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China, Oil, Yields

Client Talking Points


China got smoked for a -5.4% drop in Shanghai (-1.9% in Hong Kong) after reporting that Industrial Profits slowed to -4.6% y/y (vs. -0.1% prior) and that they have sketchy brokers – reminder: Chinese demand is not bouncing.


Black Friday sales in WTI and Gold, deflating another -1.7% and -0.7%, respectively – don’t forget that with the Fed hell bent on raising into a slow-down that USD Up (rates down this week) #Deflation Risk remains as obvious in late November as it was in late July.


That wasn’t a typo – rates are down -5bps this week on the 10yr to 2.21% and the Yield Spread continues to compress as every major #LateCycle consumer data point slows (see consumer confidence and personal consumption data for details); Swiss 10yr new lows at -0.39% this morning too.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MCD is reducing G&A by $500 billion compared to the $300 million target announced in May the vast majority of which they expect to realize by the end of 2017.


Expectations going forward are for system sales to grow faster than G&A. The incremental savings are primarily derived from savings coming from a more heavily franchised and less G&A intensive structure; streamlining of corporate and former Area of the World organizations and realizing greater efficiencies through the global business services platform. The G&A savings represent roughly a 20% reduction off of the G&A 2015 base of $2.6 billion.


Another big shift is that MCD is now aiming to refranchise 4,000 restaurants by the end of 2018, with mostly all of them to take place in the high-growth and foundational segments.


Below are two callouts from this Thursday's Willams-Sonoma (WSM) third quarter earnings print as it relates to Restoration Hardware (RH). RH will report earnings in early December.


West Elm – i.e. the only concept within the WSM family of brands that is growing square footage put up a 15.7% comp in the quarter which equated to a 40bps acceleration on a 2yr basis sequentially. The concept has always been a good bellwether for RH from a directional standpoint. The consumer/concept are much different. West Elm productivity is in the $800/sq.ft. range compared to RH at $3,300 (inclusive of e-comm) in the same size box. But it’s the only concept growing square footage. We are modeling a divergence in 3Q15 as RH pushed its growth into 2H from 1H with the release of two new concepts this Fall (Modern and Teen).

GM – was down 110bps in the quarter, with merch margins relatively flat offset by dilution from International franchise growth and increased shipping expense as WSM continues to iron out its inventory position from the West Coast port contract dispute. It's important to mention the contract dispute because it was resolved nine months ago (and yet the company still talks about it). On the shipping front, new rate hikes at FedEx and UPS haven’t hit the P&L, so this was all self-inflicted. Each of the negative drivers on the GM line appear to be unique to WSM and shouldn’t be contagious to a name like RH. 


The long bond position is taking some heat with the rate hike fears, but that’s why you’re short JNK on the other side of it. Deflation and increasing rate hike expectations are the nemesis of poor credit. As mentioned last week, it’s called spread risk, and this leverage is fueled by low rate policy.


Since the Fed turned hawkish, bonds are down, rates have risen, and deflation has re-commenced. Admittedly, long-term treasuries haven’t worked. TLT is down -2.0% over the last month; BUT, if you’ve followed us with our short JNK call, that’s down -3.4%.

Three for the Road


This has been one of the busiest weeks of US and Global economic data in Q3



"To be the man, you have to beat the man!"

-Ric Flair


Brett Farve threw for 71,838 yards during his NFL career.

November 27, 2015


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.29 2.18 2.23
S&P 500
2,025 2,109 2,088
Russell 2000
1,139 1,203 1,188
NASDAQ Composite
5,018 5,182 5,116
Nikkei 225 Index
19,287 20,049 19,786
German DAX Composite
10,826 11,384 11,320
Volatility Index
13.92 20.11 15.19
U.S. Dollar Index
99.19 100.21 99.83
1.04 1.07 1.06
Japanese Yen
122.02 123.73 122.58
Light Crude Oil Spot Price
40.18 43.64 43.20
Natural Gas Spot Price
2.21 2.39 2.29
Gold Spot Price
1,060 1,080 1,070
Copper Spot Price
1.98 2.16 2.04
Apple Inc.
111 120 118
Amazon.com Inc
635 688 675
Priceline.com Inc.
1,213 1,312 1,240
Valeant Pharmaceuticals International, Inc.
66.61 95.40 87.45
Walt Disney Co.
115 122 118
McDonald's Corp.
110 115 113



CHART OF THE DAY: Wall Street Projections Are As Bad As The Fed's


CHART OF THE DAY: Wall Street Projections Are As Bad As The Fed's - 11.27.15 EL chart


Editor's Note: Below is a brief excerpt from today's Early Look written by Hedgeye's Director of Research Daryl Jones. Click here to subscribe.


"... Now we certainly give money managers credit for being savvier, as it relates to the markets, than most members of the Federal Reserve, but the Chart of the Day shows that their “projections” may be almost as inaccurate as the Fed. As the chart highlights, in September 2014, the last time investors were selling Treasuries at this rate, it was basically at the peak in 10-year yield. So the moral of the story is: only turkeys sell at the lows."

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Don’t Be a Turkey

“The 50-50 rule: Anytime you have a 50-50 chance of getting something right, there’s a 90% probability of getting it wrong.”

