The Macro Show Replay | December 22, 2015


December 22, 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
2.32 2.12 2.20
S&P 500
1,993 2,046 2,021
Russell 2000
1,106 1,155 1,127
NASDAQ Composite
4,890 5,043 4,968
Nikkei 225 Index
18,569 19,275 18,916
German DAX Composite
10,142 10,714 10,497
Volatility Index
17.86 24.41 18.70
U.S. Dollar Index
97.61 99.42 98.46
1.07 1.10 1.08
Japanese Yen
120.35 123.05 121.21
Light Crude Oil Spot Price
34.99 37.37 35.78
Natural Gas Spot Price
1.67 2.04 1.94
Gold Spot Price
1,050 1,085 1,077
Copper Spot Price
2.03 2.15 2.14
Apple Inc.
104 111 107
641 682 664
Alphabet Inc.
745 779 760
112 121 116
Kinder Morgan Inc.
13.85 17.35 15.14
Walt Disney Company, Inc.
104 111 106



USD, UST 10YR and Spain

Client Talking Points


The signal is finally starting to show a narrower immediate-term risk range of $97.61-99.42 for the USD Index (narrowing range = bullish). Both the Euro and the Yen are up +0.2% this morning vs. USD, and they’d need to be up a lot more than that to challenge #Deflation.


The UST 10YR Yield was down to 2.18% yesterday and holding 2.19% so far this morning with Yield Spread compression (10YR minus 2YR) still testing year-to-date lows as #GrowthSlowing in Q4 remains obvious to anyone who is rate of change driven and data dependent.


Somehow Spain was lost in consensus media’s shuffle yesterday, but this political uncertainty (voting Left) definitely matters to macro markets. Spanish stocks (IBEX) are not bouncing this morning and are down -9.1% in the last month.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Federated Investors (FII) profitability got a boost last week as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.


In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.


In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.


We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer last week. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.


But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.


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


Now that the Fed finally hiked federal funds by 25 basis points into a late-cycle slowdown, the fact that TLT was up 1.8% (Wed-Fri.) on “lift-off” should be concerning to the growth accelerating bulls. After the dovish hike, the U.S. Treasury 10-Year Yield (THE GROWTH EXPECTATION PROXY) was down 10 basis points (2.3% to 2.2%). And yes, the most telegraphed rate hike ever was dovish.


Just look at the Fed’s projections and the language in the FOMC's statement. Yellen, essentially, acknowledged what we have said for ~ a year and a half now:

  • “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”
  • “Market-based measures of inflation expectations remain low; some survey-based measures of longer-term inflation expectations have edged down”
  • “Net exports have been soft”
  • ... And on the Fed’s forward-looking economic projections:
  • The Fed kept 2016 GDP estimates unchanged, and downwardly revised 2017 to 2.0-2.3% from 2.0-2.4%.
  • 2016 PCE Inflation was downwardly revised to 1.2-1.5% from 1.5-1.8%. 

Three for the Road


US Retailers $XRT testing YTD lows in spite of "low gas prices" narrative



I played the game one way. I gave it everything I had. It doesn’t take any ability to hustle.

-Wade Boggs


November Department Store Sales in Japan were down -2.7% year-over-year from 4.2%

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Cartoon of the Day: In The Sand

Cartoon of the Day: In The Sand - Fed cartoon 12.21.2015


"As we move into the final weeks of 2015, it’s still very obvious that the Federal Reserve’s grand experiment has generated forecasts that are very much out of order," Hedgeye CEO Keith McCullough wrote in today's Early Look.

Why a Perfect Storm Is Brewing in Healthcare

Why a Perfect Storm Is Brewing in Healthcare - z storm


In recent weeks politicians and the media have been preoccupied with ISIS, Donald Trump and “Star Wars: The Force Awakens,” marking a major shift in attention away from Obamacare. After dominating the media cycle with its rocky start, including crashing enrollment websites, Republican votes to repeal the legislation (61 votes so far), and damning forecasts of spiraling costs, millions of previously chronically uninsured people now have access to medical care. It is not an understatement to make the claim that lives were likely saved as a result of Obamacare, but alas our collective attention is on to different things these days.


Why a Perfect Storm Is Brewing in Healthcare - tobin aca


The benefits to these newly insured are clearly significant. Studies have shown 30 – 50% reductions in mortality from having health insurance, not to mention reduced fear and anxiety, and the potentially ruinous financial burden that comes from going without insurance. But the benefits don’t just stop with the individuals the legislation helped. The Affordable Care Act created legions of newly minted medical consumers which benefited the bottom line of the companies that cared for them, their executives, and investors who enjoyed incredible stock returns.


For investors who bet on healthcare stocks during the roll out of the ACA, the portfolio returns have been stellar...


* * *


Click here to continue reading Tobin's Healthcare piece on Investopedia. 

Spain’s Political Risk Rises!

Results from yesterday’s Spanish election showed that no party secured the 176 seats required out of the 350-seat parliament to govern with an absolute majority.  


