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Macro Tryptophan

“I wish you [turkey] didn’t have to die, but a bunch of white people put on sweaters.”

- Peter Griffin, Family Guy

 

Tryptophan – the amino acid in turkey responsible for the Thanksgiving post-gluttony coma - has to cross over the blood brain barrier in order to elicit its stuporous effects. And it can only do that in the presence of sufficient amounts of insulin/carbohydrates.

 

Without digressing into the underlying (paradoxical) physiological mechanics, the relevant peri-Thanksgiving takeaway is that if you only eat turkey & no carbs alongside it, you won’t get tired.

 

You can weigh the psycho-social cost-benefit of that biochemical reality for yourself as you ferret through the leftover’s fridge.

 

Back to the Global Macro Grind….

 

To attempt to crosswalk that holiday anecdote over the relevancy barrier to the investment space, the tryptophan paradox could be viewed similarly to the de-couplers fallacy.

 

Sure, you could go to Thanksgiving dinner and just eat some turkey and nothing else, but I’d probably only make that bet…with someone else’s stomach.

 

The U.S. could ramp into full, escape velocity de-coupling mode while the balance of the global economy harmoniously converges to a state of disinflation and decelerating growth but, right here, we’d probably only get long that improbability via high-beta, early cycle exposure…with someone else’s money.

 

The first chart of the day below is our global macro summary table which consolidates global estimate trends for growth and inflation.

 

I know you can’t really see the table detail but that’s not really necessary here - one need only observe the ubiquitous red, which represents negative growth and inflation estimate revisions, to see the global transition to Quad 4 manifesting in real-time.

 

Oil’s expedited descent to sub-$70 and the massive underperformance in the XLE are acute examples of the stuporous deflationary realities of Quad #4 as the duo of disinflation and decelerating growth remains the scourge of energy assets and inflationary leverage.

 

Macro Tryptophan  - EL chart1

 

Given the pervasive, negative revision trends and the re-crescendo of the currency wars and central bank interventionism, both the market and policy makers are discretely acknowledging the deceleration in growth.

 

Extending the logic chain, an investor overweight and long of high growth (global) equities would then seem to fall into two broad categories:

 

Wrong: in terms of a fundamental forecast (why would one be levered long into slowing growth?)

Having & Eating Cake: Long under the premise that if growth accelerates you’ll be along for the ride and if it slows equities will (again) get juiced by a global “central bank put”

 

Given the frequency and magnitude of policy intervention over the last 5+ years and the near-Pavlovian, positive response in market prices, copping to strategy number 2 is somewhat defensible as it amounts to “playing the game that’s in front of you” and not the one you think you should be playing.

 

The binary nature and exogenous dependency (i.e. the fulcrum thesis driver being completely external to economic or company fundamentals) of that strategy, however, kind of divorces it from true “investing” in an organic sense. It’s also akin to Nassim Taleb’s Turkey problem.

 

To review Taleb’s popular probability parable:

 

“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race…On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.”

 

It doesn’t take a lot of imagination to extend that metaphor to the equity market farm and envisage who’s the turkey and who’s the farmer.

 

Anyhow, getting back to the domestic decoupling…..

 

Inclusive of the crush of pre-holiday data on Wednesday, decelerating growth appears to be the emergent main course for 4Q.

 

Initial Claims deteriorated for a 3rd week. Peak improvement in claims has been a consistently solid lead indicator of the economic cycle. Are we pushing past peak?

Durable and Capital Goods spending softened (again). We expect the ISM/mfg data to soften alongside declining export demand, shifting seasonals, and middling domestic capex

Household Spending and Income saw tens of billions of dollars of income and savings revised away.

 

To delve into the last point a bit deeper.

 

Estimates for personal income were revised for the April-to-September period and the adjustments were remarkable as total disposable personal income saw some $200+ billion (SAAR) shaved away vs. prior estimates.

