The Macro Show Replay | February 29, 2016


Yen, Europe and UST 10YR

Client Talking Points


The Yen is ramping (again) vs. USD this morning and that is not a good thing when it comes to the #BigBangTheory as it keeps Japanese stocks (Nikkei -1% overnight and -23.1% since last year’s high) in crash mode with no “G20 help” this weekend.


European stocks had their slow-volume bounce last week (EuroStoxx600 +1.6% to -9.4% year-to-date), but resume their crash this morning with the DAX -1.6% (down 13% year-to-date and -24% from 2015 top) post a #Deflation print of -0.2% year-over-year for Eurozone CPI. The Swiss 10YR falls to -0.45% as #NIRP continues to perpetuate #Deflation.


The UST 10YR didn’t really budge during last week’s U.S. stock market levitation – more importantly, with the 10YR = 1.74% this morning, the Yield Spread has compressed to another new low of 96 basis points wide (10s/2s) and that keeps the Financials (XLF) as our favorite S&P Sector Short vs. Utes (XLU) long.


*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

Our preferred growth slowing vehicle remains Utilities (XLU) in equites. Hitting on Friday’s revised GDP report (Q/Q SAAR Q4 GDP revised to +1.0% from +0.7%), a deep-dive into the number doesn’t support an incrementally stronger economy:

  • Consumption was revised down marginally but net exports were up with the negative revision to imports outweighing the negative revision to exports. That’s good for the number but lower global trade activity is not a good sign for global growth;
  • Much of the actual change in the revision was due to inventories, which contributed +0.31pts to the headline number

General Mills (GIS) hit an all-time high last week when it reached $60.18 on Thursday. Although this would not be a great entry point, it is also not a reason to get out if you have a long-term view. Nothing has changed in our fundamental story and we have no reason to lose faith in our thinking to date.


Over the course of the past few years, GIS has made strategic acquisitions within the natural & organic / wellness space (we call it the string of pearls approach). Although they are not largely meaningful to top or bottom-line right now, they are changing the way the company thinks about its broader portfolio.


We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization.


Our preferred growth slowing vehicle remains (Long-Term Treasuries) TLT in fixed income. A flattening in the yield spread (10YR Treasury Yield – 2YR Treasury Yield) continued last week into double digit basis point territory (currently at 96 basis points). Year-to-date the yield spread has declined 44 basis points while the 10YR Treasury Yield has dropped 47 basis points. As a reminder the yield curve flattens as the economy slows with policy and/or liquidity management driving the short-end higher and defensive positioning and/or discounting of lower future growth/inflation driving the long end lower. 

Three for the Road


NEW VIDEO | McCullough: How To Think About Volume… cc @KeithMcCullough $IWM $SPY $DJIA



I attribute my success to this: I never gave or took any excuse.

Florence Nightingale


There are 7% fewer babies born on leap year day as there are people born on any other day.

CHART OF THE DAY: Eurozone Deflation Hits Equities (Again)

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... On that score, after another #Deflation report out of Europe this morning (Eurozone CPI -0.2% y/y FEB vs. +0.3% JAN) and the Chinese panicking with another “RRR cut” (post their stock market dropping another -2.9% overnight), the German DAX just gave back all of last week’s “bounce” (-1.6%) and remains in crash mode at -24.4% from last year’s #bubble peak."


CHART OF THE DAY: Eurozone Deflation Hits Equities (Again)  - 02.29.16 Chart

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Imagined Realities

“Unlike lying, an imagined reality is something that everyone believes.”

-Yuval Noah Harari


Or at least people don’t “feel” like they are lying when they are obfuscating the truth about either the economy or the profit cycle. As long as enough perma bull people are paid to perpetuate the spin, everything is ok – until it isn’t.


As Harari explains in an excellent chapter called The Tree of Knowledge, “over the years people have woven an incredibly complex network of stories… and the kinds of things people create through this network of stories are known in academic circles as fictions, social constructs, or imagined realities…” (Sapiens, pg 31)


For example, if the Old Wall wants you to imagine that Friday’s 1% GDP report was a “beat” (when the expectation for the past 2 years has been +3-4% growth), that’s fine. Your 2016 portfolio returns, however, have sided within being long asset allocations that do well when GDP growth slows from 3 to 2 to 1. So start your March off right - short the Financials (XLF) – buy more Utilities (XLU).


