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Macro Lullabies

This note was originally published at 8am on May 17, 2013 for Hedgeye subscribers.

Jack & Jill:  “Jack fell down and broke his crown & Jill came tumbling after”

Rock a bye baby:  “When the bough breaks, The cradle will fall, And down will fall baby, Cradle and all.”

Rub-A-Dub-Dub:  “Rub-a-dub-dub, three men in a tub”

 

Have you ever actually listened to the lyrics of the traditional nursery rhymes?

 

I honestly don’t even remember how the last one ends, but I imagine 3 men in a bath together could go downhill quickly.  Some pretty morbid content for young minds at their peak of neuroplasticity.  

 

Back to the Global Macro Grind…..

 

It’s been serene slumbering for the better part of the last 6 months as our macro model front-ran the inflection in domestic #growthstabilizing in late November.   TREND Macro moves are generally self-reinforcing and catching the positive or negative inflection in the slope of growth represents the REM period of actively managed alpha.  

 

But, alas, Rip Van Winkle and real-time, globally interconnected risk rarely make sustainable bedfellows.  After riding the expedited 300-handle advance in the SPX, we went net short yesterday for the first time since November 2012.

 

Does that mean we’re abandoning the #StrongDollar-Strong Domestic Consumption mantra we’ve been captaining for the last 5 months? 

 

Nope.  

 

Here is where it’s important to understand how the Risk Management & Fundamental Research sides of the Hedgeye model co-integrate to drive invested positioning.   

 

As Keith highlighted yesterday, “I am getting my first coordinated overbought (SP500) and oversold (Gold) signal of 2013. Both signals are explicitly linked to an overbought one in the US Dollar Index”

 

What does that mean in the context of our constructive fundamental views on the Dollar, Domestic Consumption, and Housing?  In short, it means that so long as our research view on that trinity of factors remains positive, we’ll cover shorts, buy back the same exposures we sold yesterday and get net long again when the signal indicates we’re no longer overbought or if/when we move towards the oversold 1636 line on weakness.     

 

Since our bull case was largely predicated on Strong-Dollar, Housing, Employment & Consumption, let’s summarily review the latest across those metrics.

 

$USD:  Mother Nature likes redundant systems and so do we.  With federal deficit spending declining dramatically, domestic monetary policy turning incrementally hawkish, and explicitly dovish commentary out of Japan & the EU unlikely to ebb, we think the dollar can continue to appreciate via numerous routes.  Ongoing dollar strength, perpetuated by a continuation of the above dynamics, would augur more of the same for commodity and gold price deflation.     

 

Employment:  We consider the 4-week rolling average in y/y, Non-seasonally Adjusted Claims to be the most accurate reflection of underlying labor market trends.  On that metric, yesterday’s update showed a 20bps deceleration WoW with rolling NSA claims going to -8.9% YoY vs. -9.1% YoY the week prior.  Despite that sequential deceleration, -8.9% YoY improvement represents a very good rate of decline.  Moreover, organic 2Q trends to date have overwhelmed any negative seasonal distortion or sequestration associated drag.  On balance, we’d still view labor market trends as positive. 

 

Housing:  We continue to maintain a positive view on housing broadly, but in light of yesterday’s weak headline print in housing starts, let’s narrow the focus to our expectations for starts specifically.   In short we would view a multi-year doubling of housing starts to 2M annualized units as a high probability scenario.

 

Consider this basic imbalance.  Since the start of 2011, new household formation has been running at an annual rate of 1.38 million.  Historically, due to factors such as Vacant Unit demand and Demolitions, the ratio of new housing demand to new household formation has run at approximately 135%-139% (see here & here for the supporting research).  At the current rate of household formation, this equates to demand for 1.89M housing units.  Instead we've begun construction on 0.845 million, or just 46% of the level needed.

 

Note also, against demand implied by household formation, we’ve incurred a cumulative deficit of 3M new housing units since the start of 2010.  Some percentage of this deferred demand should materialize as the economy improves, exaggerating organic demand trends over the next few years.

 

One month does not a trend make.  Clearly, there remains a significant delta between new housing units needed and units being created. 

