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Conflations and Incongruencies

“History is just one thing after another.”

 

I’m not sure who the attribution for the above quote goes to, but it does offer a nice little existential change of pace for the early AM global macro hombres.

 

The macro practitioners’ grind is just one data point and price tick after another.

 

If we’ve successfully employed our “communication tool” over the last six years, you’re gainfully aware that, at its core, our macro process operates as a hybrid model with our fundamental macroeconomic research dynamically informing our quantitative view of markets.

 

Reciprocally, as my colleague Darius Dale highlighted yesterday, we apply those top-down quantitative signals – which often front-run reported fundamental inflections - in a reflexive manner to our bottom-up qualitative analysis (e.g. our Growth/Inflation/Policy framework) in order to generate actionable investment ideas and themes.

 

Most of the time the fundamental and the quantitative are in accord, or harmonize on a small lag.

 

More rarely, the incongruency persists for an extended period. In those instances we default to the price/quantitative signal – in recognition that market prices are real-time leading indicators and that the market and the economy are not the same thing, particularly over shorter durations.

 

Theoretically, corporate earnings should reflect economic growth with the high end of sustainable earnings growth capped at potential GDP and the value of the stock market reflecting GDP, corporate earnings as % of that GDP, and the multiple investor’s put on those earnings. But that certainly doesn’t hold in the short run and it’s only approximately true over the long-term.

 

It’s the conflation of perceived fundamental trends into a convicted market call where economists turned strategists most often go awry.

 

Conflations and Incongruencies - 15

 

Back to the Global Macro Grind

 

In covering the domestic macro economy, the quasi-persistent discontinuity between the research (fundamental) and the risk management (quantitative) signals has been my reality for the last couple months.

 

Juxtaposing the current domestic labor market data (positive) against the prevailing price signals (bearish) provides a timely and tangible case study:

 

INITIAL CLAIMS: Rolling Initial Jobless Claims were just under 295K in the latest week, matching the best levels of the post-recession period. As we’ve highlighted, over the last two cycles rolling SA claims have run sub-330k for 45 and 31 months, respectively, before the corresponding market peaks in March, 2000 and October, 2007. We are currently in month seven at the sub-330K level in the present cycle. Further, over the last half century, the trough in initial claims has led the peak in equities and the peak in the economic cycle by 3 and 7 months, respectively. At present, we are still putting in the trough – with cycle precedents suggesting the economic peak is not yet imminent.

 

NFP: Monthly NFP gains have been solid on balance and, due to seasonal artifacts, even sequential slowdowns in net monthly payroll gains have been characterized by flat to rising employment growth on a year-over-year and 2Y average growth basis. At +1.93% YoY in September, Nonfarm Payrolls recorded their fastest rate of improvement since April 2006 and are in-line with peak growth in the last cycle. Similar to initial claims, peak monthly NFP gains lead the economic cycle by ~7 months. Whether the May-July NFP gains represented peak improvement remains to be seen.

 

JOLTS: Total Job Openings made a new 13 year high and the quits rate held at cycle highs in the August report released yesterday. Total hires moderated sequentially alongside the dip in NFP gains reported for August but is likely to re-accelerate to new highs in the September release. Historically, the Job Openings data leads accelerations in wage growth by about a year. The relationship has been muted vs previous cycles but with the NFIB’s compensation index making new highs, the share of short-term unemployed continuing to rise and labor supply (total available workers per job opening) tightening to pre-recession averages, wage inflationary pressures are percolating.

 

INCOME: The confluence of an accelerating employment base and flattish wage growth has driven an acceleration in disposable personal income growth over the last 5 months. Indeed, aggregate private sector salary & wage growth is currently running at +5.8% and holding at its best levels of the recovery outside of the peri-fiscal cliff period.

 

CREDIT: Consumer revolving credit declined at a -0.3% annualized pace in August according to Federal Reserve data released yesterday. The sequential decline wasn’t particularly surprising given the comps (the increase in July was the 2nd largest in 6.5 years) and the already reported retreat in spending on durable goods ex-defense and aircraft (ie. the stuff the average household buys). On a year-over-year basis, growth in credit card spending decelerated just -5bps from the 6 year high recorded in July.

