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The Rules

“Family quarrels are bitter things. They don't go according to any rules. They're not like aches or wounds, they're more like splits in the skin that won't heal because there's not enough material.”

-F. Scott Fitzgerald


The quote from Fitzgerald above seems an apt way to describe the current state of the Republican Party. No doubt with Donald Trump’s wins last night in the Michigan and Mississippi, the fissures in the “family” are only widening. 


In Michigan, Trump took 39% of the vote and in Mississippi he took 50% of the vote to strengthen his delegate count to 458, which is a 99 delegate lead over second place Senator Ted Cruz. Despite this lead, Trump still only has 45% of the delegates and is a long way from locking down the 1,237 delegates he will need to claim the Republican nomination.


So, what happens from here?


The next two major catalysts are the Ohio and Florida primaries in six days. Ohio is a must win for Governor John Kasich and Florida is a must win for Senator Marco Rubio. Currently, Trump has a wide lead in the most recent poll aggregates with a 16 point lead in Florida and a 4 point lead in Ohio.  


For the Republican family elders, though, there is probably some solace in the volatility and unpredictability of these state level polls as exemplified in the Michigan primary on the Democratic side. Going into last night, Secretary Clinton was up by some +21 points and lost. So much for all that money spent on polling!


The Florida and Ohio primaries on March 15th are critical because they are likely to decide the fates of Kasich and Rubio, but they are also the beginning of the winner takes all primaries. On March 15th, there are 367 delegates up for grabs across 5 states and 1 territory and they are all in winner take all primaries.


At a minimum, if Trump wins Florida and Ohio, the math becomes very difficult for anyone else to get the nomination. If he doesn't, then it is very likely a contested convention is in play. In this scenario, the nominee will be decided on the convention floor by rules set by the RNC’s Rules Committee. Those rules, like most rules in family feuds, can be changed and will be set shortly before the convention. In this scenario, the proverbial family feud is likely only just beginning!


The Rules - deflation cartoon 03.07.2016


Back to the Global Macro Grind


Back in the real world of data and asset prices, there is far less drama and intrigue. (Or is there?) On the oil front, the EIA indicated that it expects oil supply to grow more than previously expected due to production staying at high levels. Meanwhile, API is expecting a crude oil build of some 4MM barrels. Certainly, while oil and oil related assets (like the Loonie) have had a nice rally over the last few weeks, the data continues to fall solidly on the side of oversupply. 


The next major catalyst for oil from a policy perspective is likely to be a proposed OPEC meeting in Russia on March 20th to discuss an output freeze. As our colleague Joe McMonigle at Potomac Research has noted, next to nothing will come out of this meeting (if it even occurs) and really the major harbinger for those that are bullish on the price of oil is the fact that Iran’s sole focus is to ramp product and take back share. We think Iran will continue to beat expectations on its ability to increase production and is likely to get to 700,000+ barrels a day of exports this year.


So while traders may continue to chase the “wabbit” on the long side of oil, the data tells a different story. In fact, as highlighted in the Chart of the Day, oil supply continues to reach new highs in the U.S. at an accelerated rate. Currently, supply in the U.S. is running up +20% y-o-y!


The broader issue with oil and natural gas staying at low levels for extended periods is the financial deleveraging that will have to occur in the sector. According to Moody’s, in the year-to-date there have been 18 defaults with half in the energy sector. Last year at this point, there were 11 defaults with 1 in the energy sector. So as year-over-year change goes...


Setting the volatility of oil aside, the most significant event on the macro horizon is tomorrow’s ECB rate decision. Our expectation, which isn’t necessarily out of consensus, is that Draghi and the ECB are going further into unchartered waters (see carton above for the analogy) to fight the shark that is deflation. The key reasons we see the ECB easing further:

  1. CPI has held below +0.5% for the last 20 months and is currently in negative territory
  2. PPI was reported in January at -2.9%; and
  3. Growth by almost any measure in Europe is anemic, which was highlighted this morning by the Bank of France taking its growth estimate to +0.3% on the back of manufacturing confidence falling to 3-year lows.