 

Credit:  The Fed’s 2Q13 Senior Loan officer survey showed bank credit standards continued to ease while business and consumer loan demand, particularly for real estate, showed further sequential improvement.  Household debt burdens are making lower 30Y lows and household debt and debt ratios have retraced most of the exponential move in debt growth that occurred over the 2000-2008 period. 

 

Ongoing labor market improvement (higher income) alongside rising household net worth (primarily via housing and financial asset re-flation), should continue to support incremental debt capacity while the flow of net new credit looks favorable for credit catalyzed private consumption over the intermediate term.     

 

So, legitimate upside for the dollar still exists, labor markets trends remain positive, housing remains in the middle innings of a secular upswing, and the household income statement and balance sheet recovery remains ongoing alongside favorable consumer and commercial credit trends. 

 

Obviously, we could conjure up some bearish data points to counter some of the bullish dynamics we outlined, but employment/housing/consumption/credit have been key items of focus and key drivers capable of catalyzing positive reflexivity in the economic cycle. 

 

At present, trends across those metric remain positive and supportive of a bullish tilt towards consumption oriented domestic exposure….at a price. 

 

To clumsily bring this missive full-circle, conventional lullabies did little to placate my teething 6-month old last night.  What finally put her sleep?...Chewbacca and a 2:30am Star Wars re-run that came on accidentally when she knocked the remote onto the floor. 

 

Lesson?   Embrace Uncertainty - today’s market teething births tomorrow’s Chewbacca P&L opportunity.  Life, risk, and opportunity happen fast.  If fast isn’t your thing….

 

I hear Hedgeye made the Kessel Run in less than 12 parsecs.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1370-1446, $101.14-105.44, $83.04-84.43, $1.28-1.30, 100.65-103.78, 1.83-1.99%, 12.33-13.86, and 1636-1662, respectively.

 

Sleep tight.

 

Christian B. Drake

Senior Analyst 

 

Macro Lullabies  - Household Debt Burden

 

Macro Lullabies  - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 31, 2013


As we look at today's setup for the S&P 500, the range is 33 points or 0.81% downside to 1641 and 1.18% upside to 1674.                  

                                                                                                             

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2A

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.79 from 1.82
  • VIX closed at 14.53 1 day percent change of -2.02%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, April, est. 0.1% (prior 0.2%)
  • 8:30am: Personal Spending, April, est. 0.0% (prior 0.2%)
  • 8:45am: Fed’s Pianalto speaks in Washington
  • 9am: NAPM-Milwaukee, May, est. 49 (prior 48.43)
  • 9:45am: Chicago Purchasing Mgr, May, est. 50 (prior 49)
  • 9:55am: U. of Mich Conf, May final, est. 83.7 (prior 83.7)
  • 10am: Commerce Dept. issues benchmark revisions on retail sales data, wholesale inventories and sales data
  • 11am: Fed’s Liang speaks in Washington
  • 11am: Fed to buy $4.25b-$5.25b notes in 2017-2018 sector
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • House, Senate not in session
    • 1pm: VP Biden addresses media after mtg w/ Brazilian President Dilma Rousseff, Vice President Michel Temer in Brazilia

WHAT TO WATCH

  • U.S. consumer spending was probably little changed in April
  • P&G said planning to promote 4 as contenders to succeed CEO
  • Apple raises prices for some products in Japan after yen weakens
  • Apple ruling to revolve around who can use standard technology
  • Sony said to engage Morgan Stanley, Citigroup on Loeb plan
  • Treasury 7-Yr auction demand rises with yield at 13-mo. high
  • Boeing sells new 787 as Singapore splits $17b order
  • Dell investors sue over founder’s buyout bid
  • Japan’s April industrial production rose 1.7% m/m, exceeding the highest est. in a Bloomberg News survey
  • Euro-area April jobless rate rises to record 12.2%, est. 12.2%
  • Euro-area May consumer prices rise 1.4% in yr, est. 1.4%
  • Italy jobless rate reaches 12%, 36-yr-high amid recession
  • German retail sales unexpectedly fell for a 3rd mo. in April
  • EMA’s CHMP monthly announcements may include Sanofi, Roche

