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Janet's Transitory World

“Our pleasance here is all vain glory – the false world is but transitory.”

-William Dunbar


After listening to Janet Yellen yesterday, I finally realized that the difference between our economic forecasts boils down to the difference in one word. What we call cyclical, she calls “transitory.”


To give her some air time on this, the Miriam Webster Dictionary defines “transitory” as “ephemeral, momentary, fugitive, fleeting, evanescent, meaning only lasting or staying a short time.”


Sounds like yesterday’s US stock market move, not the consistently slowing US economic and corporate profit data!

Janet's Transitory World - rate hike cartoon 12.16.2015


Back to the Global Macro Grind


You see, even if you aren’t paid to see, this all became very clear yesterday. Despite both the data and market signals we’ve seen develop since July, the Federal Reserve had to maintain a bullish growth and inflation “forecast” that corroborated its political action.


Now that we have that out of the way, we can get back to measuring the non-transitory economic cycle.


The best part about the “rate hike” is that rates fell on that. Yep. The long-end of the curve is falling again this morning too. With the 10yr US Treasury yield down 7 basis points to 2.23%, that’s also flattening the curve.


So, forget the transitory spike you saw in most things equities for a minute and consider the causal factor that has driven long-term interest rates Lower-For-Longer, well, for a long time – both long-term inflation and growth expectations slowing. #Demographics eh.


Instead of having an un-elected-linear-economist characterize #LateCycle indicators like employment as non-transitory and everything she didn’t forecast as transitory, what does Mr. Bond Market think about this?


  1. Long-term rates are falling, despite a transitory rate hike
  2. The Yield Spread (10yr minus 2yr) just flattened to a YTD low of 123bps
  3. Credit Spreads continue to signal a classic cyclical breakout


Yes, we get that people are in the business of seeing stock prices rise into year-end. There are only 2 weeks left to get the Russell 2000 back to break-even. So you’ll need to get the sell-side to make up a narrative for a transitory +5% rally (from here) to get there.


They can be very creative.


But can they find a way to call today’s Chart of The Day (US Industrial Production) slowing indefeasibly into a recession “transitory”? Or shall we agree to agree that this rate of change dropping to its lowest level (-1.2% year-over-year) since 2009 is called cyclical?


If we’re going to call everything cyclical “transitory”, then we’ll probably get to what most economic ideologues actually believe - that they can bend gravity – and that there is no economic cycle to concern yourself with anymore because they can smooth that too.


But, if gravity fans just call cycles what they are – we won’t blow up our net wealth at every turn of every #LateCycle slow-down. Since the Federal Reserve has NEVER proactively predicted a recession, I’m thinking we stay with mother nature.


Back to tightening into a cyclical (and secular/demographic) slowdown…


  1. That’s US Dollar bullish
  2. That’s Bond Yield bearish
  3. When USD is RISING and UST Rates are FALLING, that’s deflationary


Mr. Macro Market nailed that yesterday too. It appears that he believes the inaccuracy of Janet’s forecasting process is inherent and unchallengeable. How else can you explain yesterday’s market reaction?


  1. Utilities (XLU) led gainers, closing up +2.5%
  2. Housing Stocks (ITB) came in 2nd place on the day, +2.4%
  3. Oil & Gas Stocks (XOP) led losers, deflating another -2.2%


As the legendary Herb Brooks would have said to Janet, “Again!”


On a historic day where the Fed “raised” into a both an industrial recession and corporate profit slow-down (hasn’t happened since 1967), Lower-For-Longer rate proxies rallied, credit did nothing, and commodities continued to crash.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.33%

SPX 2004-2088
RUT 1105--1171

VIX 16.49-24.55
USD 97.06-99.51
Oil (WTI) 34.09-37.26
Copper 1.99-2.10


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Janet's Transitory World - 12.17.15 chart


Client Talking Points


While there have been plenty of “reflation” and relief rallies across asset classes throughout 2015, the #1 thing to have stayed with from a TREND perspective is #StrongDollar and its deflationary force on bubbled up asset classes. What the Fed did (and maintained) in their dead-wrong growth forecast was keep a USD super spike > $100 on the USD Index in play.


Interestingly, but not surprisingly, that’s exactly how the macro market read the Fed’s hawkish statement – dovishly on growth! The CRB Index hit a fresh new low on the “news”, Oil (and its related equities) continued to crash, and Credit Spread risk didn’t change from a bearish TREND perspective either. Copper and Oil are down another   -1% each this morning.


We thought they “raised rates”? This is what we mean by the market read-through being dovish on growth – UST 10YR is down -7 basis points this morning, Yield Spread (10s minus 2s) testing its year-to-date low at +123 basis points, and Utilities (XLU) led the relief rally +2.5% on the day!


