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“Visual polish frequently doesn’t matter if you are getting the story right.”
-Ed Catmull (President of Pixar)
While it’s month-end-no-volume-markup time here in the US equity market, no matter where you go – and no matter how you have been positioned for the last 5 months, here we are. The score doesn’t lie; consensus expectations for #RatesRising in 2014 does.
Sure, there’s a polish to the reports and a gravitas to once great names in finance that still remain on their doors. But, to be clear, there is no responsibility in recommendation from the Old Wall anymore. Instead, every time they are wrong, “it’s different this time.”
The right story in 2014 has been to be long slow-growth bonds and/or anything that looks like a bond (Utilities +11.5% YTD). The 10yr US Treasury yield has crashed to a fresh YTD low of 2.42% this morning. US Growth (Russell 2000) and US Consumer (XLY) stocks are down over -2% YTD. And, depending on what piece of inflation you are long (food and/or energy) you’re up +8-22% YTD.
Back to the Global Macro Grind…
Yes, I hate losing. But I really hate it when people who are losing (including any of my teammates) try to say they really aren’t. This is a confirmation bias embedded in a society where no one is actually allowed to fail. Every lazy player in the league gets a trophy.
Instead of acknowledging what no Old Wall firm called (for US GDP Growth to be NEGATIVE) in Q114, all I hear are excuses instead of the most obvious call they don’t want to make – bond yields fall (and the yield curve compresses) when growth is slowing.
Sure, I have my own biases on leadership in action, transparency in process, and accountability in recommendation. And I am fully aware that on mornings like this that I can sound like the prickly coach. That’s who I am.
But who you or I are as flawed human beings doesn’t change the score. As the great Bobby Orr once said:
“Forget about style; worry about results.”
Having worn a black silk dress shirt and a mauve screaming eagle tie to work on my first day on Wall Street, I’d be hard pressed to convince you that my style has been consensus over the years. What I really care about is #process.
Our #process has now signaled the biggest “surprises” to both the upside (2013) and downside (2014) in US Yields, and I’m not going to apologize for it. Unlike most macro research I used to pay for when I was in your seat, our #process goes both ways.
*Note: our process takes a full team effort – here’s what our Senior US macroeconomic analyst, Christian Drake, had to say about the 10yr bond yield crashing (-20% YTD) to 2.42% this morning:
“The pro-growth panglossian contingent can take solace in the fact that after today’s negative GDP print, it can only really get better sequentially. Q114 GDP probably wasn’t as bad as the headline and Q214 won’t be as good.”
“Taking the average of the two quarters is the easiest smoothing adjustment and it will show we’re a high 1% economy – which is about right. #Hedgeye – we came here to drink the milk, not count the cows.”
It’s a 1-2% (at best), not a 3-4% US economy. And that’s why the 10yr is going closer to 2%, not 3%. Roger that, Dr. Drake.
Yes, I have fostered a culture of confidence. I don’t know one successful athlete who wakes up every morning not wanting to crush his or her competition. I’m not going to apologize for being that way either.
This is America – a country that I came to in the early 1990s when being a winner mattered more than being the whiner who wanted my winnings. We stand alongside you every day, committed to excellence. We refuse to accept mediocrity in big macro forecasting.
There is no I in Hedgeye and we reiterate our top non-groupthink Global Macro Themes for 2014 to-date:
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:
UST 10yr Yield 2.42-2.52% (bearish)
SPX 1 (bullish)
RUT 1089-1146 (bearish)
Nikkei 136 (bearish)
VIX 11.03-13.76 (bearish)
USD 79.89-80.61 (bearish)
EUR-USD 1.35-1.37 (bullish)
Pound 1.67-1.69 (bullish)
Brent Oil 109.06-110.97 (bullish)
Natural Gas 4.47-4.66 (bullish)
Gold 1 (bullish)
Copper 3.10-3.20 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – May 29, 2014
As we look at today's setup for the S&P 500, the range is 29 points or 1.14% downside to 1888 and 0.38% upside to 1917.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
This is a brief excerpt from a wide-ranging discussion Hedgeye CEO Keith McCullough had with Euro Pacific Capital CEO Peter Schiff as part of HedgeyeTV's "Real Conversations" series. While Schiff advocates policy that would actually be bad for gold, he has no faith that the government will do the right thing. The full interview runs Thursday.
Takeaway: 83% expect it to be BELOW 3%; 17% said ABOVE 3%.
We’ve been making the #GrowthSlowing call here at Hedgeye for months, so when the government reported first quarter GDP growth of 0.1% last month, it didn’t surprise us. It also won’t surprise us if the government revises its Q1 GDP estimate to a negative number tomorrow.
That said, #OldWall sees GDP accelerating in Q2. According to a Wall Street Journal survey of 48 economists, the consensus forecast is for the economy to expand 3.3% next quarter.
But we wanted to know what you thought.
Today’s poll question was: Do you expect GDP to be above or below 3% at the end of Q2?
At the time of this post, 83% of voters expect it to be BELOW 3%; 17% said ABOVE 3%.
Of those who voted BELOW 3%, one person explained, “Corporate America is not going to invest capital needed to grow when you have an anti-capitalist President who believes in higher taxes, more government regulations and redistribution of wealth. This is a ‘no-confidence’ economy.”