EARNINGS:

    • No earnings expected from S&P 500 cos.: Bloomberg data

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • China Gold Demand to Slow From April Surge, Association Says
  • Gold Traders Divided as Physical Buying Surge Slows: Commodities
  • Gold Falls on Speculation Demand May Slow After Price Rally
  • WTI Heads for Weekly Drop as Stockpiles Gain Before OPEC Meets
  • Copper Trims First Monthly Gain in Four Before Chinese Index
  • Soybeans Head for Best Month Since July as U.S. Supply Dwindles
  • White Sugar Gains on Africa, Middle East Demand; Cocoa Retreats
  • Battle Over U.S. Natural Gas Exports Increases as Permits Flow
  • ETF Investors Dumping Gold Add to Platinum Bet: Chart of the Day
  • Tea Output in India Seen at Record as Normal Weather Aids Yields
  • WTI Crude May Fall Next Week on Ample Stockpiles, Survey Shows
  • SHFE Copper Stockpiles Rise for First Time in Nine Weeks
  • Japan Pays Record Price for LNG Imports in April as Yen Weakens
  • Gold Premiums in Singapore at Record Seen Declining Next Month

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 


MAY FLOWERS: STILL LONG GROWTH

Takeaway: The TREND in the economic data continues to confirm our Research and Risk Management views on improving domestic growth.

This note was originally published May 30, 2013 at 15:12 in Macro

With the TREND in the economic data continuing to confirm our Research and Risk Management views, the Hedgeye Redundancy Department has been at productive capacity since late November repeatedly highlighting the key factors at work supporting the ongoing improvement in the domestic growth outlook.  We’ll keep it tight here in highlighting May’s macro manifestations of domestic #GrowthAccelerating

 

First, to be clear, we don’t like everything at every price but, on balance, with the $USD still in bullish formation (Bullish TRADE, TREND, TAIL), commodity deflation persisting, and Labor, Housing & Confidence (and to a lesser extent Credit and now Real Earnings) working reflexively, we continue to like the Dollar and domestic, consumption oriented equities on the long side and Gold, Yen, and the broader commodity basket on the short side.   

 

 

INITIAL CLAIMS:  This morning’s Department of Labor data showed NSA claims accelerated to -8.3% y/y growth compared with -8.0% improvement the prior week and -2% two weeks prior.   So, not only is the labor market improving, it is doing so at an accelerating rate at present.  The organic improvement in the underlying labor market YTD has bucked the trend of the past three years, continuing to overwhelm the negative March-to-August seasonal distortion and any sequestration related drag.   

 

Source: Hedgeye Financials

MAY FLOWERS: STILL LONG GROWTH - Claims 1

 

MAY FLOWERS: STILL LONG GROWTH - Claims 2

 

REAL EARNINGS:  Mirroring the broader TREND in nearly every macro chart, real earnings growth troughed and inflected positively back in November.  The Trend on both a 1Y and 2Y basis remains one of acceleration and with modest comps and persistent commodity deflation, expectations for sustained positive growth appear reasonable.   

 

We would note that a continued rise in temp and part-time employment growth and corporate attempts to manage worker hours under the 30-hour threshold dictated under Obamacare is a trend we’re monitoring and one which, while positive for employment growth broadly, may serve as a drag to hours worked and weekly earnings growth as we move towards ACA implementation deadlines.   

 

MAY FLOWERS: STILL LONG GROWTH - Real Earnings 053013

 

$USD/Commodities:  The Dollar remains in bullish formation and with the domestic growth outlook improving on both an absolute and relative basis, deficit spending declining, and monetary policy more hawkish on the margin, we continue to think the dollar holds further upside.  

