“Most successful pundits are selected for being opinionated, because it’s interesting, and the penalties for incorrect predictions are negligible. You can make predictions and a year later people won’t remember them.”
Last night I gave the keynote presentation at the Trader’s Expo at the Marriot Marquis in Times Square. Prior to giving the speech, I walked around the conference floor and heard a lot of stories of trading systems that would generate ten bagger returns, some that had triple digit positive performance last year, and so on. Clearly, the exhibitors needed to grab people’s attention in order to engage in a sales discussion.
Frankly, compared to some of the presentations, I’m guessing my presentation on the U.S. economy was a tad boring. In my presentation, I gave a quick update on our Q1 Themes and the view that economic growth in the U.S. may be slower than consensus expectations in 2014. Rightfully so, my prognostication, if you want to call it that, raised some questions.
The first question related to the cover of Barron’s this weekend which heralded the potential return of 4% growth in an article titled, “Why the Economy Could Grow by 4%”. The article was, in effect, an interview with a group called Applied Global Macro Research (AGMR), and to be fair they sounded like thoughtful guys, who are clearly an outlier with a 4% growth projection for the U.S. economy.
The question poised to me related to how the Hedgeye view differed from the view on the cover of Barron’s. My response was simple: housing. The economists from AGMR expect housing to be a massive tailwind. In the long run, we get their thesis, but in the short run we see headwinds to housing and this more tepid view on the U.S. economy may, sadly, keep us off the cover of Barron’s this year.
Back to the Global Macro Grind . . .
Speaking of housing, I wanted to touch on a few points that make us incrementally more cautious:
- Mortgage Purchase Applications - This point is highlighted in the Chart of the Day, but at a reading of 171.5 in the MBA purchase index, we are now -22% below the May 2013 peak. Mortgage applications are a direct leading indicator of home purchases and this implies that home purchase are likely to fall a commensurate amount from the peak;
- Pending Home Sales – We view housing as a giffen good and our demand driven model was fairly accurate in modeling the acceleration in housing activity. Alongside the decline in purchase apps, pending home sales are down ~9% year-over-year, which is decidedly negative for forward home price appreciation if price continues to follow the slope of demand;
- Home Price Deceleration - Corelogic home price data show that after last year’s parabolic rise, home price growth has now decelerated for 3 consecutive months; and
- Qualified Mortgages - The new “QM” (Qualified Mortgage) rules that went into effect in January tighten standards and increase culpability for both lenders and servicers. Tighter lending standards will be a drag on aggregate housing activity on the margin – particularly for 1st time home buyers and others with irregular incomes. First time home buyers are ~35% of the market.
In the long run, the housing recovery likely does have legs given the nature of the massive over build and then years of inventory drawdown, but in the short run the headwinds noted above will be important to monitor. The caveat to any view of housing, either negative or positive, is that interest rates will be the biggest driver and if interest rates head meaningfully lower from here (hard to believe that will happen if the taper is in) then our cautious view on housing would likely become more positive.
Speaking of becoming more positive, and I’m not saying we are just yet, but Merrill’s Global Fund Manager Survey came out this weekend and had some interesting contrarian data points. First, cash levels have risen from 4.5% to 4.8%, the highest since July 2012. Second, emerging markets and global energy allocations are at record lows, while global bank allocations are at record highs. Finally, global staples allocations are at the lowest levels since September 2003 (ahead of CAGNY).
It is difficult to put too much credence in a set of data we didn’t create or collect ourselves, but it is certainly worth noting the extremes in the Merrill survey. Much easier to discern is the market based indicators of inflation, which continue to percolate. An extreme example of commodity based inflation domestically is natural gas, which is up almost 30% for the year-to-date.
Less extreme is the pervasive use of natural gas in the domestic U.S. economy. According to the Energy Information Administration, there is almost 25 million MMcf used domestically on an annual basis. If my math is correct that is an almost ~$125 billion input cost into the U.S. economy every year, which is split broadly between heating, residential use and industrial use.
The bottom line is that if one of the key commodity input costs into the U.S. economy is up almost 30% in the year-to-date that, my friends, is inflationary. Although perhaps not quite as bad to the economy, even worse is that a coffee addict like myself has to endure Arabica coffee bean prices up 10% this morning!
Our immediate-term Risk Ranges are now:
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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Takeaway: As we look at today's setup for the S&P 500, the range is 43 points or 1.83% downside to 1805 and 0.51% upside to 1848.
