer discretionary, is a distant -90bps behind. Indeed, investors are still very bearish on energy.

 

Risk Managing the Shift to #Quad3 – Especially in Energy - Short Interest as a   of Float

 

Why has energy lead the market higher over the past month (XLE +13.2% WoW and +7.1% MoM vs. +4.7% and +2.2% WoW and MoM, respectively, for the S&P 500)? Because of the ongoing shift to #Quad3 – economic growth slowing as reported inflation readings accelerate – and the dovish response we have gotten and may continue to receive from the Fed in the ensuing months.

 

Risk Managing the Shift to #Quad3 – Especially in Energy - UNITED STATES

 

Risk Managing the Shift to #Quad3 – Especially in Energy - WORLD

 

We discussed this move to #Quad3 – both domestically and globally – in great detail during the aforementioned presentation. You may use the following hyperlinks to the extent you’d like to view the video replay or download the slide deck:

 

 

What does #Quad3 entail for equity investors? Historically speaking, #Quad3 is not a great place to be in that the stock market tends to exhibit flat-to-down absolute performance, as well as experience multiple compression:

 

Risk Managing the Shift to #Quad3 – Especially in Energy - SPX

 

Risk Managing the Shift to #Quad3 – Especially in Energy - S P 500 Multiple

 

There are, however, places to “hide”:

 

  1. Utes
  2. Energy
  3. REITS

 

Risk Managing the Shift to #Quad3 – Especially in Energy - Utilities

 

Risk Managing the Shift to #Quad3 – Especially in Energy - Energy

 

Risk Managing the Shift to #Quad3 – Especially in Energy - FTSE NAREIT Index

 

For what it’s worth, our Tactical Asset Class Rotation Model (TACRM) is indeed confirming the move to move to #Quad3 across a variety of factor exposures – just not yet at the primary asset class level given that such regime changes take more time to occur:

 

  • 7 of the top 10 factor exposures signaling the highest degree of positive, risk-adjusted VWAP momentum across multiple durations throughout the global macro universe of investable assets are tethered to rising inflation expectations: U.S. E&Ps (XOP), U.S. REITS (VNQ), Global E&Ps (FILL), Gold Miners (GDX), Silver (SLV), Palladium (PALL) and Sugar (SGG). [slide 16]
  • All seven are signaling investable bearish-to-bullish reversals as well. [slide 16]
  • Within the “U.S. Equities” asset class (as defined by TACRM), 3 of the top 4 factor exposures signaling the highest degree of positive, risk-adjusted VWAP momentum across multiple durations are tethered to rising inflation expectations: Large-Cap Energy Producers & Servicers (XLE), E&Ps (XOP) and Gold Miners (GDX). [slide 17]
  • Within the “International Equities” asset class, the factor exposure signaling the highest degree of positive, risk-adjusted VWAP momentum across multiple durations is tethered to rising inflation expectations: Global E&Ps (FILL). [slide 18]
  • Within the “Emerging Market Equities” asset class, the factor exposure signaling the 2nd highest degree of positive, risk-adjusted VWAP momentum across multiple durations is tethered to rising inflation expectations: the economically embattled Russia (RSX), of all places! [slide 19]
  • Within the “Domestic Fixed Income, Credit & Equity Income” asset class (as defined by TACRM), the factor exposure signaling the highest degree of positive, risk-adjusted VWAP momentum across multiple durations is tethered to rising inflation expectations: REITS (VNQ). [slide 20]

 

When TACRM speaks, investors would do well to listen. Note the timestamps on its latest top-down signals, as well as the historical backtest data, which can be found on slides 7-13 of the presentation: http://docs3.hedgeye.com/macroria/TACRM_10082015.pdf.

 

All told, the material bounce in energy related assets appears to be a classic #Quad3 style factor rotation – which means the probability that it continues is likely much higher than the probability that it does not.

 

Just don’t chase energy from these prices, however, given that the XLE is both immediate-term TRADE overbought and requires additional confirmation from the perspective of our intermediate-term TREND signal:

 

Risk Managing the Shift to #Quad3 – Especially in Energy - XLE

 

Moreover, there are a couple of signals within TACRM that support waiting for confirmation here as well:

 

  1. The underlying commodity itself (OIL, USO) has not yet signaled a bearish-to-bullish breakout. [slide 22]
  2. The U.S. Dollar (UUP) has not yet singled a bullish-to-bearish breakdown. [slide 21]

 

That said, if the aforementioned risk management thresholds are met, investors would do well to get behind the rally in energy (and other #Quad3 style factor exposures) because that is likely where the preponderance of alpha will be generated into/through year-end.

 

Best of luck out there,

 

DD

 

Darius Dale

Director


JNK: Adding JUNK BONDS to Investing Ideas (Short Side)

Takeaway: We are adding Junk Bonds (short side) today.

Please be advised that we are adding Junk Bonds (JNK) to the SHORT SIDE on Investing Ideas today.

 

Our macro team will send a full report to subscribers.

 

In the meantime, here's what our CEO Keith McCullough had to say earlier today:

 

While it's fun for people who have been bullish on both US growth and the cycle being "mid" to tell themselves that Oil, Energy Stocks, Junk Bonds, etc. bouncing are "demand" signals, it's been more fun to fade them.

 

...If we continue to be right on the cycle, the lows for the Junk Bond market are not in.

 JNK: Adding JUNK BONDS to Investing Ideas (Short Side) - z jkkkk


Cartoon of the Day: High Noon?

Cartoon of the Day: High Noon? - late cycle cartoon 10.08.2015

"...If the new bull market thesis is getting back to break-even for 2015, that’s cool. I get it," Hedgeye CEO Keith McCullough wrote in today's Early Look. "Everyone who is in the business of being perma-long growth expectations needs to start somewhere. Sort of like this bear market – she’s just getting started."


Attention Students...

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