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Bear Depression

This note was originally published at 8am on January 03, 2014 for Hedgeye subscribers.

“In 1893, the most serious depression the nation had yet experienced settled over the land.”

-Doris Kearns Goodwin (The Bully Pulpit)

 

Today is not 1893.

 

While they let some of the 2013 US stock market bears out of their caves yesterday (BREAKING NEWS: “SP500 Falls To Start Year Lower For 1st Time Since 2008” –Bloomberg), I suspect the blizzard will send them right back to where they came from.

 

This is not 2008 either.

 

Sure, there’s plenty to concern yourself with (like a market that got pinned up at an all-time high at year-end) in terms of this raging bull market being overbought and both sentiment and flows chasing it, but let’s get real here and get on with our risk managed day.

 

Back to the Global Macro Grind

 

Oh, and by the way, in 1893 we didn’t need a bunch of bureaucrats at the Fed to save us from themselves either. The bear depression of the late 19th century was one born out of this thing we call a cycle. Companies back then overbuilt rail capacity and over-extended themselves with bank loan leverage (sound familiar?). This is what happens at cycle tops (like 2007).

 

Globally (especially in Europe) we aren’t in the area code of a peaking 1893 or 2007 piggy cycle either. In the US we don’t think we’ll be seeing consecutive 4% handles on GDP, but that certainly doesn’t mean fear and panic is going to break-out across the land. With so many still whining about the last war, I say you get yourself a shovel and a smile this morning - move forward.

 

Back to the business cycle (where companies build inventories, shhh), lets dig through some fresh US economic data:

 

1. USA’s ISM Manufacturing PMI for DEC was reported yesterday at 57.0 vs 57.3 in NOV

2. The ISM’s New Orders component of the report accelerated to 64.2 DEC vs 63.6 NOV

3. The ISM’s Employment component of the report was steady at 56.9 DEC vs 56.5 NOV

 

For me, this was a surprisingly strong read-through on the US economy as the data was almost as good as it could get (sequentially) in Q3 of 2013. So to see follow-through in December was a good thing for growth (as an investment style) and bad for bonds.

 

Employment is a fun one to watch people complain about because:

 

1. The monthly BLS data is a lagging economic indicator (the one CNBC has dudes guessing on every month)

2. The only coincident to leading indicators (ISM’s, weekly Jobless Claims, etc) are poorly understood

3. NSA rolling 4-wk jobless claims (see Chart of The Day) fit the 10yr US Treasury Yield’s 12 month TREND like a glove

 

I’ll give you 5:1 odds that if you ask your run-of-the-mill TV pundit what the consequence is of using the NSA # to probability weight the direction of the bond market that they think you are talking about the National Security Agency.

 

*NSA = non-seasonally adjusted. And the reason why we use the NSA rolling-claims data series on a year-over-year basis is simply because that’s what Josh Steiner (Managing Director of our Financials team) found that Mr. Macro Market cares about.

 

Who seriously cares that, on very light volume (-14% vs @Hedgeye TREND), it was the 1st market down day “since 2008” when it has no back-test or relevance to the market we have in front of us in 2014? Here are 3 more things to think about:

 

1. US Initial Jobless Claims of 443,513 (NSA) were down -9.5% y/y yesterday (vs. down -8.2% in the wk prior)

2. US 10yr Treasury Yield held my most immediate-term TRADE line of 2.96% support yesterday; 3.07% = resistance

3. Gold is signaling immediate-term TRADE overbought this morning within a bearish @Hedgeye TREND

 

So, rather than try to get cute with some Hedgeye panic and depression propaganda yesterday, here’s what I did:

 

1. Took our Cash positions down from 50% to 40% in the Hedgeye Asset Allocation Model

2. Moved from 5 LONGS, 5 SHORTS on 12/31’s close to 8 LONGS, 4 SHORTS (bought and covered on red)

3. Shorted Gold (GLD) and bought some US Equity Beta (TSLA)

 

That doesn’t mean I am going to be right. It simply means there’s a process behind every sequence of macro market timing decisions my team and I make. There’s nothing depressing about that.

