Dovish Pig Hike

“It takes courage to be a pig.”

-Stan Druckenmiller


That’s one of the best money manager one-liners of all-time. It probably makes the linear-econ-academic types cringe. I like that too. Per a more polite economist, Lasse Heje Pedersen, in Efficiently Inefficient:


“Others go for a more diversified and risk managed approach, arguing instead that bulls get rich. Bears get rich. But pigs get slaughtered.” In his interview with George Soros (Druckenmiller’s former partner), Soros “explained that he too puts significant emphasis on risk management but he feels that one should go for the jugular in rare cases…” (Pedersen, pg 12)


If the Federal Reserve was running a hedge fund, and they’re so convicted in the idea that #Deflation is “transitory” and the US economy isn’t slowing, why not go for the jugular tomorrow and raise rates by 50 basis points?


Dovish Pig Hike - deflation 500 pound gorilla

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Back to the Global Macro Grind


Are you kidding me – 50 beeps? “How about an 1/8th of a point, Keith?” Or “what if the Fed raises by 25 beeps and signals they could start cutting rates after that?” Or “what if they don’t raise at all?”


That’s my inbox.


Post the Russell 2000 falling to -7.5% YTD (and -13.9% since July) yesterday, not one email (and believe me, I get a ton of them) is asking me about the upside in rate policy right now. They already tried the Ex-Energy, Ex-Credit, Ex-2000 Stocks thing. And it didn’t work. So, finally, for the 1st time this year… (drumroll)… every question is about the downside.


So, wouldn’t a Dovish Pig Hike be bullish?


Bullish – you know, as in ramp the “reflation” trade one more time into “year-end” baby! If Janet just goes back to what she really is (The Mother of All Doves), why can’t we have a Santa Rally? Why not? Pretty please. Do it for the kids!


After risk managing the last 2 US economic cycle tops:


  1. 1
  2. 2007-2008


I have no doubt in my mind that the Old Wall can drum up a new narrative on why US stocks can never go down. If you follow this morning’s macro message in the US Equity futures, it goes something like this:


  1. Dollar Down on a Dovish Hike
  2. Oil up another +0.5% “off the lows” (post a +1.8% bounce yesterday)
  3. Higher Gas Prices To Stimulate the US Consumer


Oh stop, Keith. Ok. I will. Because the storytelling at this point has reached the level of one of these (fictional) "Choose Your Own Adventure" books I used to read as a kid. “If you’d like to call rate hikes bullish, go to page 67 – if you’d like to call a rate-hike-reversal to dovish, go back to page 12.”


This, of course, will be the 1st time the Fed raises rates into Corporate Profits #Slowing (math people: rate of change) since 1967. And while the punditry on “it’s only 25 beeps” was loud in October, most of that complacency has turned into economic concern.


On the intimate relationship the profit cycle has with the economic cycle, my friend (former JP Morgan Strategist) Doug Cliggott wrote to me last week that we got “bad, bad data this week”:


“Profits of non-financial corporations were down -5% vs. Q3.2014, and their debts were up +7% vs. Q3.2014.  This 1200 bps gap between debt growth and profit growth is the widest we have seen since 2007.  As we talked about in September -- bad things tend to happen when debt growth is a lot faster than earnings.


The Fed data also show a violent {75%} slowdown in Q3 net share buybacks. That no doubt played a central role in the equity downdraft during Q3 ... a huge buyer went away.


My guess is this is a central theme for 2016 -- contracting corporate profits and much weaker cash flows mean very low share buyback volumes compared with the past four or five years. So U.S. equities will be "missing" a big buyer with no obvious, or less-than-obvious, cast of characters standing in the wings to step in and take their place.”


By the “data”, Doug was referring to the Q3 2015 Flow of Funds data (i.e. the Fed’s data!).


While it’ll take courage to do the Dovish Pig Hike thing tomorrow (i.e. the most dovish rate hike in US history), don’t doubt that Yellen will opt for that. All the while, keep on doubting that central planners can’t bend and smooth economic gravity anyway.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.33%

SPX 2003-2048
RUT 1101--1154

VIX 18.71-24.86
USD 96.60-99.64
Oil (WTI) 34.05-38.15


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Dovish Pig Hike - 12.15.15 EL chart