 

In a Keynesian economy, total spending is cardinal, and income and credit is predominate. You can spend what you make (income) and you can spend what you don’t make (credit) and, with both income and credit accelerating presently, the underlying trends in both are positive.

 

The caveat has been that while the capacity for consumption growth has improved alongside accelerating income growth, actual household spending has not because the savings rate has shown a commensurate increase.

 

So, while reported consumption growth remains middling, it’s hard to characterize accelerating income growth, a rising savings rate and moderate credit growth alongside increased investment as fundamentally negative.

 

Transitioning to the price signals, which paint a contrasting picture for the prospects of forward growth. Keith has hit the boards hard in highlighting these, but to briefly review:

 

10Y Yields: 10Y bond Yields are down -69 bps YTD (-23%), the yield spread (10’s-2’s) continue to compress and inflation expectations are collapsing – all of which are discretely bearish growth signals.

 

Russell 2K: The Russell is down -7.5% YTD with the rotation out of growth style factors and small Cap Illiquidity accelerating over the last month+ - again, not a growth-accelerating signal . The Russell 2000 is immediate-term TRADE oversold around 1076, but remains in a Bearish Formation.

 

Consumer: The XLY is the worst performing sector YTD (-1.84%), underperforming the S&P500 by 6% as real median income growth continues to trend negative and the bottom 60% remain very much income constrained. Also in Bearish Formation.

 

Housing: The ITB is down -9.1% YTD with housing sitting as one of the worst performing asset classes globally. We have been bearish on housing since the end of 2013 and continue to believe housing related equities underperform, trading sideways-to-down, alongside ongoing deceleration in HPI trends.

 

ROW: The EU and Japan are in discrete deceleration, China is not an upside catalyst, EM markets are flagging alongside dollar strength and the US is already past the mean duration of expansions over the last century. The IMF marked its (still too optimistic) global growth forecast lower yesterday and growth estimate revision trends over the last quarter across both developed and EM markets have been almost universally negative. Further, the disinflationary trends prevailing globally only add to the Feds Sisyphean fight towards sustained, above target CPI and core PCE inflation.

 

From a Hedgeye modeling perspective we are entering Quad #4 which is characterized by both growth and inflation slowing from a 2nd derivative perspective and a generally dovish policy response. A sequential slowdown in GDP in 3Q14 from the near 5% in 2Q14 is almost as inevitable as the sequential acceleration from the worst post-war expansionary period GDP print ever in 1Q14. Whether that manifests into a protracted slowdown domestically remains TBD.

 

Markets are discounting an increasing probability of a more enduring deceleration and are, at the least, refuting consensus’ laughably linear straight-lining of 3% growth into perpetuity.

 

May the wind be always at your back.

May the sun shine warm upon your face.

May your fundamental and quantitative signals always be in accord.

 

Our immediate-term Global Macro Risk Ranges are now: 

 

UST 10yr Yield 2.35-2.46%

RUT 1072-1100

DAX 9026-9367

VIX 15.67-17.58

USD 85.05-86.64
WTI Oil 86.92-91.39

 

To cognitive dissonance, its ubiquity and successful management,

 

Christian B. Drake

Macro Analyst

 

Conflations and Incongruencies - Complacency


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 8, 2014


As we look at today's setup for the S&P 500, the range is 30 points or 0.26% downside to 1930 and 1.29% upside to 1960.                                                                 

                                                              

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.85 from 1.83
  • VIX closed at 17.2 1 day percent change of 11.25%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Oct. 3 (prior -0.2%)
  • 8:30am: Fed’s Evans speaks in Plymouth, Wis.
  • 10:30am: DOE Energy Inventories
  • 1pm: U.S. to sell $21b 10Y notes in reopening
  • 2pm: Fed releases minutes from Sept. 16-17 FOMC meeting

 

GOVERNMENT:

    • Senate, House out of session
    • FCC deadline for replies on CMCSA/TWC Deal
    • 10am: Supreme Court to consider arguments on whether workers at Amazon.com warehouses must be paid for time spent in security screenings after they clock out
    • 2:30pm: Chinese Vice Minister of Finance Guangyao Zhu speaks at Peterson Institute talk on China-U.S. economic relations
    • 4:30pm: Former Fed Chairman Ben Bernanke speaks on future of global economy at World Business Forum
    • U.S. ELECTION WRAP: Kansas May Set New Trend; S.D. Crooning

