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Reflation Capitulates

“I will be conquered; I will not capitulate.”

-Samuel Johnson

 

That’s what one of the 18th century’s most renowned writers had to say right before his death. Having published A Dictionary of the English Language in 1755, Samuel Johnson died at the age of 75 in 1784 in London, England.

 

Not to go all mortality on you this morning, but there is a cycle to big macro expectations. And, yes, some of them die of old age. Being long what the central planners have promised (the illusion of growth, i.e. inflation expectations) killed “reflation” returns in 2015.

 

What is “reflation”, you ask? I guess it’s the hope that global demand and/or growth “bottoms” and we magically see an end to the best call you could have had in Global Macro in the last 18 months - #Deflation. But hope is not a risk management process.

 

Reflation Capitulates - reflation cartoon 10.13.2015

 

Back to the Global Macro Grind

 

Reflation (per Wikipedia) “is the act of stimulating the economy by increasing the money supply… seeking to bring the economy (specifically price level) back up to the long-term trend.

 

That, my friends, is central-planning-cheerleading 101. So whoever’s research you are reading that continues to cheer on “600 rate cuts globally” being the elixir for perma-asset-price-inflation is still looking for Waldo (i.e. demand accelerating).

 

Newsflash: global demand doesn’t bottom and accelerate when an academic tells it to. It most certainly doesn’t accelerate in the things that have already inflated to all-time-bubble price highs which perpetuated all-time-supply-to-demand-ratio highs.

 

Here’s how “reflation” looked in commodity portfolios yesterday:

 

  1. CRB Commodities Index down another -2.6%, taking its crash to -29.2% year-over-year
  2. Oil (WTIC) smoked for another -5.9% drop, taking its epic deflation to -42.9% year-over-year
  3. Natural Gas tanked another -5.2% to, taking its crash to -45.6% year-over-year
  4. Copper deflated another -1.4%, taking its epic deflation to -30.1% year-over-year
  5. Cattle prices dropped another -2.3%, taking its crash to -26.2% year-over-year
  6. Coffee prices got tagged for another -1.1% loss, taking its epic deflation to -31.5% year-over-year

 

Aren’t epic deflations and crashes fun? Ex-all-of-it, “price stability” seems to be tracking right at the Fed’s transitory target!

 

If you didn’t back out the “transitory” (Fed speak for anything they miss) nature of what was an awesome year (if you shorted every “reflation” hope – and, yes, there were plenty of opportunities to do so), you also nailed the following #Deflation Risk links:

 

  1. Foreign Currency Devaluations
  2. Corporate Revenue and Profit Pressures
  3. Credit Cycle Risks

 

When we talk about conquering complacent consensus, we’re talking about making obvious connections in our Macro Themes across asset classes. That’s why it should be no surprise that the following prices hit lower-lows (vs. their SEP lows) alongside commodities yesterday:

 

  1. The Canadian Dollar (FXC)
  2. Ex-Energy names like Freeport-McMoran (FCX)
  3. Junk Bonds (JNK)

 

Oh no you didn’t. You didn’t go all FXC or FCX on me this morning did you? Say those tickers really fast and you’ll get a second derivative of a word guys who are long “reflation” are yelling at their screens going into year-end. It’s too bad the PMIs didn’t bottom.

 

Up next in narrative drift? They definitely have to blame China. The Chinese Yuan is under some pressure this morning and their reserves don’t look so sweet either. So, whatever you do, don’t blame the #LateCycle in both US consumption and employment. Blame Canada too.

 

In other pure-play US domestic short-selling news, after falling -1.6% last week, the Russell 2000 (80% of its revenues are pure play USA) got slammed for another -1.5% loss yesterday, taking its draw-down from its “reflation” highs in July to -10.1%.

 

Slammed, smoked, tanked – them be fighting words “folks.”

 

It’s a good thing we didn’t capitulate and chase those JUL and OCT “reflation” charts.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.14-2.32%

SPX 2049-2109
RUT 1152--1178

VIX 14.01-18.69
USD 97.54-99.46
Oil (WTI) 36.64-39.98

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Reflation Capitulates - 12.08.15 EL chart


Global Growth Continues To Slow

Client Talking Points

#DEFLATION

Largely misunderstood for the last 18 months, we’ve entered the most painful part of a crash in inflation expectations – the capitulation. The CRB Index made lower-lows down -23% year-to-date yesterday and Oil and Copper have only bounced +0.7% and +0.2%, respectively this morning – this all but ensures the “bottom” in leading indicators is not in.

RUSSELL 2000

The Russell 2000 moved back into double-digit correction mode yesterday (-10.1% since July’s all-time #Bubble high) as small cap, leverage, and high beta continue to be some of the worst Style Factors to be long during a #LateCycle slow-down that’s driven by #Deflation expectations.

UST 10YR

From Atlanta Fed’s Lockhart’s lips to whoever doesn’t do macro’s ears, after cutting his GDP forecast for Q4 to 1.4% he said the “market” is well prepared for a hike. He clearly wasn’t talking about credit, commodity, currency, EM, small cap, etc. markets. The UST 10YR Yield is right back down to 2.22% as the curve continues to flatten (129 basis points 10YR minus 2YR this morning).

