This note was originally published at 8am on June 12, 2014 for Hedgeye subscribers.
“For of those to whom much is given, much is required.”
- President John F. Kennedy
Last night Keith and I took a private car service into Manhattan to watch the New York Rangers play the Los Angeles Kings in the fourth game of the Stanley Cup Finals. Clearly, given such an experience, there is no doubt we are among the fortunate in this fine nation.
While most of you that are reading this have worked hard to achieve your position, we have all also received a helping hand along the way. That helping hand may have been from a mentor, from a coach, or just being born somewhat lucky. But, regardless, we all now have the opportunity to give back.
In the spirit of #PayingItForward, Hedgeye has formed a non-for-profit called Hedgeye Cares, which will be dedicated to giving back to charities in Connecticut. Our inaugural event will be the 2014 Hedgeye Cares Golf Challenge to be held on September 16th at the Great River Golf Club in Milford, CT. The proceeds from this event will go to Bridgeport Caribe Youth Leaders (BCYL).
BCYL is non-profit based in Bridgeport, CT, one of the more economically disadvantaged cities in Connecticut, and provides athletic and enhanced educational opportunities to youths aged 5 to 18 to whom much has not been given. Currently, the program provides opportunities for some 500 kids in the Bridgeport area and we will be focused on expanding that number.
We hope you will consider joining us for a golf outing on September 16th and if you aren’t a golfer and or cannot make the event, we hope that you will consider sponsorship or auction donations and join us in #PayingItForward. Details can be found here.
Back to the Global Macro Grind...
Speaking of giving, the Kings actually gave the Rangers a fighting chance last night by losing 2 -1, so the Stanley Cup Finals return to the City of Angels this Friday. On some level, the Rangers have already exceeded expectations by winning last night. Specifically, of the 320 NBA, MLB or NHL teams that have found themselves up 3 – 0 in a seven game series, 65% have gone on to win the next game and close out the series.
In terms of coming back and winning the entire series from a 3 – 0 deficit, it has only happened four times in 171 opportunities in the NHL. For you math geeks, that equates to right around a 2.3% chance of overcoming a three game deficit. So is a comeback probable? No. But as they say, hope springs eternal.
Speaking of probabilities, as equity investors we can be pretty sure that volatility on the SP500, as measured by the VIX, won’t stay below 11 for long. Pull back a long term chart of the VIX on your Bloomberg this morning and you will see what we mean. The last time the VIX hit this level was actually January of 2007. Thereafter, volatility made a steady climb before peaking in October 2008 at ~60.
So as investors, feel free to bet that VIX will go lower from here, but practically that is about as likely as Iran, Honduras, or Costa Rica winning the World Cup. According to Oddshark.com, the odds on that are more than 1500 – 1. Math doesn’t always work, just ask California Chrome, but over time life is much simpler when we play the odds.
Speaking of odds, the likelihood is high that many of us wouldn’t have bet on a Eurozone Industrial production number that came in well ahead of expectations this morning. According to my colleague Ben Ryan:
“Industrial Production printed much stronger than expected (five-month high) for April with strength in energy and non-durable goods production which increased +2.5% and +2.1% respectively. Month-over-month, seasonally-adjusted industrial production increased +0.8%, beating expectations of +0.5%. Note that March was downwardly revised to -0.4%, so April’s increase follows a pretty bad number."
Following a bad number or not, that is the kind of number that we macro analysts underline with a big green highlighter (green being bullish) in our notebooks.
Even as European data continues to get better on the margin, we remain cautious, to say the least at current VIX levels, on the U.S. economy. In the Chart of the Day, we’ve highlighted our U.S. GDP summary table going back two years to March 2012.
The key takeaway from this table is that healthcare spending was critical in supporting GDP in the 1st quarter. With the census bureau’s release of the 1Q14 QSS survey yesterday, that estimate of healthcare spending saw a sharp negative reversal.
According to my colleague Christian Drake:
Services consumption was the singular source of strength in the 1Q14 GDP report and most of that was from Healthcare Services which contributed +1.01% to GDP – that estimate of accelerating healthcare consumption just got revised to negative growth which will take the final GDP estimate for 1Q down to -2.0% plus or minus.
The net-net of this is that the final estimate of 1Q GDP (June 25th) will be (even more) dismal and GDP is likely to miss the ever bullish consensus expectations for full year 2014. When combined with increasing uncertainty in the 2014 mid-term elections, see Eric Cantor, we may just have an opportunity for you equity bears to #PayItForward in the coming months.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.44%-2.67%
Keep your head, stick on the ice and belief in the Rangers,
Daryl G. Jones
Director of Research