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CHART OF THE DAY: Reflation Under Siege

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.


"... With the “reflation” trade under siege since peaking in early June, a -0.2% year-over-year Producer Price report for JUL (vs. +0.3% y/y in JUN) gave the market what it loves most when it can’t beat 1% GDP growth – Down Dollar, Down Rates:


  1. US Dollar Index ended the week down -0.5%
  2. US 10yr Yield fell 8 basis points on the week to 1.51%
  3. CRB Index and Oil reflated +0.5% and +6.4% on the week, respectively" 


CHART OF THE DAY: Reflation Under Siege - 08.15.16 chart

Genius Bankers

“Growing up, I heard the word genius a lot.”

-Angela Duckworth


For those of you who are new to following me, you’ll realize that I am no genius. In the mess of strategists and economists you can read rants from in the morning, I may very well be the furthest thing from it.


The aforementioned quote comes from a book I cracked open this weekend called Grit The Power of Passion and Perseverance. So far the book is ok. Unlike Duckworth, I didn’t grow up listening to my Dad talk about geniuses in the WSJ. I was taught to grind.


If you spend enough time grinding it out in macro markets, you’ll be taught many lessons in humility. Don’t let those deter your professional progress though. Every mistake leads to a learning opportunity. The faster you learn, the faster you grow.


Back to the Global Macro Grind


With $13.4 TRILLION in negative yielding bonds out there globally (up from $13.1T last week), most macro market participants are learning that without A) #GrowthSlowing and B) falling bond yields, that returns in both stocks and bonds won’t grow much faster.


Genius Bankers - global growth.sick bull cartoon 08.24.2015


I guess that’s partly why, on the heels of both US Retail Sales and Producer Prices (PPI) slowing on Friday, both US stocks and bonds remained close to their all-time closing highs.


With the “reflation” trade under siege since peaking in early June, a -0.2% year-over-year Producer Price report for JUL (vs. +0.3% y/y in JUN) gave the market what it loves most when it can’t beat 1% GDP growth – Down Dollar, Down Rates:


  1. US Dollar Index ended the week down -0.5%
  2. US 10yr Yield fell 8 basis points on the week to 1.51%
  3. CRB Index and Oil reflated +0.5% and +6.4% on the week, respectively


In the UK they get this evisceration of the purchasing power of The People program (via Down Pound) much more readily. With the British Pound down another -1.2% last week (vs. USD), the stocks in London (FTSE) ramped another +1.8% to +10.8% YTD.


Not to be confused with something like the Nasdaq or SP500, which were +0.1% and +0.2% on decelerating volume last week to +4.5% and +6.9% YTD, respectively, the UK stock market looks more like their athletes (37 medals in Rio!) than their poor people do.


Yep. That’s how the math works. If you get paid in a currency… and I burn it for the sake of “reflating asset prices” in that currency… you get poorer, in that currency. So you better own some bonds, buildings, and stocks… so that you aren’t as poor as real poor people.


Back to the USA, here’s how the Equity Sector Styles paid out on a Down Dollar, Down Rates week:


  1. Energy Stocks (XLE) led gainers, closing up +1.7% on the week to +13.9% YTD
  2. Financials (XLF) led losers (again), closing down -0.7% on the week to +0.1% YTD


Poor bankers.


Due to their own architectural genius I’m sure, banks have empowered and employed an un-elected set of central-market-planners that have officially become the causal factor in the “under performance” of their equities (yes, many bankers still get paid “in stock”).


Great week for stocks (and the bonds that are outperforming them)! But another brutal week for one of the leading indicators on how banks make money (i.e. the Yield Spread). Here’s how that spread looked subtracting the 2yr yield from the 10yr yield last week:


  1. US Yield Spread down another -6 basis points on the week to 80bps = down -41 basis points (bps) YTD
  2. UK Yield Spread down another -14 bps on the week to 38bps = down -93bps YTD
  3. JGB Yield Spread down another beep on the week to 9bps = down -19bps YTD


True, Japanese Bankers aren’t as genius as American ones these days. That’s what happens when your central bank has almost inverted your yield curve. Once that happens, the only guys who can try to be rock-stars are the bankers at the central bank itself.


