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The Macro Show Replay | January 19, 2015

 


Last Week Was Ugly

Client Talking Points

U.S. DATA

Let’s not forget we had a trifecta of “misses” on Friday with Industrial Production and Producer Prices (PPI) in recessions at -1.8% and -1.0% year-over-year, respectively (and control group for Retail Sales only +1.5%). The U.S. 10YR Yield broke 2.0% intraday (and should have on that data) and GDP is a lot slower than consensus (our favorite Macro Long idea remains the Long Bond).

SECTORS

U.S. Equity Sector Styles continue to reflect #Recessionary expectations accelerating, with Utilities (our favorite sector currently) +0.7% last week (+0.3% year-to-date) and Basic Materials -4.5% on the week (-11.9% year-to-date) and Financials -3.1% on the week (-10.1% year-to-date) underperforming what’s an already -8.0% year-to-date S&P 500.

DAX

They’re bouncing the DAX (again) +1.8% this morning, but don’t forget both Germany and Spain remain in #crash mode (-22% and -27%, respectively vs. 2015 highs). We’ll see what ECB President Mario Draghi can do on Thursday – whatever he thinks he can do is probably U.S. Dollar bullish (Euro bearish) and deflationary, in Dollars.

 

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

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 22% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
XLU

We added Utilities (XLU) on the long-side last Friday as the market continued to pummel everything we haven’t liked (high debt, high beta, and small-cap stocks leveraged to inflation expectations) – Utility stocks are low-beta, slow-growth bond proxies which is why they are by far the best relative performer year-to-date.

 

XLU is outperforming the S&P 500 by +7% and remains flat on the year. Friday’s large swath of data echoed what we have been saying for a while now on the deflationary risk of an industrial recession.

GIS

GIS led a $3 million funding round for kale chip maker Rhythm Superfoods. Although this is not a big deal and will most likely never make a strong impact to top or bottom line, it marks a changing in the tide for management thinking. They are making a distinct effort to delve deeper into the natural and organic category which will help them a lot in the long run.

 

Although the overall market has been atrocious year to date, down roughly -8%, GIS with its low beta, big cap, style factors has held in, down just -5%. We continue to like General Mills as a LONG, especially during the tumultuous times in the market.

TLT

With growth continuing to slow and volatility breaking out to the upside across asset classes, we expect the unwinding of a record amount of corporate credit leverage to continue. We’d put that deleveraging in the third or fourth inning currently. Credit spreads will continue to widen. That's why you're long TLT (and short JNK).   

Three for the Road

TWEET OF THE DAY

The Unintended Consequences Of ZIRP On Commodities https://app.hedgeye.com/insights/48514-commodities-and-the-unintended-consequences-of-the-fed-s-zirp… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

I have decided to stick with love. Hate is too great a burden to bear.

Martin Luther King Jr.

STAT OF THE DAY

President Obama is planning to insert $4 billion into the 2017 budget for a 10-year plan to support and “accelerate” vehicle automation projects (self-driving cars).


HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle

Takeaway: With markets melting down, exchange volume is exploding exponentially higher.

Another -2% drawdown in the S&P 500 during the week was enough to explode exchange traded volume exponentially higher as investors quickly attempt to reallocate capital in light of weakening economic data. Cash equity volume in the young 1Q16TD is already up +30% Y/Y, with options activity up +26% from 1Q15, and futures higher by +17% from last year. The exchanges are late cycle defensive stocks. Looking at 2007 as a test case, both CME Group (CME) and the Intercontential Exchange (ICE) continued to rise by +34% and +79% respectively in '07 after the Financials sector SPDR, the XLF, rolled over after highs in June to finish the year down -22%. As years of a low VIX and bull market complacency line up to sell equity, fixed income, and anything in between, exchange volume benefits greatly at the end of expansions. Our analysis of the few Financial sectors that work late cycle include Fin Tech, the E-Brokers, and the Exchanges.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - 2007 test case final

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - across cycle

 

Enjoy the best weekend in Pro Football. We like the Panthers to continue the best winning streak in the league (they have won 20 of their past 22) and look for Big Red to upset those Pats in Foxboro.  