So with their likely move to more negative rates and a possible -0.4% on overnight deposits, the ECB continues to re-write the rules on monetary policy. Who knows though, perhaps after more than 600+ interest rate globally this will be the one that does the trick.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.67-1.94%


VIX 16.11-23.82
USD 96.66-98.78
YEN 111.71-114.51
Oil (WTI) 30.65-38.18


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Rules - 03.09.16 Chart

The Macro Show Replay | March 9, 2016

CLICK HERE to access the associated slides.

An audio-only replay is available here.


Yen, Oil and Sectors

Client Talking Points


The #BeliefSystem (of central-market-planning) continues to break-down as the BOJ is now rumored to “hold off next week due to unstable bond markets” – wow – weren’t negative yields supposed to save equities from the profit cycle? The Yen remains bullish TREND and the Nikkei which is down -0.8% overnight remains bearish TREND.


Chase the wabbit – U.S. equity futures whipping around on what Oil does and that isn’t going to do anything for the economy obviously (volatility = bad). The immediate-term risk range for WTI is 30.65-38.18 so the way we would deal with this is fade Oil related beta moves at the top end of that range.


No matter what oil does, our favorite S&P Sector remains Utilities (XLU) which ramped another +1.0% yesterday to immediate-term TRADE overbought at +10.5% year-to-date as our favorite Sector to be short remains Financials (XLF) which led “ex-Energy” losers yesterday -1.6% to -8.1% year-to-date.


*Tune into The Macro Show with Gaming, Lodging & Leisure Sector Head Todd Jordan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

If you were long energy over utilities last week, nice trade! We'd remind you that Utilities (XLU) are outperforming the S&P 500 by +10% year-to-date. And that’s with the bounce. By contrast, Energy (XLE) was up 6.5% on the week but is up only 1% year-to-date.


General Mills (GIS) faces some headwinds across their portfolio, and although the 1H of FY16 was a challenge, the company has robust merchandising and consumer plans in the 2H that should improve results.


GIS has embarked on a mission to drive their top 450 SKUs, which represent 75-85% of their volume. Calling it their ‘Power 450’, surprisingly these 450 SKUs aren’t even in all retail locations and formats, broadening the distribution footprint of these top SKUs is priority number one for GIS’s sales team. The organization is also looking at the bottom 450, representing 1-2% of volume and making critical decisions on what products can be discontinued.


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.


We can’t emphasize enough the bigger picture from both a data and top-down market signaling perspective. To contextualize the relief rallies and short squeezes in asset classes and instruments that are counter to our more longer-term view. Here’s what how we think the macro environment plays out from here:

  1. The market is positioned for more rate hikes into 2016
  2. The data continues to deteriorate, and market volatility ensues
  3. The expectation that “all is good” comes off the table and the market increasingly pivots to the view that, throughout 2016, the Fed is going to hike rates in methodical fashion straight into an economic slowdown
  4. The market takes in the growth slowing pivot in real-time (Treasury rates and the dollar both move lower, and inflation-leveraged assets like gold catch a bid)


Once the policy catalysts are out of the way in the next few weeks, our expectation is a return to outperformance in growth slowing asset classes (TLT and XLU). If you’re in for the TAIL and the TREND call, focus on the data, not the desperate attempts of central planners to arrest economic gravity. A brief reminder: ECB chief Mario Draghi will attempt to walk on water today.

Three for the Road


An Update On Howard Penney's SHORT #ShakeShack Call | $SHAK https://app.hedgeye.com/insights/49610-hedgeye-s-howard-penney-nails-shake-shack-short-call-again-shak… @KeithMcCullough



It's kind of fun to do the impossible.    

Walt Disney


Today in 1796, Napoleon married his 1st wife, Josephine.

