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Liberty's Colossus

“Here at our sea-washed, sunset gates shall stand
A mighty woman with a torch, whose flame
Is the imprisoned lightning, and her name
Mother of Exiles” –New Colossus

 

I’m on the Acela train to Boston this morning and, admittedly, having a hard time thinking about macro markets as the sun rises on the East Coast of Liberty’s Colossus.

 

The New Colossus is commonly known as the Statue of Liberty poem. It’s a sonnet that was written by Emma Lazarus in 1883.  Interestingly, the poem wasn’t placed on the pedestal of the statue until 1903. History often takes time to find her truths.

 

En francais, on appelle le statue La Liberte Eclairant Le Monde. And whether your mother’s tongue is French like mine’s is this morning or not… no matter what your politics, we should all stand together to defend all that is truth, liberty, and justice in this world this morning.

Liberty's Colossus - statue of liberty

 

Back to the Global Macro Grind

 

My favorite long-term risk management quote is more of a question really. “What is the truth?” is something Ray Dalio from Bridgewater Associates coined a long-time ago. I like it because it attempts to simplify the complex.

 

Unlike economic and political ideologies, the rates of change in economies aren’t complex. They are simple sine curves that anyone with an excel spreadsheet can map. They (like the US Federal Reserve is supposed to be) are data dependent.

 

In our Hedgeye GIP (Growth, Inflation, Policy) model, we focus primarily on trying to probability-weight the prospective change in monetary policy by measuring the rates of change in both growth and inflation, across multiple durations.

 

Last Friday was an important “data” day as we were able to see the truth on two important growth and inflation scores:

 

  1. GROWTH – US Retail Sales slowed (again) from last November’s #ConsumerCycle high of 4.7% to 1.7% y/y
  2. INFLATION – Producer Price #Deflation hit a new cycle low of -1.6% y/y (year-over-year)

 

Since US Retailers like Macy’s (M), Nordstrom’s (JWN), and Kohl’s (KSS) had been crashing coming into this #LateCycle consumption data slowing, it was quite bearish to see both those stocks and the US Retail (XRT) sector hit new lows on the “news.”

 

Neither was it surprising to us that the 6-month crash in inflation expectations continued:

 

  1. CRB Commodities Index (19 commodities) lost another -3.3% on the week, taking its 6-month crash to -20.1%
  2. Copper deflated another -3.5% week-over-week, taking its 6-month crash to -26.1%
  3. Oil (WTI) got crushed (again) losing another -7.9% on the week, taking its 6-month crash to -35.6%

 

In other words, if you’ve been buying into the “global growth is bottoming – get long reflation” call for the last 6 months, you didn’t heed Hedgeye’s 18 month old advice, and probably lost whatever hope you had of having a big Q4.

 

What’s interesting to me isn’t that the Consensus Macro that missed calling for the #Deflation to begin with still thinks you should be long inflation expectations – it’s that they don’t get the link between #Deflation and #GrowthSlowing.

 

Here’s how this thing called the cycle works:

 

  1. Inflation Expectations peak and companies lose both pricing power and cyclical revenue “growth”
  2. As the corporate profit cycle peaks and slows, companies start firing employees to make “earnings”
  3. As people make less money and/or get fired, consumer confidence rolls over from its cycle peak

 

As you can see in today’s Chart of The Day, US Consumer Confidence looks a lot like the US economic and profit cycle. Elevator on the way up, and windows on the way down. Since it’s behavioral, it makes sense – unless you don’t do #behavioral.

 

If you don’t do history, math, and behavioral – you don’t do macro like we do. And we’d humbly submit that if you don’t do rate of change macro like we do, macro is currently doing you.

 

While it doesn’t surprise us that the alleged bull market in US stocks still has the Dow, SP500, and Russell 2000 all down for 2015 YTD (as we head into the end of 2015), we do find the level of unawareness on US Equity Style Factor exposures quite low.

 

From a Style Factor perspective, here were the Worst 3 Things you could have been long both last week (and for the last 6 months):

 

  1. Small Cap Stocks (bottom quartile of the SP500) were -5.3% last week and are -13.8% in the last 6 months
  2. High Short Interest Stocks were -5.4% last week and are -14.2% in the last 6 months
  3. High Beta Stocks were -5.8% last week and are -14.0% in the last 6 months

 

In other words, even if your competitors completely missed making the #Deflation and #GrowthSlowing call 6 months ago, they could have learned from those mistakes and not chased the 1-month counter-TREND bounce in October.

 

But they didn’t learn. And that’s a good thing for those of us who sought the truth as opposed to a preferred compensation outcome.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.15-2.36%

SPX 1
RUT 1129--1175

VIX 16.85-21.66
EUR/USD 1.06-1.08
Oil (WTI) 39.96-44.05
Copper 2.12-2.23

 

Best of luck out there this week and God bless truth and liberty,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Liberty's Colossus - 11.16.15 EL chart


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

11/12/2015 JACK | THE SHARKS ARE CIRCLING

11/05/2015 HABT | DEFYING GRAVITY

11/04/2015 DRI | ARE OLIVE GARDEN EXPECTATIONS TOO HIGH?