Now it appears that the only possible outcomes are the formation of a weak coalition or a call for new elections that could come as soon as January 13th.  This all clearly spells political risk rising! [The Spanish IBEX fell -3.6% in trading today, and is down -8.9% YTD]


The Results:

  • Spanish PM Rajoy’s center-right Popular Party (PP) finished first in yesterday’s general election, securing 123 seats, or 28.72% of the vote, but failed to win a majority
  • Trailing the PP were the Socialists (PSOE) 22.01%, Podemos 20.66% and Ciudadanos 13.93%
  • Results show that anti-austerity Podemos party and liberal Ciudadanos made big gains as the conservative PP lost support
  • There are no obvious coalition partners:  PP with Ciudadanos, 13 seats short of the 176 seat majority or the Socialists with Podemos, still 17 seats short

Below we repurpose an article written by special contributor Daniel Lacalle titled Spain. Can Politics Kill The Austerity Star? from 10/19/15.  He accurately predicted that any combination of parties would not have a strong majority, and the risks he raised about the instability of the government and sovereign’s financial health are as true now as they were then. 


Daniel Lacalle is an economist, CIO of Tressis Gestion and author of Life In The Financial Markets and The Energy World Is Flat. He presented Sell Spain conference call for Hedgeye customers on 10/21/15 (AUDIO REPLAY: CLICK HERE ; MATERIALS: CLICK HERE).  


Spain’s Political Risk Rises! - x. Spain


Spain. Can Politics Kill The Austerity Star?

It was difficult to think that Spain would make a comeback in 2011 when the Conservative Party (PP) won the elections. The challenges were too large. The previous administration, PSOE, Socialist, had left a deficit of 9% of GDP after promising a maximum 7%.


When the crisis started, the socialist government consciously decided to substitute the bursting real estate bubble with a massive civil works stimulus. It spent 3.2% of GDP, debt ballooned by 350 billion euro and destroyed more than 3 million jobs. On top of it, in the period from 2007 to 2009 the average annual trade deficit was around 6% of GDP and at one point in 2008 reached 9% of GDP. 


Spain was a Keynesian dream becoming a nightmare. 


When the socialist government left office, Spain had more than 40 billion euro in unpaid invoices from the public administrations to the private sector, the public savings banks presented a capital requirement of 100 billion euro and the regions and municipalities faced a bailout of 125 billion euro.


It was an unsurmountable situation.


However, after a large austerity plan that was split 50% in tax increases and 50% in spending cuts, and a very substantial set of reforms, including the financial sector, labor market, entrepreneurship programs and early payment schemes, Spain recovered.


Between 2014 and 2015 Spain started to grow well above the EU average. It led job creation in the Eurozone, with more than one million jobs, and brought unemployment rates back to September 2010 levels. It went from a massive trade deficit to a balance by 2015.


In summary, Spain undertook the largest adjustment seen in an OECD economy, 15 points of GDP, and managed to do so growing and creating jobs.


Despite critics´ calls of a recovery fueled by the ECB QE and low oil prices, these claims are easily refuted as Spain is growing more than countries with a similar sensitivity to interest rates and oil prices, like Italy or Portugal, and has recovered with no increase in total (public and private) debt.


However, all was not well and many challenges remain.


-          A high unemployment rate, despite the reduction and the evidence that many jobs are hidden in the underground economy and counted as unemployed.

-          A large fiscal deficit. Despite the massive adjustment, Spain´s deficit is well above the EU stability pact target.

-          External debt remains at 100% of GDP and public debt at 97%.


The austerity plan helped bring Spain out of the living dead, but did not create social stability. Despite the conservatives´ efforts to maintain social spending, the population perceived that the cuts were unacceptable. Public debt increased to 97% of GDP partially due to the bailout of the regions and savings banks as well as taking care of unpaid bills, but increasing pensions and keeping unemployment benefits didn´t please the public, as real wages fell.  As in Greece, fringe parties started to appear fueled by “magic solution” promises of default, massive increases in public spend and interventionist “miracles”.


Now Spain faces a historic election process. The Conservatives (PP) face the backlash of unpopular austerity measures and corruption accusations, and might win by a very small majority. The Socialists (PSOE) also faces a major loss of votes due to corruption and the past performance in government. However, the Socialists and the Communist-anti-establishment parties (Podemos, Ahora en Comun) could become part of a coalition for the next government with the promise of stopping the recent reforms, especially the labor market law. The moderate center party, Ciudadanos, which has steadily risen in polls, could be the deciding factor.


In any combination, the new government will not have a strong majority, and most of the likely agreements may only come with parties who promise more spending.


The risk of Spain falling under the QE trap, putting all the bets on the European Central Bank, as it did in 2008, and go back to the same mistakes of deficit spending and public sector white elephants to “boost growth” is not small. Halting reforms and going back to past failed measures will likely give the same results. Less growth, less jobs, more debt.


Spanish political parties tend to mention the Nordic nations and Obama as examples, yet they support the rigidity and intervention of France and Greece, not the economic freedom and flexibility of the leading economies. And when you copy France and Greece you get the growth of France and the unemployment of Greece.


Let us hope the decision on the 20th of December is not to bet on repeating 2008.

Early Look

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