-Andy Rooney


Over the the Thanksgiving break, we stock market operators use only one rule of thumb. Related to Rooney's quote above, we assign a 50-50 chance of falling asleep after the second helping of turkey. In reality, that sneaky critter tryptophan turns that 50 – 50 chance into a more than 90% probability of sleep.


In fact though, the rule of thumb that eating turkey leads to sleep is really just a fallacy. Take it from our good friends at Wikipedia:


“A common assertion in the US is that heavy consumption of turkey meat results in drowsiness, due to high levels of tryptophan contained in turkey. However, the amount of tryptophan in turkey is comparable to that contained in most other meats. Furthermore, post-meal drowsiness may have more to do with what is consumed along with the turkey, carbohydrates in particular. It has been demonstrated in both animal models and humans that ingestion of a meal rich in carbohydrates triggers release of insulin. Insulin in turn stimulates the uptake of large neutral branched-chain amino acids (BCAA), but not tryptophan (an aromatic amino acid) into muscle, increasing the ratio of tryptophan to BCAA in the blood stream. The resulting increased tryptophan ratio reduces competition at the large neutral amino acid transporter (which transports both BCAA and aromatic amino acids), resulting in more uptake of tryptophan across the blood–brain barrier into the cerebrospinal fluid (CSF). Once in the CSF, tryptophan is converted into serotonin in the raphe nuclei by the normal enzymatic pathway. The resultant serotonin is further metabolised into melatonin by the pineal gland. Hence, this data suggests that "feast-induced drowsiness"— or postprandial somnolence — may be the result of a heavy meal rich in carbohydrates, which indirectly increases the production of sleep-promoting melatonin in the brain.”


That is a long winded way of saying: when it comes to blindly accepting conventional wisdom, don’t be a turkey!


Don’t Be a Turkey - FED cartoon 11.25.2015


Back to the Global Macro Grind...


In the cartoon above, from our illustrious cartoonist Bob Rich, we highlight the ongoing dilemma being contemplated by investors. Are the most recent data points hawkish or dovish? If so, what will the Fed do next? The bigger question of course is whether we are all just being turkeys with this continued myopic Fed focus.


It is more than a rule of thumb to suggest that any future shift in rates by the Fed should be based on their economic outlook, the problem with the economic projections of the Fed is that there isn’t a 50/50 chance they are correct. In fact, there is a more than 90% probability they are wrong.


The range of GDP projections from the members of the Federal Reserve started the year at 2.6 – 3.0% GDP growth. Just six months later in June, those projections were down at 1.8 – 2.0%. Now certainly we get better than most that making economic projecting is challenging in the best of times, but from the mid-point that is a more than 30% change in the projection in just six months. As my thirteen year old niece would say . . . #OMG!


Still despite the proven inaccuracy of Fed projections, the consensus view remains that the Fed will raise rates in December. According to a Bloomberg report out this morning, investors are selling U.S. government bond ETFs at the fastest pace in 14 months. As well, money managers withdrew $4.1 billion from U.S. fixed-income funds in November, the most since September 2014.


Now we certainly give money managers credit for being savvier, as it relates to the markets, than most members of the Federal Reserve, but the Chart of the Day shows that their “projections” may be almost as inaccurate as the Fed. As the chart highlights, in September 2014, the last time investors were selling Treasuries at this rate, it was basically at the peak in 10-year yield. So the moral of the story is: only turkeys sell at the lows.


In China this morning, the turkeys are seemingly coming home to roost with equity markets getting clobbered down almost 6% across the board. The cause du jour of this sell off is a broad, and likely overdue, crackdown on Chinese brokerages. The primary concern is CITIC Securities, which is being investigated by the Chinese version of the SEC for a supposed inflation of its derivatives business by a mere $1 trillion yuan (or $165 billion for those of you who are counting in U.S. dollars). 


To add a bit of fuel to the sell-off in Chinese equities, the only piece of economic data released was, not to mince words, abysmal. Specifically, industrial profits came in for September at -4.5% year-over-year. Given that data point, we probably shouldn’t be surprised that Chinese nickel producers announced today that they are reducing production in 2016 by 20%. But, hey, maybe more stimulus will help?


Things obviously aren’t great in China, but then there is Japan. According to recent government data, the Japanese work force could fall from 64 million in 2014 to 56 million in 2030, a decline of over 8 million people. In other news, the U.S. Federal Reserve is projecting inflation will accelerate in Japan over the next decade. (That’s a joke!).


Contemplating Japan and China reminds us of one of our favorite quotes from the Oracle of Omaha:


“Only when the tide goes out do you realize who’s been swimming naked.”




Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.18-2.29%

SPX 2025-2109

VIX 13.92-20.11

USD 99.11-100.21
Oil (WTI) 40.18-43.64

Gold 1060-1080


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research 


Don’t Be a Turkey - 11.27.15 EL chart

McCullough: How To Stay Ahead Of Consensus Right Now


In this brief excerpt from a recent Investing Ideas ‘Macro Overlay,’ Hedgeye CEO Keith McCullough explains how to position your portfolio ahead of the Fed’s potential December rate hike. McCullough also reflects on Wall Street’s worst macro calls of the year.


Subscribe to Investing Ideas today for access to our full list of longer term ideas.


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The Macro Show Replay | November 27, 2015


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