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Fade The Fed's Forecast

This note was originally published at 8am on March 20, 2014 for Hedgeye subscribers.

“If you have to forecast, forecast often.”

-Edgar Fiedler

 

You probably don’t know who Fiedler was. Like many Keynesian “economists” of the Nixon/Carter and Bush/Obama eras, his growth and inflation forecasts were useless.

 

But I like his quote.

 

And I really like the opportunity the market gave us yesterday to add to things we’ve liked from lower prices all year. That list of big macro stuff includes Commodities (Gold, Food, etc.), Foreign Currencies (vs. the USD), and Bonds (long-term Treasuries in particular).

 

Back to the Global Macro Grind

 

But, but, she said that the economy wasn’t slowing and that rates could rise, eventually…

 

“I do want to emphasize this is a forecast”

-Janet Yellen (March 19, 2014)

 

Fade The Fed's Forecast - yell

 

I hear you on what the market did in reaction to her forecast (Dollar up, Rates up, Gold down). Nice day-trade. But do you hear Mr. Macro Market’s trending forecast? He updates his forecast often.

 

So, now there are 2 big conflicting forecasts to concern yourself with:

  1. Janet Yellen’s forecast (which is based on what happened in the US in Q3/Q4 of 2013 – inflation fell, growth accelerated)
  2. Mr. Macro Market’s updated forecast of #InflationAccelerating and real #GrowthSlowing in kind

And, since you have to pick one of the two, which one will it be?

  1. A Fed forecast that is wrong at least 2/3rds of the time and is based on lagging economic data
  2. A market based forecast that is right more than 2/3rds of the time based on real-time market data

To recap the Fed’s forecast:

  1. Most of the Q114 slow-down was due to the weather
  2. As growth recovers in the 2nd and 3rd quarter, you should expect the Fed to continue to taper
  3. There is no inflation (its below the “committee’s objective”), so don’t worry about it

And to update you on what Mr. Macro Market has to say about that this morning:

  1. US DOLLAR is showing no follow-through to yesterday’s bid and remains bearish TREND @Hedgeye
  2. US 10YR TREASURY yield is showing no follow-through to yesterday’s ramp and remains bearish TREND @Hedgeye
  3. GOLD sold off to immediate-term TRADE support of $1321, and remains a bullish intermediate-term TREND too

So, on the “what Janet meant to say” part, you might need Hilsenrath to spell it out for you circa 3PM on a market Friday. I get that. You should too. Most people don’t have a macro process, and they have to take the Fed’s word for it, literally.

 

From a risk management perspective, if the following three things happen:

  1. US Dollar Index breaks out > $81.14 TREND resistance
  2. US 10yr Yield breaks out > 2.81% TREND resistance
  3. Gold snaps $1278 TREND support

Well, then I forecast that I will change my forecast. In the meantime, I say you fade the Fed’s forecast because I forecast that Janet Yellen will get less bullish on US Growth after growth slows.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.61-2.81%

SPX 1849-1878

VIX 12.99-17.57

USD 79.29-80.41

EUR/USD 1.37-1.39

Gold 1323-1385

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fade The Fed's Forecast - Chart of the Day

 

Fade The Fed's Forecast - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 3, 2014


As we look at today's setup for the S&P 500, the range is 29 points or 1.37% downside to 1865 and 0.16% upside to 1894.                                                   

                                                                                     

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2A

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10A                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.34 from 2.35
  • VIX closed at 13.09 1 day percent change of -0.08%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: Challenger Job Cuts, y/y, March (prior -24.4%)
  • 7:30am: RBC Consumer Outlook Index, April (prior 51.8)
  • 8:30am: Trade Balance, Feb., est. -$38.5b (prior -$39.1b)
  • 8:30am: Jobless Claims, March 29, est. 319k (prior 311k)
  • Continuing Claims, March 22, est. 2.843m (prior 2.823m)
  • Jobless claims benchmark revisions 2009-2013
  • 9:45am: Bloomberg Consumer Comfort, March 30 (prior -31.5)
  • 9:45am: Markit U.S. Services PMI, March final, est. 55.5 (prior 55.5)
  • Markit U.S. Composite PMI, March final (prior 55.8)
  • 10am: ISM Non-Manufacturing Index, March, est. 53.5 (prior 51.6)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change