 

Alongside a meaningful downward revision to the savings rate in recent months, a net effect of the revision was a complete shift in the trajectory of salary and wage growth.

 

Whereas, prior to revision, the slope of aggregate wage growth in 2Q/3Q was one of acceleration, after the revision, it shifts to one of flat-to-modest deceleration.

 

Specifically, private sector salaries and wages were initially reported to be growing +6.1%, +6.0%, +5.9% over the July-to-September period. With the revision, those growth rates were marked down to +5.0%, +4.9%, +4.9%, respectively.

 

So, prior to revision, wage income was accelerating to a new cycle high alongside higher highs in savings. Thus, the capacity for incremental consumption growth continued to improve even if increased savings was muting the translation to actual spending growth.

 

The step function revision lower in both wage growth and the savings rate constrain the upside for consumption growth relative to that prior to the revision.

 

As the 3-D scatterplot below shows, the multiple regression between Disposable Personal Income growth and the change in the Savings Rate (independent variables) vs. the change in Consumer Spending (dependent variable) has an R-square of 0.95 across decades of data. More simply, growth in Disposable Income and the change in the Savings Rate explains ~95% of the change in aggregate household spending.

 

As we distilled it in our institutional note on Friday:

 

If ya don’t have it (no savings), ya ain’t gettin it (wages), and ya ain’t borrowing it (credit)…ya can’t spend it (PCE).

 

Macro forecasting can be complex and confounding but, every once in a while, it’s worth re-remembering that the strength and prospects for an economy boil down to some simple and very common sense realities.

 

To close the holiday Friday with some meditative macro invocation,

 

Grant me the serenity to accept a global entre into Quad #4.

The insight to understand the lagged benefit of lower energy prices.

And the wisdom to know (& time) the difference.

 

Christian B. Drake

U.S. Macro Analyst

 

Macro Tryptophan  - EL Chart2


Bad #Deflation

This note was originally published at 8am on November 14, 2014 for Hedgeye subscribers.

“The world wants to deflate while governments want to inflate.”

-Jim Rickards

 

Now if that isn’t one of the best quotes of the year, I don’t know what is. It’s another way of saying that, since the enemy of government debt is deflation, they’ll do anything to try to arrest economic gravity – so will Wall Street consensus.

 

To their credit, if only because they’re going #Gruber (Google the video) on The People and preying on their economic and market ignorance, at least government Policies To Inflate are implicit at this stage of the game.

 

Wall Street strategists, on the other hand, are bullish on “stocks” during both #InflationAccelerating and deflation. Yep, $100-150 Oil was no problemo muchachos…  But $70? Ah, that’s why they’ve been bullish on the “economy” all along!

Bad #Deflation - Deflation cartoon 10.02.2014

 

Back to the Global Macro Grind

 

Obviously times, technologies, and mostly everything other than the Old Wall have changed. But the very basic difference between what I’ll call good vs. bad #deflation has not.

 

Here’s the difference:

 

  1. Good #Deflation = #StrongDollar + #RatesRising (signal that real, inflation adjusted US growth is accelerating)
  2. Bad #Deflation = #StrongDollar + #RatesCrashing (signal that both US and Global growth are slowing)

 

And trust me, I know who is out there making the call that I made on #StrongDollar, Strong America (after I did in Q4 2012). He’s the same guy who got run-over by late-cycle #InflationAccelerating from JAN-JUN 2014, and missed both early-cycle US #ConsumerSlowing and #HousingSlowdown in 2014 too. But this isn’t about me versus him. This is about understanding:

 

A)     The difference between good and bad growth expectations

B)      How to express those very different scenarios in terms of stocks versus bonds

C)      How to pick the right sectors of the stock and bond markets that reflect economic reality

 

Good vs. Bad, Stocks vs. Bonds?

