“Some questions have no answers to find.”
This weekend I changed things up a bit and started re-reading a play called Copenhagen which is based on a meeting of the physics minds of Niels Bohr and Werner Heisenberg in 1941.
The timing of the play opening on Broadway (April of 2000 at the top in the US stock market) is interesting. I was a newbie on Wall Street back then. I didn’t know much more than I know now about why this time the bubble is “different.”
Copenhagen’s opening scene starts with four questions exchanged between Bohr and his wife, Margrethe:
Margrethe: “But why?”
Bohr: “You’re still thinking about it?”
Margarethe: “Why did he come to Copenhagen?”
Bohr: “Does it matter, my love? Now we’re all three of us dead and gone”
Back to the Global Macro Grind…
But why do bond yields keep going down? Why is Old Wall consensus still expecting 3.32% for the 10yr US Treasury yield for 2014 when it’s currently trading at 2.51? Why did consensus come into 2014 expecting US Growth to accelerate, and inflation to fall? Does it matter, my friends?
These questions obviously have obvious answers – unless you are paid to anchor on estimates that are dead wrong, that is. As #InflationAccelerating slows real US growth expectations for 2014, some serious questions remain as to why Wall Street and Washington have not yet come to agree with gravity.
This is, of course, the upshot of Copenhagen – Heisenberg (not the Breaking Bad dude, but Walter White was named after him):
“No one understands my trip to Copenhagen. Time and time again I’ve explained it. To interrogators and intelligence officers, to journalists and historians. The more I’ve explained, the deeper the uncertainty has become…”
“So” embrace the uncertainty associated with how an unprecedented level of un-elected central planning is affecting the rate of change in both growth and inflation in the US economy. There is nothing linear about this.
In addition to US Bond Yields getting hammered last week, here’s what Mr. Macro Market had to say about US growth:
- Growth Stocks (Russell 2000) down another -0.4% last week to -5.2% for 2014 YTD (down -8.8% since March)
- Yield Spread (10yr yield of 2.51% minus the 2yr yield of 0.36%) compressed another 8 basis points on the week (-48 basis points YTD)
- Financials (XLF) were the worst performing sub-sector of the SP500 at -0.8% on the week to -0.5% YTD
In other words, as the long-end of the curve (10yr yield) dropped -10 basis points on the week (-51 basis points YTD), not only is that a leading indicator for US #GrowthSlowing, but it’s as good a proxy as any for bank earnings (net interest margin tracks the Yield Spread).
Everyone who has followed market history knows why. There isn’t a person in this profession who can tell you with a straight face that growth stocks, financials, and bond yields all declining at the same time is a bullish growth signal.
Neither can they tell you that food and oil prices accelerating is a consumer tax cut. Here’s the update on that:
- Oil price up another +2.3% last week (breaking out above @Hedgeye TAIL risk lines of resistance)
- Cattle prices up another +1% last week to +13.5% YTD
- REITS up another +0.4% last week to +14.6% YTD
Oh, you mean you don’t eat REITS? But you’re still thinking about chasing some slow-growth yield? Obviously cost of living is ripping in this country, and since 1/3 of Americans rent, they can eat that inflation – and like it, because as Heseinberg explained in Breaking Bad, “I say so.”
The only good news I can give you on the US stock market is that buy-side consensus is starting to figure out the #InflationAccelerating slows US consumption growth theme. Here’s the updated CFTC Non-Commercial net long/short positions in the Big Macro stuff that matters:
- SPX (Index + Emini) closed the wk with a net short position of -40,901 contracts (vs. an avg NET LONG position of +16,256 contracts over the last 6 months)
- 10YR Treasury has a net long position now of +23,948 contracts (vs an avg NET SHORT position of -81,337 contracts over the last 6 months)
Put another way:
- If you were long growth equities and short bonds 6 months ago, you were killing it (but about to get killed)
- If you made the turn (out of growth stocks into slow-growth bonds) in the last 6 months, you are still killing it
Just because consensus is moving the way of economic gravity doesn’t mean the move is done. In Breaking Bad, Walter White explained this reality quite effectively to Saul too: “We’re done when I say we’re done.” And that’s all Mr. Macro Market is going to have to explain about that.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.48-2.61%
WTIC Oil 101.05-102.97
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
the macro show
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TODAY’S S&P 500 SET-UP – May 19, 2014
As we look at today's setup for the S&P 500, the range is 21 points or 0.90% downside to 1861 and 0.22% upside to 1882.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.16 from 2.16
- VIX closed at 12.44 1 day percent change of -5.54%
MACRO DATA POINTS (Bloomberg Estimates):
- 11:30am: U.S. to sell $25b 3M, $23b 6M bills
- 12:10pm: Fed’s Williams and Fisher speak in Dallas
- 12:50pm: Former Fed Chair Bernanke speaks in Dallas
- House in session; Senate returns Tue.
- President Obama attends evening fundraiser at private home in Potomac, Md.
- 10am: Supreme Court may release opinions
- 11:45am: Former Treasury Sec. Tim Geithner speaks at Politico lunch
- 1pm: Energy Sec. Ernest Moniz, EPA Admin. Gina McCarthy participate in Google+ Hangout
- Financial Stability Oversight Council hosts conf. on risks to financial system; includes Citadel’s Ken Griffin
WHAT TO WATCH:
- AstraZeneca rejects Pfizer’s sweetened $117b takeover proposal
- AT&T agrees to buy DirecTV for $95/shr as TMT deals continue
- Deutsche Bank to raise $11b as Qatar taking stake
- GE said to seek partners on Alstom assets for French approval
- Johnson Controls to spin off Automotive Interiors into JV
- Credit Suisse guilty plea looms as U.S. said to reassure banks
- Blackstone sells five Boston towers for $2.1b: WSJ
- Walgreen considering GBP10.5b Boots buyout: Sunday Times
- Cisco CEO calls on Obama to rein in surveillance: FT
- Google’s YouTube said to buy Twitch for $1b: Variety
- Yahoo Japan cancels plan to buy EAccess from SoftBank
- ’Godzilla’ wins N.A. box office with est.-beating $93.2m
- Gasoline prices fall to $3.6876/gal. in Lundberg survey
- Gunmen storm Libya parliament as violence grip oil producers
- Marriott offers EU130m for Madrid Ritz Hotel, Expansion says
- Ryanair targets profit growth by flying 3m more travelers
- Ousted NYT Editor Abramson to speak at Wake Forest commencement
- Campbell Soup Co (CPB) 6:30am, $0.59
- Urban Outfitters (URBN) 4pm, $0.27
- Valspar (VAL) 7:30am, $1.04
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Brent Extends Weekly Gain as Libya Fighting Worsens; WTI Rises
- Hedge Funds Cut Bullish Gold Wagers Most in a Month: Commodities
- Thai Gold Imports Plunge Amid Political Deadlock: Southeast Asia
- European Central Banks Make Gold Agreement Without Sales Limit
- Gold Climbs on Speculation of India Relaxing Import Restrictions
- Cocoa Drops on Outlook for West African Crops; Arabica Declines
- Wheat Set for Longest Slump in 15 Years as Rain Aids U.S. Crops
- Nickel Advances as Norilsk Forecasts Move to Deficit Next Year
- Norilsk Sees Nickel Surplus Shrinking to Smallest in Four Years
- Natural Gas Bets Drop to Five-Month Low on U.S. Supply: Energy
- Biggest 10 Banks’ Commodities Revenue Rises 26% Amid Pullback
- Iron Ore Futures on SGX Below $100 for First Time Since 2013
- Global Grain Production Records Show No Signs of Peak: Bull Case
- Russia Gas Supply Fears Spur Record Trading on ICE Exchange
The Hedgeye Macro Team
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Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Hedgeye CEO Keith McCullough talks markets on Fox Business' Opening Bell with host Sandra Smith, filling in for Maria Bartiromo.
In this excerpt from the Retail team’s conference call this morning for institutional investors, Brian McGough explains one key point in his bearish thesis on Kohl’s. Hint: it has to do with JC Penney.
Hedgeye CEO Keith McCullough takes a look underneath the economic hood and explains why stocks and bonds both have it right.
Stay with what’s been working all year – #InflationAccelerating and slow-growth #YieldChasing assets.
Food prices have surged in the US as Americans suffer sticker shock.
Could the data be more clear? #InflationAccelerating slows growth.
The PPI report on Wednesday showed (shocker!) that inflation is soaring – thanks in large part to food prices. Click here to view the poll and results.
Sell Growth: SP500 Levels, Refreshed
In a research note CEO Keith McCullough originally wrote for subscribers he said, "But whatever you do, don’t call falling bond yields (do not sell bonds here!) on today’s #ConsumerSlowing (Retail Sales +0.1%) print a US growth slowing confirmation. The weather turned, but the consumption data that matters most didn’t." Click here to read more.
Retail: Wal-Mart Plays Right Into #GrowthSlowing | $WMT
Sure, Wal-Mart's comp miss is obvious, but the earnings per share miss is startling given historical context. As Hedgeye Retail analyst Brian McGough explains, this plays right into Hedgeye's #GrowthSlowing theme. Click here for more.
Fund Flows, Refreshed
Last week's data reveals significant deceleration in equity fund flows, capping off a week of less-than-stellar performance. Click here to continue reading.
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