The Macro Show Replay | December 15, 2015


December 15, 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

10-Year U.S. Treasury Yield
2.33 2.13 2.23
S&P 500
2,003 2,048 2,021
Russell 2000
1,101 1,154 1,115
NASDAQ Composite
4,902 5,043 4,952
Nikkei 225 Index
18,505 19,390 18,883
German DAX Composite
10,099 10,668 10,139
Volatility Index
18.71 24.86 22.73
U.S. Dollar Index
96.60 99.64 97.65
1.05 1.11 1.10
Japanese Yen
120.22 122.29 121.01
Light Crude Oil Spot Price
34.05 38.15 36.27
Natural Gas Spot Price
1.85 2.06 1.90
Gold Spot Price
1,050 1,080 1,059
Copper Spot Price
2.02 2.12 2.11
Apple Inc.
111 116 112
642 668 657
Alphabet Inc.
746 784 762
Facebook Inc.
102 107 104
Valeant Pharmaceuticals, Inc.
89.53 99.38 94.14
Kinder Morgan Inc.
13.23 17.66 16.00



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2015...Was It All Good?

Client Talking Points


If you Ex-Russell (2000 stocks), Ex-Energy, and Ex-Credit, 2015 was all good! The Russell 2000 is down -7.5% year-to-date and, more importantly, down -13.9% since July – the internals of the U.S. stock market were as clear a signal as credit was.


The 19 Commodities Index hit a fresh 2015 low of 174 (-24.3% year-to-date) yesterday, so you’re going to see one of the many dead-cats that have bounced this morning. WTI oil led that, +1.8% yesterday and +0.5% this morning with a risk range of $34.05-38.15.


The UST 10YR had a 10 basis point bounce to 2.24% ahead of the Fed tightening into a slow-down (1st time they’ll hike into a corporate profit slow-down since 1967) and now all we are receiving emails about is how it’s a “one and done” and “they’ll raise but then cut”… at least we all know now what any tightening does (even 1 beep) to macro market expectations.


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

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MCD remains one of our top LONG ideas in the restaurants space. All indications are that all day breakfast is working, bringing back old customers and driving growth of new customers. Customers are pairing both breakfast and lunch items together in the lunch and dinner day, part which is helping drive additional sales.


McDonald’s Canada opened its first standalone McCafe this month. The much simplified concept intends to appeal to customers by offering both speed of service and low cost. They intend to be faster than their main competitor Tim Hortons and cheaper than Starbucks, carving out their own niche in the market.


This RH quarter is going to draw a Mason Dixon line between the Bulls and the Bears. The key factors that the Bulls (including us) need to see were profoundly present – giving us confidence that revenue will double, that we’ll see a 16% operating margin, and $11 in earnings power. In addition, RH beat the quarter, delivered 33% EPS growth in what should be the slowest growth quarter of the year, and it took up 4Q revenue guidance based on what it’s seeing so far this quarter (to 20%+).


The Bears got a nice little gift in the form of weaker Gross Margins due to promotional activity, and renewed concerns about management. The reality is that this is a transformational growth story that will change on the margin more often than it doesn’t. Based on our confidence in the earnings power at play here, we’d use any weakness as an opportunity to buy.


Implicit in our long TLT/short JNK bias is an expectation for high-yield spreads to continue along their recent trend of widening throughout the YTD.


“The U.S. economy is #LateCycle and the probability of a recession commencing by mid-2016 is extremely elevated – both in absolute terms and relative to the belief held by the overwhelming majority of investors and policymakers. Moreover, the risk of a global recession is also great in this scenario.”


The economic cycle doing what it always does (i.e. decelerate into a recession before bottoming and then reaccelerating) is reason enough to be bullish on the long bond and bearish on junk bonds, which are accelerating into full-blown crisis mode (the JNK ETF declined another -2% on Friday and is down -4.1% WoW, -5.8% MoM and -12.7% YTD).

Three for the Road


Why Raising Rates (Even One Basis Point) Right Now Is a Really Bad Idea… via @hedgeye



Who aims at excellence will be above mediocrity; who aims at mediocrity will be far short of it.

Burmese Saying


196 nations participated in climate talks on Saturday and agreed to a deal that hopes to limit the warming of our world to 2 degrees Celsius over pre-industrial levels. According to the deal the developed world will provide $100 billion a year to help developing countries switch from fossil fuels to greener sources of energy and adapt to the effects of climate change. 

