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CHART OF THE DAY: The Great Unwind [Inside the Commodity Price Super-Cycle]

 

CHART OF THE DAY: The Great Unwind [Inside the Commodity Price Super-Cycle] - 12.01.15 EL chart

 

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

 

"... As you can see in today’s Chart of The Day (slide 41 in our current Global Macro Themes deck), inflation expectations hit an all-time high in 2011-2012 as Ben Bernanke devalued the US Dollar to a 40-year low.

 

That, you see, was the key to Bernanke’s storytelling – not creating real, sustainable growth – but creating the illusion of growth (commonly called inflation). With that expectation in hand, the world’s asset inflation chasers built massive oversupply.

 

Priced in devalued Dollars, 2 of the top “asset classes” one would chase if expecting perpetual inflation are:

 

  1. Commodities that settle in US Dollars
  2. Leverage (Debt) linked to inflation expectations

That’s why our recommended asset allocation to both Commodities and Junk Debt has been right around 0% for the last 18 months."   


Are You Sexy?

“Have a rule. Always follow the rule, but know when to break it.”

-Lasse Heje Pedersen

 

That’s an important quote to qualify from a good finance book I’ve recently cited called Efficiently Inefficient. From a portfolio manager’s perspective, I like it because it makes you think about what it is that you do within the context of what other people do.

 

After melding fundamental research with a quantitative overlay, my rule is to be Bayesian. As the data and market signals change, I need to consider changing my position. Rule #1 is don’t lose money. Rule #2 is break most of the Old Wall’s linear forecasting rules.

 

Maverick Capital’s Lee Ainslie (fundamental long/short equities) explained to Pedersen that they “built a quantitative system that informs their fundamental process and helps manage the risk” (pg 11). I’d say that’s pretty consistent with most “fundamental” investors we meet with these days. Mistaking the Dollar driven #Deflation Rules for “value” crushed lots of fund managers this year.

 

Are You Sexy? - dollar

Click here to join Hedgeye CEO Keith McCullough live on The Macro Show at 9am. 

 

Back to the Global Macro Grind

 

The sexiest thing you can do on the long or short side of a security is pick a top or bottom. Been there, done that. Nailed a few – been nailed by more than a few. Along the way, I have come to realize that I’m not sexy.

 

Tops and bottoms are processes, not points. To understand how the biggest macro risk factor of the last 2 years bottoms, it’s critical to educate yourself on what the causal factors were driving #Deflation to begin with. (hint: start with the US Dollar)

 

As you can see in today’s Chart of The Day (slide 41 in our current Global Macro Themes deck), inflation expectations hit an all-time high in 2011-2012 as Ben Bernanke devalued the US Dollar to a 40-year low.

 

That, you see, was the key to Bernanke’s storytelling – not creating real, sustainable growth – but creating the illusion of growth (commonly called inflation). With that expectation in hand, the world’s asset inflation chasers built massive oversupply.

 

Priced in devalued Dollars, 2 of the top “asset classes” one would chase if expecting perpetual inflation are:

 

  1. Commodities that settle in US Dollars
  2. Leverage (Debt) linked to inflation expectations  

 

That’s why our recommended asset allocation to both Commodities and Junk Debt has been right around 0% for the last 18 months. That’s also why we have been telling our clients to avoid Style Factors linked to #Deflation like:

 

  1. High Debt to Enterprise Value Equities
  2. High Beta Small Cap Stocks (with bad balance sheets)
  3. High “yielding” stocks with inflation linked cash flow expectations (like levered upstream E&P MLPs)

 

On the short side, that’s why Rule #1 (don’t lose money) was as important as any rule you should have followed this year. It’s also why the opposite of those Style Factors made for championship seasons for some of you, on the long side:

 

  1. Low Debt to Enterprise Value Equities
  2. Low Beta Large Cap Stocks (with good balance sheets)
  3. Unlevered Growth Equities that saw revenues accelerate as GDP slowed

 

And that brings us to the next obvious question: how do we A) not blow up those gains in 2016 (Rule #1) and B) have another good year of compounding returns? While the sexiest answer might be calling a bottom in #Deflation, I don’t do sexy.

 

We do process.

 

Are You Sexy? - Deflation cartoon 11.24.2015

 

The data (in the rate of change process) says that October’s counter-TREND bounce in everything inflation expectations was (like it was in July) another head-fake.

 

Notwithstanding that US and Global Consumption slowing right now (bigger component of GDP) is more important than the recession you’ve seen develop in cyclical/industrial PMIs for the last 12 months, the PMIs themselves still sucked in November:

 

  1. US (Chicago) PMI tanked to 48.7 in NOV (yesterday’s report) vs. 56.2 in OCT
  2. China’s made-up PMI remained below 50 in NOV at 49.6 vs. 49.8 in OCT
  3. UK’s PMI slowed to 52.7 in NOV vs. 55.5 in OCT

 

Sure, there were some other 4-handles on PMIs (4 = contraction/recession reading) in places like Switzerland (49.7) and Norway (47.6) this morning. But anyone who isn’t sleeping in a cave realizes that #Deflation has been priced in, to a degree, in their markets.

