“Each circle of time has a great moment of discontinuity.”
-The Fourth Turning
No, the stock market is not the economy. And the bond market is not the stock market. Everything is relative to its own rate of change. On that score, I think the US economic cycle is about to meet another great moment of discontinuity.
“In the ancient view, a new round of time does not emerge gradually from the last but only after the circle experiences a sharp break” (The Fourth Turning, pg 31). The Hedgeye Macro Model is hardly ancient, but Mr. Market’s respect for mean reversion within long-term cycles is.
After a -2.9% GDP print in Q1, the Old Wall’s latest victory lap on US growth came in the form of a classic lagging economic indicator last week – headline employment data. Since our models focus primarily on rate of change, it wasn’t surprising to see the slope of private wage growth remain negative. #InflationAccelerating and real-wages tracking negative for the first time in two years should ensure #Q3Slowing.
Back to the Global Macro Grind…
On Thursday afternoon, we shorted SPY for the 1st time (in Real-Time Alerts terms) since February 10th, 2014, on that. Well, maybe not only on that. You see, having a view on an economy within the Global Macro marketplace is pretty much useless unless you have some repeatable mechanism (read: #timing signal) that tells you when the probability of acting is falling into your favor.
With literally no volume trading in US Equities on Thursday (at the all-time highs), here’s the multi-factor, multi-duration, risk management signal I was looking at:
1. US DOLLAR – bouncing to lower-highs for the 1st time in 2 weeks, but still well below $81.17 TAIL risk line (USD Index)
2. US RATES – bouncing to lower-highs for the umpteenth time in 2014, but well below 2.81% TREND line resistance
3. VOLATILITY – front month VIX testing its all-time lows, closing at 10.32 (it has never held below 10, sustainably)
Yes, never (in mean reversion terms) remains a very long time. So it’s a lot easier to make the SELL call on US domestic consumption growth today than it was when the Old Wall didn’t agree with us 6 months ago.
But consensus wouldn’t want to do that now, would it? How about you? If I’m right, you are going to crush your competition (newsflash: your competition in US Growth Equities is called levered long beta), just like you did from January 1st to the May 2014 lows.
If I’m wrong, well, consensus is going to be really right.
Strapping on the accountability pants is fun right here and now because the more bearish you are on US growth in Q3, the more you can get invested (on the long side) in what is going to be perpetuating outflows from US domestic equity funds:
1. Long Inflation (Commodities, Energy Stocks, Gold, etc.)
2. Long Bonds + Anything That Looks Like A Bond (love those #GrowthSlowing Yield Chasers!)
3. Long Foreign Currencies + Emerging Market Stocks (vs USD short)
This is when making a macro call matters – when you get those rare Moments Of Discontinuity in markets where you can put a lot of money to work. Sounds crazy, but this is much like the moment you had on JAN 1 to buy Gold and Utilities (+10% and +12% YTD, respectively).
To be crystal clear on this, we aren’t calling for the next Lehman – we are using our process to make an ole school consumption-cycle call. When the cycle is in phase transition, you get paid to shift your Style Factoring for the part of the cycle that you are entering.
In our process-speak we call this moving from the 2nd quadrant to the 3rd (within a 4 quad model using 2-factors, Growth & Inflation). Not unlike how Strauss and Howe explain “four-phase time” of the seasons, this risk management framework helps us simplify the complex.
“Time’s circle moves not only from cold, to hot, to cold but also from growth to maturity to decay to death.”