 

*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 3%
INTL EQUITIES 7% COMMODITIES 0%
FIXED INCOME 15% INTL CURRENCIES 7%

Top Long Ideas

Company Ticker Sector Duration
MCD

Restaurants Sector Head Howard Penney had no material update on McDonald's (MCD) this week. However, here is what Penney wrote around when we added MCD to Investing Ideas. It's worth reiterating our high conviction in the stock:

 

"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

A lot has happened in 13 weeks... not the least of which is that Restoration Hardware (RH) is underperforming not only the market by 16%, but Retail as well (by 7%) – despite RH being more insulated from some of the issues that are clipping earnings today for retailers more broadly.

 

Over this time period, however, RH meaningfully accelerated square footage growth, launched two new concepts. Some say it’s bad timing. We disagree. RH is our favorite name in the retail space, and we like it across all three durations. Trade, Trend, and Tail.

TLT

On went the game of slowing last week with a little central planning un-secretive sauce. Despite the ECB’s move to cut the deposit rate to -0.30%, Draghi didn’t ring the cowbell loud enough. Meanwhile, Friday’s jobs report might have been just enough for Janet to hike rates into a late cycle slowdown. The consensus long USD crowd was crushed on the ECB news. The dollar lost over 2% on Thursday and rates were pushed higher.

 

If growth is going to continue to slow, with a rate hike on the horizon, a relative fixed income spread play (long TLT, short JNK) is exactly what you want on.

Three for the Road

TWEET OF THE DAY

VIDEO: ‘The Stock Market Looks Fantastic! (Ex-Energy, Ex-Consumers And Ex-Credit)’ https://app.hedgeye.com/insights/47945-mccullough-the-stock-market-looks-fantastic-ex-energy-ex-consumer?type=video… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

The wise man should be prepared for everything that does not lie within his control.

Pythagoras

STAT OF THE DAY

A study of 15-year-olds was conducted in 42 countries and found that after G.N.P., the quantity of books in one’s home was the most important predictor of reading performance. The greatest effect was seen in libraries of about 100 books, which resulted in approximately 1.5 extra years of grade-level reading performance.


McCullough: ‘The Stock Market Looks Fantastic! (Ex-Energy, Ex-Consumers And Ex-Credit)’

 

On The Macro Show this morning, Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale talk style factors and Old Wall’s evolving storytelling about the stock market.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Cartoon of the Day: More Potent Than Popeye's Spinach?

Cartoon of the Day: More Potent Than Popeye's Spinach?  - US dollar deflation cartoon 12.07.2015

 

"#StrongDollar (rate hike catalyst DEC 16th) driven #Deflation Risk definitely matters to most asset classes," Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier today. "After a -3.8% decline last week, Oil is down another -1.1% this morning to $39.53 and the Commodities complex remains in crash mode."


JOIN HEDGEYE FOR HOLIDAY COCKTAILS & APPETIZERS

'Tis the Season…. We hope you can join us at La Biblioteca (622 3rd Avenue at 40th Street – located inside Zengo restaurant) on Wednesday December 9th, from 5-9pm for some holiday cheer!

 

Please RSVP to Kerrie at  if you can join.

 

We look forward to seeing you!

 

The Hedgeye Financials Team

 

JOIN HEDGEYE FOR HOLIDAY COCKTAILS & APPETIZERS - Invite


Penney: Why Chipotle Could Fall 25% Or More | $CMG

Takeaway: After surveying the damage, Hedgeye Restaurants analyst Howard Penney thinks Chipotle shares are worth $350 to $400.

Penney: Why Chipotle Could Fall 25% Or More | $CMG - chipotle cartoon

 

If you are a Chipotle shareholder you probably had a bad weekend. 

 

After the market closed Friday, Chipotle (CMG) released an 8-K detailing what the company is going to do to fix the issues it faces, including the impact of the E. coli outbreak that spread to stores nationwide. (Click here to read a brief recap of "The Bear Case Against Chipotle")

 

The expected "E. coli impact" on Chipotle's earnings was staggering:

 

  1. Comparable restaurant sales to be in a range of -8% to -11%
  2. Diluted earnings per share in the range of $2.45 to $2.85, versus consensus of $4.05
  3. Plus this- "We are also rescinding our previously-announced 2016 outlook for comparable restaurant sales increases. In light of recent sales trends and additional uncertainty related to the E. coli incident, we cannot reasonably estimate 2016 comparable restaurant sales at this time."

CMG shares took another hit today falling 3%. 

 

It's not done falling either. As Restaurants analyst Howard Penney writes, "We expect the swift decline in same-store sales caught management off guard and they are unprepared to deal with the severity of the problem." 

 

penney lays out his bearish thesis in the video below:

 

Why? To be clear, there are still a lot of unanswered questions. Here are a few from Penney's research note sent to institutional subscribers yesterday:

  1. Can the company grow its units at the same rate and deliver on consumer and investor expectations?
  2. What is the long-term damage to the Chipotle brand?
  3. Will the company need to adjust its non-GMO claims?

"The direct impact of a more humble management team will be a company with a lower margin structure and a significantly slower unit growth rate. CMG is just another restaurant company and the management team needs to realize that," he writes.

 

Bottom Line: Penney thinks the stock is now worth between $350 and $400.

 

 

To access Penney's more detailed institutional research note on Chipotle or his team's other research email sales@hedgeye.com.


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