“You can’t win a horse race with mules.”
This was a weekend of winners and losers. On the athletic front, I was excited that Yale’s hockey team beat Harvard hockey like a rented mule by a score of 5 – 1 in the inaugural Rivalry on Ice at Madison Square Garden. (Admittedly, Yale did lose by a wider margin in the alumni game!) And no doubt my colleague Darius Dale was excited that his hometown Seahawks went into full on beast mode and beat New Orleans 23 – 10.
As it relates to losing, the nation of Israel suffered a major loss with the passing of former Prime Minister Ariel Sharon. A loss like this of course is on a much greater scale than how any sports team did this weekend. I’m far from an expert on Israeli politics, but it’s hard not to respect a man who gave everything for his proverbial team. As a soldier, defense minister and finally prime minister, Sharon fought in or commanded every one of Israel’s major conflicts starting with its 1948 independence war.
Whether it be winning in politics or winning on the field or ice, victory is rarely an event that happens in isolation. My former college hockey coach, Tim Taylor, used the quote at the start of the note to describe our team when we were doing more losing than winning. His point is spot on that any great victory, in any field, takes hours of practice, repetition, and preparation. Nothing in life comes easy and the investment management business is no different.
Back to the global macro grind . . .
One of the big winners in the global asset class race over the past twelve months has been European sovereign debt. Specifically, both Spain and Italian 10-year yields have come in meaningfully. This morning the Spanish 10-year yield is at 3.83% and the Italian 10-year yield is at 3.91%. Both are effectively Euro era lows.
The healing of European credit markets, and the improvement has been meaningful, is part of what is underscoring our relatively bullish view on European equities in 2014. Ironically, the Financial Times still has a tab called, “Euro-in-Crisis”, despite a marked improvement in the outlook for the Euro. Also ironically, the five headlines in this section are as follows:
- Portugal Plans Post Bail-Out Cash Cushion;
- Investors Warm to Spanish Banks;
- Too Early To Declare Crisis Over Says Draghi;
- Draghi Can’t Keep Euro Down For Long; and
- Portugal Enjoys Huge Demand in Debt Sale
The conclusion from those headlines, and much our analysis, is that if the Euro-crats can actually get out of the way we might have a meaningful recovery in Europe.
Speaking of winners and losers, the employment report on Friday threw many U.S. focused economists for a loop and also reinforces our Q1 2014 macro theme of #GrowthDivergences. Friday’s employment report, which showed non-farm payrolls increasing +74K month-over-month to close 2013, was a disappointment versus prevailing expectations and an outlier verses the balance of higher frequency labor market data.
Indeed, in the context of the broader labor market data, where the preponderance of evidence remains positive with the ADP private employment estimate, initial jobless claims, and the ISM Manufacturing and Non-manufacturing employment indices all reflecting moderate, ongoing improvement, the BLS data sits as a single negative outlier.
With 273,000 people out of work due to bad weather (vs. an average of 166K over the prior five December’s) weather was held out as the biggest distortive factor and a favorite pundit talking point post the December release.
Our retail and restaurant analysts have highlighted weather as a drag on traffic over the last month as well, so we’re inclined to accept that unusually inclement weather did, indeed, have some negative drag – with the largest impact across hours worked and construction/transports/trade employment.
The other favorite talking point was the continued retreat in Labor Force Participation Rate (LFPR) which dropped another 19bps sequentially to 62.79% from 62.98%, driven by a net drop in the total labor force of -347K (-490K unemployed plus +143K increase in employed). The continued drop in the LFPR remains in excess of that implied by demographic trends (which we’ve written about previously) and should remain an intermediate term issue as the labor market continues to grapple with higher structural unemployment driven primarily by the stubbornly, persistent elevation in long-term unemployment. This point is highlighted in the Chart of the Day.
Further, the LFPR may seen another step function lower over the next couple months if congress fails to renew jobless benefits for the ~1.3M individuals who lost unemployment benefits at 2013 year end. Perversely, perhaps, if those individuals drop out of the labor force, the unemployment rate will show improvement at the expense of a further depression in the participation rate.