 

Weekly Activity Wrap Up

This week, cash equity trading volume came in at 9.4 billion trades per day, bringing the quarter's ADV to 8.7 billion. Options traders exchanged 20.5 million contracts per day, bringing the 1Q16TD average to 19.6 million. Futures activity came in at 25.2 million contracts per day, bringing the 1Q16TD average to 23.3 million.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon1

  

U.S. Cash Equity Detail

U.S. cash equities trading came in at 9.4 billion shares per day this week, averaging with last week to bring the 1Q16 average so far to 9.0 billion shares per day. That marks +30% Y/Y and +27% Q/Q growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of first-quarter volume, which is consistent with the prior quarter and year-ago quarter, while NASDAQ is taking a 19% share, +40 bps higher Q/Q but -108 bps lower than one year ago.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon2

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon3

 

U.S. Options Detail

U.S. options activity came in at a 20.5 million ADV this week, bringing the 1Q16TD average to 19.6 million, a +26% Y/Y and +22% Q/Q contraction. In the market share battle amongst venues, NYSE/ICE has been trending downward at a moderate pace, but at an 18% share it is +95 bps higher than the year-ago quarter. Meanwhile, NASDAQ's recent declines bring it -421 bps lower than 1Q15. CBOE's market share is down -106 bps Y/Y, but its decline seems to have stabilized recently; its 27% share of 1Q16TD volume is up +172 bps from 4Q15. BATS and ISE/Deutsche have been taking share from the competing exchanges, with BATS up to a 10% share from 9% a year ago and ISE/Deutsche taking 16%, up from 13% a year ago.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon4

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon5

 

U.S. Futures Detail

19.5 million futures contracts traded through CME Group this week, bringing the 1Q16TD average to 17.7 million, a +18% Y/Y and +34% Q/Q expansion. CME open interest, the most important beacon of forward activity, currently tallies 102.1 million CME contracts pending, good for +9% growth over the 93.7 million pending at the end of 4Q14, an improvement from last week's +2%.

 

Contracts traded through ICE came in at 5.7 million per day this week, bringing the 1Q16TD ADV to 5.7 million, +13% Y/Y and +19% Q/Q growth. ICE open interest this week tallied 66.1 million contracts, a +11% expansion versus the 59.4 million contracts open at the end of 4Q14, an improvement from last week's +8%.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon6

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon8

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon7

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon9 

 

Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon10

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon11

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon12

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon13

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon14

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon15

 

Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:

 

HEDGEYE Exchange Tracker | Chiefs, Panthers, and Exchanges Late Cycle - XMon19 3

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


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McCullough: The Real Story About How Hedgeye Happened

 

In this brief excerpt from today’s special, free edition of The Macro Show, “Why Markets Are Crashing,” Hedgeye CEO Keith McCullough shares a personal conversation he had years ago with his mother, one which helped inspire the vision of Hedgeye. 


The Week Ahead

The Economic Data calendar for the week of the 18th of January through the 22nd of January is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

The Week Ahead - 01.15.16 Week Ahead


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: TIF, JNK, NUS, W, FL, WAB, MDRX, ZBH, FII, XLU, MCD, RH, GIS & TLT

Investing Ideas Newsletter - FANG cartoon 01.15.2016

 

Below are our analysts’ new updates on our fourteen current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this.  

 

Please note that we added the Allscripts Healthcare Solutions (MDRX) and Foot Locker (FL) to the short side of Investing Ideas last week. We will send a full research report to subscribers on Foot Locker early next week. Please note that we also removed Zoës Kitchen (ZOES). Hedgeye CEO Keith McCullough’s updated levels for each ticker are below.

LEVELS

Investing Ideas Newsletter - Final1 15 2016 4 48 36 PM

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

IDEAS UPDATES

TLT | XLU | JNK

 

To view our analyst's original report on Junk Bonds click here and here for Utilities.

 

We added Utilities (XLU) on the long-side last Friday as the market continued to pummel everything we haven’t liked (high debt, high beta, and small-cap stocks leveraged to inflation expectations) – Utility stocks are low-beta, slow-growth bond proxies which is why they are by far the best relative performer YTD.

