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Rear-View Progress

“All progress comes from the creative minority.”

-George Gilder

 

So, US GDP Growth goes from 0.14% (at this time last year) to 3.6% in Q3 of this year, and all I hear consensus whine about are “inventories.” I wonder if that slope of US #GrowthAccelerating’s line had anything to do with the long-end of the yield curve being up +127 basis points (or Gold crashing) year-over-year…

 

Newsflash: businesses build inventories when confidence is rising. These are called coincident indicators. Both the US Dollar and US interest rates peaked in Q3 – so did US consumer and business confidence. So the I (Investment) in C+ I + G = GDP, went up.

 

Would the 2013 growth bears have preferred Investment to go down (and G (government) spending to go up instead)? Who knows. And who actually cares what they think anyway? For them, it’s all rear-view. Mr. Macro Market looks forward.

 

Back to the Global Macro Grind

 

Now that Bond Yields ripped to a lower-high (vs the SEP 2013 high) on a lagging economic indicator (that was a Q3 GDP report; it’s the end of Q4), and the stock market had another little meth withdrawal on that (“taper-talk” drives them batty), what’s next?

  1. TREASURY YIELDS = immediate-term TRADE overbought at 2.88% on the UST 10yr
  2. US EQUITIES = immediate-term TRADE oversold at 1779 on the SP500
  3. US EQUITY VOLATILITY (VIX) = immediate-term TRADE overbought at 15.58

So, would a bad jobs report be good for stocks (and bad for bonds)? Would another good jobs report be bad for stocks (and good for bonds)? Inquiring “lower-class folks” who don’t get to play at the insider Fed Whale tables want to know…

 

We mince no words calling this a centrally-planned-casino at this point. And since some of us are pretty darn good at buying bubbles, we feel lucky when stocks and bonds hit the high and low-ends of our risk ranges. It’s all about playing the probabilities, baby!

 

That’s why, after 5 consecutive no-volume down days for the US stock market (a correction in the SP500 of -1.2%), we bought-the-damn-bubble #BTDB (again) yesterday, taking our Cash position (asset allocation model) down to 38% (started the wk at 58%).

 

Where do we think US Growth goes from here?

  1. Down

That might be the easiest question to answer since we said US growth would go UP (from 0.14%) 1-year ago.

 

What could happen if we’re right about that?

  1. 2014 #OldWall GDP and SP500 consensus will be wrong (again) because it’s taking “forecasts” UP (it’s called anchoring)
  2. Most rear-view macro investors will probably perpetuate one more series of US stock market tops
  3. #GrowthSlowing, sequentially (from 3.6%) starts to give the US stock market multiple compression by Q2 of 2014

As most of you know, I’m not a forensic-US-stock-market-multiple-analyst. In fact, I think picking an “earnings number” for the SP500, then licking your finger on what multiple to slap on that is one of the more laughable things I hear people say with a straight face.

 

I’m more of a market history, math, and behavioral mutt myself. And history tells you that the US stock market:

  1. Sees multiple expansion when A) GROWTH accelerates and B) INFLATION slows
  2. Sees multiple compression when A) GROWTH slows and B) INFLATION accelerates

In other words, US economic STAGFLATION periods (1970s, 2010-2012, etc.) saw the SP500 trade at 7-12x earnings and #StrongDollar (deflating the inflation) periods of US real-consumption GROWTH accelerating saw multiples trade anywhere from 17-35x earnings.

 

Therefore, in my own little mind, provided that I think I know where the slopes of the 2 lines (GROWTH and INFLATION) are going in the next 3-6 months, I can start to prepare the sails of change in my positioning. In Macro, mental flexibility is forward progress.

 

Our immediate-term Risk Ranges (with TREND bullish or bearish) are now:

 

UST 10yr Yield 2.77-2.88%

SPX 1 

DAX 9068-9288 

VIX 13.31-15.58 

USD 80.22-80.66

Pound 1.62-1.64 

EUR/USD 1.35-1.37 

 

Happy b-day to my brother Ryan and best of luck out there today,

KM

 

Rear-View Progress - Chart of the Day

 

Rear-View Progress - Virtual Portfolio


Tough Questions

This note was originally published at 8am on November 22, 2013 for Hedgeye subscribers.

“Computers are useless; they can only give you answers.”

-Pablo Picasso

 

Amen to that, Pablo. It’s amazing how much time and effort we all spent at school and currently spend at work learning strategies and techniques for finding the right answers compared to how little time we spend learning to ask the right questions.

 

Implicit in any commitment to discovering the truth is a commitment to systematically asking ourselves tough questions – the answers to which may not be derivable from reported data that is inherently backward-looking in nature.

 

Furthermore, such questions extend well beyond the typical, “Where can I be wrong?”, instead opting to traverse the realm of, “Where am I not even looking?”

 

With respect to the latter question, we are in a unique position to help. In meetings with clients, it’s clear that our commitment to remaining truly independent (no banking, trading or asset management) helps us foster a level of trust with our clients that does not appear to be abundant in this industry. Having a senior roster loaded with meaningful buyside experience doesn’t hurt either.

 

Getting right into it, Keith, Ryan Fodor and I spent much of this past week up-and-down the west coast visiting with clients and prospective clients from various strategies and disciplines.

 

As usual, the topics of discussion ranged far and wide, but if there was one central theme throughout all of the meetings it would’ve been the general lack of conviction and/or answers with respect to the three most important factors in macro risk management. Below we introduce the relevant debates and where we currently stand, recognizing that we need to and will do more work on certain topics:

 

Growth:

  1. Where does domestic economic growth go from here? We think the trend in US growth data will be negative (2nd derivative) over at least the next 3-6M.
  2. What are the catalysts for #GrowthSlowing? Fundamentally speaking, we think monetary and fiscal policy uncertainty (mostly monetary policy uncertainty) will weigh on consumer and business confidence. Furthermore, GDP comps get difficult as CPI/GDP deflator comps get easier, at the margins.
  3. Regarding the equity market, will growth-related style factors continue to work? Not likely. We would sell/underweight over-exposed names.

Inflation:

  1. Where does inflation go from here? We think domestic disinflation is now a rear-view phenomenon as easy comps and a weak dollar provide upward pressure on CPI and PPI readings. We would expect both TIPS and Gold to make higher-lows (to all-time lower-highs) in this scenario.
  2. What about declining energy prices? That’s a major offset to our Growth Slowing as Inflation Accelerates (i.e. Quad #3) call and a primary reason we’re not more explicitly negative on so-called “risk assets” more broadly. We’re not wed to the aforementioned fundamental view and would happily change our minds if we saw material declines in the crude oil market – something we do not expect to see as long as the USD remains bearish from a TREND perspective.

Policy:

  1. When does the Fed taper? Probably not one week before Christmas (the FOMC meets DEC 17-18). In fact, we are increasingly of the view that the Fed is aware of the systemic risk present in the bond market and is potentially setting up to never commence tapering. They will likely accomplish this by setting far-too-aggressive targets for GDP growth and shifting their focus to combating a perceived risk of deflation, at the margins.
  2. What happens if the Fed does taper? If Janet Yellen isn’t as smart as we’re giving her credit for and she thinks the bond market can withstand a shock to the system, we think tapering will be short-lived (think: $85B per month down to $75B per month back up to ~$100B per month). Credit markets need two-way flows to function property and QE is really the only source of meaningful liquidity amid bond mutual fund and ETF outflows (-$7.3B in the most recent week). The Street’s inability to take on meaningful inventory means: A) most of the risk has been transferred to buy-side balance sheets; and B) buy-siders are ultimately forced to sell to each other during market routs. That invariably leads to gaps down in prices when macro fundamentals (i.e. the flows) change. Think about what happens to bond prices when levered-long bond fund A tries to unwind its illiquid positions at the same time Bill Gross (MBS) and Michael Hasenstab (EM) are trying to unwind theirs…
  3. How will tapering – if any – affect the stock market? We continue to think the great rotation out of debt and back into stocks is: A) still on; and B) will provide a structural bid to the equity market. That said, however, we now think that bid could be from lower prices as proxy hedging activity from distressed fixed income investors (not to be confused with investors that invest in distressed debt) weighs on broader asset prices in the interim.
  4. What happens if the Fed is still engaged in LSAP when we slip into the next recession? To be clear, we aren’t calling for an “R-word” here, but that’s definitely something to think about. Implicit in the current prices of many so-called “risk assets” is the assumption that the Fed can “smooth” the economic cycle and/or do away with credit risk altogether. What happens to those asset prices when everyone figures out they (i.e. the Fed) can’t – all at the same time? Next year will mark the fifth year since our last recession ended; the average length of time between the 12 recessions since WWII has been just that.

We’ll obviously be focused on answering these questions in greater detail in our research notes and presentations in the coming weeks and months; please feel free reach out to us in the interim if you’d like to discuss anything in real-time.

 

Going back to our opening discussion, there’s really only two ways we can add value with a business model like ours:

  1. Making you money
  2. Making you think

Hopefully today we did our job with respect to the latter category.

 

On an unrelated note, if any of you plan to be in New Haven this Saturday for The Game, shoot us a quick email and we can meet up for a beer at the tailgate.

