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CHART OF THE DAY: Were You Positioned Properly For Brexit?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. 

 

***Click here to watch our post-Brexit analysis from renowned European economist and market strategist Daniel Lacalle and Hedgeye CEO Keith McCullough in this morning's The Macro Show.

 

"... Do we have you positioned properly for this?

 

  1. Long The Long Bond (TLT)
  2. Long Gold (GLD)
  3. Short SP500 (SPY)

 

Yes. But, again, this is not a day to party. This is a serious day where serious leaders need to step up and have a real conversation about what it is that The People just voted for."

 

CHART OF THE DAY: Were You Positioned Properly For Brexit? - tlt


A Courageous Vote

“Your heart is free – have the courage to follow it.”

-William Wallace

 

For many, today will not be easy. For many others, it will be one of their best. This is the path. This is life. Everyone doesn’t always get a sticker. There are winners and losers. This is democracy.

 

A Courageous Vote - Brexit cartoon 06.16.2016

Click here for post-Brexit analysis from renowned European economist and market strategist Daniel Lacalle and Hedgeye CEO Keith McCullough in this morning's The Macro Show, live at 9am ET.

 

Back to the Global Macro Grind

 

I realize that there were crazy people on both sides of this vote. There always are. People are crazy. But The People do have a right to vote against both the establishment of a highly-paid-political-life and being centrally planned from an office they didn’t elect.

 

What will the ECB and lord Draghi do next?

 

Will they opt for another currency devaluation? Or will they realize now that a debased currency undermines the legitimacy of the government trying to manipulate it? Will they “cut rates” from negative to negative-and-beyond? What happens to the banks?

 

I don’t know.

 

But do they? That remains The Question I have about the entire #BeliefSystem of central market-planning. That’s the question I have been asking myself ever since markets started pricing in that the probability of this not ending well was rising.

 

No, this is not a day for a victory lap.

 

Not for me. This isn’t my win. This is theirs. And don’t kid yourself – there are a lot of “they” out there who have been pounded by the confiscation of their purchasing power. That’s what’s in the value of a currency. And governments should never compromise its trust.

 

Do we have you positioned properly for this?

 

  1. Long The Long Bond (TLT)
  2. Long Gold (GLD)
  3. Short SP500 (SPY)

 

Yes. But, again, this is not a day to party. This is a serious day where serious leaders need to step up and have a real conversation about what it is that The People just voted for.

 

If Americans don’t have this public conversation, is our stock market next?

 

Today’s market news might be that:

 

  1. Japan’s stock market closed down -8%
  2. Germany’s opened down -7%
  3. Spain and Italy’s are trading down -11% (on the day)

 

But the real story has been one that’s been priced in sometimes slowly – and now all at once.

 

This is partly a story of central market-planners having the arrogance to promise the world that they can bend and smooth economic gravity and that “there is no alternative to buying stocks.”

 

In 17 years, I’ve worked and lived through two major US stock market crashes. Today, I’m proud to say I worked and lived through another crash in European stock markets not having to make excuses to my clients on why “no one could see this one coming.”

 

Macro markets did see this coming.

 

I know you are not the consensus. You wouldn’t be reading this if you were. If you had the courage to follow your own research and risk management process, I sincerely hope that you and all that you’ve worked for in your life has a good day.

 

It’ll be a great day for democracy and what’s left of our free-market liberties.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.49-1.72%

SPX 2039-2113

Nikkei 148

DAX 9199-10306

VIX 16.40-30.99
USD 93.08-95.80
EUR/USD 1.10-1.13
Oil (WTI) 44.79-50.72

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

A Courageous Vote - 06.24.16 chart


REPLAY | The Aftermath: Post-Brexit Market Analysis with Keith McCullough & Daniel Lacalle

Takeaway: We opened up The Macro Show for free to the world this morning.

***In light of momentous, market-moving events surrounding Britain's decison to LEAVE the EU ... we opened up the The Macro Show for free this morning. Renowned European economist and market strategist Daniel Lacalle joined Hedgeye CEO Keith McCullough one-on-one to discuss the implications.

