Reflation Rallies!

Client Talking Points


Isn’t this getting fun? We’re pretty sure Janet Yellen never played team sports, so maybe we shouldn’t be surprised that her Fed forecasting team is all over the place at this point in talking to markets about rate hikes and USD. Massive inverse Correlation Risk continues to drive daily market moves with USD to CRB and SPY running -0.81-0.96 in March.


As opposed to v-bottoms on the SPY short-side, the long side has been easy year-to-date – as #GrowthSlows, Fed Easing has pounded the UST 10YR down to 1.81% (2YR just went from 0.90% to 0.77% in less than a week on Fed Head confusion) and Utilities (XLU) continued to lead the way on yesterday’s Yellen Ramp, closing up another +1.5% = +14.3% year-to-date XLU.


Heck, why buy Utes on Yellen turn-tailing dovish when you can go right to the vein and buy Gold? It was +3% yesterday (vs. Financials barely up at +0.18% XLF #terrible) to +17% year-to-date leading most things in absolute return space which we highly doubt will be trumpeted more than “the S&P is up” (+0.5% year-to-date) all day today (into month-end markups).


*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

CME Group (CME) put up a decent fourth quarter earnings print with a slight revenue and earnings beat. Not that we put much weight on what happened last quarter but trends into the new operating period are looking even better. The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts.


Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.


We continue to like General Mills (GIS) as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without its noise surrounding the numbers; Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising just to name a few, muddied the waters. But digging through the noise, this is a business that is truly turning a corner. When they set sail on fiscal year 2016 back in June of 2015, we knew this was not going to be an easy ship to turn towards success. Now, with many key product platforms turning (through strong product innovation and renovation) in the right direction and operational improvements implemented through cost savings initiatives, GIS is on the cusp of success. We will be measuring this success by realization of sustained top line growth in the low single digit range.


In our model the second quarter is the toughest compare on both GDP and U.S. corporate profits so we want to be very careful going into that and be positioned defensively. Stay long Long-Term Treasuries (TLT).


While small/mid cap U.S. Equities reverted to their bear market mean last week (Russell 2000 down -2.0% on the week and -16.7% since US Corporate Profits peaked in Q2 of 2015), so did a few other US Equity Market Style Factors that had had a big 1-month bounce:

  1. High Beta stocks were -2.0% on the week
  2. High Leverage (Debt/EBITDA) stocks were -1.9% on the week
  3. High Short Interest stocks were -1.7% on the week

Three for the Road



The #Airbnb Impact On #Hotels & Timeshare… via @HedgeyeSnakeye @KeithMcCullough



Courage is grace under pressure.                               

Ernest Hemingway


A recent study drawing on 16 billion e-mails sent by more than 2 million people found that more than 90% of replies are sent within a day.

T. Rowe Price (TROW) | Best Idea Short Call Invite

Takeaway: We will be updating our Short thesis on shares of T. Rowe Price tomorrow Thursday, March 31st at 11 a.m. EST.

Watch the the replay below.


The Asteroid Is Speeding Up: 1. The passive ETF asteroid is accelerating, but TROW remains committed to active only strategies. The firm's core (non-target date) mutual fund business is battling the biggest drawdown in history, just as several other passive drivers are poised to unfold. 2. TROW has the biggest stable of Large Cap strategies in the group, and it's precisely the Large Cap category that is losing the most share to passive. 3. The Department of Labor's Fiduciary rule is set to take effect and will make mutual funds less desirable to distribute because passive products (ETFs and index funds) help to avoid liability and complex reporting standards.


Target Date Is Slowing Down: TROW's main growth driver has been target date funds, but the once stalwart growth channel is now slowing substantially. Why? The target date (TD) fund arena has also been penetrated by passives. What was once a bastion for active management (90% TD market share), active TD funds are today increasingly being supplanted by passive with active TD market share now moving toward 60%. The TROW target date franchise also allocates "through" retirement, which means its TD funds have higher than average equity allocations. This results in increased volatility and a greater risk of underperformance during market declines.


Phase Transition. TROW shares continue to trade at a premium valuation to the asset management group despite substantially slowing growth. The stock is an early cycle beneficiary, but lags the market and the group in flat to down markets. Risks to a short position include the firm's dividend and buyback, but historically TROW buybacks have peaked at ~5%, which is what they're already doing.



CALL DETAILS - Thursday, March 31st at 11 am EST

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Please let us know of any questions.

Jonathan Casteleyn, CFA, CMT 


Joshua Steiner, CFA



Cartoon of the Day: Whack!

Cartoon of the Day: Whack! - oil cartoon 03.29.2016


Oil is getting knocked around again today, down another -2.4%, despite Fed head Janet Yellen reiterating that declining crude prices are "transitory."

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BREAKING: Fed Is Still Out To Lunch (Here's How To Play It)

BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - Yellen cartoon 11.11.2015


BREAKING... Believing the Fed's serially optimistic economic forecasts remains the biggest risk to investors.