Oh, you as an American, British, or European banker don’t like that? Maybe you should think about a career pivot into central-market-planning. As of last week it looks like the Bank of Japan (BOJ) is a Top 5 holder in 81 of the 225 stocks in the Nikkei!


That’s right – after another GDP #GrowthSlowing report (Japan’s GDP for Q2 was 0.2%), the Japanese are trying to teach all bankers around the world that, Ex-Banks, stocks can never go down (ever again) provided that central bankers buy them with printed money.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.46-1.58%

SPX 2156-2194

NASDAQ 5110-5265  

Nikkei 166

VIX 11.01-14.77
USD 94.99-96.64
YEN 100.06-103.21
Oil (WTI) 39.28-44.98

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Genius Bankers - 08.15.16 chart

BOJ now a Top 5 holder in 81 of 225 names in the Nikkei – all hail central-market-planning!

Client Talking Points


The central market plan for the UK remains A) burn the currency to B) protect asset prices in said currency – and Carney is seeing “success” with that (Pound -1.2% last week and down another -0.1% vs. USD this am = FTSE +0.3% this am and +4% in the last month); meanwhile the UK Yield Spread continues to get hammered (10s minus 2s down to 38bps wide).


Nice big bear market bounce of +6.4% last week sees modest follow through this am of +0.3% to $44.61 with Russian headlines dominating a quiet Monday morning – risk range for WTI is now quite wide (because oil volatility is still quite high at 37 OVX) = $39.28-44.98; good spot to sell some Oil against Long Gold (or Platinum) which pulled back small last week.


Another “scare” of “rising 10yr yields” met with another ramp in long-term bonds last week; we’re up to $13.4T in negative yielding bonds globally now (vs. 13.1T last wk) as global growth continues to look like Yield Spreads (slowing); UST 10yr down another beep to 1.50% this morning and the USA Yield Spread testing YTD lows at 80bps (short Banks #reiterated).

Asset Allocation

8/14/16 61% 3% 3% 10% 14% 9%
8/15/16 56% 4% 4% 12% 15% 9%

Asset Allocation as a % of Max Preferred Exposure

8/14/16 61% 9% 9% 30% 42% 27%
8/15/16 56% 12% 12% 36% 45% 27%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration

See update on TLT below.


Eurozone GDP, reported Friday, signaled more of the same, stagnation. With that being said there were small but marginal Euro tailwinds against a U.S. retail sales report and PPI release that was likely dovish on the margin (USD -~20bps on Friday and -~60bps on the week). 


In line with our #EuropeSlowing theme, Q2 preliminary GDP slowed across the Eurozone to +0.3% vs. +0.6% in the prior quarter and +1.6% Y/Y for Q2 which was flat on a rate of change basis from Q1.

Looking at specific country results:


  • German (0.4% vs 0.7% sequentially) GDP accelerated to +1.8% Y/Y from +1.6% which was probably a minor Euro FX tailwind
  • Italian GDP came in at +0.7% Y/Y which was a deceleration from +1.0% in Q1
  • Greece GDP accelerated to contraction again, printing a measly -0.1% Y/Y from -1.3% in Q1
  • The Southern Eurozone states continue to implode 

Recall that a strong retail sales report for June, driven by a positive trend in goods consumption, was a large contributor to our GDP revision for Q2. The headline number, for June, was up +0.6% sequentially with the sequential acceleration in the control group accelerating +7.2% (annualized).


Friday’s retail sales report was a different story, and probably a dovish data point for the USD on the margin :


  • The control group printed flat sequentially, +0.0%
  • Retail sales ex. auto and gas printed -0.3% sequentially


Next to retail sales, July headline producer prices decelerated -0.4% vs. +0.5% in June sequentially and -0.2% Y/Y vs. +0.3% Y/Y in June. PPI ex. food and energy came in at 0.0% sequentially vs. +0.4% in June and +0.7% Y/Y from +1.3% in June. #Deflation  

Three for the Road


@KeithMcCullough - Negative yielding bonds hits $13.4T vs. $13.1T last week - good thing we have #GrowthSlowing pic.twitter.com/pT1YOh4GvD



“The world breaks everyone, and afterward, some are strong at the broken places.”  