 

Our immediate-term Risk Ranges are now as follows (all 12 of my Big Macro Ranges are in our Daily Trading Range product):

 

UST 10yr Yield 2.97-3.07%

SPX 1809-1856

VIX 11.91-14.91

Gold 1185-1235

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Depression - Chart of the Day

 

Bear Depression - Virtual Portfolio


A Picture Is Worth 1,000 Basis Points

Takeaway: It's a great macro tape for country picking equities.

#GrowthDivergences (one of our Q1 Macro Themes) is actually pretty obvious from a Global Equity market read-through perspective.

 

In our model, it's all about the rate of change. And it's relative too.

 

Take a look around... Greece, Portugal, and Denmark are all up between 6-11% year-to-date. Now take a look at China, Japan and Brazil down... all 3-4% year-to-date.

 

A Picture Is Worth 1,000 Basis Points - drake

 

It makes for a great macro tape for country picking equities.

 

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CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends

Takeaway: CPI accelerated in Dec..kinda, Initial Claims improved sequentially..sort of, and Consumer Confidence worsened while Bus Confidence improved

#STORYTELLING:

There are always a host of ways to spin the Macro #Storytelling and this week’s data offers an illustrative case study.

 

Consider the Retail Sales numbers earlier this week:  

 

Headline Retail Sales growth decelerated on a MoM basis in December, but was flat on a YoY and accelerated on a 2Y.  Further, the Control Group (which feeds into GDP) accelerated on a MoM, YoY and 2Y, but the complexion of that strength from an industry level perspective wasn’t particularly inspiring and middling wage growth is unlikely to support equivalent gains going forward.   So, good on balance, but not the stuff incremental, levered allocations are made of. 

 

From a TREND perspective, the preponderance of fundamental data remains favorable.  The labor market continues to improve, credit growth is accelerating, capacity utilization and productivity are up alongside strength in the manufacturing base, confidence is rising and the bipartisan accord on the federal budget is consumption friendly on the margin. 

 

On the flip side, capex spending and wage growth have yet to really accelerate and housing market activity is set to slow into 1H14 with home price growth decelerating from the low-teens to the mid-single digits over the next few quarters (our expectation).  

 

The Economic Indicator table below provides some summary context for the latest macro data with respect to Trend averages. 

 

CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends - Indicator Table

 

STRATEGY:   This weeks data has been consistent with our current view on the direction of sequential growth domestically and serves as a solid microcosm for the broader macro data.  Reported growth isn’t really accelerating sequentially, but its not getting materially worse either and, from a GDP accounting perspective, we’ll go from ‘very good’ to just ‘good’ in 4Q. 

 

Certainly, the currently prevailing sentiment and price/growth dynamics make it a tougher call here in 1Q14 than in 1Q of last year when our macro models were explicitly signaling a positive inflection in growth while strategists and economists were taking down estimates alongside a 0% 4Q12 GDP print. 

 

But with decent macro fundamentals, positive fund flow support,  favorable seasonality through 1Q14 and the lack of a discrete negative catalyst in the immediate term, we still like U.S. equities – just not as much as we did over the TTM. 

 

Summarily, Stocks Up, Dollar Up, Rates Up remains the price factor constellation we’d like to see trend to drive a convictional (re-) increase in our exposure to domestic, pro-growth equities. 

 

Please see our 1Q14 Macro Investment Themes presentation for a detailed view of our current thinking on global macro asset allocation >> 1Q14 Macro Investment Themes

 

CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends - Inv Conc

 

 

INITIAL JOBLESS CLAIMS:  Steady as the Distortions Ebb

Successive distortions (technology upgrades, Sandy comps, calendar/holiday shifts) in the initial claims series over the last two months of 2013 made garnering a clean read on the direction of the domestic labor market increasingly difficult.

 

Despite the volatility, we’ve held that the positive improvement that characterized most of 2013 has largely persisted as divergences from trend, stemming from the aforementioned distortions, have repeatedly been followed by a subsequent re-convergence to the high-single digit, Trend rate of improvement. 

 

While year-end/holiday seasonality will persist in the data for a couple more weeks, the last two weeks of relatively clean data are signaling a return to trend with both the 2-wk and 4-wk rolling averages in YoY non-seasonally adjusted claims reflecting a ~8.5% rate of year-over-year improvement.  

