Cartoon of the Day: An (Increasingly) Red Book

Cartoon of the Day: An (Increasingly) Red Book - China cartoon 05.09.2016


Chinese equities were down hard overnight (Shanghai Comp down another -2.8% and -47% from 2015’s high) on terrible export (-1.8% y/y APR vs. +11.5% MAR) and import (-10.9% y/y APR vs. -7.6% MAR) data. To be clear, we’re not in the everything has “bottomed” camp.

McMonigle: New Saudi Oil Minister Doesn't Mean New Oil Policy

Takeaway: Saudi Arabia will continue its market share policy, rather than join the "freeze" oil production coalition.

Editor's Note: This is a special, abbreviated excerpt from an institutional research note written by Hedgeye Potomac Senior Energy analyst Joe McMonigle. It was written this past weekend, following news of the Saudi energy minister cabinet reshuffling. McMonigle continues to be ahead of consensus on key issues and developments impacting the price of oil.  



(On a related note, click image below to watch McMonigle discuss this topic on BNN earlier today.)


McMonigle: New Saudi Oil Minister Doesn't Mean New Oil Policy - mcmonigle image 5 9


Saudi Arabia King Salman Appoints Former Aramco CEO Al-Falih as New Energy Minister

Change in Ministers Does Not Mean Change in Oil Policy


Joseph McMonigle, Senior Energy Analyst

May 7, 2016


Saudi Arabia announced a major cabinet reform and reshuffle on Saturday that also included the appointment of former Aramco CEO Khalid Al-Falih as the new Minister of Energy and Industry replacing long-time oil minister Ali Al-Naimi.


Al-Falih is highly respected and well-known in the energy community. As Aramco CEO, he transformed a national oil company into a global energy company. His appointment will bring stability and credibility to the world’s second largest oil producer. When he left Aramco, he was appointed as the Saudi Minister of Health and also stayed on as chairman of the state oil company.


The most important take-away here is that a change in oil ministers does not equal a change in Saudi oil policy.  We fully expect the Saudi market share policy to continue at least through 2015, and therefore, we do not forecast any change in OPEC policy at the upcoming June 2 meeting in Vienna.


Beginning in January 2016, Al-Falih started to become more visible on Saudi oil policy having a prominent role at the World Economic Forum in Davos. His public comments have been very much in line with current Saudi oil policy.



Reflation Reversal Risk Part II

On the 22nd of April, we published a note titled, “Reflation Reversal Risk” in which we detailed what we thought was an elevated probability of the Fed-induced rally in all things reflation petering out in the near term. With many reflation-based factor exposures developing negative price momentum over the past 2-3 weeks, that has been a prescient call thus far. More importantly, we see a similarly elevated probability of this nascent negative price momentum trending for at least the next 2-3 months. Why? Because we are confident that the USD is done going down for the time being. The analysis below explains why we believe that is the case.


There are four primary reasons we think the dollar holds the line here:


I)  Contrary to what we all expect to the Fed to do in an economic environment whereby real GDP growth and headline CPI are decelerating concomitantly (i.e. ease), the DXY tends to be among the strongest factor exposures across all of global macro during historical episodes of #Quad4. This is likely because domestic investors are responding to such “risk off” signals by raising cash by repatriating foreign assets all the while foreign investors are seeking the perceived safety of the Treasury market.


Reflation Reversal Risk Part II - DXY


Reflation Reversal Risk Part II - Broad Trade Weighted U.S. Dollar Index


II)  The dollar is really good at front-running policy pivots by the Fed, as highlighted by the 1st chart below which shows the dollar has historically been very strong into the first rate hike only to sell off in subsequent months – which is contrary to what one might expect unless the tightening itself was discounted. That in conjunction with a dramatically compressed Fed Funds futures curve (2nd chart below) leads us to believe the Fed’s dovish pivot has been largely priced into the most affected markets and it’s likely that nothing shy of outright monetary easing will compress the forward rates expectations any further. Specifically, the next rate hike isn't being fully priced into the curve until March of 2018 (out from October 2016 at the start of the year)! That in the context of crowded anti-dollar positioning in the futures and options markets (3rd chart below), we think the DXY is due for a serious risk reversal.