 

Yes. Top down, the difference in your asset allocation should have been polar opposite in 2013 and 2014:

 

  1. Good #Deflation = I said Short the Long Bond, Buy The Russell (80% of its revenues come from USA)
  2. Bad #Deflation = I said Buy the Long Bond (TLT), Short the Russell (until growth expectations reset)

 

#TimeStamped

 

And to be clear, only after you have the Bad #Deflation play out in all of its manifestations (down High Yield Energy Bonds, down upstream MLP Energy Stocks, etc.) will you have the catalyst to get long the Good #Deflation.

 

Put another way, if and when markets price in what the Long Bond and Russell 2000 have been pricing in all year (like they did in early October), you get to buy your favorite early-cycle consumption stocks, lower.

 

How some of these guys go from having not called for an early cycle slowdown to calling for an economic recovery (from the consumer spending and US housing slowdown) is above my pay grade, but who really cares. Macro markets are going to do what they are going to do, on their own time.

 

In the meantime, we want you to stay with the #Quad4 deflation playbook:

 

  1. Long the Long Bond (TLT, EDV, etc.), Munis (MUB), and Cash
  2. Long Healthcare (XLV), Consumer Staples (XLP), and REITS (VNQ)
  3. Short the Russell 2000 (IWM) and Oil & Gas E&Ps (XOP)
  4. Short France (EWQ), Russia (RSX) and Emerging Markets

 

The US economy won’t recover until government Policies To Inflates are reversed (#RatesRising, not crashing). That is not what the Old Wall wants. But I called my top contact (God) this morning (smart guy)… and he said he still wants economic cycles and gravity to exist.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.30-2.40%

SPX 2011-2049

RUT 1138-1187

VIX 12.16-16.21

Yen 114.87-116.51

WTI Oil 73.89-77.31

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bad #Deflation - 11.14.14 Chart


Oh, Snap!

This note was originally published at 8am on November 13, 2014 for Hedgeye subscribers.

“The vow that binds too strictly snaps, itself.”

-Alfred, Lord Tennyson

 

Tennyson was a beauty. He was an epic British poet throughout Queen Victoria’s era, but I think he would have crushed it on Twitter these days too (short that stock on yesterday’s #bounce, btw). His lyrics were short, and to the point.

 

“Break, Break, Break”… “Tears, Idle Tears”…

 

His poems were almost hand made for this morning’s headline news that one of our modern central planning overlords – The Abe, in Japan – is going to call a “snap election” immediately following a +20% ramp in the Weimar Nikkei. Oh snap!

 

Oh, Snap! - Alfred

 

Back to the Global Macro Grind

 

Weimar Nikkei? Yes, as in 1919’s Weimar Republic – i.e. the said “democracy” that emerged in Germany post WWI and capitulated into currency devaluation (stealing from its People’s purchasing power) and centrally planned brain washing.

 

Could the Japanese vote for that?

 

Anything can happen. On the why would they part, I won’t review Japan’s 2014 economic data for you as I’ve written about it in multiple Early Looks this year, but here’s the quick recap: with Japanese Household Spending -5-6% year-over-year, the economic outcome of “Abenomics” sucks.

 

But, but… those who were long Japanese stocks for a centrally planned “economic recovery” (i.e. those who were down, in Nikkei terms -10-15% at one point this year before Abe/Kuroda devalued, again) have seen a +20% return from Japan’s October 17th low of 14,532 (as the economy continued to slow).

 

“So”, call being long Japan (or Germany’s stock market in 1924) for the wrong reasons, a win!

 

In Burning Currency terms, that is…

 

To be balanced, that’s probably why some of the Mo Bros (buy-high, and try to sell higha!) on Twitter who are long Nikkei now are more of a short than the company ($TWTR) itself. They would have loved the German “chart” in the 1920s too. #lol

 

But, after getting slammed (again) yesterday, European Equities (ex-Russia, which is down another -1.9% this morning, crashing to -26.1% YTD – and we remain short it, in Real Time Alerts), opened up on the “snap election” news.

 

And US Liquidity Trap chasers of mid-September (i.e. the Mo Bros who bought high SEP 19th, to be in the fetal position within 3 weeks at the October lows) are loving this bad sushi smell in the US equity futures this morning as well….

 

How does this end?

 

  1. #Badly, but … in the meantime,
  2. Either Abe wins the election and burns the Yen beyond the -30% drop it has had versus the US Dollar, or
  3. Abe loses, the Yen rips, the Nikkei crashes (again) – and the phase transition into #Bubbles popping continues

 

While plenty of the “Dow is up” naval gazers (it’s up +6% YTD btw, versus something like #GrowthSlowing Long Bond $TLT’s total YTD return of +18%) will call everything “good”, there remains a very obvious way to play the scenario of Abe winning:

 

SELL/SHORT: Oil and Energy stocks, bonds, and countries.

 

“Again!” as Kurt Russell said in Miracle – follow the central planned yield-chasing #bubbles as they pop:

 

  1. Japan and Europe burning their currencies = US Dollar Up
  2. Dollar Up, Rates Down = #Quad4 Deflation
  3. Deflation = Oil crashing (-28% since June), and Energy Stocks (XLE) down another -0.9% yesterday

 

You can also go downstream into the #OldWall banker sewer and short some up “upstream” MLP stocks:

 

  1. Linn Energy (LINE or LNCO, pick one, or both)
  2. Breitburn Energy Partners (BBEP)
  3. Vanguard Natural Resources (VNR)

 

On the long side, provided that you are still of the #GrowthSlowing view that the January 1st, 2014 Nikkei and Russell 2000 growth bulls missed (i.e. that growth would be cut in half this year, and long-term bond yields would fall), stay with our two favorite SP500 Sector Styles – long Healthcare (XLV) and Consumer Staples (XLP).

 

Remember, until they all “Break, Break, Break”, you don’t have to snap when the most widely held hedge in world history (short SPY) goes up. When growth and inflation expectations are slowing, there’s always a smarter bear market somewhere.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.30-2.40%

SPX 1988-2047

RUT 1137-1188

VIX 12.16-16.32

Yen 111.98-117.77

WTI Oil 75.02-78.21

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Oh, Snap! - 11.13.14 Chart


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.30%
  • SHORT SIGNALS 78.51%

OPEC CUT? NOPE.

Takeaway: A formal production cut from OPEC (which we see as highly unlikely) will have no bearing on how much member countries produce anyway.

While we can’t deny a formal production cut tomorrow will induce a short-term pop to oil prices, the follow-through will be short-lived.

 

Consensus was more one-sided on expecting a production cut when we circulated our first note on OPEC’s waning influence toward the end of October:

 

OPEC's NEXT MOVE

 

While the market has priced in this clear shift in sentiment even though WTI is -10.4% since the October note, consensus is still divided on the outcome of the meeting. We expect any decision to induce an active Friday in markets. Volatility buyers feel the same.

 

Note: Without reading about this volatility set-up know that options markets are pricing in the uncertainty embedded in the market’s expectation for the outcome of the meeting. The market is pricing-in the expectation for much higher volatility (assumed annualized 1-standard deviation price movement) near-term than it has realized over the last 1/3/6-months….

  • Rolling realized volatility in front month WTI Crude is 24%/23%/19% going back 1/3/6-months

 

While…

 

  • At-the-money put- implied volatility for Jan 15’ is trading near 38%, which is +24%/+41%/+74% above trailing averages over the last 1-6 months
  • Looking at the skew of the chain going back every week in November reveals the heightened levels of uncertainty into the event.  The shape of the surface has remained proportionally the same while volatility across the whole chain has been bid up significantly

OPEC CUT? NOPE. - WTI volatility surface

 

We don’t gamble by positioning ourselves in front of events, but we can certainly study consensus positioning and the expectations for volatility vs. what it has realized over going back in time and tell you that any decision is going to warrant a volatile Friday.

