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Cartoon of the Day: A Closer Look At NIRP

Cartoon of the Day: A Closer Look At NIRP - negative interest rate cartoon 04.21.2016


BOJ governor Haruhiko Kuroda has been defending the central bank's negative interest rate policy recently, even stressing his readiness to expand monetary policy still further. "Good luck with that," Hedgeye CEO Keith McCullough wrote recently. "These guys just don't get it. The #BeliefSystem is breaking down."

Important Thoughts On Market Structure and Sentiment

We’ve been getting a lot of the same questions from a number of clients spanning the gamut in terms of investment strategy and AUM, so we figured we might as well address them in a public forum given the broadly applicable nature of our responses.



Q: “What gets the SPX to go down from here?”


A: The data.


Since the late-September lows, the S&P 500 has held a reasonably tight positive 0.75 correlation with the Citi U.S. Economic Surprise Index, which itself has rallied hard off its early-February lows as U.S. economic data stabilized in rate-of-change terms and perpetuated a waning of recession fears.


Important Thoughts On Market Structure and Sentiment - 4 21 2016 8 46 00 AM

Source: Bloomberg L.P.


Now, a topping process in the latter index appears to have gotten underway over the past two weeks, as most recently highlighted by big misses in this morning's Philly Fed and Chicago NAI surveys. While our process generally underweights survey data – particularly one-off regional surveys – in lieu of doing the actual rate-of-change calculus on relevant “C” + “I” + “G” + “NX” metrics, we reiterate our view that economic deterioration from here is itself the catalyst for the stock market to reverse course a meaningful manner.


Simply put, because macro consensus doesn’t have our economic outlook, we believe domestic economic data will start to miss by wide margin again as it did in the early part of this year. It’s also worth noting that economist consensus always has a natural upward-sloping bias to their growth estimates, which creates additional downside surprise risk to the extent we're right on where the data is headed over the next couple of quarters. 


Important Thoughts On Market Structure and Sentiment - 12


Q: “The market is clearly pricing in a high likelihood of monetary accommodation out of the Federal Reserve. Doesn’t the imminent threat of a rate cut and/or QE4 prevent a market sell-off in almost circular reference fashion?”


A: Not at all.


For starters, it’s important that market participants do not disrespect just how bullish the confluence of economic stabilization in the U.S. and China + a remarkably dovish pivot by the Federal Reserve has been for reflation assets.


As the following table highlights, a healthy amount of key domestic high-frequency growth indicators stabilized on a sequential basis in the FEB/MAR time frame. While the trend of broad-based deceleration remains firmly intact per the “Trending Data” column, there is plenty enough green in the “Sequential Data” column for market participants to have broadly perpetuated a general reduction in near-term recession fears.


Important Thoughts On Market Structure and Sentiment - U.S. Economic Summary Table


And while we disagree with the conclusion (i.e. the risk of a 2016 recession has subsided), we acknowledge that delaying the commencement of said downturn is decidedly bullish for risk assets in the context of the early-February highs in pervasively bearish sentiment.


Secondly, the aforementioned stabilization in the face of Janet Yellen going full-frontal dovish proved to be a powerful elixir for risk appetite – particularly among reflation assets.  Specifically, factor exposure leadership across every major asset class is pricing in some version of QE4 per our Tactical Asset Class Rotation Model:


Important Thoughts On Market Structure and Sentiment - TACRM Summary Table


Important Thoughts On Market Structure and Sentiment - TACRM Global Macro 10 10


Important Thoughts On Market Structure and Sentiment - TACRM U.S. Equities 10 10


Important Thoughts On Market Structure and Sentiment - TACRM Int l Equities 10 10


