Client Talking Points
U.S. Dollar down for 2 straight weeks (and not bouncing this morning) following the Fed getting easier in terms of both its growth forecast and timing on rates; this is not a position for the faint of heart as #InflationAccelerating is already slowing U.S. consumption growth.
UST 10YR yield down another 7 basis points last week (-49bps year-to-date) to 2.53% and not bouncing this morning; Yield Spread (10yr – 2yr) compressed 8 basis points to +207 basis points wide; inflation slowing U.S. growth into Q3 remains our out-of-consensus call; bond market agrees.
EuroStoxx600 -1.8% last week and not seeing much of a bid into month-end today either; both the DAX and Italian MIB Index have broken our immediate-term TRADE lines of support; this relative weakness is new and noteworthy if it were to continue.
|FIXED INCOME||24%||INTL CURRENCIES||15%|
Top Long Ideas
Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration. The first survey tool measures 3-D Mammography placements every month. Recently we have detected acceleration in month over month placements. When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner. With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.
Three for the Road
TWEET OF THE DAY
DUBAI: back into crash mode, -4.5% this morning (-23% since the beginning of June)
QUOTE OF THE DAY
“Nobody's a natural. You work hard to get good and then work to get better. It's hard to stay on top.”
STAT OF THE DAY
$42.6 million, the amount of money Miami Heat guard Dwyane Wage would have earned over the next two years had he not opted out of his current contract.
“Without cycles, time would literally defy any kind of description.”
-The Fourth Turning
From a performance reporting perspective, it’s both month and quarter end today. As William Straus and Neil Howe recently reminded me in The Fourth Turning, “The words year and hour come from the same root as the Greek horos (solar period)… and the word month is a derivative of moon.”
Time and price put more pressure on us than most things in this profession. We just need to take a few deep breaths every once in a while to contextualize both. “We need to recall that time, in its physical essence, is nothing but the measurement of cyclicality itself.” (The Fourth Turning, pg 13)
After one of the lowest volume months in US equity market history, where are market prices within the context of the future? What is the US economic cycle (and bond market) telling you vs. the US stock market’s last price? Does history matter?
Back to the Global Macro Grind…
Straus/Howe do a good job arguing that most academics who are trying to become famous in the social sciences with “it’s different this time” are disrespecting time and space. “This scholarly rejection of time’s inner logic has led to the devaluation of history throughout our society” (pg 12).
While it might work in disruptive technologies, devaluing history, time, and cycles rarely works in Macro… “so”, let’s embrace the uncertainty born out of these measurable risk factors and get on with Q3.
One of the Top 3 Global Macro Themes we’ll roll with for Q314 (we’ll be hosting our Institutional Investor conference call next week) is simply going to be #Q3Slowing. US growth slowing, that is.
Nope, God didn’t call us this weekend. Here’s where we’re finding conviction in this out-of-consensus view:
- The Currency Market
- The US Bond Market
- The US Equity Market
- FX – US Dollar Index (down for 2 straight weeks) remains below both our TREND ($80.84) and TAIL ($81.19) risk lines of resistance
- TREASURIES – 10yr Yield -7bps last week (-49bps YTD) remains below both our TREND (2.81%) and TAIL (2.65%) risk lines of resistance
- US EQUITIES – slow-growth Utilities (XLU) were up another +1% last week to +15.6% YTD (Consumer Discretionary is still down YTD)
And those are just the quantitative signals (time/price) augmenting our baseline research views that:
- The Fed is perpetuating inflation via its #DownDollar Policy To Inflate
- As the Dollar declines, #InflationAccelerates and real-consumption growth slows
- As real-growth slows, inflation + slow-growth #YieldChasing strategies (long Bonds, Utilities, etc.) #win
Who cares if an ideological and un-elected central planning committee doesn’t get paid to acknowledge time and space? All you have to do is listen to Mr. Macro Market’s inner logic and you’ll beat your peers in generating risk adjusted returns.
