prev

CHART OF THE DAY: Why Stocks & Long-Term Treasury Bonds Are Rallying

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.

 

"... If the US economy was even half as “good” as the bulls would lead you to believe, the Fed would be raising rates and the US Dollar would be ripping higher (as opposed to closing -1.8% lower last week to -4.1% YTD).

 

The reason why both stocks and long-term Treasury bonds are rallying in sync right now is the same reason they always do when the market is begging for the Fed to replace what is disappointing economic growth with the illusion of growth (inflation)."

 

CHART OF THE DAY: Why Stocks & Long-Term Treasury Bonds Are Rallying - 04.04.16 chart


Surprised?

“We tend to make money out of surprises, and people are very bad at foreseeing surprises.”

-David Harding

 

Following up on the David Harding (Winton Capital Management) interview that I cited last Thursday, I wanted to highlight what I am sure many of you have had to deal with in 2016 YTD – surprises.

 

Are you surprised that the latest bull market (in US Equities) catalyst is a dovish Fed? Were you surprised (like the Fed was) at the pace of the slow-down towards 1% GDP and SP (FEB 11, 2016 closing low)? Or are you surprised that almost 2 months later SP500 is back up at 2072 and the Long Bond’s Yield this morning is only up to 1.76% (vs. 1.68% on FEB 11)?

 

As Harding reminded Pederson in Efficiently Inefficient, “luckily, most surprises do unfold gradually” (pg 227) and that’s how history would characterize economic, profit, and credit cycles. They take time to play out in full. On that score, Friday’s US jobs report was yet another rate of change slow-down from its #LateCycle peak. We’ll contextualize that on our Q2 Macro Themes Call on Thursday.

 

Surprised? - jobs pig cartoon 02.05.2016

 

Back to the Global Macro Grind

 

Sure, you can anchor on “ISM manufacturing surveys have bottomed.” Or you can stay with the reality that ISM Services (much larger part of the economy) continue to slow from their survey cycle peak in 2015. You’ll get confirmation of the latter tomorrow.

 

Bond Yields get it (TLT = +8.4% YTD). So do Utilities (XLU = +15.1% YTD). And The Financials (XLF = -4.7% YTD) get that too.

 

Instead of anchoring on one-off sequential data points (shorter term surprise moves like Oil had off its lows), Mr. Bond Market has an excellent historical track-record of mapping and measuring the intermediate-term TREND of the economic cycle.

 

If the US economy was even half as “good” as the bulls would lead you to believe, the Fed would be raising rates and the US Dollar would be ripping higher (as opposed to closing -1.8% lower last week to -4.1% YTD).

 

The reason why both stocks and long-term Treasury bonds are rallying in sync right now is the same reason they always do when the market is begging for the Fed to replace what is disappointing economic growth with the illusion of growth (inflation).

 

As you can see in the 30-day inverse correlations that the machines are chasing:

 

  1. SP500 vs. US Dollar Index -0.86
  2. CRB Commodities Index vs. USD -0.89

 

That’s what has mattered most to the US Equity and Commodity market for the last month.

 

You definitely won’t hear this from the equity-centric bulls, but there has been literally 0% correlation between that US stock, bond, and commodity-linked equity strength and the rest of the world’s equity markets:

 

  1. European Stocks (EuroStoxx 600) down another -0.6% last week to -8.9% YTD
  2. Spanish and Italian Stocks (IBEX and MIB Indexes) down another -2.1% each last week to -9.9% and -17.0%, respectively
  3. Japanese Stocks (Nikkei) down another -4.9% last week to -15.1% YTD

 

Yes, Chinese and Emerging Market Equities bounced (again) on Down Dollar. But most of you get why Down Dollar (remember 2011) drives bullish expectations in Gold (+15.3% YTD) and EM. I don’t want to rehash that history in this note this morning.

 

Instead, I simply want to remind you of what should not surprise you this morning. Contrary to popular “markets will never go down, ever, again” #BeliefSystem, The Currency War is alive and well. Unless your FX is falling, your stock market isn’t rising.

 

Here’s how the futures and options market sees things (non-commercial CFTC net positioning):

 

  1. SP500 (Index + Emini) net SHORT position of -132,850 is its LOWEST in a month (-0.06x 1yr z-score)
  2. 10YR Treasury net SHORT position of -18,579 vs. its 3 month avg net LONG position of +10,075 contracts
  3. USD Dollar net LONG position of +17,620 is right at YTD lows (-2.06x 1yr z-score)

 

In other words, consensus is betting that A) stocks go down less, B) long-term bonds go up less, and C) the US Dollar keeps going down. In the very immediate-term, I don’t doubt that could be right (I wouldn’t doubt anything short-term at this point!).

