CHART OF THE DAY: #Deflation Resumes Its Crash

Editor's Note: Below is an excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe. 


CHART OF THE DAY: #Deflation Resumes Its Crash - 11.09.15 EL chart


"... Everything that has been signaling #Deflation to you in the last year, resumed its crash on Friday and has not improved upon where it might be “reflating” in a Down Dollar scenario. It’s right back into what we call Quad4."

Fail, Improve, Grow

“You fail. You Improve. You grow.”

-Jon Gordon


I don’t know about you, but I fail. And when I do, I like to fail fast, so that I can get on with the next.


The aforementioned quote comes from a new book I cracked open this weekend called The CarpenterA Story About The Greatest Success Stories of All. It’s an easy read. And after a Friday like I had, I needed something easy.


Our profession isn’t easy. But I love that. While being super bullish on #GrowthSlowing (bearish on rates) was dead wrong on Friday, the prospects of the Fed raising into a local and global slow-down being bearish for inflation expectations still looks right.


Back to the Global Macro Grind


Being bearish on inflation expectations is another way of saying that you’re bullish about being positioned for the mother of all Global Macro risks, #Deflation. If you’ve failed to recognize that risk in the last 1.5 years, you need to improve and learn about it, fast. 

Fail, Improve, Grow - deflation 500 pound gorilla 


The way that the #Deflation Risk really kicks in are twofold:


  1. The US Federal Reserve raises rates into a domestic cyclical (and secular) slow-down
  2. The rest of the world responds to slowing by “easing” (devaluing currencies) and raising the value of the US Dollar


Post the headline “great” US jobs report on Friday (which actually saw Non-Farm Payrolls slow to 2.01% year-over-year growth vs. the US Labor Cycle peak of 2.34% growth in FEB), this is what happens in FICC (Fixed Income, Currencies, Commodities):


  1. US Dollar Index +2.3% week-over-week to +9.9% YTD
  2. US 10yr Yield +18 bps week-over-week to 2.33%
  3. EUR/USD -2.4% week-over-week to -11.2% YTD
  4. Canadian Dollar (vs. USD) -1.7% week-over-week to -12.7% YTD
  5. Mexican Peso (vs. USD) -1.9% week-over-week to -12.2% YTD
  6. New Zealand Dollar (vs. USD) -3.7% week-over-week to -16.3% YTD
  7. Commodities (CRB) Index -2.3% week-over-week to -16.9% YTD
  8. Oil (WTIC) -4.9% (to $44.29/barrel) week-over-week to -25.5% YTD
  9. Gold -4.7% week-over-week to -8.4% YTD
  10. Copper -3.3% week-over-week to -20.8% YTD


In other words, everything that has been signaling #Deflation to you in the last year, resumed its crash on Friday and has not improved upon where it might be “reflating” in a Down Dollar scenario. It’s right back into what we call Quad4.


While US Equity markets didn’t like the “good is bad” response to the jobs print on Friday, they did have a good week both on an absolute basis and relative to something like Emerging Market Equities (MSCI) which were only +0.5% on the week and still -10.9% YTD.


The Style Factors of the US Stock Market that performed best were the ones that have been the worst for the last 6 months where markets have been pricing in both a top-down Global slow-down and bottom-up “earnings” ones:


  1. High Short Interest Stocks were +1.9% week-over-week vs. -7.5% in the last 6 months
  2. High Beta US Stocks were +1.7% week-over-week vs. -8.5% in the last 6 months
  3. Small Cap Stocks were +1.6% week-over-week vs. -8.3% in the last 6 months

*Mean performance of the Top Quartile vs. Bottom Quartile of SP500 companies


And, from a Sector Style perspective, small/mid cap banks had a big week inasmuch as the Financials (XLF) did, closing +2.7% on the week getting the XLF back to 0.0% for the YTD (for people who have been bullish on Financials all year, flat is the new up).


Since one of my favorite US Equity Sectors on the short side (alongside US Retailers, XRT) has been the Financials, that made me very wrong last week after being right into their lows in September.


Yes, one can be wrong for what we call the immediate-term (TRADE) while being right on what we call the intermediate-term (TREND). Unless you’re an Old Wall strategist (or Madoff), you can’t be right all of the time.


But where to from here?