 

With USD correlations to the SPX (+) and Gold/Commodities (-) remaining strong across durations, #StrongDollar, long stocks, short commodities remains the baseline macro strategy playbook.   *Note: Keith bought the dollar via UUP this morning in our Real-time Alerts  

 

MAY FLOWERS: STILL LONG GROWTH - DXY 053013

 

MAY FLOWERS: STILL LONG GROWTH - Gas vs. Real Earnings

 

MAY FLOWERS: STILL LONG GROWTH - Inflation vs Real Earnings

 

CONFIDENCE:  The Bloomberg Consumer Comfort Index, Univ. of Michigan Consumer Confidence, and the Conference Board Consumer Confidence Index all accelerated in May while making fresh 5Y highs.  As we have highlighted, economic activity relationships with confidence have completely broken down over the last 4 years but, historically, consumer confidence has been a good-to-very good leading indicator for economic activity metrics such as new orders, consumer spending, and money velocity.  A sustained breakout of the trough channel we have been in since 2008 may augur a re-tightening in historical confidence-econ correlations.   

 

MAY FLOWERS: STILL LONG GROWTH - Consumer Confidence 053013

 

HOUSING:  Purchase Applications continue to accelerate in 2q13TD despite the recent back-up in rates, the NAHB (Home Builder) HMI advanced in May, Existing Home Sales remain strong and the latest New Home Sales, Pending Home Sales and Home Price (FHFA & Case-Shiller) data all accelerated sequentially. 

 

Admittedly, the comps on pricing continue to steepen and a significant, expedited back-up in rates may prove a marginal headwind but we continue to view the housing recovery as a multi-year story and wouldn’t view a move from the current low-double digit parabolic recovery to steady high-single digit HPA growth as a material negative.    

 

Mortgage Application and Pending Home Sales data suggests forward housing activity will remain healthy and, over the next few years, we continue to believe a move towards 2M housing starts represents a high probability scenario.   

 

MAY FLOWERS: STILL LONG GROWTH - Purchase Apps

 

Yield Spread (10’s-2’s):  In so much as a widening in the yield spread = expectations for QE Taper = Improving Domestic Macro is a transitive relationship, the recent expansion in the yield spread would serve as positive confirmation of an improving domestic growth outlook.  The positive price divergence from financials (+4%) MTD, negative divergence from Utilities (-8.7%) MTD and ongoing outperformance for Consumer Discretionary would seemingly concur as well.   

 

MAY FLOWERS: STILL LONG GROWTH - 2  10 Spread

 

Christian B. Drake

Senior Analyst 

 

 

 


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 80.33%
  • SHORT SIGNALS 78.51%

THE M3: DYNAM JAPAN

THE MACAU METRO MONITOR, MAY 31, 2013

 

 

PACHINKO COMPANY EYES MACAU Macau Business

Pachinko arcade operator Dynam Japan Holdings Co Ltd says it is looking for business opportunities in Macau’s gaming mass market.  Dynam chairman Yoji Sato as saying the company is in talks about cooperation terms with Macau gaming companies.  However, he said there is no actual agenda yet.


Dynam has 362 pachinko arcades in Japan and has plans to increase its share of the market there by adding 85 gaming arcades this year and next.  The firm is also seeking to change its charter, allowing it to get into restaurants, manufacturing, selling coffee and lending to companies in Japan and overseas.  But it will still concentrate on pachinko arcades.

 

 



Trade of the Day: NSM

Takeaway: We sold Nationstar (NSM) at 11:28am this morning at $42.70.

A beauty +5% intraday rip for Hedgeye Jedi Josh Steiner. NSM now moves to immediate-term TRADE overbought (within Steiner’s intermediate-term bullish TREND). We’re booking it. Profits are a good thing.

 

Trade of the Day: NSM - NSM


Keith's Top-5 Tweets Today

Takeaway: A look at some of Keith's top tweets today.

"Best month in Hedgeye history - big knucks to the fans and foes from New Haven, CT"

@KeithMcCullough 2:33PM

 

"You know Hedgeye is a cult right? We are crazy - we are accountable to our opinions and everything"

@KeithMcCullough 1:52PM

 

"Managing the risk of the markets range works in many ways; stay with the bullish bias until everyone capitulates"

@KeithMcCullough 1:24PM 

 

"Either I'll be really wrong here, or consensus stock bears/gold bulls will be right - game on"

@KeithMcCullough 10:11AM

 

"Pundits and English majors remain royally confused as to why buying each dip keeps working"

@KeithMcCullough 10:02AM

 

Keith's Top-5 Tweets Today - tweet


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