11/03/2015 BLMN | CAN YOU TEACH AN OLD DOG NEW TRICKS

 

RECENT NEWS FLOW

Thursday, November 12

YUM | Yum! Brands China division reported October same-store sales growth of 5%, comparable to the divisions 6% growth in September. October results consist of 10% growth at KFC and a 9% decline at Pizza Hut.  China division same-store sales growth guidance for the fourth quarter was reiterated at 0% to 4%. (ARTICLE HERE)  

JMBA | Is becoming the latest company to launch a Mobile Order app, their app will be launching in mid-November in 600 stores across the United States (ARTICLE HERE)

DPZ | Opened its first store in Belarus, the sixth new market opened in 2015 (ARTICLE HERE)

 

Monday, November 9

DNKN | Dunkin’ Donuts franchisee signs agreement to build 25 restaurants in Mexico (ARTICLE HERE)

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow had a mixed week last week, with casual dining companies outperforming the XLY, while quick service companies underperformed. The XLY was down -4.5%, top performers on a relative basis from casual dining were RT and TXRH posting increases of +6.0% and +4.9%, respectively, while PLKI and WEN led the quick service group this week up +4.0% and +3.2%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3

 

XLY VERSUS THE MARKET

Monday Mashup - CHART 4

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks BEARISH in the TRADE duration but BULLISH from a TREND perspective, TREND support is 77.55.

Monday Mashup - CHART 5

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 9

Monday Mashup - CHART 10

Monday Mashup - CHART 11

 

Keith’s Three Morning Bullets

Both US and European Equity Beta signaled immediate-term oversold into Friday’s close:

 

  1. EURO – down another -0.4% vs. USD at $1.07 this morning with the more important line of support being the YTD low of $1.05. While Dudley’s latest comments on “inflation continues to run well below the Fed’s target” are new/dovish this am, the FX market is obviously focused on the tragic events in France
  2. KOSPI – last week was ugly for everything Global Growth Expectations and KOSPI continued to break-down overnight down another -1%, taking it’s month-over-month decline from OCT’s counter TREND bounce to -4.3%
  3. COPPER – fresh new lows (again) this morning as Copper’s #Deflation Crash continues, -1.1% to $2.12/lb – the 6 month crash in Copper is -26% vs. WTI Oil’s at -35% - the Fed would have to back off the DEC hike to arrest the #Deflation

 

SPX immediate-term risk range = 1; UST 10yr Yield 2.15-2.36%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


November 16, 2015

We've made some updates and enhancements to Daily Trading Ranges. You'll now receive risk ranges for 20 tickers each day -  the last five of which will be determined by what's flashing on Keith's screen and by what names you're asking about. Contact support@hedgeye.com if you have any questions or feedback.

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.36 2.15 2.28
SPX
S&P 500
1,998 2,053 2,023
RUT
Russell 2000
1,129 1,175 1,147
COMPQ
NASDAQ Composite
4,907 5,081 4,928
NIKK
Nikkei 225 Index
18,741 19,750 19,597
DAX
German DAX Composite
10,602 10,867 10,708
VIX
Volatility Index
16.85 21.66 20.08
DXY
U.S. Dollar Index
97.43 100.15 99.10
EURUSD
Euro
1.06 1.08 1.08
USDJPY
Japanese Yen
121.43 123.99 122.62
WTIC
Light Crude Oil Spot Price
39.96 44.05 40.73
NATGAS
Natural Gas Spot Price
2.23 2.45 2.38
GOLD
Gold Spot Price
1,074 1,115 1,083
COPPER
Copper Spot Price
2.12 2.23 2.16
AAPL
Apple Inc.
111 118 112
PCLN
Priceline.com Inc.
1,231 1,361 1,298
VRX
Valeant Pharmaceuticals International, Inc.
68.34 83.16 75.41
FB
Facebook, Inc.
102 110 104
DIS
Walt Disney Co.
110 117 114
KSS
Kohl's Corp.
41.22 44.96 42.85

 

 


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The Macro Show Replay | November 16, 2015

 


Final Reminder | Invite to Macrocosm: The Dock Debates

A final reminder that limited seats remain for our first institutional conference Macrocosm: The Dock Debates in Stamford, CT on Wednesday, November 18th from 12 - 7pm.  

 

Please contact sales at  for pricing and availability.

 

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.

 

Please note that this event is off the record (i.e. not open to any media) and seating is limited.

 

Final Reminder | Invite to Macrocosm: The Dock Debates - Macrocosm1


Pelosky: Our Worrisome ‘Tri Polar World’ and Its Global Implications

In this second installment of our recent interview with J2Z Founder and Principal Jay Pelosky, Pelosky lays out the implications of his Tri Polar World (TPW) theme. According to Pelosky, TPW simply means we are now in a world of 1) Insufficient demand; 2) Excess supply; 3) No inflation; and 4) Excess debt. It comes from his view that, “2008 was not only a financial crisis and crash, but it also meant the crash of all major global growth models at the same time.” He speaks with Hedgeye Director of Research Daryl Jones.


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