CLICK HERE TO WATCH the replay

 

REPLAY | The Aftermath: Post-Brexit Market Analysis with Keith McCullough & Daniel Lacalle - HETV macroshow title Lacalle

 

Lacalle will be LIVE FROM LONDON providing critical insights and takeaways for global investors with Keith. Have a question? We will open up the conversation to live Q&A as we do every weekday morning.

 

A brief overview of what will be covered:

  • The Brexit vote outcome … what it ultimately means for the EU
  • Investing Implications … analysis of global stocks, bonds and currencies
  • What to watch ahead of this weekend’s uncertain Spanish election (and why it matters)

 

Join us live at 9am ET—you don’t want to miss this. 

 

Brief Bio on Daniel Lacalle

Lacalle is a European economist, who previously worked at PIMCO and was a PM at Ecofin Global Oil & Gas Fund and Citadel.  He is the author of Life In The Financial Markets and The Energy World Is Flat and a lecturer for the IE Business School and Master MEMFI at UNED University. He is currently CIO of Madrid-based Tressis Gestion.

CLICK HERE TO WATCH


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.

WisdomTree (WETF) | Timber!

Takeaway: WisdomTree flows out of their hedged products are continuing and although off of lows in 1Q are extremely worrisome.

  • We are lowering our out year 2017 estimate to $0.28 per share, -30% below consensus on ongoing dramatic outflows from the company's 2 biggest products, the Hedged European Fund (HEDJ) and Hedged Japan (DXJ). While the sequential rate of change has improved slightly from -$5.4 billion in outflow last quarter (the worst quarter in the firm's history) to a running outflow of -$3.9 billion thus far in 2Q16, this time last year, WETF was still gathering assets at a substantial pace so the redemption story is still quite new. We don't think the firm has any chance of comping positively on a year-over-year basis until the first quarter of 2017.
  • Most investors that are positive on the story believe that HEDJ and DXJ are just getting swept up in an unpopular International equity category which is not factually accurate in our view. The biggest factor for the substantial about face in positive trends in HEDJ and DXJ is the currency hedge which has nullified +15% annual returns in the Yen this year and a positive +3% return in the Euro. These funds were designed solely to capture QE trends, i.e. weakening currencies and positive equity returns but with risk aversion instead taking place, investors are covering Yen and Euro shorts (causing those currencies to rally) and are pulling out of local equities.
  • The resting value for HEDJ and DXJ was roughly ~$1 billion each prior to respective QE programs and thus with the funds still at a combined $19 billion, there is still substantial downside in our view. Our $0.28 estimate assumes total AUM at $35 billion next year but we think a break even scenario is possible at $20 billion in AUM (we haven't forecated that scenario yet but we are watching for this). In our current earnings scenario we see fair value at $5-6 per share (using median valuation multiples on Revenue, Earnings, EBITDA, and AUM). If a breakeven scenario (on earnings) comes about, we forecast an equity value of $2 per share. We do not think shares currently are attractive as a take out candidate considering dour trends and concentration risk in the International Hedged Equity category. 

 

Contrary to investor belief that the firm's biggest funds are "out of favor" because of the International Equity category, the bigger issue is the firm's hedging of foreign currencies within these funds which are now forcing investors out of these products as the hedges are now nullifying currency gains: 

WisdomTree (WETF) | Timber! - Chart 1 dxj

 

The resting value of both DXJ and HEDJ prior to QE programs in Japan and Europe was ~$1 billion each which leaves plenty of downside if risk aversion in both geographies continues:

WisdomTree (WETF) | Timber! - Chart 2 hedj

 

 Although flows have improved from -$5.4 billion last quarter, Q2 is running at -$3.9 billion down -150% from +$6.5 billion in 2Q15:

WisdomTree (WETF) | Timber! - chart 3 revised

 

Fair value at our current projection for 2017 on Revenue, Earnings, EBITDA, and AUM points to downside of up to -50% from here. At a breakeven scenario on earnings at $20 billion in AUM, we see fair value at $2 per share. We do not think shares are attractive as a take out candidate with distressed trends:

WisdomTree (WETF) | Timber! - Chart 4 Valuation

 

 

WisdomTree (WETF) - It's Different This Time

WisdomTree (WETF) - The Land of the Sinking Sun

WisdomTree (WETF) - The Kuroda Kicker

WisdomTree (WETF) - More Questions Than Answers - We Remain Short 

 

Please let us know of questions,

Jonathan Casteleyn, CFA, CMT 

 



Joshua Steiner, CFA


Must-See Brexit & Spanish Vote Insight with Daniel Lacalle Friday 9AM ET

Wondering exactly what to do once the Brexit vote results are in?