 

While my favorite long positions going up less (The Long Bond, Utilities, and Gold) and my favorite shorts going down less (XLF, SPY, and QQQ) would annoy me in the short-term, I’ll be less annoyed as the converse plays out over the intermediate-term (i.e. Q2).

 

The longer-term TAIL shift in investing styles that I’ve been calling for (towards good balance sheets and liquidity) played stronger than being long Oil did last week (WTI down -6.9% on the week). From a US Equity Style Factor perspective, here’s how that looked:

 

  1. Low Debt (EV/EBITDA) Equities were +2.4% to +3.2% YTD
  2. Low Beta Equities were +2.4% to 9.8% YTD

 

Like the Long Bond (TLT) and Utilities (XLU), some of our Investing Ideas (longer term ideas) like McDonald's (MCD) and General Mills (GIS) have turned into bigger momentum stocks in 2016 than Amazon (AMZN) and Netflix (NFLX). That multiple expansion in Low-Beta Liquidity vs. multiple compression in High Beta (-2.2% YTD) shouldn’t surprise any of our subscribers this year either.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.74-1.87%

SPX 2015-2077

NASDAQ 4

Nikkei 16043-16889
USD 94.11-96.12
Oil (WTI) 36.08-39.32

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Surprised? - 04.04.16 chart


Yen, Europe and UST 10YR

Client Talking Points

YEN

The Yen was up small +0.2% vs USD, which was enough to keep the Nikkei from bouncing overnight. The Nikkei 225 closed down another -0.3% taking its crash from the July 2015 high to -22.8% and -15.4% year-to-date (China and Hong Kong closed today).

EUROPE

Post a dreadful producer price report of -4.2% year-over-year for the Eurozone this morning the ECB’s Peter Praet is saying they’ll “continue to act forcefully” (to try to tone down Euro Up vs Yellen’s Dollar Down move) so let’s see how European stocks react to this as they were down (again) last week with Italy’s MIB Index -2.1% week-over-week to -17.0% year-to-date.

UST 10YR

With the SPY back in the black for the year-to-date (QQQ and Russell still down), we don’t see many stories about how well the Long Bond and Utilities (+15.1% year-to-date) are doing (absolute). The UST 10YR Yield is 1.76% this morning and the Yield Spread remains a big headwind for bank earnings as U.S. Cycle #GrowthSlowing continues (hosting our Q2 Macro Themes Call on Thursday 11AM).

 

*Tune into The Macro Show with Ben Ryan and Financials analyst Jonathan Casteleyn at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 23% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
CME

CME Group (CME) stock is among the small cohort of financial companies that benefit from volatile markets. With the exchange's open interest continuing to expand, which will drag trading volume higher, CME Group is one of the few lower beta longs that will hold up relatively better in the current environment.

 

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.

GIS

Joining McDonald's, General Mills (GIS) also hit an all-time high last week. We continue to like GIS as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without some noise around the numbers. Just look at the Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising to name a few things that muddied the waters.

 

But after filtering out the noise, this is a business that is truly turning a corner. When fiscal year 2016 began last June, we knew this was not going to be an easy ship to turn towards success.

 

Now, many key product platforms are 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 and expect GIS to realize sustained top line growth in the low single digit range.

TLT

Non-Farm payroll additions came in over +200 again (+215K to be exact) and private sector wage growth was also “good,” increasing +4.2% year-over-year on Friday. We’re most concerned with "better" or "worse" from a rate of change perspective. The non-farm payroll number is "less good" (i.e. "worse") from a year-over-year rate-of-change perspective. Growth in non-farm payrolls peaked in February 2015 at +2.3% year-over-year and the trend since then has been one of decline (+2.0% Y/Y for March 2016). And private sector salary and wage growth peaked on a year-over-year percent change basis in December of 2014.

 

We remain bullish on Long Bonds (TLT and ZROZ), Utilities (XLU) and short Junk Bonds (JNK). We expect more alpha after what was a great Q1, as the back-end of the Treasury curve continues to get flatter regardless of Fed rate hikes. We were alone in that camp, in December, when we first told you that a rate hike was in fact good for long-duration Treasury bonds. Stick with what's worked.

 

Here's the Q1 2016 Scorecard (data through 3/31):

  • TLT +8.3%
  • XLU +14.7%
  • JNK +1.0%
  • versus S&P 500 +0.7%

Three for the Road

TWEET OF THE DAY

$WYNN All ears on Investor Day Wednesday. Will $wynn print a preliminary 1Q # high enough?

@GLLStrategist

QUOTE OF THE DAY

Remember no one can make you feel inferior without your consent.