Well, since the causal factors that drove the SEP lows were:


  1. Worldwide #Deflation
  2. GDP #GrowthSlowing


I’m going to stay with both because:


A) US Dollar strength perpetuates both commodity and leverage-linked deflation expectations

B) We don’t have US GDP bottoming in rate of change terms until potentially Q2 or Q3 of 2016


If the Fed raises rates into what’s been the most accurate rate of change calls on both inflation and growth, I think they’ll be talking about cutting those rates within 1-3 months of the 1st “hike” anyway.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.04-2.36%

SPX 2033-2119
RUT 1144--1213
USD 97.55-99.46
EUR/USD 1.07-1.10
Oil (WTI) 43.03-45.96

Gold 1078-1127


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Fail, Improve, Grow - 11.09.15 EL chart


Join Hedgeye CEO Keith McCullough live on The Macro Show at 9 am ET.

Invite To Macrocosm: The Dock Debates

We are proud to present our first annual conference Macrocosm: The Dock Debates in Stamford, CT on Wednesday, November 18th from 12 - 7pm.  


Hedgeye CEO Keith McCullough will moderate five panels with experts on various macro topics including Currency Wars, Consequences of QE, Europe, Demographics and Healthcare. Panelists include David Einhorn, Jim Rickards, Michael Aronstein, Daniel Lacalle and Jurrien Timmer among others. Click here for the full roster and bios. 


Importantly, there will be ample time allocated at the end of each debate for interactive audience Q&A.


This event is off the record (i.e. not open to any media) and seating is limited so please contact sales at for pricing and availability.


Invite To Macrocosm: The Dock Debates - Macrocosm1




MGM - MMCT, the joint Mohegan-Mashantucket Pequot venture authorized to seek a site for Connecticut's third casino received five site proposals ahead of Friday's 4 p.m. deadline.  The venture, which issued a request for casino proposals in October, said in a press release that it had received submissions from East Hartford, East Windsor, Hartford and Windsor Locks.  Mohegan Tribal Council Chairman Kevin Brown has described the project as in direct competition with MGM Springfield, which is scheduled to open in late 2018.



MPEL - The firm operating the City of Dreams Manila casino resort in the Philippines capital, Manila, said its chief operating officer Kevin Sim resigned on Friday for “personal reasons”.  Melco Crown Resorts Corp added, in a filing to the Philippine Stock Exchange announcing the news, that the company would make an announcement about Mr Sim’s replacement “at the appropriate time”.  The firm is a unit of Asian casino developer Melco Crown Entertainment Ltd.



MAR - U.S.-based hotel chain Marriott International Inc and Alibaba Group's online travel booking platform announced a tie-up on Monday, joining a flurry of rivals expanding their presence in China to cater to the country's growing upper-middle class.  Marriott's deal announced on Monday is a commission-based tie-up with Alitrip that allows customers to book rooms with their mobile phones. It follows a September deal with an Alibaba affiliate allowing Marriott customers to settle their bills with Alipay, a Paypal-like payments service.  



CCL - Papua New Guinea's uninhabited Conflict Islands, one of the most remote and peaceful atolls in the world, will be opened up to cruising from next year. Unveiling its 2017-18 program, P&O Cruises announced Pacific Jewel will make the first-ever cruise ship call to the privately-owned islands in June 2016.  In 2017 P&O will also offer its first international "sea break" short cruise, with Pacific Eden's second Cairns season including four-night roundtrip itineraries to Alotau in Papua New Guinea and scenic cruising through Kawanasausau Strait and Milne Bay. 



PCLN - A partnership with China Mobile – China’s biggest mobile phone network with more than 800 million users – means anyone reserving a room from a dedicated page on China Mobile’s web site gets at least 1GB-worth of free data.  It also applies to bookings made via the China Mobile app.  And for subscribers to China Mobile’s Shanghai Mobile brand, the reward is 2GB per booking.  The amount of free data will increase in proportion to the number of bookings a user makes. modestly claims this is “the world’s biggest cross-industry marketing campaign in history.”



Gaming Industry Review - The government will complete this year its review of the gaming industry, Secretary of the Economy and Finance Lionel Leong Vai Tac has said.  Mr Leong told reporters that the results of the review would be announced early next year.  The review examines the progress of the six casino operators since the liberalisation of the gaming market in 2002. Each of the concessions they hold will expire between 2020 and 2022.