GOVERNMENT:

    • 8am: U.S. Chamber of Commerce Foundation Aviation Summit
    • Attendees incl: TSA Administrator Pistole, Delta CEO Anderson, Virgin founder Branson, Southwest CEO Kelly, Airbus Americas chairman T. Allan McArtor,W. Douglas Parker
    • 9:30am: House Ways and Means Cmte holds hearing on Obama’s trade policy w/U.S. Trade Rep. Michael Froman
    • 9:30am: CFTC to hold public roundtable to discuss Dodd-Frank
    • Budget panels/testimony:
    • 10am: House Energy and Commerce panel: Energy Sec. Ernest Moniz
    • Senate Env./Public Wks Cmte considers drinking water protection bill (S. 1961)
    • U.S. ELECTION WRAP: Donation Ruling May Aid GOP, Sunlight Says

WHAT TO WATCH:

  • Draghi seen defying deflation risk in ECB decision
  • China plans to support growth with rail spending, tax cuts
  • Fed’s Bullard says inflation slowing may prompt taper delay
  • Google trading symbols change today
  • Credit Suisse restates 4Q loss U.S. tax probe charge
  • NATO warns Russia force on Ukraine border building up
  • U.S. opens criminal inquiry into Citigroup Mexico unit: NYT
  • U.S. secretly financed social network in Cuba: AP
  • Mobius says MSCI plan to add China domestic shrs is bad idea
  • Sinopec said to pick Goldman Sachs for $30b retail sale
  • Outbrain hires Goldman, JPMorgan for IPO in U.S.: FT
  • Senate Finance Committee marks up tax extenders bill
  • Iraq veteran kills 3 soldiers, self at Fort Hood in Texas

AM EARNS:

    • Greenbrier (GBX) 6am, $0.61
    • Hudson’s Bay (HBC CN) 7am, C$0.50
    • Perry Ellis International (PERY) 7am, $0.03
    • RPM International (RPM) 7:30am, $0.09
    • Schnitzer Steel Industries (SCHN) 8:30am, $0.08

PM EARNS:

    • Global Payments (GPN) 4:01pm, $0.95
    • Micron Technology (MU) 4:05pm, $0.59 - Preview
    • Seachange International (SEAC) 4:02pm, $0.02
    • Synnex (SNX) 4:01pm, $0.94

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

  • Brent Crude’s Premium to WTI Near Six-Month Low Amid Libya Talks
  • Food Costs Jump to 10-Month High as Weather Hurts Beef to Wheat
  • Pricey Wagyu Steaks Are Abe Answer to Cheap Imports: Commodities
  • Tin Advances Most in Four Weeks as Withdrawal Orders Increase
  • Gold Trades Near Seven-Week Low as Demand Weighed Against Data
  • Wheat Extends Biggest Drop in Five Weeks as Rains May Aid Crops
  • Sugar Declines for the Fourth Session; Cocoa Rises in New York
  • Iron Ore Swaps Trading Rises to Record on Bets for China Growth
  • Yamana Poised to Best Goldcorp in Osisko Bid: Corporate Canada
  • Price War Seen as Thai Rice Glut Swamps Market: Southeast Asia
  • Foreign Frackers Now Find Comfort in Water-Hungry Spain: Energy
  • Gazprom’s $910 Billion Gaffe Shows Putin Economy Eroding Wealth
  • Asia LNG Prices May Fall as Gail, Chubu Lead Joint Purchasing
  • Rebar in Shanghai Climbs to 1-Month High on China Stimulus Plans

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

 

 

 

 

 

 

 

 

 

 

 

 

 


Poll of the Day Recap: A Spring Re-Birth for Consumer Spending?

After all the finger pointing at this year’s epic-ly frigid winter as an excuse for weak company performance, the white wash snow days of winter are (finally) coming to an end.

 

With no more excuses about why consumers stayed inside, we asked in today’s poll:  Will consumer spending bounce back this spring?
 

At the time of this post, 53% responded YES; 47% said NO.
 

Of those who voted YES, one responder pointed out that “this winter is what killed the dinosaurs (coldest in 13 years) - people stayed home from work and the shops.”
 

Another YES commenter further explained, “There's pent up demand from a bad winter and the oil longs are way too bold and when prices correct, the consumer wins!”
 

One voter summed up their YES vote by comparing previous seasons: “Last summer was the wettest on record in a decade. That's a good year-over-year comp.  Bottom line, April through July has a positive tailwind. After that, accelerating inflation will crimp spending in the late summer/early fall.”
 

And, while one YES voter agreed that weather had a hand in the slow down, calling it simply “fact,” they admitted that “the bounce won't be great, just better than it has been.”
 

Conversely, among the NO voters, one commenter said consumer spending will not bounce back due to “tepid job growth.”
 

Others clarified:

  • “I think the mild bump from pent up weather effects gets more than offset by larger burden for healthcare spending falling on consumers due to ACA this year.”
     
  • “I have less money than last year; [my] savings [are] slowly eroding...”
     
  • “Discretionary income will be lower due to higher fees/taxes and food/energy costs. Spending lower. Consumers maxed out on borrowing capacity.”
  • “Most of the relief people receive with the spring will be used to repair family balance sheets and brace for more inflation.”
     
  • “Any increase will be only inflation driven which is not good for economy or people especially when low rates already hurt savers badly.”

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What Did LINN Buy? A Look at BRY’s 2013 Reserve Report Results

Berry Petroleum filed stand-alone reserves, costs incurred, and PV-10 data for 2013 in the back of its 3/31/14 10-K.  With legacy BRY comprising ~25% of LINN Energy’s pro forma total production and ~50% of LINN’s pro forma oil production, these results are important to review for anyone interested in LINE/LNCO.

 

We’ve summarized and synthesized the 2011 – 2013 data in the five tables below, where the takeaways should be relatively self-evident.  But some high-level thoughts….

 

Overall, the results were mixed.  In 2013 BRY again directed the majority of its capital to its oil plays, but cost creep exceeded the revenue uplift, and profit margins slipped slightly from 2012 (EBITDAX margin fell 300 bps YoY) – SEE TABLE 1.  Despite a 39 MMboe PUD write-off, BRY had a decent year with the drill bit, growing total production 14% and oil production 20% while the PD F&D cost came in at $29/boe and reserve replacement was 140% – SEE TABLES 2 and 3.  We note that LINN’s 2014 maintenance CapEx guidance implies an F&D cost of ~$22/boe for BRY.  That $7/boe difference on 15 MMboe of expected BRY production in 2014 equates to another $105MM ($0.30/unit) of maintenance CapEx on the  legacy BRY assets alone.   The most interesting data to us were the changes in PV-10.  Despite stable price decks (oil flat, NGLs down, gas up), BRY’s PV-10 dropped $545MM (-11%) YoY to $4.6B, with the PD PV-10 down $87MM (-2%) and the PUD PV-10 down $457MM (-36%) YoY.  LINN wrote down $856MM of PV-0 due to negative revisions of previous quantity estimates, which appears to be mostly related to the negative PUD revisions – SEE TABLES 4 and 5.  BRY’s PD PV-10 has been flat at ~$3.8B since YE11, while its PUD PV-10 has fallen from $1.9B to $800MM.  Over that time, the company added ~$1B of debt to the balance sheet, paid out a small dividend (~$17MM/year), and had share count creep due to SBC.  We don’t see much in the way of “value creation” in these results – perhaps why BRY was such eager seller.