Food prices (CRB Foodstuffs Index) were up another +0.5% to +23.5% YTD last week. Cattle led the charge on that front, closing up another +3.6% on the week to +25.9% YTD. Being long of that and short Del Frisco’s (DFRG) cost of goods sold (and traffic slowing) works for us.
Or how about being long the lover of all things slow-growth-#YieldsFalling, Gold? Gold was up another +0.3% last week to +9.6% YTD (vs. the Dow +1.7% YTD). But, after 4 consecutive up weeks, you want to be buying ze #GrowthSlowing Gold on red, not green!
In a Fed Easing, Down Dollar, and #InflationAccelerating environment, there are so many places to put your money that I’ll run out of time and space in this morning’s rant. To recap, here are some of the bigger asset allocations we continue to like:
- Fixed Income (still loving TIPs and Treasuries)
- Foreign Currencies (still loving the Canadian, Mark Carney, at the Bank of England #StrongPound)
- Commodities (Gold, Oil, Food, etc.)
- International Equities (India, Brazil – i.e. most of the markets we didn’t like last year)
- US Equities (Utilities, Energy Stocks, Healthcare Stocks, Semis, etc.)
In other words, without embracing the uncertainty of where we are going in the macro cycle, my writing to you every market morning would literally be useless. #History teaches us that knowing where you are going in markets requires contextualizing where you’ve been.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.51-2.60%
BSE Sensex 242
WTI Oil 105.16-106.99
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
the macro show
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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
This note was originally published at 8am on June 16, 2014 for Hedgeye subscribers.
“Something deep in my character allows me to take the hits and get on with trying to win.”
First and foremost, happy belated Father’s Day to all the Dads out there who do what they do when no one is looking. As most of the young men playing in the 2014 World Cup will attest, doing the best that you can do out there, every day, is a grind.
For those of you who didn’t know who Messi was until your Dad’s Day dinner last night, what a gem this guy is in the arena that is soccer. Selfless, hard working, and talented, he is everything that the largesse of Argentina’s government is not.
At 26 years old, Messi is the Captain of Argentina’s hopes in Brazil. Like many athletes who represent their country, his maturity and leadership are beyond his years. On money, he said it “doesn’t thrill me or make me a better player… I’m just happy with the ball at my feet.”
Back to the Global Macro Grind…
With both the NHL and NBA seasons officially over (congrats Kings and Spurs!), it’s time for some World Cup Soccer while you attempt to risk manage what are becoming very thinly traded all-time-bubble-highs in US Equities.
In order to look forward, let’s take a step back. Unless you were long #InflationAccelerating last week, it was messy:
- SP500 and Dow were down -0.7% and -0.9%, respectively, last week (Dow barely up YTD at +1.2%)
- Russell 2000 resumed its bearish intermediate-term TREND at -0.1% YTD and -3.8% since March
- Industrials (XLI) led losers at -1.5% on the week as energy prices (producer costs) ripped
US Consumer Discretionary stocks (XLY) are still -1.6% YTD and continue to eat #InflationAccelerating:
- CRB Commodities Index (19 Commodities) was up another +1.5% last week to +10.6% YTD
- WTI Crude Oil led inflation melt-up at +4.2% on the week to +10.8% YTD
- Natural Gas and Coffee prices were up another +1% last wk to +14.8% and +50.6% YTD, respectively
While Total US Equity Market Volume was down -34% (vs. the 3 month average) on Friday’s +0.3% SPX negative breadth up-day, we finally got some real equity and commodity market volatility last week:
- Oil volatility (Oil VIX) was +34.3% last week to 19.47
- US Equity volatility (VIX) was +11.8% last week to 12.18
From a risk management perspective, rate of change in our model always matters – but it really matters when that directional rate of change (2nd derivative) signal occurs off its most asymmetric long-term TAIL risk point.
That’s where US Equity Volatility (VIX) was when it closed at 10.73 on June 6, 2014. While the perma-bulls on US GDP growth may think “it’s different this time”, it’s not. The VIX has never stayed below 10 – ever. And, as you know, never-ever is a very long time.
