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CHART OF THE DAY: Bearish Sentiment = Non-Existent

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.


"... Not to be confused with SENTIMENT on long-term US Treasuries where they ramped the net SHORT position (non-commercial CFTC futures & options contracts) in the 10YR last week to -97,876 contracts (-1.5x on a 1yr zscore):


  1. SP500 (Index + E-mini) positioning popped to its MOST BULLISH in 2016 at -1,206 contracts = +1.9x (1yr z-score)..."

*Note: +/- 2.0x on a 1yr z-score is considered overbought/oversold


CHART OF THE DAY: Bearish Sentiment = Non-Existent - 05.02.16 Chart

Buy In May And...

“Our desire to reach into the future will always exceed our grasp.”

-Phil Tetlock


“But”… Phil Tetlock wrote in his new #behavioral book that I’m reviewing called Superforecasting… “debunkers go too far when they dismiss all forecasting as a fool’s errand.”


I’m a debunker, skeptic, forecaster, etc. Aren’t we all? If not, as analysts, what are we?


As the old saying goes, should we sell in May and go away? Or should we, like many did in April, stay? With the SP500 closing pretty much flat for April and US equity market positioning as bullish as it has been all year, our bearish forecast for Q2 really matters now.


Buy In May And... - growth escalator cartoon 04.29.2016


Back to the Global Macro Grind


When I use the word “bearish”, I am talking about US, Chinese, European, and Japanese growth. By growth, I mean the rate of change in demand and/or GDP growth.


Being bearish on growth means you’re bullish on Long-term Bonds (TLT), safe-equity yields that look like bonds like Utilities (XLU), and currencies that have no yield (but not a negative yield either) like Gold (GLD).


No, that doesn’t mean I nailed calling all 3 of these positions on every day at every price. Did you? But we absolutely nailed the causal factor (#GrowthSlowing) and will continue to run that ball right up the middle on anyone who disagrees with that forecast.


Last week’s US economic data ended on a bad note (again) with:


  1. US GDP (Q1) coming in at 0.5% (vs. 1.4% in the quarter prior)
  2. Chicago PMI slowing (again) to 50.4 in APR vs. 53.6 in MAR
  3. US Consumer Confidence (Univ. of Michigan report) slowing to 89.0 in APR vs. 91.0 in MAR


And, finally, the almighty US Equity market started reading bad as bad:


  1. US Dollar dropped another -2.2% to -5.7% YTD as markets are now flat out begging the Fed to ease (again)
  2. Commodities, Oil, and Gold all ripped higher on that … but so did #Stagflation fears
  3. Bond Yields pulled back (again) on that, with the UST 10yr Yield dropping -5bps to -44 basis points YTD


Point #2 is the most interesting one to me when it comes to attempting to answer the question in the title of this note. What if both my immediate-term US Dollar SIGNAL and SENTIMENT indicator is right?


  1. US Dollar signaling immediate-term TRADE oversold at 92-93 on the US Dollar Index
  2. Crude Oil signaling immediate-term TRADE overbought in the $46-47 range on WTI
  3. CRB Commodities Index signaling immediate-term TRADE overbought in the 185-187 range


Not to be confused with SENTIMENT on long-term US Treasuries where they ramped the net SHORT position (non-commercial CFTC futures & options contracts) in the 10YR last week to -97,876 contracts (-1.5x on a 1yr zscore):


  1. SP500 (Index + E-mini) positioning popped to its MOST BULLISH in 2016 at -1,206 contracts = +1.9x (1yr z-score)
  2. US DOLLAR positioning remained at YTD lows = -2.1x (1yr z-score)
  3. Gold and Oil positioning remained at YTD highs at +2.1x and +1.9x on 1yr z-scores, respectively

*Note: +/- 2.0x on a 1yr z-score is considered overbought/oversold


In other words, whoever has been “getting longer” because “everyone is bearish”, is now everyone (i.e. they’re positioned bullish on growth, from a net perspective, longer SP500 and shorter the Long Bond). And I like that.


Oh, you like it, eh? That is so bombastic of you Keith. Stop it.


Really? In the 8 years that I’ve been at the helm of my inbox @Hedgeye, I haven’t had more people pestering and poking at me that I’m “way too bearish”, “overstayed my welcome”, “myopic”, “getting fat” (true)…


And, after absorbing all of that like a hungry dog in the rain, the SP500 has actually been DOWN for 4 of the last 6 weeks and if I look at it post March month-end markup to April 2nd to May 2nd, here’s the score:


  1. SP500 -0.4% month-over-month
  2. Nasdaq -2.8% month-over-month


Did I get big things wrong in March? Absolutely. Did you? If you didn’t, you really had things wrong from JAN/FEB! I think that both my firm and credibility would have looked really wrong if we capitulated to the “charts” and went bullish on growth in April.


While there were days in April that I wanted to cross-check some people in the small of their back, I’m happy I took the Mature-Mucker road less-travelled and opted for a real vacation (April 13-23). A younger me would have had many many you-ge fights.