 

(How about how to play this weekend’s pivotal Spanish election?)

 

We’ve got you covered.

 

The Macro Show tomorrow morning at 9am ET will feature renowned European economist and market strategist Daniel Lacalle one-on-one with Hedgeye CEO Keith McCullough. Lacalle will be LIVE FROM LONDON providing critical insights and takeaways for global investors.

 

A brief overview of what will be covered:

  • The Brexit vote outcome … what it ultimately means for the EU
  • Investing Implications … analysis of global stocks, bonds and currencies
  • What to watch ahead of this weekend’s uncertain Spanish election (and why it matters)

 

Join us live at 9am ET—you don’t want to miss this discussion. CLICK HERE TO WATCH

Must-See Brexit & Spanish Vote Insight with Daniel Lacalle Friday 9AM ET - HETV macroshow title Lacalle

 

Have a question? We will open up the conversation to live Q&A as we do every weekday morning.

 

Brief Bio on Daniel Lacalle

Lacalle is a European economist, who previously worked at PIMCO and was a PM at Ecofin Global Oil & Gas Fund and Citadel.  He is the author of Life In The Financial Markets and The Energy World Is Flat and a lecturer for the IE Business School and Master MEMFI at UNED University. He is currently CIO of Madrid-based Tressis Gestion.


CORRECTION: Stock Report: iShares Barclays TIPS Bond Fund (TIP)

Takeaway: We added TIP to Investing Ideas on the long side on 6/21.

Editor's Note: The original version inadvertently read "... we added TIP to Investing Ideas on the short side on 6/21." We apologize for the error. Of course, we meant "long side."

 

CORRECTION: Stock Report: iShares Barclays TIPS Bond Fund (TIP) - HE II TIP table 6 23 16

THE HEDGEYE EDGE

The Hedgeye Macro proprietary Growth, Inflation, Policy (GIP) model has proven to be an accurate, front-running model for predicting growth and inflation on a go-forward basis. After an epic two years of deflation, the model is signaling that growth continues to slow with inflation picking up into Q3.

 

We model growth and inflation on a Y/Y trending basis, and CPI readings in the second half of the year will be coming against easy comps. On the other side of that, Q2 and Q3 GDP comps are THE TOUGHEST of the cycle. Taken together, we expect incrementally dovish Fed rhetoric to continue which should support reflation assets.

 

Treasury Inflation-Protected Securities (TIPS) are a lower volatility way to play reflation with a growth slowing bias embedded in the position.

 

INTERMEDIATE TERM (TREND)

 

We signaled buy TIPS in our Real-Time Alerts product on Monday, with US Treasury Bond yields up on "no Brexit" speculation. Our quantitative risk management product is signaling that a short-term step-up in U.S. Treasury yields is just a TRADE, not a TREND, so we will continue to fade any newsy move in yields when the timing is right, according to our signals.

 

From an intermediate-term perspective, the TREND in long-term Treasury yields remains BEARISH, as real (trending) economic growth continues to slow (hence our months-long TLT position in Investing Ideas).

 

LONG TERM (TAIL)

 

Again, we want to be long of growth decelerating and inflation picking up into the back half of 2016 and TIPS are a great way to play both of these views along with our GLD (reflation) and TLT (growth slowing) positions.

 

To review our global #GrowthSlowing call from a demographic perspective, the working age population continues to decelerate in the U.S., Europe, and Japan while the 65+ year-old age bracket, in the U.S., Europe, Japan, and China, is estimated to accelerate well through 2020. This is a scary picture from a productivity standpoint.

 

The policy response globally has been, and will continue to be, currency devaluation and monetary easing with the intent to create inflation. Considering these policies have fallen short, we have no doubt that central bankers will continue pushing through inflationary policies with domestic CPI finally accelerating as it comes against easy comps starting in the coming quarters. 

ONE-YEAR TRAILING CHART

CORRECTION: Stock Report: iShares Barclays TIPS Bond Fund (TIP) - HE II TIP chart 6 23 16


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