Imagined Realities - Growth cartoon 0624.2014


Back to the Global Macro Grind


What our profession refers to as “month-end” can sometimes be as magical as Disneyland. On no volume at all (the sellers take a break), prices can levitate – and, as long as you close your eyes, you can believe that you are actually flying (or tell your kids they are).


Then the ride ends, and you’re back in another line thinking “why am I doing this?” Why are you suspending the very basic belief that life is just a long line of hopeful expectations? Cycles take time to play out.


With US “stocks up” for the 2nd straight week last week, “ex-stocks” here’s how the rest of the ride went in Global Macro:


  1. US Dollar was +1.5% week-over-week, getting back to almost break-even at -0.6% YTD
  2. Euro (vs. USD) was down -1.8% week-over-week to +0.7% YTD
  3. Yen (vs. USD) pulled back -1.2% week-over-week to an FX War leading +5.5% YTD
  4. Commodities (CRB Index) bounced +1.3% week-over-week to a deflationary -8.2% YTD
  5. Oil (WTI) bounced too, +3.6% week-over-week, but remains -15.9% YTD
  6. Gold corrected for the 2nd straight week, but only -0.6% week-over-week to +15.3% YTD
  7. US 10yr Treasury Yield barely budged, closing +2bps week-over-week to 1.76% (-51bps YTD)


In other words, last week was what we call a counter-TREND (i.e. counter to what’s been really working) move where the asset allocations that are really working (positive absolute returns) barely corrected.


Meanwhile, back on Space Mountain (Global Equities), here’s how the week looked:


  1. Italian Stocks (MIB Index) +3.4% on the week to -18.4% YTD
  2. US Small Cap Stocks (Russell 2000) +2.7% on the week to -8.7% YTD
  3. Nasdaq +1.9% on the week to -8.3% YTD
  4. SP500 +1.6% on the week to -4.7% YTD
  5. European Stocks (EuroStoxx600) +1.6% on the week to -9.4% YTD
  6. Japanese Stocks (Nikkei) +1.4% on the week to -14.9% YTD
  7. German Stocks (DAX) +1.3% on the week to -11.4% YTD
  8. Emerging Market Stocks (MSCI) -0.8% on the week to -7.4% YTD
  9. Asia (Ex-Japan) down another -1.3% on the week to -9.2% YTD
  10. Chinese Stocks (Shanghai Comp) -3.2% on the week to -21.8% YTD


Yeah, the “bounce” was fun. But when everyone got off the ride, they looked at their YTD equity return and vomited.


As you probably noted, “Dollar Up” weeks still hammer the poor bastards who are long “EM, China, etc.” … and they give hope to those begging for the currencies in the equity markets they are long (Italy and Japan) to be devalued…


But what happens when the music stops? What happens when everyone comes to realize that the truth about US growth is somewhere in between 0 and 1.5% and the rest of the world’s #GrowthSlowing and #Deflation risks have not gone away?


From a US Equity Style Factor perspective, Mr. Macro Market just reminded us that it’s being long the following exposures that gives you the biggest bang for your buck (provided that you weren’t long any of them during the decline!) on bounces:


  1. High Short Interest Stocks were +3.9% last week to -3.1% YTD
  2. Small Cap Stocks were +3.7% last week to -6.2% YTD
  3. High Beta Stocks were +3.7% last week to -10.5% YTD

*Mean performance of Top Quintile vs. Bottom Quintile (SP500 companies)


Yep. Getting on some of these rides is definitely racy, but if you’re awesome at threading the needle and whipping your entire portfolio into all of the things that have crashed… you’re all set, until they start crashing again.


On that score, after another #Deflation report out of Europe this morning (Eurozone CPI -0.2% y/y FEB vs. +0.3% JAN) and the Chinese panicking with another “RRR cut” (post their stock market dropping another -2.9% overnight), the German DAX just gave back all of last week’s “bounce” (-1.6%) and remains in crash mode at -24.4% from last year’s #bubble peak.