Important Thoughts On Market Structure and Sentiment - TACRM EM Equities 10 10


Important Thoughts On Market Structure and Sentiment - TACRM DFICEI 5 5


Important Thoughts On Market Structure and Sentiment - TACRM FX 5 5


Important Thoughts On Market Structure and Sentiment - TACRM Commodities 5 5


Important Thoughts On Market Structure and Sentiment - TACRM IFICEI 5 5


***CLICK HERE to learn more about TACRM and its proprietary methodology for quantifying VWAP price momentum across multiple durations and amalgamating those signals into a composite Adjusted VAMDMI score.***


But as we penned in yesterday’s Early Look titled, “Back To Basics”, the Fed has little scope left to manipulate asset markets absent an explicit commitment to monetary easing – which we don’t think will occur in proactive fashion. Specifically, spreads across Fed Funds futures contracts have compressed dramatically in the YTD; the next rate hike is not fully priced into the market until Q3/Q4 of 2017, as opposed to October of 2016 when we started the year.


Important Thoughts On Market Structure and Sentiment - Implied Yields on Select Fed Funds Futures Contracts


That’s an important distinction to make given the fear among bulls and bears alike about this squeeze being perpetuated higher by increasing talk of QE4.


In summary, the dovish shift by the Fed has largely run its course and that they can’t do much in rhetorical terms to convince market participants of their dovishness even more so than they already have. They need to bring out the bazooka and we don’t think they can or will absent material degradation in the economic data (which we are forecasting) and a commensurate decline in risk asset prices as implied by the first chart in this note.


Q: “What do you make of the recent selloff in Treasury bonds and Utilities?”


A: It’s one of two things and neither is good for the forward outlook for risk assets.


Specifically, we think the back up in Treasury bond yields and commensurate sell-off in Treasury bonds and Utilities is a function of investors broadly capitulating on the bear case and that capitulation is obviously in the process of reaching its inevitable crescendo today. In positioning terms, investors broadly giving up on playing defense implies they are either tacitly or explicitly increasing their exposure to risk. We are taking the other side of that decision at the current juncture and keen to do quite the opposite by adding to defensive factor exposure longs today.


Another reason for the aforementioned selloff could be a marginally hawkish shift by the Federal Reserve in next Wednesday’s FOMC statement. If, like us, you believe the FOMC is a collection of bureaucrats that stress the crossing of T’s and dotting of I’s,  then there’s nothing like a couple of months of backward-looking stabilization of economic data and 2100 on the SPX to resuscitate the “policy normalization” debate.


Specifically, there is risk that Janet Yellen pivots fairly hawkishly and sets the stage for another rate hike in mid-June. If that’s the case, the next six weeks could resemble the first six weeks of the year – which, coincidentally, was the worst start to the year ever in equity market performance terms.


Remember, this is the same policymaking entity that opted for “liftoff” amid the worst swoon for stocks since 2011 and into peak U.S recession fears. Don’t disrespect their willingness to take another ill-timed “victory lap”.


We hope you find these discussions helpful. Feel free to email us with any follow up questions and we’ll be happy to assist further.




Darius Dale


Will Bernie Bow Out? ... Trump's Got "The Best Toys"

Below is a brief excerpt from our Potomac Research Group colleague and Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.



Will Bernie Bow Out? ... Trump's Got "The Best Toys" - bernie sanders


Bernie Sanders' NY loss was crushing - not just for losing in the state where he was born, raised, and claimed he would pull an upset, but because it dashed any reasonable chance for him to eclipse Hillary Clinton in pledged delegates. Now he must choose whether to up the ante with attacks on Clinton, or pull a 180 and return to his core, issues-based movement. His campaign is sending mixed signals on whether he will remain in the race after the conclusion of next week's Northeast primaries - where Clinton has healthy leads. This could be a make or break week for his continued candidacy, and going negative again might be his only shot - yet can he justify doing so just as there are signs that 83% of Sanders-leaning Democrats would coalesce around Clinton? Party unity is on the line.