 

We continue to expect ongoing improvement in the reported labor market data as seasonality builds as a tailwind into March before again reversing to a tailwind over the March to August period.  

 

CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends - NSA 011613

 

CPI INFLATION:  (STILL) WATCHING THE $USD

Headline CPI accelerated on both a MoM and YoY basis with the month-over-month increase driven primarily by the jump in energy prices.  Core Inflation decelerated 10bps MoM and was flat at +1.7% YoY while price inflation for services decelerated modestly on both a YoY and 2Y. 

 

As we highlighted in our 1Q14 Macro themes call last week, the dollar has driven commodity inflation over the last 10 years and headline CPI follows the slope of food and energy inflation. 

 

With the dollar currently in no man’s land from a quantitative perspective - below TREND resistance ( 81.12) and above TAIL support (80.72) - a breakdown or breakout for the dollar will be critical input in determining how we manage our asset/geographical exposures from here.     

 

CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends - CPI Table

 

CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends - CPI Services

 

CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends - USD vs FE CPI

 

CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends - Headline CPI vs FE Sequential

 

CONFIDENCE:  NFIB small business confidence improved in December making unanimous the post-government shutdown resurgence observed across the primary survey’s to close the year (see December data in Table Below). 

 

Meanwhile, Bloomberg’s weekly read on consumer comfort deteriorated sequentially in the second print for 2014.  Notably, most of the weakness was concentrated in the higher income brackets while the lowest income bucket posted its best reading since June of 2008 and the penultimate bucket improved for a fifth consecutive month. 

 

With Consumer Confidence and the USD moving in lockstep over the last year, it makes sense to continuing ball-hawking the price signal in the dollar.

 

CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends - Confidence wkly

 

CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends - USD vs Confidence

 

CPI, CLAIMS, CONFIDENCE: Kinda, Sorta, It Depends - Confidence Table 011613

 

 

Christian B. Drake

@HedgeyeUSA

 


NEW BEST IDEA: SHORT CAKE

We are adding CAKE to our Best Ideas list as a high conviction SHORT.

 

After being the bull on CAKE for the majority of 2013, we have reversed course and turned bearish heading into the 4Q13 print and throughout 2014 for several reasons including, but not limited to:

  • The secular decline of the casual dining industry
  • The end of the road for CAKE’s margin story
  • Growing complacency on the street

Trading at a peak multiple, we see 20-30% downside to the stock in 2014 as full-year earnings estimates and expectations are revised down.

 

Click here for the full report: CAKE: BEST IDEA SHORT

 

We’ll host a quick conference call TOMORROW at 1pm EST to hit on the key points of our thesis and field questions. Please send any questions over to .

 

Call Details:

Toll Free Number:

Direct Dial Number:

Conference Code: 331331#

 

 

Howard Penney

Managing Director

 


#INFLATIONACCELERATING: ALL EYES ON BRAZIL

Takeaway: For now at least, investors should stay SHORT, underweight, or completely out of Brazil.

CONCLUSIONS:

 

  1. Looking to Brazil specifically, we continue to see inflationary pressures emanating throughout the economy, which is perfectly in-line with view we introduced as part of our AUG ’11 Brazil Black Book, which called for Brazilian CPI to remain persistently elevated over the long-term TAIL.
  2. The aforementioned sticky inflation has weighed and continues to weigh on the slope of Brazilian economic growth.
  3. Jumping ship, two potential catalysts we see heading into and through 2H14 that investors will become increasingly focused on are the 2014 World Cup (6/12 – 7/13) and the 2014 General Elections (OCT 5).
  4. The former will obviously deliver a much-needed boost to GDP (positive catalyst), but might also expose Brazil’s shoddy infrastructure, ill-preparedness to host such a large event and angry populous (riots?) to the world stage (negative catalysts). The latter might ultimately be viewed as a positive catalyst if the market starts to price in expectations for a candidate like Jose Serra emerging victorious with Pena Nieto-like promises of economic reforms.
  5. For now at least, investors should stay SHORT, underweight, or completely out of Brazil.

 

WHERE WE’VE BEEN

In a unanimous 8-0 decision yesterday afternoon, BCB hiked its benchmark SELIC Rate by another +50bps to 10.5%. This tightening measure marked the sixth consecutive meeting where BCB hiked interest rates; the SELIC rate has now been hiked +325bps from an ill-advised (but forced) record-low of 7.25% in APR ’13, making BCB the most hawkish central bank in the world over that time frame.