As a 41 year old man, I quite like the idea of becoming more of a lover than a fighter. God willing, I just love waking up early every day, trying to get intermediate-to-longer-term Macro Themes on growth and inflation right. In May, I’m not going away.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.70-1.87%

SPX 2054-2090


VIX 14.05-17.91
USD 92.83-94.92
Oil (WTI) 41.64-46.57

Gold 1250--1299


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Buy In May And... - 05.02.16 Chart

USD, Japan and Copper

Client Talking Points


The U.S. Dollar was down (again) -2.2% last week (-5.7% year-to-date) after both the PMI (50.4) and Consumer Confidence numbers slowed (again) on Friday. Markets are obviously questioning whether a Dovish Fed can replace actual growth with some version of stagflation, but USD is signaling immediate-term oversold inasmuch as Gold is signaling overbought.


One of the best ways to make money on the short side of Equities this year remains Japan – not only is the U.S. slowing (Dollar Down, Yen Up), but the #BeliefSystem is finally breaking down that Japan (or Europe) can do anything to stop it. The Nikkei is getting newsy though, signaling immediate-term oversold -3.1% overnight (-23% since July 2015).


Instead of buy USD (not brave enough, yet!), we sent out SELL signals in both Oil (+5.2% last week) and Copper on Friday; both are signaling overbought inasmuch as USD is signaling oversold. Copper $2.31 is an important macro level for the stagflation vs. #Deflation debate; so far longer-term #Deflation is still winning.


*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

We have been LONG General Mills (GIS) since May 26, 2015. We still like the long-term story, that being said, there are a number of one-time items impacting volume growth that should self-correct in 4Q16 and FY17. GIS is currently trading at 13.9x EV / NTM EBITDA an all-time high for the company.


Looking past GIS, the entire Consumer Staples space feel like there is a Safety Trade/ZBB/M&A bid underneath the entire group. We maintain our long-term bullish stance on GIS, but giving the rapid acceleration to all-time highs in the YTD period, a correction is inevitable.  


In a recent note to Real-Time Alerts subscribers, Hedgeye CEO Keith McCullough asked rhetorically, "What to buy?" "On pull backs to the low-end of my immediate-term risk range, I'd be buying more:

1. Long-duration Bond Exposures (TLT, ZROZ, EDV, etc)

2. Low-Beta Big Cap Stocks With Safe Yields (MCD, GIS, NKE, etc.)

3. Gold (GLD)"


McDonald's (MCD) has all the style factors we like for these turbulent markets, which explains why it's up 27% since we added it to Investing Ideas in August. Stick with it here.


Despite the weak U.S. GDP print, growth is very unlikely to rebound here in Q2. Don't get caught up in residual seasonality hopium. The confluence of steepening base effects amid the trending deterioration in economic momentum support our GIP Model forecast of a continued deceleration in the YoY growth rate of real GDP from +1.9% in 1Q16 to +1% in 2Q16E. The latter growth rate translates to +0.3% on a QoQ SAAR basis, which is up from our previous forecast of -0.5% (a lower base rate implies a smaller delta to get to the same numbers, all things being equal).


Assuming Q1 isn’t revised in any material way, our forecast for 1H16E is represents the slowest pace of domestic economic growth on a multi-quarter basis since 2H12. Any downside surprises from there will surely translate to renewed recession fears.” Giddy up for continued #GrowthSlowing!


The good thing about each of our active Macro positions (i.e. TLT, ZROZ, XLU and JNK) is that each of them typically works on an absolute return basis when growth slows.

Three for the Road


REPLAY! This Week On HedgeyeTV https://app.hedgeye.com/insights/50597-replay-this-week-on-hedgeyetv… via @hedgeye



Start where you are. Use what you have. Do what you can.

Arthur Ashe


By Uni Watch's count, there were 22 teams in the four major pro leagues (MLB, BFL, NBA, NHL) that either came into existence or were reborn with a new team name in the 1990s. Of those 22 teams, half of them (11) used purple and/or teal in their inaugural color schemes.

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. McCullough: What If Amazon & Facebook Can’t Go Higher? (4/29/2016)



In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough and Retail analyst Alec Richards respond to a subscriber’s question about whether companies like Amazon and Facebook can continue to prop up equity markets.


2. REPLAY | Healthcare Earnings Takeaways: $ATHN $HOLX $MD $ZBH (4/29/2016)



After a busy week of earnings, our Healthcare analysts Tom Tobin and Andrew Freedman will provide a recap and takeaways of our top ideas athenahealth (ATHN), MEDNAX (MD), Hologic (HOLX) and Zimmer-Biomet (ZBH).


3. About Everything | The Surge in Mental Health Services (4/28/2016)



In this complimentary edition of About Everything, renowned demographer and Hedgeye Sector Head Neil Howe discusses why "mental health services spending is riding a long-term attitudinal shift that has brought mental health issues out into the open." Howe explains why it's happening and explores the broader societal and investing implications.