-William Strauss and Neil Howe (The Fourth Turning)
And while the “decay to death” part is not what I wake up thinking about in the morning, it does happen. Countries and companies slow too - and so does the confidence The People have in things like central-planning and the stock market’s last price being the economy.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.50-2.67%
Brent Oil 110.03-112.99
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP – July 7, 2014
As we look at today's setup for the S&P 500, the range is 43 points or 1.99% downside to 1946 and 0.18% upside to 1989.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.12 from 2.13
- VIX closed at 10.32 1 day percent change of -4.62%
MACRO DATA POINTS (Bloomberg Estimates):
- No major economic reports expected
- U.S. Rates Weekly Agenda
- FX Weekly Agenda
- President Obama hosts teachers at White House to discuss efforts to improve teacher quality
- Iran, World Powers hold nuclear talks in Vienna
- Argentina delegation in NYC to meet with court-appointed mediator
WHAT TO WATCH:
- Archer Daniels Midland to acquire Wild Flavors for $3b
- American Apparel investor said to weigh paying $10m loan
- Lagarde hints at global forecast cut even as U.S. rebounds
- Fed seen raising main rate earlier after June employment surge
- Goldman Sachs brings forward rate forecast as Treasuries drop
- American Express “take it or leave it” policy goes on trial
- SABMiller to sell $1.09b Tsogo Sun stake following review
- SunTrust agrees to pay up to $320m to end mortgage probe
- Apache said to seek buyer for Wheatstone LNG project holdings
- Aristocrat to buy Video Gaming Technologies for $1.3b
- Anglo to sell 50% in Lafarge Tarmac for minimum of GBP885m
- China auto sales rise 14% as foreign brands target small cities
- German industrial output falls as confidence in recovery wanes
- Noyer says BNP case may encourage diversification from dollar
- Alimentation Couche Tard (ATD/B CN) 8:42am, $0.25 - Preview
- Bankers Petroleum (BNK CN) 7am, $0.09
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Coffee Stockpiles With Vietnam Farmers Declining to Two-Year Low
- Palm Oil Inventories in Malaysia Extend Climb as Output Expands
- Corn Avalanche Coming as Rain Trumps Planting Drop: Commodities
- Philippines to Consider More Rice Imports, Ending Subsidy
- Rubber Closes Nears 3-Week Low as Oil Price Drop Reduces Appeal
- Brent Oil Falls to Three-Week Low on Libya Supply; WTI Slips
- Gold Extends Retreat From Three-Month High as Dollar Strengthens
- Indonesia’s Presidential Candidates Trade Barbs on Graft
- Copper Drops as Stockpiles Swell Most Since March on South Korea
- Cars Beating Homes Shifts Steel Use in China: Chart of the Day
- Commodity ETP Outflows Seen by Blackrock at $392mln in June
- Philippines to Consider Ending Rice Farmers’ Subsidy: Pangilinan
- Apache Said to Seek Buyer for Wheatstone LNG Project Stake
- Russia Oil Exports Fall to Six-Year Low as Refiners Process More
The Hedgeye Macro Team
We will be hosting our highly-anticipated Quarterly Macro Themes conference call on Friday, July 11th at 11:00am EDT. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and related investment opportunities.
Q3 2014 MACRO THEMES OVERVIEW:
- #Q3Slowing: Against a backdrop of harder growth and easier inflation compares in 3Q14, the conflation of rising inflation, static nominal wage growth, and an ongoing deceleration in housing should drive a sequential deceleration in domestic economic growth. Growth sentiment, meanwhile, has been improving with 3Q GDP estimates rising as consensus again back-end shifts misguided 1H estimates. We expect that optimism to be marked to [a more dour] reality as we progress through 3Q.
- #DollarDevaluation: Given that the Fed's 2H14 and full-year growth forecasts are still too optimistic, the outlook for an easier Fed and future dollar devaluation looks probable. The negative correlations between the dollar and commodity prices should tighten further as the Fed surprises consensus by getting more dovish.
- #VolatilityAsymmetry: Across global financial markets, measures of volatility are at historically-depressed levels. While low levels of volatility aren't necessarily a timely harbinger of financial market calamity in and of themselves, other signals - such as the economic cycle rolling over and pervasive complacency among investors and corporations - would seem to suggest we are well into the latter innings of this bull market.
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 171487#
- Materials: CLICK HERE (Slides will be available approximately one hour prior to the start of the call)
Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Helegeye is excited to welcome Craig Berger, our new Semiconductor Analyst and Technology Sector Head. Below Craig touches on his extensive resume, his research process, and highlights a few of his favorite names in the space.
WHO DO YOU TRUST?
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We believe we’ve identified one of Wall Street’s current darlings and recently added it to the Hedgeye Best Ideas list as a short.
In today’s Morning Newsletter Keith McCullough wrote, “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.”
As Q2 month-end markups end today and as June stands as one of the lowest equity volume months in U.S. we wanted to know what your thoughts were heading into the third quarter.
Today’s Poll Question Asked: Are you bullish or bearish on U.S. equities for the third quarter?
In the video below Director of Research Daryl Jones highlights the top three reasons why he is decidedly BEARISH on U.S. Equities for the third quarter.
At the time of this post, 51% voted BULLISH, 49% voted for BEARISH.
Those who would are optimistic about what the third quarter holds and are BULLISH on U.S. Equities had this to say:
- Hard to be bearish on the equity market as a whole. There are certain sectors that are significantly outperforming. Record amount of assets under management, easing Fed, life is good when investing with other people's money. I'll buy all the stocks with VIX at 10, as long as I get paid. Greed is good.
- Consumer spending compares get easier in 2H (the second half of the year). The worst performing stocks in the market through six months have almost all been consumer discretionary. If this group simply ceases to be putrid, it should be positive on the margin for the broader market.
- Until the Fed stops propping up the market, I can't bet against it. I don’t want to fight the Fed.