 

We were very critical of President Rousseff and Finance Minister Guido Mantega’s overt influence over Brazilian monetary policy then (dating back to JUL ’12) and that policy interference continues to haunt the Brazilian economy to this day. From the analytical rooftops, we boldly shouted “GET OUT OF BRAZIL IF YOU HAVEN’T ALREADY” in early FEB ’13 as a continuation of this thesis:

 

“Not much else needs to be said other than the fact that it has recently become clear to us that Brazilian policymakers refuse to address the country’s growth/inflation imbalance – which they themselves have perpetuated through currency debasement – with an adequate amount of exchange rate appreciation (we already know Dilma won’t budge on rates). As such, we no longer consider Brazilian equities or the BRL good investment opportunities on the long side with respect to the TREND duration…” (2/6/13)

 

Since then, both the Bovespa Index and the BRL are down roughly -16%; Bloomberg’s Brazil LC Sovereign Debt Index has declined -2.3% over that duration.

 

In full disclosure, we made a terrible mistake pitching Brazilian consumer exposure from early-MAY to mid-AUG of last year in an attempt to help investors find opportunities on the long side in the context of our bearish #EmergingOutflows theme; the MSCI Brazil Consumer Discretionary and Consumer Staples indices declined -17.5% and -10.7% over that time frame. Bad performance for a bad idea; we should’ve just stuck to the original script – something we have done since.

 

WHERE WE’RE GOING

Looking ahead, 1Y OIS rates are now trading at a +45bps premium to the benchmark SELIC rate after a +19bps DoD move, implying further hawkishness in the months ahead. Contrary to the general tone of sell-side commentary following yesterday’s hike, we think that is the appropriate view to adopt in the context of our #InflationAccelerating Q1 macro theme.

 

Looking to Brazil specifically, we continue to see inflationary pressures emanating throughout the economy, which is perfectly in-line with view we introduced as part of our AUG ’11 Brazil Black Book, which called for Brazilian CPI to remain persistently elevated over the long-term TAIL.

 

A bloated budget balance – which doesn’t include all of the accounting gimmickry Mantega pulls with BNDES – and an increasingly tight labor market remain headwinds for BCB’s inflation fight.

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Budget Balance

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Current Account

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Unemployment Rate

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Wages

 

Cyclically speaking, CPI accelerated on both a YoY and MoM basis in DEC; the YoY reading of +5.9% YoY remains ~140bps higher than the midpoint of BCB’s +4.5% +/- 200bps target and the MoM reading of +0.92% was the fastest sequential rate since APR ’03. Increasingly easy comps and a currency/commodity base effect (refer to slides 7-9 of our Q1 macro themes for more details) support maintaining a hawkish outlook for Brazilian CPI over the intermediate term.

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - CPI MoM

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - CPI Comps

 

In short, sticky inflation has weighed and continues to weigh on the slope of Brazilian economic growth.

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Business Confidence

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Industrial Production

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Consumer Confidence

 

#INFLATIONACCELERATING: ALL EYES ON BRAZIL - Retail Sales

 

WHAT MIGHT HAPPEN

Lastly, two potential catalysts we see heading into and through 2H14 that investors will become increasingly focused on are the 2014 World Cup (6/12 – 7/13) and the 2014 General Elections (OCT 5).

 

The former will obviously deliver a much-needed boost to GDP (positive catalyst), but might also expose Brazil’s shoddy infrastructure, ill-preparedness to host such a large event and angry populous (riots?) to the world stage (negative catalysts). The latter might ultimately be viewed as a positive catalyst if the market starts to price in expectations for a candidate like Jose Serra emerging victorious with Pena Nieto-like promises of economic reforms.

 

We’ll see.

 

For now at least, stay SHORT, underweight, or completely out of Brazil. If you have on existing SHORT positions, don’t add to positions unless you see lower-lows in the Bovespa Index (cycle trough: 45,044 on 7/3) and higher-highs in the USD/BRL cross (cycle peak: 2.4543 on 8/21/13).

 

Darius Dale

Associate: Macro Team


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