 

XLU is outperforming the S&P 500 by +7% and remains flat on the year. Friday’s large swath of data echoed what we have been saying for a while now on the deflationary risk of an industrial recession:

 

  • Industrial Production for December printed down -1.8% Y/Y, accelerating to the downside (first negative Y/Y print of the current cycle) 

Investing Ideas Newsletter - 01.15.16 Industrial Production

 

To exemplify the depth of the current industrial recession, we quoted the CEO of Fastenal, Dan Florness in his introduction to the company’s earnings call on Friday. This quote comes from a guy who’s in the trenches:

 

“In the first quarter of this year, 72 of our top 100 customers grew. In the second quarter, that dropped to 63. In the third quarter, that dropped to 56. In the fourth quarter, that dropped to 49. So in the fourth quarter, half our top 100 customers grew and half contracted. In the month of December, to amplify that a little bit, 41 of our top 100 customers grew and 59 contracted.

 

We sell across the continent and around the planet; most of our business is in North America. And we sell to a lot of different industries. And when you start looking through the list, a lot of names that you would recognize stand out and you can see the pain they're feeling in their business.”

 

More on the depressed state of the producer. Deflationary PPI continued its march downhill with December reported numbers:

  • Headline PPI declined -1.0% Y/Y
  • PPI Final Demand declined -3.9% Y/Y
  • PPI Final Demand Services increased +0.4% Y/Y
  • PPI Energy declined -3.4% Y/Y

Investing Ideas Newsletter - 01.15.16 PPI

 

Investing Ideas Newsletter - 01.15.16 PPI Energy

 

As mentioned in last week’s newsletter, with growth continuing to slow and volatility breaking out to the upside across asset classes, we expect the unwinding of a record amount of corporate credit leverage to continue. We’d put that deleveraging in the third or fourth inning currently. Credit spreads will continue to widen.

 

That's why you're long TLT and short JNK.

NUS

To view our analyst's original report on Nu Skin click here.

 

Nu Skin (NUS) continues to be a best idea SHORT for us in the consumer staples sector. They were down at the ICR conference in Florida, but did not provide a webcast to their presentation.

 

We found this to be odd and deceiving. Upon reaching out to IR, they said they didn’t feel the need to webcast because they were just showing slides from a previous presentation. We heard the room was pretty empty.

FII

To view our analyst's original report on Federated Investors click here.

 

What is the long-term thesis behind our Federated Investors (FII) long call?

 

Over the past 7 years, more than $1 trillion has been redeemed in money funds and reallocated to stock and bonds, sourcing the big bull market in risk assets. With the economic cycle eclipsing 72 months, we think it is time to get defensive.

 

In addition to improved profitability from even marginal rate hikes, this $1 trillion becomes a longer-term opportunity for all money fund markets as investors reallocate and back out of risk assets in the latter stages of this market/economic cycle.

 

With roughly 9% market share in industry money fund assets, FII will recapture these funds as they come back out of stock and bond markets. We have modeled +$200 billion in positive money flow for the money fund industry in 2016 and +$400 billion for 2017. This assumption reflects some conservatism allowing for some funds to remain outside the money fund channel.

WAB

To view our analyst's original note on Wabtec click here

 

We believe freight rail equipment spending is just starting to enter a multi-year downturn. It’s a cyclical market, but Wabtec (WAB) shares remain priced for growth. WAB's peak margins also aren’t a great sign for longs. Here are two key charts:

 

Investing Ideas Newsletter - nom equip wab

 

Investing Ideas Newsletter - historic

TIF

To view our analyst's original report on Tiffany click here.

 

Tiffany (TIF) is scheduled to report holiday sales on Tuesday Jan 19th and at the same time should give preliminary guidance for FY 2016.  We still think that earnings expectations for 2016 are 5-10% too high. The stock hit new 52-week lows mid-week then rallied slightly into the weekend.

 

We suspect the strength versus the down market may have been due to shorts covering into this sales announcement, booking some gains with the stock down 20% over the last month.  