Today, Fed head Janet Yellen said "caution" about further rate hikes was "especially warranted." While she was speaking, Treasury yields continued their downward descent. 


Here's where we're at. The Fed continually dials back rate hike expectations and thereby jawboning Long Bond yields lower. The 10-year Treasury yield currently sits at 1.82%, 45 basis points below where it started at the beginning of the year. 


BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - 10yr treasury


Q: Who warned you?

A: Hedgeye


The dovish Fed commentary confirmed what we have long known. It was a mistake to raise rates in December and interest rates will have to stay #LowerForLonger to prop up an already flimsy economy. (Reminder: Wall Street's "top strategists" predicted the 10-year Treasury yield will end the year between 2.5% and 3.5%. We'll see about that.) 


As Hedgeye CEO Keith McCullough likes to say, it still pays to be "the most bullish guy on Wall Street" on Long Bonds (TLT). Take a look at the performance of TLT year-to-date versus the S&P 500:


BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - tlt v sp


What else has worked this year? Other Hedgeye Long calls...


  • Gold (GLD) up 16.6% year-to-date
  • Utilities (XLU) up 13.4% year-to-date

(*Not exactly macro market expressions of confidence in the Fed's "all is good" mantra, huh?)


And if you think things get easier from here for Yellen & Co. don't hold your breath. As McCullough wrote in today's Early Look:


"We’re reiterating that the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3."


Let's set aside for a second the fact that the Atlanta Fed's own Q1 2016 GDP forecast released yesterday just plunged 200 bps in the past month to a paltry 0.6%. It's our contention that as the developing corporate profit and industrial recession gets priced into the market (aka economic data continues to roll over), long-only equity investors can expect a lot more pain from here. 


stick with what's been working all year.

The Airbnb Impact On Hotels & Timeshare


Hedgeye’s Gaming, Lodging, and Leisure team hosted a presentation recently to introduce our proprietary Airbnb listings/price tracker and discuss the Airbnb impact on the lodging and timeshare space.

Millennials: Where the Wild Things Aren't (And The Investing Implications)

Takeaway: As Millennials have come of age, young adult entertainment has softened—a trend with profound generational undercurrents.

Editor's Note: Below is a complimentary research note written by world-renowned demographer Neil Howe who recently joined Hedgeye as Demography Sector Head.


Millennials: Where the Wild Things Aren't (And The Investing Implications) - 12



The U.S. nightlife industry is suffering. Over 10,000 bars have shut down in the past decade—with closures reaching a peak of six per day in 2014. Even big joints are going down, including four of Atlantic City’s 12 casinos last year.


Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide3


It’s not just a U.S. trend. Nightclubs in Britain fell over the last decade from 3,144 to 1,733—a 45 percent drop. In the Netherlands, the number of nightclubs and “discos” have meanwhile fallen by 38 percent.


Kids these days just want to live in their f---ing own little worlds in their bedrooms watching Netflix and becoming obese.” –frustrated UK bartender cited in The Economist (2015)



Young adults typically provide the top-line growth for drinking places. But today’s young adults are drinking (and smoking) less. This was a trend first noticed when the oldest Millennials were in highschool back around 2000, and the trend is aging with them as they grow older.


Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide6


When they do drink, moreover, Millennials are less likely to do so in anonymous settings with random strangers. Why?


(1)  Millennials use social media and smart phone to choose exactly who they want to be with. You no longer have to be with everybody in order just to meet somebody.

(2)  The demographic weight of the Boomers, as they age, is changing the social mood tone in a more sedate and conservative direction. When Boomers were young, the culture celebrated wild night life. Now it celebrates mindfulness and juice diets.

(3)  Millennials—a.k.a. “Generation Yawn”--themselves show a wide-ranging aversion to personal risk-taking of every variety, including the edgy nightclub/bar lifestyle. Assertive Millennial women may be taking the lead here: They are devaluing male-dominated hedonism, and the men are mostly going along.



In the media, Boomers (and Xers) are embracing the dysfunctional “wild child” label, even as Millennials abandon it. There is a burgeoning category of movies and TV shows centered on “Baby Boomers behaving badly.” Millennials, meanwhile, are flocking to the “new nice” in entertainment, hosted by never-nasty hosts like Jimmy Fallon and Trevor Noah.


Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide11


Sports brands are losing their bleeding edge. Nike e.g. is less into black and winning at all costs—and instead doubling down on neon and pastel and “athleisure.” Millennials who do color runs and tough mudder are not trying to beat each other. Activities associated with competition and danger (like snowboarding) are on the decline—along with bar games like pool and darts.


Las Vegas casinos, seeing that Millennials are not as attracted to drinking and gambling as older generations, are ramping up on sociable skill games with leaderboards. They’re also investing more in spas, restaurants, and even underground wine caves to give Millennials more spectacular and “shareable” experiences.


Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide9

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