TODAY’S S&P 500 SET-UP – February 18, 2014
As we look at today's setup for the S&P 500, the range is 43 points or 1.83% downside to 1805 and 0.51% upside to 1848.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.42 from 2.43
- VIX closed at 13.57 1 day percent change of -4.03%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Empire Manufacturing, Feb., est. 9.00 (prior 12.51)
- 8:30am: CPI benchmark revisions
- 9am: Net Long-term TIC Flows, Dec. (prior -$29.3b)
- 10am: NAHB Housing Market Index, Feb., est. 56 (prior 56)
- 3:15pm: Fed holds open board meeting on bank supervision
- President Obama scheduled to give remarks on the economy
- Washington Week Ahead
WHAT TO WATCH:
- Actavis said to near $25b deal to buy Forest Laboratories
- Starr, Partners buy MultiPlan in purchase said at $4.4b
- German investor sentiment falls a 2nd month on growth caution
- China said to plan tighter rules for direct-sales cos.
- Yahoo seeks to focus on mobile, contextual search
- Apple to introduce iPhone 6 in 3rd quarter: Economic Daily
- BOJ boost to lending programs signals room for further easing
- Car sales in Europe rose a fifth consecutive month in January
- Shanghai Fosun, TPG to buy hospitals operator Chindex
- Tyson Foods said to buy Goldman Sachs’s Michael Foods
- Novartis buys CoStim to boost immunotherapy capability
- Philip Falcone’s Lightsquared files new reorganization plan
- Google buys Israeli login-security firm SlickLogin
- Total, Hellman & Friedman may raise $1b in cryogenics IPO
- Blackstone said in talks to buy some Encana assets: NY Post
- Starwood Capital Group said to consider IPO, WSJ reports
- Fed district chief expects tapering to continue: L.A. Times
- HP got Autonomy audit reports showing hardware sales: FT
- Banks review rules on FX traders making bets with own cash: FT
- Auto union regrouping after losing vote at Volkswagen plant
- Wanxiang wins Fisker Automotive asset auction with $149m bid
- China provinces/natl data gap narrows as Xi changes metrics
- China’s Goldleaf Jewelry to pay $665m for ERG Resources
- Coca-Cola (KO) 7:30am, $0.46 - Preview
- Cumulus Media (CMLS) 9am, $0.08
- Dentsply Intl (XRAY) 6:31am, $0.61
- Diana Shipping (DSX) 7:45am, $(0.06)
- Duke Energy (DUK) 7am, $0.95
- Genuine Parts (GPC) 8:49am, $0.91
- Medtronic (MDT) 7:15am, $0.91
- NiSource (NI) 6:30am, $0.47
- Norwegian Cruise Line (NCLH) 6am, $0.18
- Rona (RON CN) 7am, C$0.10
- Waste Management (WM) 7:30am, $0.61
- Wolverine World Wide (WWW) 6:30am, $0.20
- Access Midstream Partners (ACMP) 4:15pm, $0.54
- Analog Devices (ADI) 4:01pm, $0.49
- CF Industries (CF) 4:01pm, $4.41
- Community Health Systems (CYH) 4:15pm, $0.56
- Fluor (FLR) 4:05pm, $0.98
- Healthcare Trust of America (HTA) 5:19pm, $0.04
- Herbalife (HLF) 4:10pm, $1.28
- KAR Auction Services (KAR) 4:15pm, $0.27
- La-Z-Boy (LZB) 4:05pm, $0.35
- MannKind (MNKD) 4pm, $(0.13)
- Nabors Industries (NBR) 4:01pm, $0.20
- NPS Pharmaceuticals (NPSP) 4:01pm, $0.03
- Oceaneering Intl (OII) 5pm, $0.84
- Panera Bread (PNRA) 4pm, $1.94
- Photronics (PLAB) 4:30pm, $0.05
- Retail Properties of America (RPAI) 4:17pm, $0.03
- SM Energy (SM) 5pm, $1.45
- Terex (TEX) 4:15pm, $0.49
- Yamana Gold (YRI CN) 4:20pm, $0.07
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Arabica Coffee Jumps Most Since 2004 After Brazil’s Dry Weather
- Vitol Says Brent Oil Benchmark Needs African Fix as Output Drops
- Top Gold Forecasters Still Bearish After 2014 Rally: Commodities
- BHP Joins Rio Tinto in Seeing Iron Ore Price Dropping on Supply
- Gold Drops From 3-Month High as Buying Seen Deterred After Rally
- WTI Oil Rises Amid Speculation U.S. Snowfall Will Bolster Demand
- Copper Declines as Top User China’s Central Bank Drains Funds
- Corn Rises to 4-Month High as Brazil’s Dry Weather May Hurt Crop
- Iraq Grain Board to Meet Thai Officials Soon on Rice Import Ban
- China Steel Demand Poised to Plunge as PMIs, Indexes Show Slump
- Gold Demand in Japan Tripled Amid Abenomics as Prices Slumped
- Snow Snarls Travel as Another Storm Strikes U.S. Northeast
- Iron Ore Bests Metals as Prices Have Gone Nowhere Since 1913
- Rusal Sees Least Output in at Least 8 Years as Smelters Shut
The Hedgeye Macro Team
This note was originally published at 8am on February 04, 2014 for Hedgeye subscribers.