The other, somewhat disappointing metric in the release was average hourly earnings – which slowed 20bps sequentially to 1.80% year-over-year. You can’t spend it if you don’t got it and if the savings rate holds little upside and the current iteration of the wealth effect is muted compared to historical precedent, then middling, sub 2% growth in income (ie. capacity for consumption) isn’t the path to winning for a domestic economy still beholden to consumption for 70% of GDP.
Our immediate-term Risk Ranges are now:
10yr UST Yield 2.85-2.98%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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TODAY’S S&P 500 SET-UP – January 13, 2014
As we look at today's setup for the S&P 500, the range is 25 points or 0.94% downside to 1825 and 0.41% upside to 1850.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.49 from 2.49
- VIX closed at 12.14 1 day percent change of -5.82%
MACRO DATA POINTS (Bloomberg Estimates):
- 11am: Fed to purchase $1b-$1.25b TIPS in 2018-2043 sector
- 11:30am: U.S. to sell $28b 3M bills, $26b 6M bills
- 12:40pm: Fed’s Lockhart speaks in Atlanta
- 2pm: Monthly Budget Statement, Dec. est. +$44b (pr -$135.2b)
- House, Senate in session
- Senate resumes consideration of unemployment insurance extension, 2pm
- Supreme Court hears arguments on whether President’s recess-appointment power may be exercised during recess that occurs within session of Senate, 10am
- Secretary of State John Kerry, Russian Foreign Minister Sergei Lavrov meet in Paris to discuss Iran’s participation in Syrian peace talks to take place Jan 22
WHAT TO WATCH:
- Fed said to probe banks over roles in forex fixing
- Amec agrees to buy Foster Wheeler for $3.2b in cash, stock
- Target’s delay in revealing breach was necessary, CEO tells CNBC
- Basel Committee makes concessions to banks on debt-limit rules
- Honeywell probed by U.S. on F-35 fighter part made in China
- UBS isn’t considering investment-bank spinoff
- Sanofi pays Alnylam $700m to add rare disease drugs
- Discovery Communications, Scripps end merger talks: WSJ
- U.S. automobile industry growth is leveling off, Toyota says
- BlackRock’s Bolton faces Italy proceeding over Saipem trade
- North American International Auto Show begins in Detroit
- JPMorgan health-care conference begins; THOR, THC present
- ICR XChange retail, consumer conference begins in Fla.
- Alcatel said to hold talks with Unify on enterprise unit sale
- Court in EnPro case sets liability obligation amt at $125m
- Limoneira (LMNR) 7am, $0.08
- Xyratex (XRTX) 8am, $0.12
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Indonesia Bans Ore Exports in Compromise Push for Metal Smelting
- China Said to Weigh Higher Food Imports in Security Shift
- Bullish Bets Fell Most in Seven Weeks Before Slump: Commodities
- Nickel Touches a Two-Week High as Indonesia Bars Ore Exports
- WTI Declines After Weekly Loss; Iran Nuclear Deal to Take Effect
- Sugar Extend Gains After Speculators Boost Bearish Bets by 19%
- Gold Trades Near One-Month High as Investors Weigh Fed Stimulus
- Corn Weekly Reversal Signals Rebound to Highest Since September
- Rebar Falls as Steelmaker Shagang Cuts Prices on Weaker Demand
- Philippines Sees Nickel Boon on Indonesia’s Ban: Southeast Asia
- Iran Oil-Export Capacity Falls 5.4% in Tanker-Tracking Signals
- American Cold Snap May Force EU Heating Oil Imports: Bear Case
- Hedge Fund Bullish Oil Wagers Drop as Fuel Supply Gains: Energy
- Wheat Rises as Egypt Purchase Indicates Demand for U.S. Supplies
The Hedgeye Macro Team
This note was originally published at 8am on December 30, 2013 for Hedgeye subscribers.
“Self trust is the first secret of success.”