Reflation Reversal Risk Part II - DXY Historical Rate Hike Analysis


Reflation Reversal Risk Part II - Implied Yields on Select Fed Funds Futures Contracts


Reflation Reversal Risk Part II - EXTREME SENTIMENT MONITOR


III)  We all know who wins in a weak dollar scenario (corporate America, U.S. asset managers, EM, etc.) but if there are winners, then there must also be losers. As we discussed at length in our 4/28 Early Look titled, “Positioning and Sentiment”, both the European and Japanese economies are reeling amid sharp currency appreciation – as are their respective financial markets. Even if there was some sort of détente reached at the late-February Shanghai G20 Summit in terms of quashing USD appreciation and Chinese capital outflows, there’s only so much pain Europe and Japanese officials can take before they are forced to throw in the proverbial towel. Remember, given that exchange rates are the primary transmission mechanism, monetary policy is largely a zero sum game. As such, we think the European and Japanese officials are growing increasingly tired of holding the proverbial “hot potato” that is currency appreciation.


Reflation Reversal Risk Part II - 6


Reflation Reversal Risk Part II - 7


Reflation Reversal Risk Part II - 8


Reflation Reversal Risk Part II - 9


Reflation Reversal Risk Part II - 10


Reflation Reversal Risk Part II - 11


Reflation Reversal Risk Part II - 12


IV) Lastly, the U.S. consumer also has to pay the piper in a weak dollar scenario and incremental reflation is likely to perpetuate a decline in the growth rate of real PCE even more than what’s implied by cycle-peak base effects. An inflationary shock to domestic consumption may serve to incrementally lower consumer confidence and perpetuate higher savings rates – which we are already seeing in the data. As such, the Fed is in a box – as it always is during stagflationary #Quad3 – and may not be able do much more from here unless markets are in crisis.


Reflation Reversal Risk Part II - REAL PCE


Reflation Reversal Risk Part II - Real PCE Comps


Reflation Reversal Risk Part II - RETAIL SALES CONTROL GROUP


Reflation Reversal Risk Part II - CONSUMER CONFIDENCE


Reflation Reversal Risk Part II - PERSONAL SAVINGS RATE


Reflation Reversal Risk Part II - INFLATION MODEL


All told, as China’s trade data highlights this morning, global demand for commodities and commodity-sensitive assets has not bottomed. And we all know by now that the “supply” bull thesis for crude oil is at best a circular reference designed to explain away bullish price momentum. So there’s that…


Reflation Reversal Risk Part II - IMPORTS


Reflation Reversal Risk Part II - EXPORTS


Best of luck continuing to manage these reflation reversal risks,




Darius Dale


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REPLAY | About Everything: Does Cable Have a Future?

Yes, but not a happy one. It’s mostly about managing decline.


Editor's Note: In this complimentary edition of About Everything below, Hedgeye Demography Sector Head Neil Howe writes about why the cable and satellite TV industry's glory days are behind it. In it, Howe dissects the underlying demographic drivers and explains the broader implications for investors.


***After reading the written piece, join Neil LIVE on HedgeyeTV (see video player below) at 2:30pm ET Tuesday to discuss. It's free.




The cable and satellite TV industry is ailing. Gone are the glory days of the early 2000s, when company revenues soared 20 to 30 percent annually.


Last year, industry revenues fell 15 percent. Net incomes among giants like Comcast, Time Warner Cable (TWC), DirecTV, and Dish also tanked—while smaller players like Charter Communications and Liberty Global actually saw theirs turn negative.


REPLAY | About Everything: Does Cable Have a Future? - neil chart3


You wouldn’t know the severity of the situation by looking at the market. Though share prices of most cable companies took a dive last year, many of these stocks have recovered and are now doing better than ever. Comcast (also home of NBCUniversal) has all but regained its peak 2015 value, while Verizon and AT&T continue to post new highs (no thanks to their cable businesses). 