–Ernest Hemingway


USA has 69 medals this Olympics so far, 26 of them are gold.

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The Macro Show with Financials & Housing Sector Head Josh Steiner Replay | August 15, 2016

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An audio-only replay of today's show is available here.



The political process strikes again per Knapp-Track, as the continued fascination with the election process has seen TV viewership up 60-90% in July; restaurant sales continue to struggle as a result.  While Knapp cites people staying home as the reason for this month’s decline, it does not explain the continued softening in sales since the peak in January 2015.  We believe there are a number of reasons for the restaurant malaise currently being played out across the industry.  The most important of which can be gleaned by the excess inflation in the core services inflation (i.e. housing, healthcare, education, transportation).  The Hedgeye Macro team makes a very strong case that the government continues to underreport these measures. 


Knapp reported that sales in July were -0.2%.  This suggests that sales improved 210bps sequentially, after being down 210bps sequentially in June. The two-year average improved 50bps in July, which represents the third month of 2016 with improvement in the sequential two-year average change. In 2Q16 it was more than just casual diners that were affected by a slowing in the restaurant industry. We have heard from nearly all the restaurant companies at this point and virtually all of them mentioned a slowing in consumer spending on restaurants. This is now a widespread slowing in the restaurant industry, and coupled with the slowing in restaurant employment as shown below, leads us to believe we will be in for prolonged slowdown in spending. The restaurant industry has always been a game of market share, but now that will become an even greater focus for operators as there are fewer consumer dollars to go around.



For just the second time this year, the two-year average comparable guest count number improved sequentially. In July, Knapp-Track traffic was down -3.4%, which represents a 140bps improvement sequentially, and 60bps improvement on the two-year average sequentially.




Two of the top drivers of restaurant industry success in our opinion are income and jobs. The May data we saw in June showed a continued flattening out of growth which started to shift towards a slowdown. Now, coming out of July as we got a look at the June data, we saw an accelerating slowdown in the growth of limited service restaurants. Growth in limited service restaurant employment slowed 36bps sequentially to 2.72%, down from 3.08% in May. Since hitting a peak in summer of 2013, limited service restaurant employment, and broader restaurant industry employment has slowed and is beginning to roll-over.



Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw




Augmented Reality: Better Than Virtual?

Takeaway: Despite the hype surrounding consumer VR, augmented reality may be the real wave of the future.

Here's a preview of the next issue of "About Everything." You're welcome to join a Hedgeye Q and A on this piece that I will do on Wednesday, August 17, at 1:00 PM.


Watch the replay below.



A couple of years ago, I helped MTV design a survey question that went out to American adults of all ages: "True or false: Life is really like a videogame." Adults over age 65 hardly understood the question. But 60% of adults under 30 answered "true." After conducting brief focus groups on all the Millennials who answered yes, we found out why. Many of them said life is all about defining a challenge, learning the rules, performing, getting a gold star (or not) for achieving, and then moving on to the next challenge. Just like a videogame. As the screen tells you in Sega Genesis: "Welcome to the next level."


Is this outlook really so surprising in a generation that has willingly submitted itself to more tests and exams, by far, than any other in American history? And that is mortgaging its future in pursuit of extra gold stars from post-secondary educational institutions. More than older generations, Millennials truly believe that every competency can learned through instruction and feedback and that society can and should a meritocracy based on credentialed achievement. (Boomers and Xers may roll their eyes at this programmed, left-brained understanding of how the world works. But there it is.)


In day to day living, this emerging outlook is embodied in today's burgeoning "gamification" trend. I'm referring to the attempt of employers, educators, retailers, health providers, entertainers--you name it--to transact with us through gamified interfaces. The military now does most of its weapons training through games. Check-out workers at Target learn to improve their productivity through games. You can now monitor and adjust your investments, your fitness, your health, your climate control, your shopping list, and your travel options through gamelike screens.


OK, this is a somewhat long-winded way of introducing the trending topic of Augmented Reality (AR), which is now big news because of the smash success of Pokémon Go. But AR rapidly spreading across many other areas of our lives.  And it is a major vehicle through which gamification is transforming our personal environment.

Augmented Reality: Better Than Virtual?



Virtual reality (VR) has gotten a lot of media hype over the past few years as the tech world’s “next big thing,” with enthusiasts heaping praise on devices like Facebook’s Oculus Rift.


But the next big thing may already be sitting in your pocket: augmented reality (AR), brought to you by smartphones.


Think about it. Pokémon Go, an AR app, was downloaded more times during its first week of existence than any other app in history. Its success more than doubled Nintendo’s (NTDOY) stock price in two weeks—despite the fact that private software development firm Niantic, not Nintendo, actually created Pokémon Go. (The boom receded quickly once investors realized their error.)


Plenty of other companies also believe that this is AR’s moment. Intel (INTC) will unveil its Remote EyeSight AR goggles sometime this month. Google (GOOGL) has hinted that it’s not done with AR despite its Google Glass misstep. Even retailers like IKEA and Lowe’s (LOW) are using in-store AR displays to help their customers “try out” different amenities or paint colors.


Augmented Reality: Better Than Virtual? - augmented reality2


Augmented Reality: Better Than Virtual? - augmented reality3


All told, technology consulting firm Digi-Capital predicts that the AR market will be four times more lucrative than the VR market by 2020, generating $120 billion in annual revenue.


All of this bullishness is warranted, given that Pokémon Go’s success may fast-track AR’s adoption cycle. Think about it: An emerging technology normally takes 10 to 15 years to make its way to the mass markets. But now, millions upon millions of consumers have already used AR—most of them without ever spending a dime to acquire the technology.  When’s the last time you saw that happen?




The all-encompassing “alternate reality” field can be broken down into several types of technology, each subtly different than the next.


Augmented Reality: Better Than Virtual? - augmented reality4


Think of alternate reality on a sliding scale, ordered from the highest degree of verisimilitude to the lowest.


At the high end of the spectrum is virtual reality. Devices like the Oculus Rift place users in an immersive environment completely separate from the real world. Also in this realm is “mixed reality”: Devices like Microsoft’s HoloLens display digital holograms overlaid on top of a user’s surroundings. VR and MR are perfect for entertainment and, in some fields, for instruction or training.


At the low end of the verisimilitude spectrum is what’s called a “schematic interface,” like the Waze navigation app—or like a real-time operator display screen for drivers or pilots or robot operators. Though Waze doesn’t show anything that looks like the real world, it does give valuable information about the real world that can be acted upon. (Even Pokémon Go has some elements of a schematic interface.)


Each end of this spectrum has limitations. The most realistic VR devices feel stunning—but they aren’t very good at helping you interact with the real world. Indeed, they induce users to withdraw from the real world, which gives them a somewhat creepy, dystopian vibe. While Mark Zuckerberg may say he plans to create “social VR,” the facts on the ground point to “adult content” as perhaps the biggest single source of VR revenue over the next several years.


The least realistic devices, on the other hand, may do a great job helping you navigate and manipulate your environment—just push the fan image on your car dashboard and the AC starts—but they only work in highly structured settings. And they don’t look anything like the environment they’re representing.


AR is in the perfect sweet spot: right in the middle of the spectrum. AR gets the best of both sides—plenty of interaction with the real world plus flexibility and a high degree of verisimilitude—without straying too far in either direction.


“Onsite AR” apps and platforms like Pokémon Go enable (and often require) users to interact with their real-life surroundings. For example, travelers can use AR apps to locate a good restaurant nearby. Tourists visiting foreign countries can use AR apps to translate unfamiliar street signs. Hotel visitors can use AR to find their way to the lobby or the pool. One could even imagine a car mechanic using an AR tablet app to identify malfunctioning parts under the hood.


Augmented Reality: Better Than Virtual? - augmented reality5


Augmented Reality: Better Than Virtual? - augmented reality6


Augmented Reality: Better Than Virtual? - augmented reality7


One step down in terms of verisimilitude is “remote AR,” like the yellow first-down line you see when you tune into any NFL broadcast, or like the virtual display used by a drone operator. These services overlay information on top of a real-world display—but don’t portray a user’s immediate surroundings.