“In the real world, action and reward go together.”
Greg Berns is part of a stealth movement in America – he’s a neuroeconomist working in the Department of Psychiatry and Behavioral Sciences at Emory University in Atlanta, GA.
John Coates introduced me to Berns in a chapter called Thrill of The Search in The Hour Between Dog and Wolf. Coates went on to suggest that “when the Theory of Relativity dawned on Einstein, he must have had the mother of all dopamine rushes… dopamine, like noradrenaline, does a lot more than motivate the brain: it prepares the body for action” (pg 139).
Was your mind and body prepared for this selloff in US and Japanese equities? I can tell you one thing, my back is in spasm. But I think that has more to do with shoveling snow than being long Japan’s Mother’s Index (-18% in two days). Through action and reward, #History, #Math, and #Behavorial economics continue to be the three pillars of our learning process. Risk happens fast.
Back to the Global Macro Grind…
In addition to the crash in Japan’s widely held brokerage index, the Nikkei got crushed for another -4.2% lost last night, taking it to -14% for 2014 YTD. How many hedge funds were snowed into the short Yen, long Nikkei trade last year? Lots.
How many stayed long the Russell 2000 at the all-time high? That was only 9 trading days ago, don’t forget. And while I am certain that everyone on CNBC nailed it, for the rest of us a -7.4% nine day correction from an all-time peak provides a bit of a rush too!
The last time the US stock market had this sharp of a 9-day decline (Russell2000 = down -9.1% in 9 days in November of 2011), Ben Bernanke’s resolve was simple – print, print, print. So remind me why Janet Yellen won’t do the same?
If we get one more economic data point that crashes like yesterday’s New Orders component of the ISM did, remind me why the Mother of All Doves won’t:
A) Stop the tapering
B) Talk up more quantitative easing
Setting aside the eureka reality that commodity markets inflating and slowing real-consumption growth don’t give the Fed or the Bank of Japan what they are promising The People (sustainable growth), why won’t Yellen go back to the same old saw?
Maybe, just maybe, Mr. Macro Market is already front-running her on this. I know, while markets front-running our central planning overlords has been the only game in town now for the last half-decade, why would they be doing so again?
Humor Mr. Macro Market for another minute and play this probable (not to be confused with definite) scenario out:
- US #InflationAccelerating continues to slow real-inflation adjusted growth
- As US #GrowthSlowing freaks out the Fed, they whisper “no-more-taper” to Hilsenrath
- Whispers start to bury the Dollar again, Food and Gold prices continue higher yet again, and …
Growth slows even faster!
Oh, and by summer time they’ll be whining about “inequality” at Jackson Hole without accepting that Policies to Inflate only pay those who are long of coffee futures and mortgage-backed-securities, while they pulverize the poor.
Back to how bad that Institute for Supply Management’s (ISM) manufacturing report was yesterday:
- Headline ISM dropped -10% sequentially (month-over-month) to 51.3 JAN vs 57 DEC
- New Orders in the ISM crashed -20% month-over-month to 51.2 JAN vs 64.4 DEC
- Prices Paid in the ISM (inflation in costs) ripped +13% from 53.5 in DEC to 60.5 in JAN
Yes, since I’m so plugged in politically, I rigged the numbers to fit our Top Global Macro Theme of #InflationAccelerating like a glove. But don’t tell anyone I get this inside info or I’ll have to change the name of my firm.
Again, to review, this wasn’t all about the “weather”:
- Inflation (prices) rose, fast, month-over-month… and…
- Growth (orders) fell, even faster in kind
So enjoy the “green arrows” this morning. I am sure this market will bounce on no-volume again until we get the next US consumption #GrowthSlowing data point (tomorrow) in the ISM Services report for January.
With the CRB Commodities Index +1.4% vs. Consumer Discretionary (XLY) stocks -8.7% YTD, bulls can blame the weather. But that is the score. In the real world, if you don’t shovel your driveway and get to work, you probably won’t get paid that way either.
Our immediate-term Global Macro Risk Ranges are as follows:
Nat Gas 4.91-5.41
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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