Voters who are BEARISH on U.S. Equities for 3Q reasoned:
- Bearish for a 10% reversion to mean without hurting major uptrend. Reasons: XLY:XLU ratio trending sideways to downward on 1 month, 4-6 month and 1 yr period, all while JNK:TLT outperformance has slowed on those same periods.
- Too much complacency out there, no volume, inflation cutting into consumer spending, growth forecasts being revised downward with room for consensus to continue to chase growth to the downside with future revisions...
- Inflation creeping up, economy slowing down, jobs being created are not permanent, increasing disconnection between stock prices and economic reality... see and increasing movement of funds to commodities.
- The third quarter contains September which historically is the worst month for the markets - so sideways trading in light volume until the tick down in Sept.
Solid report overall as NFP goes >200K for five months in a row for 1st time since Jan 2000 (although that wasn’t a particularly positive harbinger), employment gains were broad based, the Unemployment rate flirts with a 5-handle, and the U-6 and total LT unemployed continued to decline.
On the other side, total part-time and involuntary part-time both increased significantly while the slope in private wage growth remained negative – with real earnings growth likely to be negative for a second month in June.
- NFP: Solid Report with NFP = +288, Private = +262, 2Mo Revision = +29K
- Household Survey: Net gain of +407K in June with Employment growth accelerating across all age buckets except 20-24 YOA
- Unemployment Rate: Unemployment Rate dropped to 6.1% from 6.3% prior alongside the +407K increase in total Employed and a -325K decrease in Total Unemployed
- U6/LT Unemployed: U-6 Unemployment dropped to 12.1% from 12.2% while the ranks of the long-term unemployed dropped -293K MoM on an absolute and -1.8% to 32.8% as a % of total
- State & Local Government Employment: increased for a 10th consecutive month in June while the rate of job loss at the Federal level improved 10bps sequentially to -2.0% YoY. Aggregate government salary and wage growth has finally begun to contribute positively to aggregate disposable income growth in recent months
- Initial Claims: The employment data has followed the steady improvement in the initial jobless claims data in recent months and this mornings update to claims was again positive with both headline rolling claims and the YoY rate of improvement in NSA claims holding near the best levels YTD.
WAGE GROWTH: Average hourly earnings in the Private sector grew 2.0% YoY, down from +2.1% in May and continuing the stagnant 2.0% +/- 20bps that has prevailed over the last two years. Average hourly earnings for Production and Nonsupervisory employees also decelerated -10bps to +2.29% YoY.
With nominal earnings growth static, real earnings growth likely to be negative for a 2nd month in June with the official release, and the spread between spending and earnings growth having re-expanded the last couple quarters, we continue to think the upside to consumption growth remains constrained in the immediate/intermediate term – particularly if inflation continues to march northward and the savings rate remains at current levels.
WAGE RAGE: Wage Growth Refuses To Accelerate, Does it Matter To The Policy Outlook?
Conventionally, wages are viewed as a lagging indicator, with wage inflationary pressure building as the labor supply declines and the economy moves towards constrained capacity. There’s a view that the FOMC won’t move to raise rates so long as real wage growth is flat or declining, which it is currently.
It’s somewhat difficult to make a particularly cogent empirical argument in either direction, however. The longest historical dataset for (real) wages is that for Production & NonSupervisory Employees which goes back to 1964 (the BLS series for total private employment reported inside the NFP release only dates back to 2006).
The problem with using this series stems from the well documented, secular plight of middle and low income earners where flat/negative real wage growth has characterized the last four decades.
In fact, the current post-recessionary trend in real wage growth compares favorably with those observed over the last half century.
We’d agree that the collective policy bias of the current FOMC body argues for dovish conservatism in the face of negative real wage growth alongside sub-target, or moderately above target, inflation levels.
THE WORST EVER...& EVER IS STILL A PRETTY LONG TIME
The painstakingly slow progression of growth out of the Great Recession has been exhaustingly documented and the duo of negative post-recession GDP prints observed in 1Q13 and 1Q11 sit as the two worst of any post-war recession with a recovery greater than 61 months (the duration of the current expansion).
The five month run of positive labor market data has been encouraging - though not fully corroborated by broad macro strength post the immediate weather-distortion bounce.
We’d advise keeping growth optimism anchored over the intermediate as growth compares get harder and inflation comps easier in 3Q and the conflation of rising inflation, static nominal wage growth, and an ongoing deceleration in housing should drive a sequential deceleration in domestic economic growth.
The reality of the intermediate/LT is that household balance sheets remain over levered, demographics are going the wrong way, and policy driven increases in inequality will continue to feed the growing phantasm that is the U.S. middle class.
Yellen’s acute attention to the prospects for secular stagnation and hysteresis isn't misplaced.
Enjoy the Holiday Weekend,
Christian B. Drake
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