REPLAY | About Everything: Does Cable Have a Future? - neil chart4


While industry P/E ratios are a far cry of what they were a decade ago, they’re still just marginally beneath the S&P 500 at large. So what would you rather bet on: the entire American economy or a moribund industry with no easy path to profitability? OK, “neither” is an acceptable answer. But “number two” is certainly the wrong answer.


REPLAY | About Everything: Does Cable Have a Future? - neil chart5



Cord-cutting. The top nine cable companies lost about 340,000 video subscribers in 2015. The year before, the industry at large lost 1.2 million subscribers. By comparison, Netflix added more than 1.5 million subscribers last quarter alone. Thanks to Netflix and the myriad other cheap (or free) ways consumers can get content today, you no longer need a cable subscription to see your favorite shows.


Even when cable firms do gain subscribers, they’re often feasting on the scraps of shrinking satellite providers. (Dish and DirecTV lost over 135,000 subscribers each last year.)


Generational change. Millennials are by far the largest group of cord-cutters and cord-nevers. Whether they can’t afford it or they’re content to find entertainment online, Millennials consider cable an option, not a necessity. In 2015, 19 percent of 18- to- 29-year-olds cut their cable or satellite subscription. Another 16 percent never had cable. (And plenty still live with parents who foot the bill.) 


REPLAY | About Everything: Does Cable Have a Future? - neil chart6


Instead of plunking down on a cable subscription, Millennials would just as soon use an antenna (remember those?) to find broadcast shows. Or they cut out broadcast TV altogether and go broadband-only. 


REPLAY | About Everything: Does Cable Have a Future? - neil chart7


This trend will continue to give cable companies a major headache as Millennials take their new viewing habits with them up the age ladder. Forecasting firm eMarketer predicts that by 2018, one in five households will not subscribe to pay-TV.


REPLAY | About Everything: Does Cable Have a Future? - neil chart8


Increased regulatory scrutiny. In 2015, just three companies—Comcast, TWC, and Charter—accounted for 77 percent of all cable subscribers. Not only is cable concentrated at the national level, but many of these companies enjoy steel-trap regional monopolies. In many cities, the typical household can only subscribe to one provider. Most of the rest can choose between two duopolists (usually a cable company and a telecom). 


REPLAY | About Everything: Does Cable Have a Future? - neil chart9


REPLAY | About Everything: Does Cable Have a Future? - neil chart10


From monopoly comes pricing power, and from pricing power comes a boost in profit margins. Yet this too may be ending. The antitrust regulators are catching on. The TWC and Comcast merger was called off—thanks in part to promises by federal regulators to fight the deal. Charter’s newly minted acquisition of TWC includes mandates that are stricter than current industry regulations. Stricter FTC oversight may ultimately deter “defensive” mergers by small cable firms in steep decline. This would further cloud the industry’s outlook.


Even the set-top box is fair game for regulators. Cable giants earn $20 billion annually from forcing their hardware into the hands of subscribers—at least until the FCC drops the hammer and opens up this niche market to third parties. 



Broadband. In the absence of a robust pay-TV customer base, the top cable companies are gunning for new broadband revenue. But this transition could be stymied by net neutrality legislation. The FCC wants to regulate broadband like a common carrier—which would prevent cable companies from raising broadband prices to make up for cable losses.


Sure, the industry would get a boost if the American public rapidly upgraded to much higher bandwidth video (like 4K video or perhaps new VR consoles). In time, the FCC would have to allow firms to invest in a whole new broadband infrastructure. But don’t hold your breath. There’s little evidence to date that the public wants to pay for this extra “service,” any more than it wanted to pay for 3D TV. (Gee, what happened to that?)


“Skinny” bundles. Last year, Verizon and Comcast introduced pared-down, cheaper channel bundles—but these options reduce revenue and earnings. Cable companies have no real incentive to offer pay-per-channel plans: There’s no way they would be better off with less content and less revenue in a bundle-less world. 