 

Priced in? Those are two of the sexiest words a “value investor” who wants to pick a bottom can hear. That said, if you start to buy a crashing asset price, you better have more capital to average in.

 

As the great value-investor, Marty Whitman, says: “a bargain that remains a bargain, is no bargain.”

 

Value with a catalyst? Yep. That’s what I’m looking for. And, while it’s been wrong since July, maybe that’s why the “PMIs have bottomed” call has been so sexy – everyone is looking for something to love.

 

In November all we measured were more bearish worldwide demand (read: #GrowthSlowing) signals on both the industrial and consumption side of the ledger. With the US stock market only having 5 up days in the last 18, Mr. Macro Market saw that too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.18-2.28%

SPX 2045-2106
RUT 1148--1209
USD 99.15-100.38
Oil (WTI) 40.69-43.15

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Are You Sexy? - 12.01.15 EL chart


December 1, 2015

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.28 2.18 2.21
SPX
S&P 500
2,045 2,106 2,080
RUT
Russell 2000
1,148 1,209 1,198
COMPQ
NASDAQ Composite
5,009 5,169 5,108
NIKK
Nikkei 225 Index
19,502 20,092 19,747
DAX
German DAX Composite
10,899 11,446 11,382
VIX
Volatility Index
14.11 19.46 16.13
DXY
U.S. Dollar Index
99.15 100.38 100.21
EURUSD
Euro
1.05 1.07 1.06
USDJPY
Japanese Yen
122.37 123.78 123.11
WTIC
Light Crude Oil Spot Price
40.69 43.15 41.68
NATGAS
Natural Gas Spot Price
2.20 2.33 2.23
GOLD
Gold Spot Price
1,055 1,080 1,064
COPPER
Copper Spot Price
1.99 2.09 2.05
AAPL
Apple Inc.
114 120 118
AMZN
Amazon.com Inc.
648 688 664
PCLN
Priceline.com Inc.
1,213 1,294 1,248
VRX
Valeant Pharmaceuticals International, Inc.
69.97 99.22 89.96
DIS
Walt Disney Co.
113 117 113
MCD
McDonald's Corp.
111 116 114

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

PMIs, USD and the UST 10YR

Client Talking Points

PMIs

On the heels of a recessionary PMI of 48.7 in the U.S. yesterday, China goes with making up a 49.6 in NOV (vs. 49.8 OCT). German/French PMIs are flat sequentially at 52.9 and 50.6, respectively – Swiss PMI drops below 50 to 49.7 – UK PMI slowed from 55.5 to 52.7 – Japan 52.6 vs 52.4.

USD

Dollar Down, Rates Down post the 4-handle on the PMI yesterday, so we get another “reflation” bounce this morning in Commodities (Copper +1%) and EM (Indonesian Stocks +2.5%) – don’t confuse these bounces with accelerating “demand” – that’s just silly.

UST 10YR

If this picture doesn’t tell a thousand tweets, I don’t know what does. The immediate-term risk range for the UST 10YR is 2.18 to 2.28%. 

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 68% US EQUITIES 4%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 16% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

We added McDonald's to Investing Ideas on August 11th. Since then shares of McDonald's have risen over 16% compared to a 0.2% return for the S&P 500.

 

As Restaurants Sector Head Howard Penney wrote right around the time we added McDonald's (MCD), "We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."

RH

We believe that RH is to Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market.

 

RH is the preeminent brand in the space. We think that RH is in second inning of a game that may ultimately prove to be a double header. We believe the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we see a stock in excess of $300.

TLT

The consumption side of the economy is arguably the most important, as its 69% of U.S. GDP. From a rate-of-change perspective, consumption growth decelerated in October, and consumer confidence is waning along-side it. That's why we would like to reiterate our Growth Slowing=Long TLT call.

 

To be clear, the consumption side of the economy had been a point of strength over the last several months. We’re not calling for a crash in household consumption, but the comps (comparison vs. prior reporting period) are important in rate-of-change analysis. The next four quarters of comps for Real PCE growth are the most difficult since Q3 2008 while the next four quarters of comps for CPI are the easiest since the four quarters ended in 4Q11. Simply put, both are headwinds for the consumer and we expect that the consumption component of the economic equation will continue to decelerate.

Three for the Road

TWEET OF THE DAY

"#Yellen to be first #Fed Head in modern times to raise interest #rates into recessionary data." -@KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

Thoughts rule the world.

Ralph Waldo Emerson

STAT OF THE DAY

The total amount of tree production acreage in the U.S. decreased by about 31% from 2002 to 2012, and the number of operations with Christmas tree sales has decreased from about 14,700 to 13,000 in the same period, according to the USDA.


Cartoon of the Day: Blast Off!

Cartoon of the Day: Blast Off! - Rate hike cartoon 11.30.2015

 

"Janet Yellen would be first Fed Head in modern times to raise interest rates into recessionary data," wrote Hedgeye CEO Keith McCullough earlier today.


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The Best Deal Hedgeye Has Ever Offered (Today Only) - best deal

 

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