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Yen, Europe and The Russell 2000

Client Talking Points

YEN

Burning Yens move back to $116.67 on Abe promising to do what the country can’t afford (delaying consumption tax for political points) and going for the snapper election on DEC 14th – what happens to this global carry trading thing if he loses? Yen (vs. USD) testing the low-end of its 114.04-116.97 risk range #volatility pending!

EUROPE

It’s not clear how many more selling opportunities they are going to give us in French and Italian equities, but this is just one more bounce to lower-highs that we’d look to sell into on a newsy morning about “German recovery” – GDP comps for Europe are tough for the next 3 quarters.

RUSSELL 2000

The Russell 2000 is down -1.9% in the last 3 days, but the world’s consensus hedge (SPY) isn’t down (yet), so no worries. From both a liquidity and volume perspective, this is a rewind of the movie you saw in late SEP (decelerating volume on UP days for SPX). Total U.S. Equity market volume was -26% vs. its 1month average yesterday.

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 29% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

 

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

XLP

The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road

TWEET OF THE DAY

CFTC (non-commercial) net SHORT position in the Euro at YTD highs of -162,216 contracts #massive

@KeithMcCullough

QUOTE OF THE DAY

If you would be wealthy, think of saving as well as getting.

-Benjamin Franklin

STAT OF THE DAY

A group of Walmart employees pushing for higher wages are planning protests at 1,600 Walmart stores nationwide on Black Friday, the biggest shopping day of the year in the United States.


LEISURE LETTER (11/18/2014)

Tickers:  MGM, CHH, DRH, HST, CCL, NCLH, RCL

EVENTS

  • Nov 18: BEL Investor Meeting Webcast
  • Nov 18: BYI shareholder vote on SGMS merger
  • Nov 18: 1 pm Pennsylvania Gaming Control Board to award second Philadelphia Casino license
  • Nov 19: Sega Sammy Investor Meetings
  • Nov 23: Pacquiao-Algieri bout at Venetian Cotai Arena

COMPANY NEWS

GENS:SP – Genting Singapore executing on a share repurchase program.  Over the past two days, the company repurchased 14 million shares for S$14.87 million.  Cumulative shares repurchased year-to-date = 21,584,000 and the maximum shares authorized for repurchase = 1,223,813,684.   Following today's 10 million share repurchase, the total shares outstanding = 12,225,510,702.

http://infopub.sgx.com/Apps?A=COW_CorpAnnouncement_Content&B=AnnouncementTodaySecurity&F=ZTQGEN19V0D0MUXS&H=33f49ea6312a75f099fd1466f255b245191bc2788c4e79b6d82cd8d64751a8a5#.VGsu3cmCuYs

Takeaway: When the prospects for new development fade (Japan) buy back stock. 

 

034230:KS & 6460.JP (Paradise and Sega Sammy) – WIth Japan's Diet unable to pass integrated resort legislation and a near-term pause in growth across Macau, gaming operators and investors are turning their attention to South Korea.

http://news.mk.co.kr/newsRead.php?no=1437035&year=2014

Takeaway: Not entirely an unexpected story since Sega Sammy in currently conducting investor meetings in New York.

 

MGM – late on Monday, paid Massachusetts the required $85 million gambling licensing fee for its $800 million Springfield resort casino and the 15 year operating license. 

http://www.reviewjournal.com/business/casinos-gaming/mgm-pays-85-million-bay-state-casino-license-fee

Takeaway: BlueTarp reDevelopment is now live, Springfield must now issue the building permits.

 

CHH– repurchased 1,043,509 shares of its common stock from Stewart Bainum, Jr., the Chairman of the board of the company at a purchase price per share of $51.95 per share. Following the transaction, Bainum remains the beneficial owner of over 12.6 million shares of Choice common stock, or approximately 22% of the outstanding common stock. As a result of this repurchase, approximately 20,000 shares remained available under the CHH’s share repurchase program

Takeaway: A very efficient share repurchase for CHH and likely a larger repurchase than modeled by analysts and investors.

 

DRH – agreed to sell the 1,004 room Los Angeles Airport Marriott for $160 million, or $159,360 per key to Sichuan Xinglida Group Enterprises, as a result of reverse inquiry.  SIchuan previously acquired the Torrance Marrioot from DRH in November 2013.  Diamondrock purchased the LAX Marriott acquired the Hotel in 2005 for $118 million and then renovated the property in 2006. The property sold at a 6.6% cap rate on last twelve month net operating income of ~$10.5 million.

Takeaway: A very good price for a large, airport centric upper-upscale hotel.  We continue to wonder why Starwood Hotels has not been more active.