Demand For Casino Staff - Demand for manager-level and other types of skilled workers in the Macau casino industry is forecast to grow by about 30% over the next three years.  A special committee on labour policies set up by the government has come up with the estimate.  The forecast was based on studies commissioned by the committee from four Macau higher education institutions. The studies have not been made public; the estimate was instead included in an official press release on Friday’s meeting. It did not detail the methodology used to come up with the figure. 


Takeaway: Unit labor costs are probably still headed higher


River Cruises - Several river cruise lines have been forced to cancel or alter their plans on the Danube River, due to continuing low water levels and drought conditions in Europe.  On a sailing from Budapest to Amsterdam on Uniworld Boutique Cruises' Maria Theresa supership, the captain delivered the news Friday in Passau that the ship could go no further. Other ships are tied up at a smaller town about 12 hours east.  Saturday, members of the ship were told that three cargo barges have run aground near Deggendorf, completely closing the river, even to small craft.



  • MARYLAND SS GGR: +9.2% YoY
  • ILLINOIS SS GGR: +2.1% YoY
    • BYD: -1.5% YoY (Par-A-Dice)
  • IOWA SS GGR: +1.6% YoY
    • BYD: +6.1% YoY

Takeaway: Regional gaming revenues coming in solid for October. We still like BYD on the long side

The Macro Show Replay | November 9, 2015



Client Talking Points


The USD was +2.3% on the week and that keeps most other foreign currencies in crash mode (New Zealand Dollar -3.7% on the week!); took WTI Oil -4.9% on the week too – a Fed tightening into a slowdown will bring recessions in Texas, Canada, EM, etc.


One “good” jobs report (which actually saw NFP slow to 2.01% year-over-year vs. the cycle peak of 2.34% in FEB) that is subject to revisions trumps all other industrial and cyclical data slowing? We’ll see about that – TREND risk range on the UST 10YR looks like this now 1.85-2.51% and that will drive FICC volatility.


Japan is not Indonesia – Nikkei loved the smell of Burning Yens overnight, closing +2%, but EM (Indonesian Stocks) resumed their crash closing -1.5% (Australia -1.8%, Thailand –0.9%) – recession is probably too mild a word to describe Commodity and EM investments now.


**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

Post earnings, the next catalyst for McDonald’s (MCD) is going to be next week's November 10th analyst meeting. The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT.


Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.


Restoration Hardware (RH) hit all-time highs this week, but this story is far from over. We think RH will earn close to $11 per share in 3 years, which compares to the consensus estimate of just over $6. We estimate that the stock is worth $300.


The square footage component is well known, but we think people are missing…

  1. The productivity and market share that we’re likely to see from each new store,
  2. How scalable this business model is without commensurate capital investment,
  3. The leverage we’re likely to see is below-market real-estate deals being struck today and that should begin to impact the P&L. 

Current policy makers remain fixated on the jobs market, and this Friday’s report was good on the surface. Here’s the rundown:

  • The U.S. added +271K to non-Farm payrolls in October which blew out the expectation for +185K additions (last month’s awful print was revised even lower to +137K additions). Remember that the estimates are useless as the number is near impossible to predict. Keep that in mind.
  • Unemployment Rate moved lower to 5.0% for October from 5.1% in September
  • Wage growth was a positive surprise as Avg. hourly earnings printed a +2.5% growth rate for October vs. an expectation of +2.3%. The growth rate in September was +2.2%

So, again, on the surface it was a positive report. However, as we’ve emphasized, consumption and labor market strength are staples of an economy that is late cycle.

Growth continues to slow, and a rate hike has the potential to pull-forward a recession and flatten the yield curve. In the event this happens, you’ll be happy you held onto your long-bond position. If you haven’t bought into the #slower-for-longer view, the market is giving you the chance to buy bonds at another lower high… For the 5th time this year.

Three for the Road


Must-See: Post Jobs Report – What's Next? … via @Hedgeye CEO @KeithMcCullough #Fed



In any project the important factor is your belief. Without belief, there can be no successful outcome.

William James


Wage growth for production and nonsupervisory employees (~80% of the labor force) was +2.3%, below the private sector average of +2.5%.

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