As gas prices rage higher alongside an all-time high in US rents (34% of the country rents and shelter is their #1 cost of living), prepare for another messy week of Consensus Macro expectations meeting their maker (bond market signaling growth is slowing):
- TUESDAY: US Consumer Prices (unlegislated taxes) for May should continue to accelerate
- WEDNESDAY: The Fed should talk down its US Housing and GDP forecasts now that they’re wrong on growth (again)
- THURSDAY: Uruguay plays England at 3PM EST #WorldCup
If England plays like they did against Italy, that could get messy too. As Spain learned against the Dutch, at first risk happens slowly – then all at once.
UST 10yr Yield 2.45-2.64%
Brent Oil 109.87-113.11
Natural Gas 4.65-4.83
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – June 30, 2014
As we look at today's setup for the S&P 500, the range is 25 points or 0.86% downside to 1944 and 0.41% upside to 1969.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.06 from 2.07
- VIX closed at 11.26 1 day percent change of -3.18%
MACRO DATA POINTS (Bloomberg Estimates):
- 9am: ISM Milwaukee, June est. 60.0 (prior 63.49)
- 9:45am: Chicago Purch. Mgr Index, June., est. 63 (prior 65.5)
- 10am: Pending Home Sales m/m, May, est. 1.2% (prior 0.4%)
- 10:30am: Dallas Fed Mfg Activity, June., est. 10.0 (prior 8.0)
- Noon: USDA quarterly grain inventories
- 1:10pm: Fed’s Williams speaks in Sun Valley, Idaho
- President Obama welcomes Chilean president Michelle Bachelet to White House
- House, Senate on recess until July 8
- 10am: Supreme Court issues last decisions of term; likely to hand down decision on Hobby Lobby case
- 10am: Kenneth Feinberg, a victims compensation lawyer hired by General Motors, holds news conf. on details of program to compensate victims or family members of victims killed in accidents connected to faulty ignition switch that prompted recall of 26m vehicles
WHAT TO WATCH:
- BNP dollar-clearing ban said to start in 2015 as plea looms
- ‘Transformers’ debut of $100m sets high mark for 2014
- Aereo halts service after Supreme Court loss to broadcasters
- Al-Qaeda offshoot declares Islamic caliphate as Iraq fights back
- Tencent to buy $736m stake in Craigslist-like 58.com
- Japan output rebounds in sign companies enduring tax rise
- Hollande, Merkel urge Ukraine talks to Putin, Poroshenko
- Former P&G CEO McDonald is Obama’s pick to head Veterans Affairs
- American Apparel adopts stockholder rights plan
- GM compensation fund details to be released
- Caesars vies w/ Genting as bids due for N.Y. casino licenses
- No earnings expected from S&P 500 cos.
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Daily Iron Ore Mine Closures in China Mean Citigroup Is Bullish
- Brent Pares Biggest Monthly Gain Since August on Iraq; WTI Falls
- Wheat Bears Multiply as Prices Slump Most Since ’11: Commodities
- Rebar Posts Longest Quarterly Slump Since 2011 on Ore, Property
- Tin Seen Rising 21% by ICDX as Indonesian Exports Reach 8-Yr Low
- Palm Oil Posts Biggest Quarterly Decline Since September 2012
- Gold Holds Below 2-Month High as Prices Head for Quarterly Gain
- Hedge Funds Boost Gasoline Bets as July 4 Holiday Nears: Energy
- China Iron Ore Port Inventory Falls From Record: Steelhome
- Japan Refiners May Cut Capacity to Meet New Efficiency Rules
- Zinc-to-Lead Balance Flips by Most Since 2010: Chart of the Day
- Second Asia-Bound VLCC Since April Heads for Hound Point: Track
- ARA Gasoil Stockpiles Hold at Record for Fourth Week: Genscape
- Chinese Steel Mill Protesters Lay on Rail Tracks as Pays Frozen
The Hedgeye Macro Team
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