Will Bernie Bow Out? ... Trump's Got "The Best Toys" - ted cruz up


As it stands now, Donald Trump is 392 delegates shy of the 1237 needed to secure the nomination the old fashioned way, but he is poised for another huge set of wins in CT, MD, DE, PA, and RI next week. Whether or not Trump goes to Cleveland with a delegate majority, some pols and pundits are suggesting that he could still clinch the nomination on the first ballot even if he is 100-150 delegates short.


This is due to the unbound "free agent" delegates that will be available, and are sure to be wined-and-dined by Trump and Ted Cruz for their support - though Trump's lead and his claim of having "the best toys" means he may have more to offer.   


There may be five more Northeastern states voting before May 3rd's IN contest, but the focus of the Trump and Cruz campaigns has shifted back to the Midwest. IN is being compared to WI - where Cruz pulled off a strong victory - and if he has any hope of blocking Trump from winning 1237 delegates, he needs to sweep the Hoosier State. But this is far from certain - IN's demographics are more favorable to Trump than WI's were, and the anti-Trump forces have yet to organize there. As important as winning IN is to Cruz's new strategy, it may be more vital to Trump and his ability to win a delegate majority without it.

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About Everything: The Golden Age of Home Improvement

Takeaway: Buying a home is out, remodeling one is in.

Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why consumer spending on home improvement is outstripping GDP growth and the key demographic trends behind this shift.


About Everything: The Golden Age of Home Improvement - z home imp



Three years ago, in a report called “The Boom in Home Remodeling,” I predicted that this was an industry about to take off. Now, it is airborne. Total spending on home improvement, well above $300 billion (and perhaps hitting an all-time high in 2016), continues to grow faster than GDP.


What’s more amazing is that the industry has expanded in the face of a crumbling housing market. Residential construction spending plunged a whopping 60 percent from peak to trough during the Great Recession. Home improvement spending’s fall? Just 13 percent. 


About Everything: The Golden Age of Home Improvement - about everything slide 3


In housing, single-family homes (not multi-units) have lagged the most in recent years. But in home improvement, single-family is the faster horse.


About Everything: The Golden Age of Home Improvement - about everything slide 4


Equity prices in the industry reflect this boom—and the big chains are really riding the wave.


About Everything: The Golden Age of Home Improvement - about everything slide 5


Lowe’s stock prices have more than doubled over the past four years. Home Depot shares have nearly tripled in value. Lowe’s plunked down $2.3 billion to acquire the Canadian giant RONA. And thanks to home services platforms like Pro.com, even more industry revenue gets funneled to the big guys.


About Everything: The Golden Age of Home Improvement - about everything 4 21 callout



The rising average age of homes. While sprawling infrastructure projects once lowered the average age (and created new housing demand) by demolishing wide swathes of residences, those days are long gone. About 63 percent of the nation’s houses are at least 30 years old, up from 47 percent in 1995. 


Today’s homes, moreover, are better constructed, allowing for indefinite improvements rather than knocking down and rebuilding. Thus, in some ways, home remodeling is actually replacing new home sales.


Falling mobility rates. A dwindling share of Americans move each year (a trend that kicked off in the 1980s). Falling mobility is partly due to an aging population and partly due to lower mobility at each age. More and more homeowners are in their current properties for the long haul—and are incentivized to spend on home remodeling.


Economic recovery. Homeowners who put off large discretionary projects during the Great Recession finally have the cash to take on those projects. Discretionary spending on remodeling is on the rise for the first time in a decade.


Generational change: aging-in-place Boomers. Boomers account for almost half of all dollars spent on home remodeling.


About Everything: The Golden Age of Home Improvement - about everything slide 6


They’re aging in place, working longer in retirement, and putting up their adult children who are just fine sticking around the nest.


About Everything: The Golden Age of Home Improvement - about everything slide 7


Generational change: DIY Xers. Most Gen-Xers will gladly save money by buying an imperfect or under-finished home—and then fixing it up on their own over time. They value personalization and often trust their own talents more than those of a homebuilder. In home remodeling (as in any other area of their lives), Xers wonder why they should call a professional when they can do the job themselves.