 

Our immediate-term Risk Ranges are now as follows:

 

UST 10yr Yield 2.63-2.83%

SPX 1785-1805

VIX 11.85-13.61

USD 80.42-81.39

Brent 105.88-110.29

Gold 1237-1289

 

Keep your head on a swivel,

DD

 

Darius Dale

Associate: Macro Team

 

Tough Questions - Chart of the Day

 

Tough Questions - Virtual Portfolio


JCP: Fundamentals vs Newsflow vs The Stock

Takeaway: People are shooting first, then shooting again, and are not contextualizing reality at all as it relates to JCP. We're still bullish.

Here's our take on JCP's volatility over the past two days -- specifically its' announcement that it received an inquiry from the SEC about its liquidity and recent equity offering.  First off, let's just state up front that we take any SEC inquiry very seriously. We'd never in a million years chalk it up as a non-event. But there are some major factors to consider…

 

  1. We're Not Dismissing It, But This is Routine: Regulators ask for information all the time. In fact, we'd challenge anyone to find any three companies (you can probably find one) in the S&P that have never unexpectedly been subject to a request for information by either a federal or state regulator.
     
  2. Timing Matters: Consider the timing on this one…though it is only being disclosed now, the inquiry happened on October 7th -- that's almost two months ago. That was within two weeks of JCP announcing its equity deal, which subsequently took the stock down 26% by the inquiry date and sparked several shareholder lawsuits. To top it off, it was at a time when the company had yet to show any operating improvement whatsoever and the 'going to zero' call still carried some weight.  With all of that happening at the same time -- it seems to us that requesting information about financing and liquidity seems like a prudent fiduciary move by any regulator.
     
  3. Fundamentally, Nothing's Changed: What's changed with this story fundamentally? Nothing. Business continues to get better on the margin as JCP regains share from KSS and the other retailers who benefitted from it writing a $4.3bn check to competitors.
     
  4. Stock Move Led The News: So what about the stock move over the past two days? Do you think that just MAYBE someone somehow had scoop that a) One of its largest holders sold out of its 5.2% position in the equity (still holds the debt), and/or that b) the company was going to disclose the SEC inquiry with its 10Q -- after all JCP has been squatting on the information for the better part of 60 days.  So while that trading was taking place and the stock was tanking, it naturally gave the hoards of bears on the sell side the stock equivalent of beer-muscles to get louder on the short side while still hanging on to the same old stale 'going away' call.
     
  5. We're Tweaking Our Tone On Ullman. One quick point on Mike Ullman, interim CEO of JCP. The WSJ is out this evening with a comment that that while the company is still searching for a new CEO, it is inclined to keep Ullman at the helm til the turnaround is done. Now…let's be clear about something.  We're not members of the Mike Ullman fan club. We'd been in the camp that the company needed to replace him by April. We still want him out. But our patience has grown in recent weeks. The reality is that he's absolutely stabilized the company, and he's taking the appropriate steps to regain customer confidence, and ultimately re-grow the top and bottom line. We never thought we'd say this, but if the guy is still there in a year, we won't be upset -- so long as he realizes that the second that turnaround is within spitting distance, we need fresh blood in the C-Suite to take this company to the next level.
     
  6. We're Not Banking On JCP Being A Good Retailer: Importantly, that 'next level' is no where in our investment thesis. We're simply in the camp that JCP is going to go from being a horrendous retailer, to being a bad retailer. We realize that this hardly sounds like an appetizing investment thesis, but mathematically it all flushes out to about $1.50 in earnings power, or about a $20 stock.  If a new CEO could add any value above and beyond this turnaround, that's gravy as it relates to the stock and upside from $20. We'll take it one step at a time.
     
  7. Consumer Survey, Round 2: On Monday at 1pm we're hosting the second installment of our JCP consumer survey. The first iteration was critical in helping us gain confidence in JCP heading into the quarter, and in being short KSS. We look forward to sharing our update with you. Please send me a reply email if you are interested, or contact sales@hedgeye.com.
     
  8. Bottom line: Despite the confluence of bad news that hit over the past 48 hours, we're still bullish on the stock. 

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Bernanke’s Burning Bucks

Takeaway: That smell you’re smelling? #BurningBucks.

In spite of the ECB rate cut, the Eurocrats just can’t seem to keep the Euro down versus the US Dollar.

 

Why?

Bernanke’s Burning Bucks - USD vs EUR

 

Because Professor Bernanke is prepping his academic turkeys for more no-taper basting. Fed fear sells.  

 

A 3.6% Q3 GDP print? No matter. Tumbling jobless claims? Big deal. Who cares what the economic data says? It’s always 2008 in Fed-Storytelling-Land and the sky is still falling.

 

Incidentally, that smell you’re smelling is the smell of #BurningBucks. Bernanke loves the smell of #BurningBucks in the morning.

 

Eurocrats? Not so much.