Click here to read Howe’s associated About Everything piece.


4. Washington On Wall Street: Handicapping the ‘Acela Primary’ (4/26/2016)



Potomac Research Group Chief Political Strategist JT Taylor joins Hedgeye Director of Research Daryl Jones to discuss today’s so-called "Acela primary" bringing voters to the polls in Pennsylvania, Connecticut, Rhode Island, Maryland and Delaware.


5. Can Fed Stop Recessionary Selloff? (4/26/2016)



In this animated excerpt from The Macro Show, Hedgeye’s Keith McCullough, Darius Dale and Neil Howe respond to a subscriber’s question about whether the Fed can continue propping up the stock market as economic conditions deteriorate and a recession knocks on the door.


6. McCullough: You’re ‘Crazy’ Buying Stocks Now (4/25/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why he’s not going to be the “crazy one” buying U.S. stocks at this point.

Investing Ideas - Levels

Takeaway: Current Investing Ideas: DE, HBI, LAZ, MDRX, FL, NUS, JNK, TIF, WAB, ZBH, 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.


Investing Ideas - Levels - levels 4 29


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

Retail | Late Cycle Lease Activity

Takeaway: Chgs in retail lease duration clearly supports a Late Cycle view. Lease terms are getting stretched to find otherwise scant margin dollars.

With 10k season largely over for the retailers, we can see how the underlying lease profile is changing for retail (we don’t get this disclosure in Qs or 8ks – only annually). The punchline is the we’re seeing lease terms stretch to a level we have not seen since the end of the last economic cycle. While not toxic, this is definitely a level that suggests to us that the group is either a) unit growth starved, or b) in search of margin – by stretching out the duration of its lease portfolio.


What does it mean to ‘stretch out the duration’?

First off, let’s calculate said ‘duration’. It really comes down to the ratio of rent minimums carried off balance sheet that are required to be paid over the next 1-2 years compared to what a company is obligated to be pay 5+ years out. Let’s not get too focused on the periods used, as the trajectory will be roughly the same for a given company regardless of the period in question.

For the retail industry as a whole – which is made up of 84 companies – we have a weighted average duration of 7.6 years. That’s meaningless on its own. We have to look at this relative to itself, which was only 7.0 years as we exited the Great Recession. It might not sound like much, but look at the chart below. 

Retail | Late Cycle Lease Activity - 4 20 2016 chart1


What Does It Mean When The Duration is Headed Higher?

Basically, it means a company is signing leases it really cannot afford. To avoid losing the property to a competitor, it is either…

a) Buying Into Escalating Rent Trajectory.  This means signing leases with low initial payments, but high (usually dd) rent escalators in the outer years. That way it can book revenue, low rent costs, and worry about paying ‘real’ market rents sometime down the road. This is akin to a family that makes $90,000 a year, and takes out an interest-only 5-yr arm in order to buy that $2mm ‘dream home’ (that probably needs work) in Summit NJ.

b) Buying Time. This basically means signing a lease years before the competition would even consider it. Usually a company will sign about 2-years out from the property open date. 3-years max. But sometimes we’ll see ‘growth’ retailers without the cash flow to compete for premium properties sign up for a property that’s not available for another 4-5 years. It’s pretty arrogant that any company – even the best retailer around – can predict which plot will be relevant more than one Presidential term down the road. Importantly, there’s no way of knowing who the co-tenants will be. So while you think you’re moving next to a Restoration Hardware or Tiffany, you end up next to Olli’s Bargain Basement or Hibbett Sports. This ‘risk’ manifests itself in a growing duration – and while it is a hypothetical number, it represents margin risk that is very real sometime in the not-too distant future.


What Happens For Those Companies Where The Lease Duration is Headed Lower?

Simply put, reverse all the negatives I just called out. A lower lease portfolio duration means that…

a) Pay More Today, Owe Less Tomorrow. That means long term liabilities come down, and current payments go up. Most would call this bearish as it relates to hitting estimates. But when a management team opts to pay more over the near-term instead of being up against a wall in 3-5 years, we call that proactive risk management. That’s akin to paying off high interest debt, or taking a 30-year fixed mortgage to a 15-year loan – higher payments, but lower interest cost, and lower long-term risk.

b) One point worth noting is that this would also happen to a company that has just run out of growth or is closing stores with longer-dated durations. Acquisitions can just as easily skew these numbers one way or another.




Here’s an overview of the implied duration by retailer. One obvious pattern is that the specialty mall-based retailers hover between 5-6 years, while the department stores are almost all twice that level. Of particular note is Target at 20 years, and Kohl’s is 23 years! Let’s be clear about this…KSS is managing its liability profile in a way that assumes it is still actually selling product in its stores in another 20 years. We’d take the ‘under’ on that one.

 Retail | Late Cycle Lease Activity - 4 20 2016 LD CHART2


 Retail | Late Cycle Lease Activity - 4 20 2016 LD CHART3


 Retail | Late Cycle Lease Activity - 4 27 2016 Scatter chart4

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