Enjoy whatever is left of the month-end markup in US stocks. Both March and the February US Employment data are coming. And our version of this interconnected story will be non-fiction.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.68-1.81%


Nikkei 155
USD 96.43-98.48
YEN 111.43-114.70
Oil (WTI) 27.72-34.41


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Imagined Realities - 02.29.16 Chart

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)





1. Under 60 Seconds: Foot Locker's Earnings Report | $FL (2/26/2016)


Hedgeye Retail analyst Brian McGough highlights three key points from Foot Locker's latest earnings report.


2. McCullough: How To Think About Volume (2/26/2016)



In this brief excerpt from RTA Live, Hedgeye CEO Keith McCullough responds to a subscriber’s question about how we analyze financial markets (using price, volume, volatility) and how best to interpret what market volume is telling you.  


3. Under 60 Seconds: Wayfair's Earnings Report | $W (2/25/2016)



Hedgeye Retail analyst Brian McGough highlights three key points from Wayfair's latest earnings report.


4. Three Reasons Why Financials Are ‘Getting Mercy Crushed’ (2/25/2016)



In this brief excerpt of The Macro Show, Hedgeye Senior Macro analyst Darius Dale and Commodity analyst Ben Ryan discuss our macro themes and why we advised our subscribers to be underweight Financials heading into 2016.


5. McCullough: How To Think About Risk Ranges (2/24/2016)



In this brief excerpt of The Macro Show, Hedgeye CEO Keith McCullough explains how to use his daily risk ranges and why widening risk ranges could be signaling a coming collapse in equities.


6. Healthcare Updates Replay | MD HOLX MDRX (2/23/2016)


*Click here for the slides from this presentation.


Our Healthcare analysts Tom Tobin and Andrew Freedman provide updates on a few of their Best Ideas.


Topics included:

  • MEDNAX (MD) is the acquisition model broken
  • Hologic (HOLX) 3D update
  • Allscripts Healthcare Solutions (MDRX) field notes
  • Recession tracker


7. McCullough: Sold to You, Jamie! (2/23/2016)



On RTA Live this morning, Hedgeye CEO Keith McCullough talked about recent moves in $JPM and why now is a bad time to be long financials.


8. What Matters More? Sentiment Or Fundamentals (2/23/2016)



In this brief excerpt of The Macro Show, Hedgeye Senior Macro analyst Darius Dale and CEO Keith McCullough discuss the relationship between the economic cycle and financial markets and how the former influences our approach to the latter.


9. Barron’s: ‘3% Growth, No Recession’ … LOL (2/22/2016)



In this animated excerpt of The Macro Show, Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale discuss why Barron’s is wrong on U.S. economic growth and why Friday’s GDP report will have a “0” in front of it.



This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)


1. Bear Facts (2/26/2016)

This Week In Hedgeye Cartoons - bear chart 02.26.2016


Hedgeye CEO Keith McCullough is arguably the most bearish guy on Wall Street.


2. RUN! It's Abenomics (2/25/2016)

This Week In Hedgeye Cartoons - Abenomics cartoon 02.25.2016


Global central planners remain the world's biggest risk.


3. Economic breakdown (2/24/2016)

This Week In Hedgeye Cartoons - economic indicators cartoon 02.24.2016


"What matters to markets and your returns are expectations and rates of change," Hedgeye CEO Keith McCullough wrote in a note to subscribers. "As critical rates of change continue to slow, the probability of a US #Recession continues to rise."


4. cliff dive (2/23/2016)

This Week In Hedgeye Cartoons - lemmings cartoon 02.23.2016


We warned our subscribers in July about increasing stock market risks. Despite the recent selloff, we think the worst isn't over.


5. Recession knocking? (2/22/2016)

This Week In Hedgeye Cartoons - recession cartoon 02.22.2016


Since January, our Macro team has been highlighting the increasing likelihood that the U.S. economy slips into recession in Q2 or Q3 of 2016, as the preponderance of economic data continues to roll over. 

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