 


Jobs: Fed Head In the Sand

Takeaway: The Fed needs to bury its head further into the sand to reconcile its policy on purchases with the realities of the labor market.

Editor's note: This is an excerpt from a piece written by Hedgeye Financials Sector Head Josh Steiner. For more information on how you can subscribe to Hedgeye research click here.

 

Jobs: Fed Head In the Sand - headsand

Rising Rates Love Falling Claims

It's getting harder to ignore the improvement in the labor market, unless, of course, you're the Fed.

 

Increasingly, however, it seems as though the bond market is taking fewer cues from the Fed and more from the labor market. True, seasonally-adjusted initial claims have a 2-handle on them principally because of the Thanksgiving mismatch this week vs last year (a week later this year), but adjusting for that and all the other recent turbulence in the data reveals one unmistakable fact. The data continues to strengthen and the bond market is taking notice. 

 

Aside from the obvious, which is that this is more good news for credit quality, the upward pressure being exerted on rates is ferreting out clear winners and losers, i.e. good for banks and online brokers, and bad for homebuilders and mortgage REITs. For more details, see our note from 11/22 "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials."

 

Next week should be the first week in a long time where we get a clean print on the labor market, so stay tuned.

Nuts & Bolts

Prior to revision, initial jobless claims fell 18k to 298k from 316k WoW, as the prior week's number was revised up by 5k to 321k.

 

The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -10.75k WoW to 322.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -21.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.3%

 

Jobs: Fed Head In the Sand - stein1

 

Jobs: Fed Head In the Sand - stein2


INITIAL CLAIMS & 3Q13 GDP: GOBBLE GOBBLE

3Q13 GDP (1st Revision): Juiced by inventories. Rising probability of a sequential slowdown

 

3Q13 GDP was revised +0.8 higher to 3.6%, marking the best growth number since 1Q12.  Under the hood, the component dynamics that characterized the advance estimate – namely, inventory accumulation alongside middling consumption/real final sales – were further exaggerated in this first revision.

 

Inventory Accumulation contributed +1.68 to GDP while consumption (services) growth slowed 40bps sequentially and real final sales (GDP less Inventory change) and real final sales to domestic consumers  (GDP less exports less inventory change) both came in sub 2%. 

 

While backlogs are growing and vendors remain largely unconcerned with inventory levels according to the ISM survey data, the positive impact to GDP should reverse as inventory drawdown will be challenged by final demand still constrained by flagging personal income growth. 

 

In short, the strong headline print belied a moderately more vapid reality.   While momentum in the manufacturing base remains ongoing and disposable personal income growth comps ease through 2014, a sequential slowdown in growth is increasingly probable. We’ll get a first look at personal income and spending data for 4Q13 tomorrow alongside the payroll report. 

 

On the employment side, despite sizeable fluctuations in the absolute number of non-farm payroll gains the last few month, the rate of growth on a 2Y basis has held relatively consistent at ~+1.66% - a phenomenon largely stemming from seasonality.  Consensus is basically sitting right on this growth number with the current NFP estimate for November at +185K.  As a reminder, seasonality will build as a positive support to both the NFP and jobless claims figures through 1Q14.

 

From a policy perspective, today's growth data is probably another non-catalyst with inflation still holding below target, service consumption growth flagging and sustained acceleration in the aggregate labor market data still absent. 

 

But at the same time, if you can’t taper at 3.6% GDP, when can you taper?

 

- Hedgeye Macro

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - GDP 3Q13 Prelim

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - UNITED STATES

 

 

 

INITIAL CLAIMS:  The Fed needs to bury its head further into the sand to reconcile its policy on purchases with the realities of the labor market.


Rising Rates Love Falling Claims

It's getting harder to ignore the improvement in the labor market, unless, of course, you're the Fed.

 

Increasingly, however, it seems as though the bond market is taking fewer cues from the Fed and more from the labor market. True, seasonally-adjusted initial claims have a 2-handle on them principally because of the Thanksgiving mismatch this week vs last year (a week later this year), but adjusting for that and all the other recent turbulence in the data reveals one unmistakable fact. The data continues to strengthen and the bond market is taking notice. 

 

Aside from the obvious, which is that this is more good news for credit quality, the upward pressure being exerted on rates is ferreting out clear winners and losers, i.e. good for banks and online brokers, and bad for homebuilders and mortgage REITs. For more details, see our note from 11/22 "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials", a link to which can be found here.

 

Next week should be the first week in a long time where we get a clean print on the labor market, so stay tuned.

 

Nuts & Bolts

Prior to revision, initial jobless claims fell 18k to 298k from 316k WoW, as the prior week's number was revised up by 5k to 321k.

 

The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -10.75k WoW to 322.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -21.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.3%

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - JS 1

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - JS 2

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 


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