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Cartoon of the Day: Goldilocks & The Three Bears

Cartoon of the Day: Goldilocks & The Three Bears - three bears cartoon 03.08.2016


The risks looming over macro markets are getting downright depressing.

An Update On Howard Penney's SHORT Shake Shack Call | $SHAK

Takeaway: Shares tumbled as much as 11% today, after management offered unexpectedly light guidance.

An Update On Howard Penney's SHORT Shake Shack Call | $SHAK - shake shack image


Shake Shack shareholders are getting punished today. Shares of the burger chain fell as much as 11% after company guidance disappointed rosy expectations.



Hedgeye Restaurants analyst Howard Penney has been the bear on Shake Shack (SHAK). In May 2015, Penney told anchors on BloombergTV that SHAK shares were "egregiously overpriced" and had 60% to 70% downside. 


An Update On Howard Penney's SHORT Shake Shack Call | $SHAK - howard penney


Since then, SHAK shares have fallen -43%. Penney has been consistently bearish on the stock saying "Shake Shack Is One of the Most Overvalued Stocks Out There."


An Update On Howard Penney's SHORT Shake Shack Call | $SHAK - shake shack chart


The bottom line ... from Penney's original short call on the company, is that "the SHAK growth story (business model) is predicated on the view that what works well in NYC will work well in the rest of the world." However, outside Manhattan, the average restaurant's margins are slimmer because brand awareness isn’t as strong. Penney concluded:


"The bottom line is that, for us, there is a very good probability that SHAK begins opening up some new units that fall short of the Street’s expectations.”


That's what happened today.


For an update on Penney's latest think on SHAK, see the excerpt from the institutional research note below.


An Update On Howard Penney's SHORT Shake Shack Call | $SHAK - shake shack update


To read Penney's entire Shake Shack research note ping sales@hedgeye.com.

JT Taylor: Will GOP Dump Rubio For Cruz... & Can Anti-Trump Money Make A Difference?

Takeaway: What to watch on the election 2016 campaign trail.

Below is a brief excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning.



JT Taylor: Will GOP Dump Rubio For Cruz... & Can Anti-Trump Money Make A Difference? - donald


There are 150 delegates at stake tonight -- MI, MS, ID, and HI. Donald Trump is leading in MI with 59 delegates at stake, but John Kasich and Ted Cruz are both on his heels. If Trump pulls off a double-digit win in MI and takes MS as well, then the weakness in his numbers from the past weekend's primaries, currently being touted by the establishment press, will feel like an aberration.  


If the race is closer than expected, then the toll from two poor debate performances, millions of dollars in attack ads, and opposition from most of the Republican establishment may be taking root, and could make the winner-take-all primaries much closer than the pundits are predicting. 



JT Taylor: Will GOP Dump Rubio For Cruz... & Can Anti-Trump Money Make A Difference? - ted cruz up


The Republican establishment has long detested Cruz, but his lead over Marco Rubio is persuading some that he is best-positioned to block Trump. We're hearing whispers that a number of Rubio supporters are quietly preparing to jump to Cruz's ship, while additional reports claim "multiple" senators will endorse Cruz later this week. Still, Rubio's camp insists that once they win Florida, the map favors them after March 15th... leaving Rubio no incentive to get out.  



JT Taylor: Will GOP Dump Rubio For Cruz... & Can Anti-Trump Money Make A Difference? - romney


Since Super Tuesday a loose anti-Trump coalition has spent over $10 million on ads targeting the Republican frontrunner -- an effort to impede Trump's popularity in delegate-rich states like FL and IL. While these ads are ubiquitous in those states and others, they fail to guide voters towards another candidate, and Trump's core supporters will blindly follow him into November.


If Trump cleans up on March 15th then the anti-Trump movement may be short-lived. The real damage will take its toll in the general election -- with the Dems' gift that keeps on giving from the Dean of the Establishment Mitt Romney and other Republican leaders providing great substance to the anti-Trump storyline. 

Early Look

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