W

To view our analyst's original report on Wayfair click here.

 

Wayfair (W) presented at a retail conference this week, and as usual CEO Niraj Shah delivered a compelling message. However, we maintain our negative position on the company's business model as management is building the infrastructure for a total addressable market 5x larger than it really is.

 

Also, we firmly believe mono-channel does not work. Restricting sales to just the internet in this category is just as bad as a retailer who focuses 100% on physical stores.

 

Both are highly likely to fail over time.

RH 

To view our analyst's original report on Restoration Hardware click here

 

On Restoration Hardware (RH), we’re as confident as ever that NEAR-TERM earnings expectations are completely in check, and that long-term earnings are too low. And we’re as sure as we can be that we’re not about to be blindsided by any kind of press release from the company about management, business trends, or promotions.

 

We’re now looking at historically peak short interest (33% of float), and the multiple setting a new historical trough (16x).  Put another way, we’re talking a 16x multiple for a 40% EPS grower.

 

Obviously, the market thinks we’re wrong in our earnings math.  We’re absolutely not ignoring a material slowdown in the economy or Hedgeye’s bearish Macro view. We simply think that RH should still do better than the consensus in that environment, and that’s what we’re focused on given the massive 40% correction since November, and 20% month-to-date in January.

 

In the end, we think the risk is isolated to the multiple, not the consensus earnings, and that’s what matters most at a 16x p/e with 33% short interest.

MCD

To view our original note on McDonald's click here

 

McDonald's (MCD) is down just -2.5% YTD. That is impressive considering what the market is doing around it. This stock continues to be Howard Penney’s top idea in the Restaurants sector. Looking out into 2016 we are looking forward to them having a full year of All-day Breakfast and their McPick 2 menu.

 

Long investors should be looking forward to that too.

ZBH

To view our analyst's original report on Zimmer Biomet click here. Here's an update from Hedgeye Healthcare analyst Tom Tobin.

 

"We listened to an upbeat CEO of Zimmer Biomet (ZBH) present at JPM this week. SYK also made some positive comments which resulted in a brief ortho rally this week. But it didn’t last.

 

I wasn’t surprised, or terribly concerned, about the short case unwinding here, and that turned out to be a good decision. ZBH’s CEO expressed a lot of optimism about the Biomet integration and the “cadence” of new products in 2016. I think what will be more impactful is the cadence of the US Economy which is already slowing into a rate cycle; not a good combo for employment and what is often a deferrable surgical case.

 

In terms of the narrative ZBH tells about the upside to their business longer term they used the chart below in their discussion. Up and to the right is good for the population of people over 65 years old, but pay attention to the scale. 

 

The dates range from 2010 all the way out to 2050. If we take the next step and ask what the annual growth rate is in this chart, the answer is +1.9% per year. Since pricing is trending at -2.5%, adding 1.9% population growth yields 0% market growth.

 

With bundled payments emerging this year (CCJR) in knee surgery, and with more bundles coming next year from CMS, I don’t see that ZBH is in as enviable a position as they claim. Taken together, 1.9% volume, less -2% pricing, less bundled payment pressure, less US and global growth slowing, would mean they really have a difficult task in front of them to grow at all. 

 

They’ll surely cut costs, and grow EPS, but that strategy does not typically yield an expanding multiple and good stock performance.

 

But we’ll see."

 

Investing Ideas Newsletter - zbh slide jpm

GIS

General Mills (GIS) led a $3 million funding round for kale chip maker Rhythm Superfoods. Although this is not a big deal and will most likely never make a strong impact to top or bottom line, it marks a changing in the tide for management thinking. They are making a distinct effort to delve deeper into the natural and organic category which will help them a lot in the long run.

 

Although the overall market has been atrocious year to date, down roughly -8%, GIS with its low beta, big cap, style factors has held in, down just -5%. We continue to like General Mills as a LONG, especially during the tumultuous times in the market.

MDRX  

We added Allscripts Healthcare Solutions (MDRX) to Investing Ideas this past week. Click here to read our analyst's full stock report.


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