 

What Did LINN Buy?  A Look at BRY’s 2013 Reserve Report Results - b1a

 

What Did LINN Buy?  A Look at BRY’s 2013 Reserve Report Results - b2

 

What Did LINN Buy?  A Look at BRY’s 2013 Reserve Report Results - b3

 

What Did LINN Buy?  A Look at BRY’s 2013 Reserve Report Results - b4

 

What Did LINN Buy?  A Look at BRY’s 2013 Reserve Report Results - b5

 

Kevin Kaiser

Managing Director


Firing Oblivious Darden Management Is Only Way to Unlock ‘Generational Buying Opportunity’ | $DRI

 

 Veteran Hedgeye Restaurants analyst Howard Penney explains why he's in lockstep agreement with activist investor Starboard's new 200-page manifesto on Darden Restaurants and why the company's oblivious management team needs to be replaced in order to unlock significant shareholder value.


9 Charts: Europe's Economic Outlook

Takeaway: We think there’s no prospect of President Mario Draghi moving interest rates from current levels.

Ahead of tomorrow’s interest rate decision – at which we think there’s no prospect of President Mario Draghi moving from current levels – we want to give a quick update on our European economic outlook through the nine charts below.

 

9 Charts: Europe's Economic Outlook - Finanzminister beraten  ber Euro Krise

  • PMIs have moderated and somewhat flat lined over recent months (the UK and Germany Manufacturing are notable callouts), however the data remains grounded above the 50 line (expansion) and in aggregate is in-line with modest growth ticking higher, and remaining stable. We continue to marginally prefer European equities over U.S. equities.

9 Charts: Europe's Economic Outlook - z. pmis large

  • Confidence continues to grind higher. In the next two charts we show this trend across Economic Sentiment, Consumer Confidence, and Business Confidence.

9 Charts: Europe's Economic Outlook - z. confidence

9 Charts: Europe's Economic Outlook - z. business climate

  • Italian Retail Sales is one call-out to the performance of the periphery. The Italian Retail Sales data shows fits and starts of improvement, however we think the trend line will move higher to positive as we head into the back half of the year. While Italian politics remain far from stable, we expect the young new government of PM Matteo Renzi to spur confidence. The Italian stock market (FTSE MIB) is up a monster +14.8% YTD, with Greece (Athex) up +16.2% and Portugal (PSI 20) up +17.3% as the top performing European equities YTD.

9 Charts: Europe's Economic Outlook - z. italy retail sales

  • New Car Sales across Europe have shown steady improvement over the past 14 months, and have remained positive over the last 6 months. We view confidence in big ticket items, like a car, as a material read-through on the positive state of the European consumer (and there’s no distortion here from a cash-for-clunkers program).

9 Charts: Europe's Economic Outlook - z. cars

  • Inflation – we view the media’s manic deflation scares as misplaced. The ECB has long signaled to the market a very extended program to return CPI toward its target level of 2.0%. In the second chart below we show how far CPI has moved in the last 12 months: our take-away is that deflation of the inflation is a tailwind to consumption. ECB VP Victor Constancio said yesterday that he expects a higher reading in April, versus the 0.5% reading in March.

9 Charts: Europe's Economic Outlook - z. cpi

9 Charts: Europe's Economic Outlook - z. cpi chg

  • Germany, along the UK (via the etf EWU), has been a preferred equity position via EWG. As we show in the chart below, the DAX is comfortably trading above its TREND line of support at 9,382. The EUR/USD remains resilient, supported by stable underlying growth of the region and policy from the ECB to better shield the member states and shore up the link between the banking systems and the sovereigns. For now, the dovish Fed head Janet Yellen is supporting a strong EUR/USD (TREND support = $1.36). Strong German Factory Orders is merely one important signal that Germany’s industry export base is firing on all cylinders. 

9 Charts: Europe's Economic Outlook - z. dax

9 Charts: Europe's Economic Outlook - z. german factory png

 

This research note was originally published April 2, 2014 at 11:35 a.m. by Hedgeye Macro Analyst Matthew Hedrick.

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