 

WHAT TO WATCH:

  • U.S. Said to Ready Charges Against Banks, Traders in FX Case
  • Symantec Said to Explore Split Into Security, Storage Businesses
  • Valeant Said to Plan Raising Allergan Bid Near December Vote
  • Yum Cuts Profit Forecast as Chinese Food Scare Weighs on Sales
  • Costco Profit Tops Estimates as Same-Store Sales Increase
  • Russia Buys Rubles for a Third Day While Shifting Trading Band
  • Marchionne Says He’s ‘Done’ After 2018 Plan for Fiat Chrysler
  • Kurdish Protests Roil Turkey as Islamic State Attacks Kobani
  • Facebook to Let Advertisers Target Users Based on Locations
  • SolarCity to Finance Rooftop Systems in Shift From Leasing Model
  • Chimerix’s Antiviral Drug Improved Survival in Josh Hardy Study
  • Bard Said to Pay $21 Million in First Big Vaginal-Mesh Accord
  • World Growth Eclipses Dollar as Concern for Lew, Manufacturers
  • 18 Banks Said to Adjust Derivatives Contracts Practices: FT
  • Fed Needs Plan to Sell Mortgage-Backed Assets, Lacker Says: WSJ
  • San Francisco Supervisors Agree to Legalize Airbnb: SFGate

 

AM EARNS:

    • Blackhawk (HAWK) 8:30am, $0.03
    • Jean Coutu (PJC/A CN) 7am, C$0.29
    • Monsanto (MON) 8am, $(0.24) - Preview
    • RPM Intl (RPM) 7:30am, $0.78

 

PM EARNS:

    • Alcoa (AA) 4:03pm, $0.22 - Preview

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • London Metal Exchange Wins Appeal Over Rusal Warehouse Ruling
  • Brent Drops to 27-Month Low on IMF Growth Cut; WTI Declines
  • Gold Climbs on Demand From China After Holiday; Platinum Rallies
  • Corn Retreats in Chicago as U.S. Harvest Seen Exceeding Forecast
  • Narrow Price Gap Opens Door for African Oil Exports to U.S. East
  • Arabica Coffee Slides in New York on Speculation of Brazil Rain
  • China Steel Demand May Slow as Economy Becomes More Sustainable
  • OIL DAYBOOK: EIA Crude Build Fcast; OPEC Basket Drops Below $90
  • Northeast U.S. Homes to Pay Higher Prices for Less Gas in Winter
  • Commodity ETP Outflows Totaled $1.8 Billion in Sept: Blackrock
  • Gold With Iron Ore Seen Least Preferred Metals by Morgan Stanley
  • OPEC Crude Below $90 Won’t Spur Immediate Output Cut: Julian Lee
  • Nickel to Aluminum Decline on Demand Concern as IMF Cuts Outlook
  • Indonesia Seen Losing $20B Mining Investment on Political Risk
  • Rusal Says Will Seek to Appeal U.K. Court Ruling on LME Today

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


October 8, 2014

October 8, 2014 - Slide1

 

BULLISH TRENDS

October 8, 2014 - Slide2

October 8, 2014 - Slide3

 

 

BEARISH TRENDS

October 8, 2014 - Slide4

October 8, 2014 - Slide5

October 8, 2014 - Slide6 

October 8, 2014 - Slide7

October 8, 2014 - Slide8

October 8, 2014 - Slide9

October 8, 2014 - Slide10


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MACAU: 1ST 6 DAYS OF OCTOBER

It looks like average daily table revenues (ADTR) fell 30% YoY in the first days of October and not the 40% as some initial reports indicated.  Either way, ADTR of only HK$1.17 billion vs. HK$1.68 billion for the first 6 days of October 2013 was disappointing.  The 2nd half of this October will be quite volatile as there were placeholder weeks in October 2013.  We are estimating full month October GGR to fall 15-20% YoY.