P | What's Your Gameplan? (Web IV)

Takeaway: Ruling is out sometime tomorrow. This note is more about P’s model in a post Web IV world than the decision itself (notes on that below)


  1. NO BASIS FOR FLAT RATES: The only way to get to down to flat rates is if the CRJs overweight the Merlin deal, which we actually expect to receive the least amount of credence (links below).  The other key benchmarks are advocating for a rate above what P is currently paying today (.16c); including the IHRT-WMG deal that has an effective rate of .17c while offering WMG a terrestrial radio revenue share, which IHRT has no legal obligation to pay for, and is also not covered by the statutory license.  SX is looking for .25c starting next year, which may seem extreme, but is not that far off from what the Web III Remand CRJs (same CRJs in Web IV) ruled for in the 2015 period (.23c).  In short, we can’t see the CRB ruling for a rate below .20c starting in 2016; the structure of the pre-1972 settlement alone suggests P is expecting the same.
  2. WEB IV = POWDER KEG: The issue is not so much that there is a certain rate threshold that would require P to sunset its ad-supported model, but rather the limited flexibility P has to manage any rate increase.  P's revenues are highly dependent on its cost structure (Content + S&M), so it can't really trim expenses without putting more of its revenues at risk.  Rather, P will likely need to spend more in S&M (i.e. salesforce) in hopes of driving enough revenue growth to offset the royalty rate increase; especially since it has yet to show any real improvement in ad revenue/sales rep over the past 2 years (both on a direct & trailing-rep basis).  But more importantly, very small misteps in execution (revenue growth/cost containment) could lead to considerable increases in cash burn (see slides below).  The risk of getting it wrong is too severe to continue prioritizing the ad-supported model.    
  3. WHAT'S YOUR GAMEPLAN? Mgmt will be hosting a call to discuss the Web IV outcome tomorrow at 4:30ET; what mgmt says on this call may be more important than the actual decision.  Mgmt implied on its Strategic Update call that its recent acquisitions/agreements were essentially hedges against the Web IV outcome, but stated that it wouldn't deemphasize its ad-supported model.  Granted, that may just be posturing, but if mgmt continues to devote the bulk of its resources (i.e. its loan) to its ad-supported model that has barely limped along under the Pureplay rates, then P will remain a secular short.  But if P chooses to demphasize the ad-supported model in favor of a dedicated push into the higher ARPU/margin subscription market, then it could be a different story.  


See below for supporting analysis on the implications of Web IV on P's business model.  Let us know if you have any questions or would like to discuss further.


Hesham Shaaban, CFA




P | What's Your Gameplan? (Web IV) - P   pre 1972

P | What's Your Gameplan? (Web IV) - P   Web IV benchmarks

P | What's Your Gameplan? (Web IV) - P   Web IV prior rates

P | What's Your Gameplan? (Web IV) - P   Web IV leverage slide

P | What's Your Gameplan? (Web IV) - P   Cost structure slide 2

P | What's Your Gameplan? (Web IV) - P   Web IV fallout 1

P | What's Your Gameplan? (Web IV) - P   Web IV fallout 2

P | What's Your Gameplan? (Web IV) - P   Web IV ARPU slide



P | Changing Its Tune (Strategic Update Call)
11/17/15 08:35 AM EST

[click here]


P: Can We Still Be Friends? (3Q15)
10/23/15 08:14 AM EDT

[click here]


P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
[click here]


P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
[click here]


P: Losing the Critical Debate? (Web IV)
04/08/15 08:53 AM EDT
[click here]


Friday, December 18th at 11:00am EST



Mostly Not Cranes


We see few names in the Industrials sector that are as undervalued and underappreciated as Manitowoc.  MTW offers a clear revaluation catalyst with the 1Q 2016 split of the Foodservice Equipment unit from the Cranes business.  We see significant upside potential from the market’s reappraisal of these solid but stunningly mismanaged franchises.  In our experience, investors often get bogged down in Crane segment cyclicality and miss the broader operating improvement and value-unlock opportunity.  While it is common for companies to trade poorly ahead of transformational break-ups, the recent decline in MTW shares provides a straightforward value opportunity in an otherwise challenged sector.   




  • Foodservice Equipment Drives Value:  An independent, better performing Foodservice Equipment segment is alone likely to receive a higher valuation than the current combined companies.
  • Implied Negative Value For Cranes:  Buyers are being paid to take the Crane unit, by our estimates, despite the potential for better performance or a sale of this ‘Cadillac’ of cranes producer.
  • Sabotaging, Weak Management Out:  As we see it, prior management made efforts to undermine the separation, and recent c-suite changes are a significant positive.
  • Long-term View of Metrics, Operating Potential:  We will review crane market cyclicality, currency exposure, and foodservice equipment market drivers.
  • Opportunities For Better Management:  Improved management could execute botched facilities rationalizations, price innovative products more effectively (VPC), or just deliver products & services on time.
  • Valuation Upside:  We value MTW’s two separate companies $20/share or higher.  A sale of either unit is also possible, and we note the current interim CEO is from Bucyrus.





We will conclude the call with a live Q&A session.  Industrials subscribers will receive the dial-in and materials link in a reminder email prior to the call.


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