 

HST – the media is reporting Host Hotels & Resorts with its partner, Vornado Realty Trust, the eight-story tall billboard recently installed on the Marriott Marquis Hotel on Broadway, was leased by Google for November 24 until January 2015.  Reports indicated ads on the screen are being marketed for at least $2.5 million for four weeks. 

http://www.businessweek.com/news/2014-11-17/google-takes-times-square-crown-with-half-acre-billboard

Takeaway: With the revenue economics now disclosed, we look forward to details from HST management regarding the revenue sharing arrangement with Vornado.

 

CCL – announced the Company's first-ever multi-brand marketing campaign incorporating all nine of its leading global brands to drive increased awareness, consideration and demand for cruising as a great vacation option at an exceptional value.

http://www.cruiseindustrynews.com/cruise-news/11878-carnival-corporation-to-launch-first-ever-multi-brand-national-marketing-campaign.html

Takeaway:  This new marketing strategy to attract 1st time cruisers may result in lower corporate expenses.

 

CCL – unveiled details of its newest ship, Koningsdam, Holland America's biggest ship and the first in a new Pinnacle Class, scheduled for delivery in February 2016. Highlights of the 99,500-ton, 2,650-passenger ship include:  The Queen's Lounge, which has been expanded to include a second tier; a three-deck-high, skylight-capped atrium encapsulated in a stainless steel sculpture; new family cabins; and two outdoor swimming pools.

 

NCLH – Norwegian to re-create The Cavern Club with entertainment programs spanning Broadway to the birthplace of the Beatles aboard Epic with sailings from Barcelona.

http://www.seatrade-insider.com/news/news-headlines/norwegian-to-recreate-cavern-club-aboard-epic-in-europe.html

 

RCL – On the heels of a vessel sale to Ctrip earlier this year, Royal Caribbean Cruises continues to move toward an announcement with the Chinese travel company on a joint venture cruise lines.

http://www.cruiseindustrynews.com/cruise-news/11875.html

Takeaway: Our understanding is that RCL would like to partner with Ctrip on creating a lower-end mass product servicing China.

INDUSTRY NEWS

China Corruption Crackdown – In a crackdown named Operation Fox Hunt, China arrested 288 fugitives suspected of committing economic crimes as part of an aggressive anti-corruption effort aimed at individuals who have fled to 56 countries, including the United States, Canada, Spain, South Korea, and South Africa

http://www.chinadaily.com.cn/china/2014-11/18/content_18934780.htm

Takeaway: No end insight for the corruption crackdown.

 

Portugal's Minister of Internal Affairs Resigns Over Golden Visa Program – The “golden visa” program was launched in 2013 and fast tracks the visa process for citizens living outside of the Schengen space that invest a certain amount in Portugal for a period of no less than five years. Thus far, the two years of the program have seen a total of 1,649 visas awarded, the majority to Chinese citizens, and attracting in excess of €1 billion (USD1.25 billion) in investment, primarily going into the property market

http://macaudailytimes.com.mo/golden-visa-scandal-portugal-minister-steps-friends-caught-corruption-net.html

 

Macau Slow to Approval Building Reuse Plans – The government has approved only two of the 14 sets of plans it has received since April 2011 to turn industrial buildings into housing.

http://www.macaubusiness.com/news/building-conversion-efforts-produce-few-results.html

Takeaway: While the government pushes for gaming operators to provide worker housing, the government must also lend a hand in the approval process.

 

Delta Bridge Cost Estimates Rise – The Hong Kong-Zhuhai-Macau bridge project will cost taxpayers at least HK$3.3 billion more than its HK$83 billion budget. The whole bridge will cost some HK$132.9 billion, according to the bridge authority. The costs will be split between Hong Kong, Macau and mainland authorities. Hong Kong's contribution, including the new island, will come to HK$83 billion.

http://www.scmp.com/news/hong-kong/article/1632992/zhuhai-bridge-costs-set-soar-hk37-b?page=all

Takeaway: While cost go up, no announced delays to the 2016 opening. However, we wouldn't expect the bridge to open before 2017.

 

Clark County Taxi Trips Rise– Nevada Taxicab Authority disclosed October taxi trips were up 5.6% to 2.4 million passengers for the month compared with the same month a year earlier.  Revenue per shift also was up 2.9% to $294.04 for the month. For the first 10 months of 2014, taxi trips are up 4.7% to 23.7 million trips over last year.

http://www.reviewjournal.com/news/traffic-transportation/clark-county-taxi-trips-56-percent-agency-reports

Takeaway: Strong October visitation trends for the Las Vegas strip and locals gaming operators. 