 

MACAU: 1ST 6 DAYS OF OCTOBER - m1

 

High rollers continue to be relatively sparse during Golden Week, affecting VIP volumes.  It doesn't help that hold was below average as well; Grand Lisboa saw negative hold for a few days and WYNN/GALAXY/Four Seasons also had bad luck during Golden Week.

 

Some smoking tidbits we're hearing:

  • SCL had designated the Four Seasons Plaza entire casino Premium mass but because no smoking parlors are set up, the place is entirely non-smoking.  Construction of yet to be approved smoking parlors may disrupt the small casino floor.

  • COD smoking rooms operational but not officially approved by Health Bureau

In terms of market share, we think low hold may have played a small role – Wynn Macau held poorly – but volumes were the main culprit overall.  Wynn Macau also held low in Golden Week 2013.

 

MACAU: 1ST 6 DAYS OF OCTOBER - M2


Shipbuilding Short Update: Sinking Far From Port

Summary

 

We typically introduce the Hedgeye Industrials research process using the shipbuilding cycle and industry structure as an illustration.  The discussion typically goes something like “after WWII, war related tonnage was converted to commercial use, but ships last for only, give or take, 30 years, so there was a replacement cycle in the mid-1970s”…and so on.  But shipbuilding is not just an example of a capital equipment cycle and a flawed industry structure, it has also been, and will likely continue to be, a once in a career short opportunity

 

Shipbuilding Short Update:  Sinking Far From Port - shi1

 

 

Beyond the Fishfinder updates, we have only written on shipbuilding occasionally because not much happens that is relevant to our thesis.  Basically, our view is that shorting South Korean shipbuilders should work for several years; the next move for investors is to buy Chinese shipbuilders in roughly 2030 (only partly kidding).  Recently, however, there has been more action.

 

 

Industry Structure: Extremely Fragmented, Government Subsidized

Shipbuilding Short Update:  Sinking Far From Port - shi2

 

We focused on Samsung Heavy in our launch deck and subsequent notes because it had fewer non-shipbuilding exposures.  Samsung Heavy shares have dropped about 45% in the past year, significantly underperforming the KOSPI.  Below, we provide some updates.

 

Shipbuilding Short Update:  Sinking Far From Port - shi3

 

Key Highlights

  • Chinese Shipbuilder ‘Bailout’:  Excess shipbuilding capacity has largely been of a massive ramp in Chinese capacity.  To us, it has become clear that China isn’t exactly planning to layoff shipbuilding employees.  For instance, the handling of China Rongsheng, a theoretically private competitor, has consisted of local government support for the company while it does a restructuring analysis due in mid-2015.  Apparently, the government is looking to merge the shipbuilder with a financially stronger competitor at some point, but maybe not.  This is consistent with our view that the industry is more of an employment project than a viable profit center.  Excess Chinese capacity will likely continue to weigh on industry pricing.

Shipbuilding Short Update:  Sinking Far From Port - shi4

 

  • Pressure on Margins, Pricing:  SHI’s orders have been below management expectations this year and excess capacity has pressured industry pricing.  Given the intense competition in standard ship categories, Samsung Heavy and others South Korean builders have competed for complex offshore energy-related orders (drill ships, FPSOs, etc).  Unfortunately, the margin on these complex ships has been poor. Costs and schedules have proved more difficult to forecast than those of more traditional products.  As a result, SHI’s margins have suffered so far in 2014.  We would expect that earlier orders in backlog carry better pricing than current orders, setting the stage for ongoing margin pressure.

Shipbuilding Short Update:  Sinking Far From Port - shi5

 

  • Not Just Samsung Heavy:  Obviously, Chinese shipbuilders are experiencing stress, but other South Korean firms have also seen margin degradation.

 Shipbuilding Short Update:  Sinking Far From Port - shi6

 

  • Last Time It Took 13 Years To Bottom:  The global shipping fleet is young, having just completed a replacement cycle.  Energy and bulk commodity prices have seen pressure in recent months, with customers in those end-markets driving demand.  We expect pricing pressure from weak demand, excess capacity, and government subsidization to depress SHI’s profitability for years.  In the last replacement cycle, deliveries peaked around 1975 and bottomed in roughly 1988.  

 Shipbuilding Short Update:  Sinking Far From Port - shi7

 

  • Low Profitability, Except During Peak Demand:  Aside from the boom years of the replacement cycle, shipbuilding seems more like an employment scheme than a profit-making enterprise.  

Shipbuilding Short Update:  Sinking Far From Port - shi8

 

  • Still Lots of Value to Lose:  Given that the South Korean shipbuilding industry has lost significant ground to Chinese competitors in the last decade, we would expect valuations to compress below pre-boom norms.  We also expect that Chinese shipbuilders will further develop capability in drill ships, FPSOs, and other more specialized vessels.

 Shipbuilding Short Update:  Sinking Far From Port - shi9

 

  • Prior Valuation Range:  We continue to think that our June 2012 launch deck valuation range for Samsung Heavy is still reasonable.  The shares are now below our “Best” case scenario, however, but have downside to the “Optimistic Base” case.

 Shipbuilding Short Update:  Sinking Far From Port - shi10

  

  • Over-Sold & Inheritance Tax Issue:  We are not expert in the Samsung inheritance tax issue, but it seems clear that minimizing shareholder value may be a short-run priority.  The shares have declined precipitously in the past year, and it might be best to wait for a bounce to press the short or initiate a position.  The tax liability may be a fruitful topic for further analysis.
  • Overseas Plant Addition:  Samsung Heavy has announced plans to add an overseas facility in a location with lower labor costs.  Vietnam, Indonesia, and Malaysia are apparently under consideration.  The plant would cost $950 million and focus on lower value ships.  In an industry awash in excess capacity for less complex vessels, this seems a bizarre idea at best. 
  • Merger with Samsung Engineering:  The merger with Samsung Engineering, an engineering & construction company with exposure to the Energy sector, makes a bit more sense than the addition of overseas capacity (almost anything would).   That said, it is difficult to see how the minor cost synergies would offset the customer perception problems that may result.

 

Upshot

 

We continue to believe that Samsung Heavy is, well, somewhat doomed and that the shipbuilding industry is good hunting for shorts.  While SHI may have a numerically substantial backlog, the margin on that backlog need not be good or even positive and a portion is pass-through.  SHI’s plan to add capacity and merge with Samsung Engineering looks like a strategy developed by a flailing capital intensive enterprise caught in a long downcycle.  That said, the inheritance tax issue, pressure on commodity prices, and sell-off in the shares would probably leave us looking for a bounce (like the one CAT recently completed) to press or enter a short.  While we expect the shares to eventually trade much lower, we might wait for a better short-run entry point.

 

 

 

(Interested readers should feel free to ping us for our earlier materials.)

 


THE MARKET THINKS WE’RE IN #QUAD4… DO YOU?

Takeaway: The must-read below walks through why the preponderance of our quantitative signals support our view that the US economy is mired in #Quad4.

Keith is on the road this week visiting with customers and prospective customers in London; no doubt he’s accumulating reps at the one thing I am personally most passionate about as it relates to being some version of a sell-side research analyst: explaining why we’re different.

 

One of the core tenets to our process that differentiates us from our perceived competitors across the independent research landscape is our ability to consistently extract predictive color from financial markets. Furthermore, we apply those top-down quantitative signals in a reflexive manner to our bottom-up qualitative analysis (e.g. our Growth/Inflation/Policy framework) in order to generate actionable investment ideas and themes. Our process isn’t perfect, but 6+ years of growing a business with no banking, trading or asset management fees to help “keep the lights on” would seem to suggest it’s as valuable as an input to your respective processes as we’d humbly submit it is.

 

Today, the preponderance of the aforementioned quantitative signals support our fundamental research view that the US economy is mired in #Quad4 – which is an economic scenario whereby the 2nd derivatives of both real GDP and headline CPI are negative. If either the anticipated delta into this quadrant is meaningful or the setup is expected to last for more than one quarter, it becomes a meaningful macroeconomic headwind to the valuation of most financial assets. 

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - UNITED STATES

 

Keith’s Model Is Signaling #Quad4

For example, take Keith’s proprietary factoring of Price/Volume/Volatility data across multiple durations (i.e. TRADE, TREND and TAIL) for various asset classes and style factor exposures. If you too subscribe to the view that financial markets are leading indicators and that various periods throughout history often rhyme with the present setup, it’s easy to conclude from these signals that the market is pricing in a #Quad4 setup at the current juncture – especially in the context of our GIP Model backtest results:

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - GIP Model Backtest

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - SPX

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - SPX GIP

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - XLP

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - XLP GIP

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - XLV

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - XLV GIP

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - UST 10Y

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - UST 10Y GIP

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - CRB

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - CRB GIP

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - DXY

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - DXY GIP

 

TACRM Is Signaling #Quad4

If that combination of History, Math and Behavioral Psychology isn’t robust enough for you, then let’s expand this search for quantitative confirmation to our Tactical Asset Class Rotation Model (TACRM). On this measure, there are a number of indicators that suggest the market is pricing in a #Quad4 economic scenario. To highlight a few of the most noteworthy signals:

 

  • Only 18% of the nearly 200 ETFs comprising the TACRM risk management system have Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings greater than 0x. You have to go all the way back to the week-ended June 22nd, 2012 to find a commensurately low proportion.
  • TACRM is generating a “DECREASE Exposure” recommendation for every primary asset class except Cash, which is comprised simply of US dollars and volatility – two things that have historically appreciated in value when investors liquidate assets or close out carry trades in order to raise cash.
  • Regarding Foreign Exchange and Commodities specifically, TACRM generated the aforementioned bearish recommendations during the weeks-ended August 29th and August 15th, respectively. The broad-based breakdowns across style factor exposures within these asset classes – and across European equities and currencies – was one of the reasons we first started to openly debate the possibly of #Quad4 back in early August.
  • TACRM is generating a “DECREASE Exposure” recommendation for even the historically defensive Fixed Income & Yield Chasing primary asset class. This is due to the fact that nearly 2/3rds of the ETFs comprising this asset class have negative VAMDMI readings.
  • To highlight the market’s rotation into historically defensive fixed income exposures, the Vanguard Total Int’l Bond Market ETF (BNDX), the iShares National AMT-Free Muni Bond ETF (MUB), the iShares 20+ Year Treasury Bond ETF (TLT) and the PIMCO 25+ Year Zero Coupon US Treasury Bond ETF (ZROZ) are the only ETFs within the Fixed Income & Yield Chasing primary asset class that have VAMDMI readings greater than or equal to +1x at the current juncture.
  • At +0.8x apiece, the S&P 500 sector SPDRs with the two highest VAMDMI readings currently are Consumer Staples (XLP) and Healthcare (XLV); that rhymes with our GIP Model backtest results highlighted above.
  • We are constantly monitoring the composition of the bottom-20 and top-20 VAMDMI readings in the broader sample of ETFs with the expectation that breakdowns and breakouts in individual markets may front-run critical inflection points in the chaotic system that is the global financial marketplace. Among the top-20 are the iShares Nasdaq Biotechnology ETF (IBB), Health Care Select Sector SPDR Fund (XLV), iShares US Pharmaceuticals ETF (IHE) and the iShares US Medical Devices ETF (IHI) at 15th, 12th, 9th and 8th, respectively. Our Healthcare Sector Head Tom Tobin was keen to remind us of the demonstrable outperformance of these sector style factors well into the summer of 2008 – just ahead of the most meaningful #Quad4 occurrence since the Great Depression. Just something to think about…

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - TACRM Summary Table

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - TACRM GMRS N

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - TACRM Heat Map

 

THE MARKET THINKS WE’RE IN #QUAD4… DO YOU? - TACRM 20 20

 

For those of you’d who’d like to learn more about TACRM and how to fully harness the power of its signals within the scope of your respective investment mandate, please review the following presentation or ping me directly (): http://docs3.hedgeye.com/macroria/TACRM_10-7-14.pdf.

 

The Median Consumer Is Signaling Recession

Lastly, one of the things we don’t do that many of competitors anchor on is survey work. This is because:

 

  1. Our six-person Macro Team is flat-out better at forecasting the 2nd derivate of both growth and inflation than most corporate executives.
  2. Consensus among both corporate executives and the fundamental analyst community is almost always dead wrong at critical inflection points (e.g. early-2000, late-2007 and early-2009).
  3. Quite often, surveys tend to be an incestuous process that would generate a Circular Reference warning in the most basic of spreadsheets. For example: “Banker A” tells “CFO B” that 2015 growth will 3-plus percent; “CFO B” orders 3-plus percent worth of inventory from “Supplier C”; “Supplier C” tells “Banker D” that its order book is “off the charts”; “Banker D” relays that information to “Economist E”, who then updates his 2015 GDP growth forecast to 3-plus percent. #Magical.