*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


REPLAY | Fed Day Live with Hedgeye CEO Keith McCullough https://app.hedgeye.com/insights/48087-fed-day-live-with-hedgeye-ceo-keith-mccullough-wednesday-at-2-10pm-et… via @hedgeye



Time and tide wait for no man.

Geoffrey Chaucer


A new study found that heads of state lived 2.7 fewer years than the opponents they beat.

December 17, 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 2.30
S&P 500
2,004 2,088 2,073
Russell 2000
1,105 1,171 1,148
NASDAQ Composite
4,904 5,163 5,071
Nikkei 225 Index
18,565 19,808 19,049
German DAX Composite
10,201 10,907 10,469
Volatility Index
16.49 24.55 17.86
U.S. Dollar Index
97.06 99.51 97.88
1.05 1.10 1.09
Japanese Yen
120.33 123.81 122.21
Light Crude Oil Spot Price
34.09 37.26 35.74
Natural Gas Spot Price
1.76 2.01 1.83
Gold Spot Price
1,052 1,079 1,071
Copper Spot Price
1.99 2.10 2.07
Apple Inc.
108 115 111
Amazon.com Inc.
643 686 675
Alphabet Inc.
749 785 776
Facebook Inc.
102 109 106
Kinder Morgan Inc.
13.51 17.48 15.94
Valeant Pharmaceuticals, Inc.
87.88 121.13 118.47



P | Web IV ≠ Powder Keg

Takeaway: We were looking at Web IV as the last leg to our short, but it didn't go our way. We’re evaluating the position from here


  1. THIS TIME REALLY WAS DIFFERENT: The CRB ruled for a bifurcated rate structure, which took us by surprise since there is no historical precedent for a dual rate structure outside of the Merlin or Pureplay agreement, and P was the only involved party requesting such a rate structure.  The 2016 Web IV ad-supported/subscription per-track rates for 2016 are .17c/.22c vs. .14c/.25 under the Pureplay Rates, which translate to an effective rate of .18 for 2016 vs. the .23 that the Web III remand CRJs (same as Web IV CRJs) ruled for the 2015 period.  In short, Web IV is massive reset off Web III.
  2. WEB IV ≠ POWDER KEG: The 2016 Web IV blended effective rate is .18c vs. .15c under the Pureplay Rates that P is paying today; translates to a manageable ~15% increase in royalty rates.  P will continue to pay lower ad-supported rates (vs. subscription), which is how P structured its model.  In short, the structure of the Pureplay agreement is largely intact, but the Web IV rate structure has essentially shifted more of P's margin profile further away from the ad-supported business into the subscription business.  
  3. NOW WHAT? We were looking at Web IV as the last leg of our short.  We wouldn't necessarily look at the pre-market squeeze/relief rally as a short opportunity since P would still be trading at basically a 2-yr low.  We'll be monitoring consensus estimates to decide what to do with the position from here.  


Let us know if you have any questions or would like to discuss further.


Hesham Shaaban, CFA



P | Web IV ≠ Powder Keg - P   Web IV Rate comparison

ICI Fund Flow Survey | Bull Market in Money Funds

Takeaway: In the week before the Fed's first rate hike this cycle, almost all risk asset classes saw withdrawals

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Almost all risk asset classes experienced net withdrawals in the 5-day period ending December 9th while investors shored up +$13 billion of cash in money market funds, the 8th inflow into cash products in the past 10 weeks aggregating over $85 billion. Other than money markets, only equity ETFs and municipal bond funds saw net positive flows with equity ETFs taking in +$4.1 billion and muni bond funds collecting +$825 million during the week. Meanwhile, taxable bond funds lost -$7.3 billion, their largest outflow of the quarter, on fears of high yield credit exposure. Domestic equity mutual funds lost another -$5.2 billion, bringing the YTD cumulative flow to -$160.2 billion.


With 30-40 day duration in most of their money fund portfolios, Federated Investors will now be able to add roughly 6 cents per quarter in new earnings starting in the middle of 1Q16 as new benchmark rates filter through the system (see our FII report HERE).


ICI Fund Flow Survey | Bull Market in Money Funds - ICI1


In the most recent 5-day period ending December 9th, total equity mutual funds put up net outflows of -$6.4 billion, trailing the year-to-date weekly average outflow of -$1.1 billion and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$1.2 billion and domestic stock fund withdrawals of -$5.2 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 8 weeks of positive flows over the same time period.