 

Connecticut Gaming Expansion NOT Likley – Gov. Dannel P. Malloy indicated he won't play a "lead role" in any legislation to expand gaming to include a slots parlor near I-91 between Hartford and Springfield.  Malloy further suggested  the issue is a legislative matter, and he doesn't believe the topic has support in the state.

http://www.courant.com/business/hc-dannel-malloy-expanded-gaming-20141117-story.html

Takeaway: Mohegan's hope for a second property, now clearly less likely.

 

Graton Resort & Casino Land Challenge – Stop Graton Casino, a group opposed to the recently opened Graton Resort and Casino near Rohnert Park have opened up a new attack on the gambling mega-complex, asking the California Supreme Court to invalidate the Graton Indian tribe's claim over the land in that casino's 254 acres don't meet state and federal guidelines for Indian casino land because they weren't ancestral Graton territory and were instead given to the tribe by Station Casinos of Las Vegas.

http://www.sfgate.com/bayarea/article/Graton-Resort-and-Casino-attacked-again-over-land-5899527.php

Takeaway: Another Off-Reservation tribal gaming challenge and not likely to be successful.

 

Hotel Cancellation Fees Going Up, Following the Airline Model – Marriott and Hilton, announced they would increase their fee revenue by tightening rules on last-minute reservation cancellations, effective January 1, both companies say that if you don’t cancel your reservation by the day before your scheduled arrival, you’ll be charged a penalty of one night’s room rate.

http://www.nytimes.com/2014/11/18/business/marriott-and-hilton-announce-penalty-for-last-minute-cancellations.html?_r=0

Takeaway: With occupancy at record levels, hotels are trying to drive  additional high-margin revenues. Business travelers, who according to the American Hotel and Lodging Association, represent about 40% of all hotel stays are traveling more and changing/cancelling their plans more as well.  We won't be surprised to see the hotel companies offer their their top tier loyalty program customers complimentary cancellation policies.

MACRO

China Foreign Direct Investment – Increased 1.2% for the month of October on a year-over-year basis.  On a year-to-date basis, January through October, FDI declined 1.2%

 

China October New Home Prices – declined 0.8% versus September and was a slight improvement versus the 1% decline in September versus August.  The year-over-year price decline was 2.4%. 

 

German ZEW Economic Sentiment Indicator for November was 11.0 versus consensus expectations of 4.3 and 4.1 during October.

 

Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis. 

 

Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

 



RH - Atlanta Store Opening

Takeaway: Math on RH Atlanta says 65k sq. ft. is conservative

We'll be at the RH Atlanta Design Gallery Grand Opening on Thursday night. This is an important one because the store is 65,000 sq. ft. (45K indoor selling  + 20K outdoor) -- the first of the '2nd Generation' Design Galleries. Remember that the first wave of Design Galleries averaged about 20,000 feet. The Street 'gets it' that the economics in these stores are significantly better than in the legacy 9,000 ft stores, but there are massive questions (and doubts) about the economics associated with a mega-store like what RH is building in Atlanta.

 

A couple of reasons why we think this store size makes sense for RH in Atlanta.

1. As we outlined in our RH Real Estate Deep Dive, you need to look at market size of every single store -- which we define as home furnishings spend for consumers earning over $100k. We did that in every single region RH operates.

2. Our math suggests that there are 22 existing RH locations that could support a store of 60,000 or greater. This assumes 2018 market share of 10%, and sales productivity of $1,200.

3. Of these 22 locations, Atlanta is #3 on the list, behind New York and Houston. Our math suggests RH could have a store size as great as 90,000 feet.

 4. The rent economics work. Relative to RH's existing store in Atlanta, we think that occupancy math lines up well with the Denver store, which will open in 2015 (See math below).

 

RH remains our top idea in Retail.

 

RH - Atlanta Store Opening - 11 17 chart3

RH - Atlanta Store Opening - 11 17 chart4


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.

THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we highlight the crowded net short position in long-term Treasuries and why we want you to continue buying bonds.

INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. SPDR S&P Regional Banking ETF (KRE)
  2. iShares Russell 2000 ETF (IWM)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

 

QUANT SIGNALS & RESEARCH CONTEXT

 

  • Buyside Consensus Remains on the Wrong Side of Bonds: As Keith highlighted in yesterday’s Early Look, the speculative net SHORT position in long-term Treasuries via the futures and options markets just hit a 6M high of -126.2k, which represents an -86.1k WoW delta and -1.4 standard deviations shy of the TTM average. What’s important about that last quantitative signal is that it’s the most crowded net short positioning in long-term Treasuries since the week ended 12/31/13. Not ironically, the 10Y Treasury Yield  peaked on a closing price basis at 3.03% on that date. As most recently supported by our #Quad4 theme, we have remained completely on the other side of buyside consensus on bonds all year and continue to recommend this contrarian asset allocation at the current juncture. Much like our #RatesRising view of 2013, fading consensus on bonds has proven to be an extremely profitable exercise over the past two years.
  • “But, But I Can’t Buy Bonds Up Here”: Over the past 1-2 months, one question we’ve repeatedly received from subscribers is some version of whether or not our view on bonds has already played out. Such inquiries are typically prefaced with the assumption that XYZ investor has “missed the move” and that “all the money has been made”. We obviously disagree with this highly consensus premise and prefer to substantiate our claims with hardcore analysis. Moreover, we find it odd that we never get questions like that on the equity market; investors seem to love buying high in the stock market, but not so much in bonds (TLT, EDV, MUB) and in bond-like equities (XLP, XLU, VNQ)… Buy bonds and like it.
  • Keep Pushing Out Those “Dots”!: On that note, our proprietary G3 Monetary Policy Model shows that we’re nearing the strike zone for marginal easing out of the FOMC. While we don’t necessarily believe they’ll actually pull the trigger on another LSAP before year-end, we do find that a continued pushing out of the “dots” on tightening expectations is a highly likely occurrence based on our model. Looking back to QE1, QE2 and Operation Twist, our model was showing an average reading of 26% on the day marginal easing was either announced or strongly hinted at Jackson Hole. QE3 was the lone anomaly in this data set with a 58% reading; recall that its announcement caught consensus by surprise as well. To review, our G3 Monetary Policy Model is an amalgamated look at 10 economic and financial market indicators (on a percentile basis), whereby 0% implies a high probability of easing in the near term, while 100% implies a high probability of tightening in the near term. We are currently at a relatively low reading of 36%...

 

THE HEDGEYE MACRO PLAYBOOK - ust 10Y NCCP

 

QE1 Announcement (11/25/08):

THE HEDGEYE MACRO PLAYBOOK - QE1 Announcement 11 25 08

 

QE2 Hint at Jackson Hole (8/27/10):

THE HEDGEYE MACRO PLAYBOOK - QE2 Jackson Hole 8 27 10

 

Operation Twist Announcement (9/21/11):

THE HEDGEYE MACRO PLAYBOOK - Operation Twist Announcement 9 21 11

 

QE3 Announcement (9/13/12):

THE HEDGEYE MACRO PLAYBOOK - QE3 Announcement 9 13 12

 

Current: 

THE HEDGEYE MACRO PLAYBOOK - Current 11 17 14

 

***CLICK HERE to download the full TACRM presentation.***

 

TRACKING OUR ACTIVE MACRO THEMES

#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

 

Early Look: November Rain (11/18)

 

#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.

 

Top Ten Reasons to Stay Short the Euro (11/5)

 

#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

 

Early Look: Battlefield’s Vortex (11/11)

 

Best of luck out there,

 

DD

 

Darius Dale

Associate: Macro Team

 

About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.

 


CHART OF THE DAY: Fed Balance Sheet Holdings vs. 10-Year Treasury Yield

CHART OF THE DAY: Fed Balance Sheet Holdings vs. 10-Year Treasury Yield - EL Chart  2 QE vs BS

 

Today's Chart of the Day, first published by our Financials team early in the year, shows that the end of QE1 & QE2 were both followed by sharp drops in 10-year treasury yields as the bond market priced in slowing growth and the inability of the private sector to successfully take the hand-off from the Fed.   We’re inclined to interpret the current weakness in the 10Y as a protracted version of this recurrent cycle.  Essentially, it's the same selloff seen in the last two iterations, but in slow-motion, over the duration of the taper instead of all at once.



November Rain

“If at first you don’t succeed, then skydiving definitely isn’t for you”

- Steven Wright

 

Every November for the last decade, my high school buddies and I gather ahead of Thanksgiving to toast our respective, eclectic journeys into grown up’ness.

 

Every November for the last half-decade, domestic inflation expectations have crashed in an acute, seasonal de-crescendo.                                                                                                                                                    

Every November, Global Central Bankers meet in the collective effort to arrest economic gravity. 

 

Every December, the Macro Muchachos of Hedgeye toast to the profit opportunities borne of the unique pervasiveness of this-time-is-different’ness

 

Back to the Global Macro Grind…

 

In mid-October, Fed researchers documented Residual Seasonality in the reported Inflation data whereby in 8 of the last 10 years consumer price inflation has tended to be higher in the first half of the year than in the second half – a pattern evident even in the seasonally adjusted data. 

 

The research doesn’t really offer a supporting theory for the serial seasonality but the publication of the research suggests the Fed is, at least, aware of the seasonality and may (partially) discount the magnitude of sub-target inflation reported in the 3rd and 4th quarters. 

 

Notably, the paper also fails to identify policy itself as a contributing factor in perpetuating that phenomenon. 

 

As can be seen in the 1st Chart of the Day below, policy initiatives have, in recurrent fashion, been implemented circa November in the wake of crashing growth expectations.  

 

November Rain - EL Chart  1 QE vs BE

 

The direction of causality is (perhaps) open to debate but given that QE initiatives (generally announced in late 3Q) drove recurrent bouts of commodity price inflation & ‘escape velocity’ optimism into the New Year and that inflation expectations, in regular fashion, collapsed subsequent to cessation of QE initiatives is certainly suggestive.   

 

The 2nd chart of the day, first published by our Financials team early in the year, shows that the end of QE1 & QE2 were both followed by sharp drops in 10-year treasury yields as the bond market priced in slowing growth and the inability of the private sector to successfully take the hand-off from the Fed.   We’re inclined to interpret the current weakness in the 10Y as a protracted version of this recurrent cycle.  Essentially, it's the same selloff seen in the last two iterations, but in slow-motion, over the duration of the taper instead of all at once.

 

The Fed wants to get out of QE if only to afford themselves the opportunity to get back in and the cost-benefit balance in terms of policy spillover to financial market (in)stability has shifted in favor of policy normalization, but established patterns/habits and embedded (dovish) ideologies are hard to break…. particularly with the Quad#4 scourge of disinflation and slowing growth becoming an increasingly tangible threat.    

 

In physics, Constructive Interference describes the phenomenon of wave propagation and the propensity for two, in-phase waves to meet and produce a resultant wave larger in magnitude than either of the individual waves.  Conversely, destructive interference, describes the propensity for two, out of phase waves to cancel each other out. 

 

How does that relate to global macro risk? 

 

A host of individual economies have traversed through Quad #4 over the last 5 years.  However, the preponderance of G7/G20 economies have been at different points along the economic cycle at any given time – effectively in a state of destructive interference with the collective effect being a global economy oscillating above and below middling growth.

 

One benefit from being “out-of-phase” is that a rotate-the-QE model among DM central banks was a viable strategy and the race to the currency war bottom could proceed in a more-or-less orderly fashion.   

 

At present, however, the global Macroeconomy is experiencing a constructive interference of sorts whereby individual country cycles are converging to an in-phase wave of disinflation and decelerating growth.  The expedited collapse in major currencies and the discrete rise of $USD correlation risk is symptomatic. 

 

Growth, domestically, was almost 5% in 2Q. The first  revision to 3Q GDP will  show a negative revision down to  ~3%.  The early estimate for 4Q from the Fed’s GDPNow model is pointing to  +2.6% growth.   

 

The U.S. has been a source of relative strength but the late-cycle data is cresting alongside persistent, negative revisions to global growth and inflation estimates.  With bonds leading asset class performance YTD and the canonical defensive trio of XLV/U/P leading the 2014 rise in sector variance, the market has been discounting some measure of the current reality for some time. 

 

Personally, I’m getting bored of being long the long bond and would welcome a shift back into early-cycle, high growth/high beta exposure but neither the quant nor the fundamental data are supportive of that, yet. 

 

In other physics 101 news, Work still = Force x Distance.  

 

Here, distance actually refers to displacement, so, if your net change in position is zero you didn’t technically do any work.  On a physics score, the Russell 2000, having round-tripped in price, hasn’t done any work for two weeks….technically, with the S&P 500 up ~0% on an inflation adjusted basis since mid-2000, we haven’t done any work in nearly two decades. 

 

Yup…all the collective speculation, all the sunken search and research costs, all the spurious activity = zero work done when measured in SPX price terms.    

To Tuesday morning existentialism and bull markets in (economic) #gravity. 

 

Our immediate-term Global Macro Risk Ranges are now:  

 

UST 10yr yield 2.29-2.35%

RUT 1149-1181

CAC40 4149-4262

VIX 12.53-16.01

Yen 114.04-116.94

WTI Oil 74.05-76.99

Gold 1130-1203 

 

Christian B. Drake

U.S. Macro Analyst

 

November Rain - EL Chart  2 QE vs BS

 


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