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Real Conversations: Hanke, McCullough Talk Macro, Money Supply and More

 

In this edition of Real Conversations, Hedgeye CEO Keith McCullough has a wide-ranging conversation with Steve Hanke, a Professor of Applied Economics at  Johns Hopkins University and a Senior Fellow at the Cato Institute.


OC: Removing Owens Corning from Investing Ideas

Takeaway: We are removing OC from our high-conviction stock idea list.

We will take the hit here in OC.  We have been wrong on the name and don’t want to compound that error by holding it in a volatile market that is inhospitable to underperforming smaller capitalization names.  While our long-term research view on OC remains favorable, we expect 3Q 2014 results to be poor and are not sure if the company will lower 2014 guidance.  In a less volatile market, we would assume that the weak 3Q numbers had already been priced in.  In the current volatile market, that could prove a risky assumption.

 

We are pulling OC right as the company implements price increases in its roofing and insulation businesses.  It will take a couple of quarters for those price increases to be reflected in financial results, however.  As a result, we do not see a rush and expectations for 4Q 2014 are still elevated.

 

We do expect to re-enter OC and this might be viewed as a trading call.  Those who have invested during (or traded in) periods of high volatility may agree that OC will likely have poor top-down risk style factors for such an environment.  We could be wrong in pulling the name, but can also return to OC once the storm has passed – even if the shares are higher. 

 

OC: Removing Owens Corning from Investing Ideas - owens


Video Replay: #Bubbles Or Bottom?

Earlier today the Hedgeye Macro Team, led by CEO Keith McCullough, hosted a Flash Call #Bubbles or Bottom? On the call Keith highlighted the best places to "hide out in" in order to weather the market volatility.  

 

We encourage you to check out the Video Replay (click on the image below).

*This video is available for Hedgeye Macro Subscribers only.

 

To access the presentation referenced in this call CLICK HERE.

 

Our industry-leading fundamental macro research and proprietary quantitative risk management systems suggest a heightened probability of a market crash over the intermediate term. When juxtaposed against the consensus narrative of, "where do I buy the dip?", we think this is a call no one can afford to miss.  



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Cartoon of the Day: Beware the Bounce

Cartoon of the Day: Beware the Bounce - bounce cartoon 10.17.2014

 

Don’t let today’s bounce in the markets fool you. This won’t end well.

 

subscribe to cartoon of the day


LM: Removing Legg Mason from Investing Ideas

Takeaway: We are removing LM from our high-conviction stock idea list.

While our long-term research view is bullish on this company, our intermediate-term risk management view is very concerned about both the Financials Sector and small/mid cap liquidity.

 

At this time (on the bounce), we think it’s prudent to reduce exposure to these Risk Style Factors that are top-down in nature, across your entire portfolio. We can always re-invest, lower.

 

LM: Removing Legg Mason from Investing Ideas - LM


INITIAL CLAIMS: PEAKS ARE PROCESSES

Takeaway: The labor data says all systems go. Unfortunately, the market is (still) not the economy.

This note was originally published October 16, 2014 at 13:16 in Macro

The domestic labor market has been an increasingly insular island of strength in a receding sea of global growth expectations the last couple months. 

 

Initial claims have continued to improve, the trend in aggregate income growth has been one of acceleration and monthly payroll gains have been solid. 

 

As our Financials team commented earlier today,

 

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.

 

Source: Hedgeye Financials

INITIAL CLAIMS: PEAKS ARE PROCESSES - 2 2

 

INITIAL CLAIMS: PEAKS ARE PROCESSES - Claims NSA 101614

 


PEAKS ARE PROCESSES:  Initial Claims have been a leading indicator for both the market and economy with peak improvement in the series occurring late in the cycle.  We’ve profiled the primary labor market metrics in the context of historical market/economic cycles a number of times.

 

Summarily, and assuming the prior seven (post-war) cycles are appropriate analogues (which is debatable), the pattern has been pretty consistent:  The trough (i.e. peak improvement) in claims occurs 4 to 9 months ahead of the economic cycle peak and a few months ahead of the market peak.

 

With rolling initial claims making lower lows, at present, we are still putting in the trough.  If cycle precedents hold, the implication is that the economic peak is still some months out. 

 

Timing of the market peak is more tenuous - particularly given the more recent hyper-democratization of information and the shift towards a more meritocratic investing landscape.

 

 

INITIAL CLAIMS: PEAKS ARE PROCESSES - Initial Claims cycle

 

INITIAL CLAIMS: PEAKS ARE PROCESSES - 0.1  Club

 

FUNDAMENTAL & QUANTITATIVE INTEGRATION:

Labor drives income growth which supports household spending directly and indirectly via augmenting the capacity for incremental credit. 

 

Income and credit growth drive aggregate demand and if trends in both are positive/improving then the fundamental support for bullish equity exposure is there. 

 

Right?

 

As we’ve witness (again) in the last week/month, the equity and bond markets are not the domestic labor market, particularly in the short term and when volatility ramps, ROW is slowing and behavioral factors and price reflexivity predominate within an over-levered and illiquid market. 

 

INITIAL CLAIMS: PEAKS ARE PROCESSES - Complacency

 

INITIAL CLAIMS: PEAKS ARE PROCESSES - Illiquidity 

 

I detailed how our macro process functions in integrating our (sometimes conflicting) fundamental macro view with our quantitative view of markets in an Early Look last week.  

 

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

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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