Fixed income mutual funds put up net outflows of -$6.5 billion, trailing the year-to-date weekly average outflow of -$58 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$825 million and taxable bond funds withdrawals of -$7.3 billion.


Equity ETFs had net subscriptions of +$4.1 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$39 million, trailing the year-to-date weekly average inflow of +$1.1 billion and the 2014 average inflow of +$1.0 billion.


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.

Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:


ICI Fund Flow Survey | Bull Market in Money Funds - ICI2


ICI Fund Flow Survey | Bull Market in Money Funds - ICI3


ICI Fund Flow Survey | Bull Market in Money Funds - ICI4


ICI Fund Flow Survey | Bull Market in Money Funds - ICI5


ICI Fund Flow Survey | Bull Market in Money Funds - ICI6

Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.


ICI Fund Flow Survey | Bull Market in Money Funds - ICI12


ICI Fund Flow Survey | Bull Market in Money Funds - ICI13 2


ICI Fund Flow Survey | Bull Market in Money Funds - ICI14


ICI Fund Flow Survey | Bull Market in Money Funds - ICI15


ICI Fund Flow Survey | Bull Market in Money Funds - ICI16

Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


ICI Fund Flow Survey | Bull Market in Money Funds - ICI7


ICI Fund Flow Survey | Bull Market in Money Funds - ICI8

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors withdrew -5% or -$306 million from the long treasury TLT ETF ahead of the Fed's first rate hike in seven years. Additionally, the industrials XLI also lost -5% or -$315 million.


ICI Fund Flow Survey | Bull Market in Money Funds - ICI9

Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.


ICI Fund Flow Survey | Bull Market in Money Funds - ICI17


ICI Fund Flow Survey | Bull Market in Money Funds - ICI18

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$4.1 billion spread for the week (-$2.4 billion of total equity outflow net of the -$6.5 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$858 million (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)


ICI Fund Flow Survey | Bull Market in Money Funds - ICI10


The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


ICI Fund Flow Survey | Bull Market in Money Funds - ICI11 

Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA

An open letter to the CEO of Chipotle from his peer group

Dear Mr. Ells,


Thank you so much for making a TV appearance the other day as part of your apology tour.  It’s great to see you since, well, never.  I also read your full spread ad in the paper yesterday.  It’s a nice Mea culpa but begs the question “Why weren’t you more serious about food safety earlier?” 


You normally fly under the radar screen, unless of course you could take advantage of a platform to publicly admonish your peers about "food with integrity” — much to our dismay (and we were jealous as you picked off our sales).  But mostly we were dismayed since we didn’t agree with the entirety of your approach.


We (the industry) didn't believe your approach was legitimate or sustainable at your scale and please note that we have been at the foodservice thing for a long time.  Dining out wasn’t invented yesterday for god’s sakes.


We let you run with it though, just like we let you run your mouth.


We mostly remember you as the guy proselytizing: “Spending money dining at my joint is better than spending it at your joint. Why?  Because I say so.  I know how things should work. If you don’t believe me, just ask me.  I based my brand on authentic, local and protein friendly."  Nevermind that much of your marketing nonsense is just that — nonsense.


We also find it interesting that you are going to save the planet and all the lovely critters on it as well. Especially, you know, the special critters — swine, bullock and fowl.  Mr. Ells, how come you don’t take credit for birthing all these animals so you can kill them and stuff them into your burritos?  If not for you, this protein wouldn’t exist for you to harvest.  We understand it’s a tough marketing message — We are responsible for raising a large number of critters for a specific purpose — to grow them, kill them and eat them (but we smother them gently)."


However, Mr. Ells, we must remind you that you forgot to include the most basic rule of foodservice in your brand architecture.  You know…like the number #1 rule?


Rule #1: Don’t make the guest sick.

Rule #2: Don’t forget rule #1.


It’s interesting that the food sold by most chains and supplied by conventional sources seems to be safer than yours.  Other than a hamburger chain 20+ years ago we don’t recall a chain of your size that successfully created so many cases of acute abdominal distress in such a short time. 


Take Subway for instance, especially since they use the same style production line.  We can’t recall an issue there on the scale of yours, and they are a heck of a lot bigger.  Perhaps you can learn a few tips from the chains you are fond of trashing.  They appear to practice foodservice basics you ignore.  Perhaps they can’t claim they are GMO free, but lets come clean…neither can you.  Right?


Mr. Ells, congratulations on the successful transformation of an enviable brand into “just another foodservice joint”.  You set a land speed record doing that.  You lost the halo you didn’t deserve and betting odds are it will stay lost.  And make no mistake about it — that is exactly what you are today, just another foodservice joint and an expensive one at that.




Your Peers


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