-Ralph Waldo Emerson
With a little more downtime than usual this past week I had the opportunity to crack open a few new books. One of them is a leadership book that’s been in my pile for almost a year now titled Unusually Excellent, by golf pro John Hamm.
The aforementioned quote is the opening line from Chapter One – Being Authentic, The Courage to Be Yourself. And it’s followed up by another insightful thought by Lao Tzu: “He who knows others is wise. He who knows himself is enlightened.”
Hamm’s core leadership framework has three parts: Credibility, Competence, and Consequence. In other words, be who you are, do what you do, and be accountable for the decisions you make. Trust your process in 2014 and people will probably trust you.
Back to the Global Macro Grind…
When people ask me why I seem so confident in my process, it’s relatively easy to explain. My process embraces change and uncertainty. One of the simplest truths that I trust about this game is that my process will change as my business, markets, and economies do. It’s a lot easier being confident in that than a predetermined dogma, conclusion, or ideology.
Lots of people in the media have asked me what my “highest conviction calls are for 2014?” Instead of being put in a box, I just say that I’m very confident that I have no idea what will happen across a trivial twelve month period. Then the other side of the conversation gets quiet. And I assure them that its really ok. “I don’t know” is often the answer.
What I do know is that I’ll be up and at it, grinding away alongside my teammates, at the top of every risk management morning in 2014. Every day starts with information surprise – new economic data, market risks, price moves, etc. – it’s kind of like Christmas, but every morning, for Canadian-American macro market geeks.
On that score, last week was as interesting as any other week in 2013:
- US interest rates ripped back up to their YTD highs
- US stocks ripped back to their all-time highs
Even though this wasn’t the way consensus expectations drew it up with its “2013 predictions” at this time last year, all-time, as we like to say here @Hedgeye, is a long time.
With the Fed reacting (on a 3-month lag) to what markets have been pricing in all year (US GDP #GrowthAccelerating from 0.14% Q412 to 4.12% Q313), all we have witnessed here is a run-of-the-mill rotation out of fear (slow-growth yield chasing) and into growth itself:
- SP500 and Russell 2000 = +1.3% each last week to +29.1% and +36.7% YTD, respectively
- 10-year US Treasury Yield = +11 basis points to 3.00% (+124 basis points, or +70% YTD = #RatesRising)
- US Equity Fear (Volatility) = VIX down another -9.6% last wk to -30.9% YTD #crashing
All the while, underneath the hood, the month-to-date performance across asset classes and investment Style Factors continues to do what it constantly does – change:
- SP500 = +1.97% for DEC to-date
- Basic Materials (XLB) = +3.81% and Utilities (XLU) = -0.58% DEC to-date, respectively
- CRB Commodities Index (19 commodities) = +3.4 and Copper = +5.6% DEC to-date, respectively
In other words, as US #GrowthAccelerating hits its crescendo (rate of change on a 9-12 month basis), market expectations for INFLATION are finally starting to rise again. That’s new.
And yes, inflation expectations rising will eventually slow real (inflation adjusted) economic growth. But since the entire edifice of Certainty Forecasting that is Old Wall Street and Washington DC “economics” centrally plan and predict on a lag, threading the needle on when #GrowthSlowing might matter to market expectations is going to be one of the more important things I do.
Notwithstanding it’s 1-wk up move on the taper news, it’s important to acknowledge the real-time #GrowthSlowing factor that is the USD falling for 6 of the last 7 weeks. That, in our model, is what is perpetuating the resurgence of inflation expectations. While we were bearish on Commodities for over a year, Mr. Macro Market is telling us to go neutral on that, for now.
Got respect for Mr. Macro Market? My process does. This is a short-term market reality, but looking at the 15-day inverse correlation between the CRB Commodities Index and the USD right now, it’s jumping off my screen at -0.94. And with the Euro breaking out versus USD (see our Q413 #EuroBulls Macro Theme), Down Dollar (with taper!) is to be respected by our process as well.
Our immediate-term Global Macro Risk Ranges are now (Top 12 ranges are in our Daily Trading Range product):
UST 10yr Yield 2.93-3.05%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer