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Video | Daryl Jones Talks Market Peak on Fox Business

Hedgeye Director of Research Daryl Jones comments on investors reassessing growth forecasts after the market peak and struggles the consumer will face with Sandra Smith on Fox Business Network. Jones' remarks begin at 2:05 in the video above. 

 



PIGS Paper Shows Swift Reversal!

There’s a recent swift inflection in Eurozone peripheral yields and select Eurozone equity markets roll into crash phase!  #PrepareYourself


Despite the steady improvement (decline) in sovereign periphery bond yields on a year Y/Y basis, the inflection taking place on a D/D and W/W basis is significant.  Here’s a look at the 10YR yields:

  • Greece 8.91% (+105bps D/D ; +229bps W/W)
  • Portugal 3.67% (+38bps D/D; +71bps W/W)
  • Italy 2.59% (+17bps D/D ; +28bps W/W)
  • Spain 2.22% (+10bps D/D; +14bps W/W)

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And Portuguese and Greek equity markets are down YTD -25.2% and -23.9%.

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Why the shift?  As we expressed in our Q4 Macro Themes playbook, not only is global growth getting a lot worse, but specifically in our #EuropeSlowing theme we stress that Draghi’s Drugs will not arrest deflation (currently at 0.3% Y/Y) nor produce sustainable economic growth. 

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A second theme we continue to hammer home is that US economy has entered #Quad4, which is characterized by slowing growth and decelerating inflation.

 

And our last theme, #Bubbles, demonstrates that we see a significant number of market bubbles (including the SPX). Our call is “they don’t bounce”, or said another way, we’re recommending a 0% exposure (or short position if applicable) to the equity market, and not buy-in points.

 

Add on in recent weeks:

  • Global growth forecasts were taken down by the IMF (and by numerous individual countries/governments)
  • Persistent geopolitical risks (ISIS, Ukraine, and Hong Kong)
  • Ebola outbreak concerns

And there’s plenty of “juice” to send risk premiums higher. Specifically in Europe, we’re seeing a confluence of factors that are sending the risk trade (not growth trade) higher.

  • Greece:  Political uncertainty – Greek PM Samaras reiterated his belief that Greece would hold a general election in 2016, even though his government faces the prospect of losing the presidential vote in February
  • Greece:  Financial uncertainty – There’s backlash and investor uncertainty over Greece’s claim to be purely market funded. We believe the country will need to ask for another credit line from the EU when EU funds run out this year (note: Greece is still taking funding from IMF through 2016)
  • Italy:  Joins France on sending Austerity is Dead message with Italian PM Renzi presenting an expansionary, tax-cutting 2015 budget that ignores the concerns from the European Commission on meeting its original deficit reduction target.

If we’re right that Draghi won’t be able to bend gravity to arrest deflation and produce sustainable economic growth, we’d expect sovereign yields from the Eurozone’s weaker member states to move higher commensurate with a higher risk profile. We expect the stronger deflation in peripheral countries to persist and extend the time period to higher growth levels.

 

We direct you to recent work including Just Ugly Charts #EuropeSlowing and #EuropeSlowing – Austerity Is Dead? for more on our investment position, outlook on ECB policy, and country-specific commentary. 

 

Matthew Hedrick

Associate


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LVS - WILL STREET ESTIMATES GO LOW ENOUGH?

Our premium mass concerns were finally confirmed by management on the call. Lower Street estimates do not appear to be going low enough

 

Please see our note:  http://docs.hedgeye.com/HE_LVS_10.16.14.pdf


LABOR IS GOOD BUT A LOT OF OTHER THINGS ARE BAD

Takeaway: Solid labor market data flies in the face of a rising risk environment. Should you buy the dip or press the shorts?

What To Do When the Stars Don't Align

Sometimes conflicting data can put you in a tough analytical position. We track labor data closely because the credit cycle trumps all for Financials investors. Labor (i.e. loss frequency) is the primary driver of the credit cycle with collateral values (i.e. loss severity) riding shotgun. We track both. This morning's claims data suggests the recovery in the labor market is ongoing. In fact, the rate of improvement accelerated to the fastest clip we've seen YTD. Rolling NSA initial claims were better by 17.2% this week vs the prior year comp. Admittedly, the comps from last year were easier, making the significance slightly less, but the conclusion is still the same. The labor data suggests all systems go.

 

However, every Monday morning we also publish a note called the Monday Morning Risk Monitor and the titles of that note have been increasingly bearish for the last 3 weeks, including this past Monday's note: "Danger Zone". The Risk Monitor helps us navigate the short to intermediate trends while the labor market data helps us keep perspective on the longer-term credit cycle. 

 

At the moment, they are in conflict. The short to intermediate term outlook is decidedly bearish based on the signals from our Risk Monitor. The longer-term outlook remains constructive, for now. A word of caution, however: the longer-term outlook is dynamic, and can be altered by short to intermediate term pressures. We've learned over the years to wait for the Risk Monitor to give us the green light before getting back in the water. So, for now, we'd be pressing the shorts. 

 

The Data

Initial jobless claims fell 23k to 264k from 287k WoW. The prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.25k WoW to 283.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -17.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of--13.4%

 

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Yield Spreads

The 2-10 spread fell -4 basis points WoW to 183 bps. 4Q14TD, the 2-10 spread is averaging 186 bps, which is lower by -13 bps relative to 3Q14.

 

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Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

 


Podcast | Q&A: What is Deflation?

In the Q&A portion of today's Morning Macro Call for institutional investors, Hedgeye CEO Keith McCullough explains deflation in clear terms.


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