Generational change: cohabiting Millennials. Every Millennial who lives with mom or dad is one less buyer of a new home and one more excuse to remodel an existing home.


About Everything: The Golden Age of Home Improvement - about everything slide 8


Even when they do move out, Millennials tend to stay nearby—enabling them to get parental advice or funding when remodeling their own homes or to help their parents when remodeling theirs. When Millennials remodel, they need someone to show them the way: Lowe’s recently released how-to tutorials on Vine for Millennial DIYers. N2Care even builds “granny pods” so that Millennials can have their aging parents within reach. 



Affluent Boomer demand is fueling the industry’s growth. High-end Boomers unfazed by the Great Recession have spent heavily on home improvement even while banks foreclosed on younger and poorer consumers. Affluent coastal metro areas in the Northeast (in cities like Boston, New York, and Washington, D.C.) and in the West (Seattle, San Jose, and Phoenix) continue to be hotbeds for these big spenders.


About Everything: The Golden Age of Home Improvement - about everything slide 9



Airbnb property owners are renovating their rented spaces. Private residences are taking over a growing chunk of the accommodation market. Homeowners who never had to worry about hotel industry regulations are now rebuilding stairways, constructing windows, and adding insulation to bring their properties up to code. Not to mention the cosmetic upgrades (like repainting and installing new countertops) designed to boost appeal.


Home remodeling firms are betting big on technology. Lowe’s and Microsoft have teamed up to create an in-store augmented reality experience that will allow shoppers to “try out” different cabinets, finishes, and more before buying. IKEA has created an online VR app that allows website visitors to customize a sample kitchen. And Home Depot carries scores of smart home products, from learning thermostats to precipitation-driven irrigation systems. 



Remodeling firms should be mindful of the generation they’re targeting:


  • Boomers are building onto their homes to make room for the kids (and grandkids). They also need “universal design” accessibility upgrades, from wheelchair ramps to widened hallways.
  • Xers spend heavily on no-frills DIY. This generation is the most price sensitive.
  • Millennials want high-touch (as well as high-tech) services. They are looking for an expert to show them the way. 


About Everything: The Golden Age of Home Improvement - about everything slide 10


For more, watch Neil Howe in the associated About Everything video.


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU)

Soybean market breadth has been strong on the CME – even unprecedented. Speculation behind the move has come from many different fundamental angles relieving U.S. farmers whether it be: 1) Brazilian farmers curbing forward-selling with political uncertainty; 2) Argentina unloading of record soybean stockpiles now being offset by unfavorable weather; 3) China shifting purchases from Argentina to the U.S.; 4) Macro - A weaker Dollar making U.S. crops more competitive in the global landscape.  


Whatever the correct story, the market has seen huge relative volumes and record levels of futures open interest behind the price move (some of it a structural change with ETFs holding futures contracts) off the end of February Lows with a huge long build in net futures and options positioning (table below), which we outlined in Monday’s call-outs. Implied vol. has spike triple digits (3-4x trailing averages in grains). See charts below for the behavioral set-up.


However, with regard to Y/Y farmer economics and FX moves (especially in the Real and Argentine Peso), we would need to see a sustained continuation in the short-term move before we would reconsider farmers’ beaten down propensity to consume crop input expenditures (fertilizer, seed, nutrients) in a time of credit contraction on the farm – farming realities move much slower than the CME, hence our thesis - the price of inputs has been slow to lag real-time grains prices out of the 2012 bubble highs, compressing farmer margins to dire straits. AGU’s retail exposure is more levered to the price of domestic corn, which like soybeans, is only up mid-single digits Y/Y against a U.S. dollar that is down -3.8% Y/Y. Continued unfavorable economics should weigh on the budgets of cash-strapped farmers who have gotten little relief in the price of seed, fertilizer, nutrients since the 2012 bubble highs in grains prices – YET – See last chart below.