Eleanor Roosevelt

STAT OF THE DAY

The record for the highest jump cleared by horse and rider according to the official Fédération Equestre Internationale is 2.47 m (8 ft 1.25 in) by Huaso ex-Faithful, ridden by Capt. Alberto Larraguibel Morales (Chile) at Viña del Mar, Santiago, Chile on 5 February 1949. The committee stated that in order for it to be beaten, 2.49 m must be cleared.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


POSITION MONITOR (SBUX, EAT, SONC)

POSITION MONITOR (SBUX, EAT, SONC) - CHART 1 replace

 

BEST IDEAS LIST ADJUSTMENTS / UPDATES

SBUX — Last week we elevated SBUX to our core Best Ideas list as a SHORT. We will be presenting our thesis in a live Black Book presentation tomorrow, April 5th at 11:00AM ET.

 

Our SBUX SHORT thesis is not an indication that Starbucks is a broken company or that they are in need of a major overhaul. The simple fact is that much of the tailwinds (unit growth, mobile order & pay, daypart expansion) supporting the company right now are already built into the current stock price. So we are left asking, what’s next?

 

Going forward the increased complexity of the store due to the amplified focus on food sales will hamper growth, and could potentially tarnish the premium brand equity that Starbucks currently possesses.  Additionally, the competition in the morning day-part is getting stronger.  While beverage sales remain strong, a significant part of future same-store sales is dependent on selling more food.  Food is not a core competency of the company and the company’s product offering is less compelling than others in the space.  Additionally, the more they broaden the menu to less healthier items the challenges the company faces will intensify.    

 

CALL DETAILS

Toll Free:

Toll:

UK: 0

Confirmation Number: 13633080

Materials: CLICK HERE (materials to be provided approximately 1 hour before the call)

 

EAT — Last week we also elevated EAT from our SHORT bench to our Best Ideas list as a SHORT. We see EAT as a company in transition and believe that FY2017 could become a year where management makes some incremental investments in the Chili’s brand.  While EAT is one of the strongest companies in the Casual Dining space, the Chili’s brand needs to return traffic trends to positive territory again.  What is unclear is how the investment will unfold in FY2017, but we will learn more at the upcoming analyst meeting on June 9th in NYC.  

 

As a result of these investments, we see the Street’s estimates for 2017 as aggressive.  Currently, FY2017 Street consensus is for Brinker to post EPS of $3.95.  We see FY2017 estimates coming in closer to $3.40-$3.45, flat with FY2016 or even lower. 

 

In the intermediate term, EPS for 2H FY2016 are also aggressive.  For 3Q16 and 4Q16 estimates are for $1.00 and $1.25, respectively.  Our model has estimates closer to $0.95 and $1.10, respectively.

 

Currently, EAT EV/NTM EBITDA multiple is 7.3x, significantly below its three year average and the Casual Dining group of 8.4x.  If we are right about the current trend in EPS, the discounted multiple might not be enough of a discount.

 

SONC — Lastly, we moved SONC from our SHORT bench to our LONG bench. Please see our brief note HERE. In the coming weeks we will lay out our more detailed LONG thesis.

 

RECENT NOTES

4/3/16 SONC | ADDING TO THE LONG BENCH

3/31/16 SHAK | SUPPLY CHAIN ISSUES IN THE 10-K

3/30/16 PLAY | THE LAST STAND

3/29/16 EAT | AGGRESSIVE ESTIMATES

3/24/16 PLAY | SHORT| EXPECT VOLATILITY

3/15/16 CMG | DELUSIONAL

3/10/16 KNAPP-TRACK FEBRUARY RESULTS/ISPOT AD ANALYSIS

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow outperformed the XLY last week. The XLY was up +2.4%, top performers on a relative basis from casual dining were KONA and TXRH posting performance of +4.8% and +4.5% respectively, while SHAK and SONC led the quick service group this week up +9.6% and +9.3%, respectively.

POSITION MONITOR (SBUX, EAT, SONC) - CHART 2 replace

POSITION MONITOR (SBUX, EAT, SONC) - CHART 3 replace

 

CASUAL DINING RESTAURANTS

POSITION MONITOR (SBUX, EAT, SONC) - CHART 4

POSITION MONITOR (SBUX, EAT, SONC) - CHART 5

 

QUICK SERVICE RESTAURANTS

POSITION MONITOR (SBUX, EAT, SONC) - CHART 6

POSITION MONITOR (SBUX, EAT, SONC) - CHART 7

 

COMMODITIES

POSITION MONITOR (SBUX, EAT, SONC) - CHART 8 replace

POSITION MONITOR (SBUX, EAT, SONC) - CHART 9 replace

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Investing Ideas - Levels

Takeaway: Current Investing Ideas: HBI, LAZ, MDRX, FL, NUS, JNK, TIF, WAB, ZBH, CME, ZROZ, XLU, MCD, GIS, TLT

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.

 

Enjoy the rest of the weekend.

LEVELS

Investing Ideas - Levels - levels 4 1

 

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

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next