 

That being said, we will happily cherry pick survey data that supports our fundamental conclusions when the preponderance of high-frequency economic data is not yet supportive of our forecasts as it is currently.

 

Given that so few investors actually analyze macroeconomic data in a repeatable and robust manner, we constantly find ourselves having to debate what we think are moot points regarding lagging indicators such as continued strength in the labor market and the 2Q14 GDP print.

 

So in light of that, we thought we’d use the following PwC survey data to highlight the ongoing “early cycle slowdown” Keith has being writing about all year:

 

  • The projected average household expenditure during the upcoming holiday season of $684 is down -6.9% YoY.
  • 84% of US households plan to spend the same amount as last year or less.
  • 72% of US households believe the economic environment is the same or worse than it was last year.
  • 67% of US households are in what PwC labels as the “Survivalist” bucket, which means they earn less than $50k annually and have budgets that are constrained by the rising cost of living. The proportion of US households that fall into this cash flow constrained category is up +200bps YoY and up +400bps from 2012.
  • 84% of shoppers cite price as the primary factor for choosing a particular retailer, up from 74% in 2013.

 

All told, at least 2/3rds of the country thinks we’re already in or heading into what may ultimately turn out to be a recession or, at best, a recession scare. This conclusion is very much in line with our work on the median consumer as part of our #ConsumerSlowing theme.

 

If you’re buying risk assets at these valuations and spreads, you better have some darn good edge on why the 1/3rd will prevent that from occurring. Refer to our #Bubbles theme for a detailed discussion of the still-egregious mispricing of many financial assets.

 

Investment Conclusion: Continue Rotating Out Of #Quad4 Losers and Into #Quad4 Winners

We obviously understand that most investment mandates will prevent you from raising what we perceive to be adequate levels of cash or from tilting defensively enough to weather such volatility. In light of that, we’ve created a daily product – The Hedgeye Macro Playbook – to help you better incorporate our research conclusions into the scope of your respective strategy. Be on the lookout for that 1-page summary every weekday prior to the market open.

 

Beyond that, we’ve put together the following list of US equity subsectors that have historically fared really well (i.e. quarterly performance in the ~90th percentile and above) or really poorly (i.e. quarterly performance in the ~10th percentile and below) in #Quad4:

 

  • LEADERS
    • Tires & Rubber
    • Homebuilding
    • Automotive Retail (only 6 historical occurrences)
    • Drug Retail
    • General Merchandise Stores
    • Home Improvement
    • Agricultural Products
    • Tobacco
    • Specialized Finance (only 8 historical occurrences)
    • Real Estate Services (only 4 historical occurrences)
    • Health Care Facilities
    • Managed Health Care
    • Pharmaceuticals
    • Industrial Gasses
    • Specialty Chemicals
    • Metal & Glass Containers
  • LAGGARDS
    • Consumer Electronics
    • Specialized Consumer Services (only 6 historical occurrences)
    • Coal & Consumable Fuel (only 4 historical occurrences)
    • Other Diversified Financial Services (only 8 historical occurrences)
    • Diversified REITS (only 5 historical occurrences)
    • Industrial REITS (only 5 historical occurrences)
    • Office REITS (only 5 historical occurrences)
    • Residential REITS (only 5 historical occurrences)
    • Retail REITS (only 5 historical occurrences)
    • Health Care Technology (only 5 historical occurrences)
    • Research & Consulting Services (only 4 historical occurrences)
    • Trucking
    • Electronic Equipment & Instruments
    • Multi-Utilities

 

NOTE: If any of the aforementioned GICS Level 4 industries have recorded at least 10 quarters in #Quad4, we did not include the number of historical occurrences in parenthesis; most had 14.

 

Best of luck out there,

 

DD

 

Darius Dale

Associate: Macro Team


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