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - Open interest


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - Avg. Volumes


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - price changes


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - Implied Vol


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - Contract Positioning


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - AGU Retail Exposure


Jumping Beans - Key Call-Outs (SOYB, CORN, AGU) - Seed Expenses 

UA | Huh?

Takeaway: We love most things about UA, but this conference call was just weird.

UA’s numbers proved today why it trades at the multiple it does (65x earnings, 29x EBITDA, 4x sales). Revenue and EPS grew +30% and +62%, respectively, which is pretty much bullet-proof. Cash flow from operations was down 5%, but no one will care about that with this kind of Brand Heat and P&L momentum. Our call on this name is simply to do nothing. We won’t buy it here. Yet on the flip side we think it’s foolish to argue a valuation short – as UA is earning the hype, and the only justifiable fundamental short has to do with rising cost pressures as Nike flexes its wallet and makes it tough to grow in footwear and International – but Nike is clearly focused on bigger and better things. So in the end…we’re a ‘do nothing’ on this – and we’re fine with that.


But we can’t hold off from commenting on Kevin Plank – and just a warning, this is not going to be pretty.  In recent quarters we’ve commented on how far Plank has come as CEO. Not just in his self-given title, but how well he has grown into it and matured as a leader both inside the organization and out. Note, I think we all know that being a CEO, a Manager, and a Leader are all very different things. A select few people can do all of them well. We’ve been growing into the mindset that Plank is, in fact, one of those people.  That may still be the case. It probably is. But to be analytically honest, we need to call out that today’s conference call definitely serves as an argument to us against it.  Here goes…


1) Overall, his tone throughout was just extremely brash and “in your face”. It was reasonably intimidating at times. Is that what people inside the organization see – only more intense? We gotta wonder.

2) It probably started off with his discussion of Steph Curry. Yes, we get it…Curry is unlike anything the NBA has seen in forever. He’s the man. But Saying how the company grew 30% to match Curry’s #30, and his average points for the season was odd. Maybe it was something of a joke, but it came across as flat-out weird.

3) He was more focused on calling out (almost yelling out) athlete victories than talking about what UA is doing to build emotional connections with the athletes REGARDLESS of whether they win or lose. Is UA building these connections? Of course, to a degree. But what happens when Steph Curry loses one day? This reminds me a lot of when Reebok had Allen Iverson under its belt 15 years ago. All Reebok talked about was AI. Then one day he became less relevant. Then it had to merge with Adidas. That won’t happen here. UA is a much better company. But it should never lose sight of what it could become.

4) Case in point, I really can’t stand Kobe. He’s one of the most disliked players outside of LA by the general public. Most basketball players really don’t like the guy. But Nike managed to take the fact that most people hate Kobe and turn it into a “I Hate Kobe” campaign upon his retirement – that actually is helping his popularity. And yes, Nike is backing it with hundreds of millions worth of Kobe product in its direct channels (check out SNKRS app).  Don’t be so focused on the wins. Those are not monetizable. Emotion is.

5) Was I the only one who thought it was weird when Plank cut off an analyst who was asking an otherwise thoughtful question? It’s as if he knew what he wanted to say before he even heard the end of the question and ran right over the person on the other end of the phone.  


Look…we all have our good days, and we have our bad days. Lord knows I have my fair share – likely more than Plank. But I’m not CEO of a $21bn company – yet. Heck, maybe he just worked out with Dwayne “The Rock” Johnson and was still amped up. 


We’re giving him a pass on this. The market obviously doesn’t care. But we’re looking for a more grounded, somewhat humble, and commercially-focused Kevin Plank next quarter.

Go Warriors.


UA | Huh? - 4 21 2016 SIGMA chart1


UA | Huh? - 4 21 2016 Algo chart2