REPLAY | About Everything: Does Cable Have a Future? - neil callout


New services. The big cable firms are reaching far beyond mere TV packages. They are dreaming up new products they hope will entice more consumers to stick around. Exhibit A: AT&T, Comcast, TWC and Verizon all offer home security systems, which cost less than traditional home security services when bundled. But long-term, do you think they can possibly compete with cutting-edge IP-based services like Nest? There’s a reason why this software revolution is called the “Internet of Things”: It’s all on the INTERNET.


Comcast and Cablevision are also investing in ways to allow customers to stream content through their set-top boxes. But again, this strategy risks rendering the cable subscription itself obsolete.


Live TV. Can’t-miss live events—like NFL games or local news or presidential debates—may be the last true bastion of cable profitability. It’s easier to maintain an exclusive price for content that has to be watched in real time. Nobody hosts a Super Bowl Party the day after the Super Bowl.


To be sure, generational forces could help live programming. Millennials’ penchant for second-screen viewing gives the cable industry more opportunities to bring back the linear TV experience. Cable could turn the tide by hosting online communities centered on live programs that are available only through cable.


But how long will it be until major sports leagues take a page out of HBO’s playbook and bring their content directly to the fans? Though cable companies hope the answer is “never,” the seeds have already been planted (see: NBA Live, MLB Live, and


Content aggregation. There may be room enough for one cable company to win out. How? By using the research and consumer data at its disposal to guide consumers through an increasingly fragmented landscape of content. A savvy, streamlined firm (perhaps Comcast?) could have a chance to survive the impending dearth of cable subscribers. So I’ll allow that one healthy survivor may emerge. But only after a prolonged and bloody gladiatorial contest has come to an end.


  • Broad band, cord-cutting, IP-based software, and stricter antitrust enforcement are combining to throttle cable firms. Avoid being long in these firms, and look for opportunities to short those having no line of business (like telecom or content) other than cable.
  • Be skeptical when you hear CEOs and analysts say they have a magic formula to stop the bleeding—like doubling down on broadband, repackaging content, or offering new products. There’s no easy fix for a dying paradigm.

Dale: The Most Important Charts In Global Macro

Dale: The Most Important Charts In Global Macro - Dollar cartoon 04.27.2016


Below are six key charts with analysis from Hedgeye Senior Macro analyst Darius Dale, which shed light on where we think the U.S. Dollar is headed. (For more, follow Dale on Twitter, @HedgeyeDDale.)



"These are the the most important charts in all of global macro. Will the US Dollar hold the line or fade like a flower?"


Dale: The Most Important Charts In Global Macro - dxy index 5 9


"The Federal Reserve torched the dollar and got the short-term reflation pop it wanted, but can that be sustained?"


Dale: The Most Important Charts In Global Macro - demographics 5 9


"As a follow-up, here's why 35-54 year-olds matter."


Dale: The Most Important Charts In Global Macro - demographics2 5 9


"At what point do the ECB and BoJ throw in the proverbial towel.. and perpetuate a series of higher-lows in the DXY?"


Dale: The Most Important Charts In Global Macro - euro stoxx topix 5 9


"Furthermore, how much more pain can Japanese and European officials take? The alleged 'Shanghai Accord' is killing their markets." 


Dale: The Most Important Charts In Global Macro - euro stoxx topix2 5 9


"To be 100% clear, we think the US Dollar holds the line and pukes on reflation over the next few months. But if it doesn't, our game-plan will change."


Dale: The Most Important Charts In Global Macro - dxy index2 5 9


McCullough: Expensive? ‘I Love Expensive’

In this brief excerpt from The Macro Show today, Hedgeye CEO Keith McCullough responds to a subscriber’s question about why he’s still bullish on McDonald’s (MCD), Utilities (XLU), and Long Bonds (TLT) even though they are “getting expensive.” 

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.