Additionally, this voter agreed the GDP would be BELOW 3% because it has “been declining since Q32013, 10 yr yields continue dropping since Dec2013…now @ 2.44% and housing has gotten bleaker; certainly makes a GDP > 3% truly improbable, if not impossible.”
Another voter said that though they expected it to BELOW 3%, “when you are able to change the rules and how they are calculated like in Italy recently adding prostitution and illegal drugs...anything is possible!”
On the opposite end, one ABOVE 3% voter noted: “Q1 will probably be revised to negative. But the YoY rate of change is likely to be flat-to-down. And down even more so as we progress throughout 2H14.”
Takeaway: While dicey from a seasonal perspective (VIX/JPY mid-summer ramp?), investors should begin the process of covering their Abenomics shorts.
With the Nikkei 225 up +4.5% WoW, the index is now down only -0.6% since our 2/19 note calling for consolidation in the Abenomics Trade (vs. -4.9% 1W ago). Inclusive of a -0.5% WoW decline, the JPY is now up only +0.4% vs. the USD since the aforementioned date (vs. +0.9% 1W ago).
If you’ve been inappropriately levered long of the Abenomics trade since then, ~150bps of wrong-way PnL probably feels more like a ~1,500bps squeeze in the context of the Nikkei 225 being down -9.9% YTD and the JPY being the 2nd strongest G10 currency vs. the USD in the YTD at +3.4%. As an aside, that is just shy of the +3.5% advance for the AUD, in line with the +3.4% advance for the NZD and followed next by the NOK’s +1.6% gain. Did someone say, “#InflationAccelerating will matter in 2014?” I digress…
You know why we’ve been calling for said consolidation (refer to the aforementioned note), but to recap:
In the context of a Japanese fiscal policy vacuum (see: “missing Third Arrow”), we appropriately thought this setup called for a consolidation of the Abenomics Trade. We’ve certainly seen that in the data:
We’ve been writing about points #1 and #2 daily since JAN, so there’s no need for us to waste any of your time proving that out in this note. In fact, our conviction on the intermediate-term outlook for US economic growth remains unshaken amid what has been a golf clap-worthy weather-related bounce domestically. What we will focus on, however, is the next 3-6M outlook from here with respect to Japan’s GIP fundamentals.
Starting with our proprietary GIP process, we do not currently hold out-of-consensus expectations for Japanese growth and inflation dynamics – i.e. a sharp, inflationary slowdown in 2Q followed by a fleeting, disinflationary recovery in 2H.
GDP comps level off from here while CPI comps ramp in 2H. In the context of now-sideways trending inflation in Japan, that only increases pressure on the BoJ to ease by the end of 3Q – especially if Japanese consumer sentiment continues to careen to the downside (think: emerging pressure upon the Abe administration that may lead to intraparty dissension).
Giving respect where it is due, Japan’s economy has been handling the +300bps consumption tax hike perhaps a little better than expected (but still terribly on an absolute basis). In going through all of Japan’s key high-frequency economic data that has been reported for the 2nd quarter, there are three trends that jump out to us thus far:
We are also no longer out of consensus with regards to our outlook for Japanese fiscal and monetary policy – i.e. we also think the BoJ expands upon its QQE program by the end of 3Q or early into 4Q (statements on JUN 13, JUL 15, AUG 8, SEP 4, OCT 7 and OCT 31) and we think the Third Arrow of Abenomics has increasing potential to surprise consensus expectations to the upside with respect to corporate tax cuts, GPIF reform, corporate governance and/or labor market reforms come next month’s supposed introduction.
Basically anything that will be interpreted as simulative to meaningful domestic CapEx expansion should be taken as a major positive amid continued #PayMeNow corporate governance in Japan; dividend payments by Japanese enterprises grew +20% in FY13 to a record ¥6.9T and 47% of companies plan to resume or hike payments further.
Rather than speculate on either of these fiscal/economic policy catalysts amid their respective deliberative processes, we’ll just continue to read the tea leaves and react accordingly; email us if you’d like us to discuss the latest happenings further.
All told, our fundamental GIP outlook leaves us very much in consensus on a lot of things Japan – which means we should not be trying to call for contrarian outcomes with respect to Japanese capital and currency markets on Japanese fundamentals alone.
We still have a ton of conviction in our contrarian bear case on US GIP fundamentals, so assuming we’re in the area code of right on both catalysts, it’s hard to know which will be more favored by investors going forward (we’d argue that it’s been all US #GrowthSlowing thus far).
As such, it no longer makes sense for investors to continue aggressively playing for counter-trend deltas in Japanese stocks and the JPY. To the extent you’ve done so – either by pairing back equity long holdings or outright selling them short – we think it makes sense to begin the unwind process of that trade.
This is especially true in the context of TACRM signals that, for the first time since 2013, are showing DM Equities gain relative momentum at the primary asset class level in lieu of FX and Commodities. Assuming this is the start of a trend, that Global Macro beta would be positive for Japanese equities and negative for the JPY.
In short, the risk of consensus finally being right on Japan – based solely on Japanese fundamentals alone – is a lot higher now than it has been in the YTD.
Best of luck out there,
Associate: Macro Team
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