AR’s ability to enhance real life gives it unlimited uses. The very functionality of AR means that the technology has vastly more real-world potential than other types of alternate reality.


VR works within its own dedicated universe—making it awesome for passive entertainment, but not very useful for real life. Simulated interfaces have limited usefulness as well, because they don’t portray a user’s surroundings. AR, on the other hand, works on top of what’s already there—meaning that the technology can adapt to whatever a user is doing. As technology colomnist Ricardo Diaz put it, “Both VR and AR tinker with our reality—but AR enhances it, while VR diverts us from it.”


AR is a great fit within our increasingly gamified society. From marketing to education, entire professions are using technology to transform routine tasks into engaging, game-like scenarios. Even entertainment itself is getting more gamified. Any sports broadcast is now loaded with pop-ups that display player stats and simulations that show a play in action. The actual gameplay is just one part of what fans are treated to these days.


Augmented Reality: Better Than Virtual? - augmented reality8


AR provides a way to quantify whatever we’re doing—and to grade our performance along the way. As a worker, imagine an AR system guiding you through a complex task. At the end of the task, the system would be able to identify which of your steps needs improvement, thereby helping to boost your performance over time.


Generational change. AR signals a profound shift in what consumers want from technology. For decades, the goal of technology was to reproduce reality, whether by way of “hi-fi” audio or “high-definition” television. VR is simply the last step.


But for Generation Xers and Millennials, fidelity is no longer enough. Today’s consumers want a better, more productive reality loaded with extra information that helps them accomplish something.


Over the long term, AR could fundamentally change how we live and work by placing us in always-on environments bolstered by technology. While older consumers may shudder at the thought, today’s digital natives may not mind being guided by the devices on their heads or in their hands.




Certain industries are sure to benefit from AR’s success. Augmented reality is already being used heavily in entertainment and leisure, from games to navigation apps to virtual tour guides. Meanwhile, the military has long used “heads-up displays” (HUDs) that give soldiers valuable information about their surroundings. Pioneer Electronics has even created an HUD car system, NavGate, that projects an AR display onto a driver’s windshield.


What other types of companies will reap AR’s rewards? Smartphone manufacturers like Apple (AAPL) and Samsung are clear long-term winners. The proliferation of app-based AR would give these companies an immediate advantage over AR hopefuls like Google that don’t own the platform on which AR is taking place. Reports are that Apple stands to gain $3 billion in revenue from Pokémon Go alone. Not bad for an app that the company had no hand in creating.


Additionally, AR gives the smartphone—especially the “phablet,” with its larger display—a little more value, adding yet another capability to its repertoire. One can even imagine a scenario in which AR revitalizes a troubled tablet sector by driving sales.


AR also has promising implications for brick-and-mortar retail. Some businesses are already using Pokémon Go to their advantage, buying in-game “lures” to attract more Pokémon in the hopes of boosting foot traffic. But it doesn’t end there: AR could be used to win back market share from e-commerce. Companies could build AR into an all-encompassing system that utilizes everything from in-store analytics to personalized pricing. A store could supplement an item display with layers of information—such as online reviews and prices at nearby stores.


Augmented Reality: Better Than Virtual? - augmented reality9


Expect safety to loom ever larger as AR continues to integrate into everyday life. Early iterations of consumer AR have unearthed safety issues. Some analysts worried that Google Glass was not safe to use while walking or biking, while Pokémon Go has already led to distraction-related accidents.


The stakes will only get higher as AR is relied upon for ever-more vital functions. Remember a few years back when mobile GPS was blamed for leading a couple to drive up a wilderness fire road in perilous conditions? One can imagine a similar accidents arising with emerging AR apps that help people perform surgery, design a bridge, or work with dangerous machinery—situations where one small error means disaster.



  • Many analysts believe that consumer VR is tech’s next big thing. But VR takes place in its own dedicated universe, limiting its real-world applications.
  • AR, on the other hand, has the potential to fundamentally change entire professions, industries, and our very way of life. It will be a boon especially to smartphone makers that already own the AR hardware—as well as brick-and-mortar retailers that can use AR systems to beat back e-tailers.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%