 

------

Before dethroning OPEC as a powerful cartel that pushes and pulls oil markets, let’s look at those parties who are perfectly comfortable with the overstated hora of OPEC as an organization:

 

1.       OPEC members themselves which is self-explanatory from a political standpoint

 

2.       Financial market participants who live off volatility

 

3.       Oil companies who like higher oil prices and can use OPEC as a scapegoat for pushing prices higher

 

4.       The media because they need something to report

 

Our expectation is simple…

 

WE DON’T EXPECT A FORMAL PRODUCTION CUT FROM OPEC OUT OF THE MEETING AND THIS WILL PUT MORE PRESSURE ON OIL PRICES (in addition to the quant set-up and #QUAD4 deflation which we have continuously outlined).

 

As mentioned above, we do not doubt any decision will provide a short-term move in spot markets, but from an intermediate to longer-term perspective, the decision is irrelevant:

 

OPEC IS NOT A FUNCTIONING ORGANIZATION AND QUOTA LEVELS HAVE NO BEARING ON HOW MUCH COUNTRIES ACTUALLY PRODUCE.

 

OPEC member representatives underestimate the longevity of other non-traditional plays, especially U.S. shale. We have no reason to believe OPEC officials know much about the technological advancements in shale extraction have brought down the break-even costs of U.S. shale plays. We hosted a call with Leonardo Maugeri who has consulted with the Sec. Gen. of OPEC, and he provided support to this reality. 

 

Replay Link

 

In 2013, OPEC referenced an average per unit cost of production of $90/barrel for U.S. shale plays and this year they’ve said $70/barrel. On a longer -term horizon, OPEC members anchor on the idea of peak oil in the global marketplace, meaning their influence only has upside from here.

Remember that OPEC currently produces 40% of the world’s oil, but they hold an estimated 60-70% of proven reserves. They are more focused on near-term market share and long-term relative positioning against one another supporting prices.

Do we think that Saudi Arabia is ready and willing to come to Venezuela’s rescue when Venezuela has the second highest (behind Saudi Arabia) level of crude reserves on earth? No, we do not.

OPEC total production levels are below the 2012-13 period and we expect the inflection to higher levels to continue from here barring geopolitical discontent. The biggest perceived risk near-term is that they will continue to lose market share.

With some of the Gulf States having the lowest production costs on earth, they are fine with lower prices (especially if they carry the perception of squeezing non-traditional plays). 

 

OPEC CUT? NOPE. - Total OPEC Production Ratio

 

OPEC CUT? NOPE. - OPEC to U.S. Production Ratio

 

Saudi Arabia holds almost all of OPEC’s spare capacity and we do not think they will be willing to further production cuts.

 

OPEC CUT? NOPE. - OPEC surplus

 

As outlined in section 11.C. of OPEC’s statute, a formal production cut from OPEC technically requires a unanimous decision from the one representative member of each nation (unlikely considering the near-term incentives outlined above).

Now, assuming OPEC members band together and agree to a production cut, let’s take a look at how irrelevant these quotas have been throughout history…

 

Jeff Colgan of Brown University performed an extensive study of OPEC from its founding in 1982 and found that OPEC countries cheated (out-produced) their quotas 96% of the time.

  • OPEC ANNOUNCEMENTS have an ability to move spot prices for about 15-20 days, but there is no evidence that production levels are at all influenced
  • The correlation between OPEC quotas and oil prices is non-existent (r^2 =.15 since inception in 1982)
  • During this period all OPEC nations except Iran and Venezuela over-produced 80% of the time based on monthly observations
  • The nine principal OPEC members produced on average 10% above their respective quotas in this period.
  • From 1 there were 22 OPEC meetings where quotas were increased, and in 21 cases, the increase in quotas were still below what each country had produced the month before quotas were raised

------

 

If OPEC is irrelevant, what happened in 1973?

While the chain of events leading to the embargo in 1973 is the one precedent that refutes our claim that OPEC as an organization is irrelevant:

 

1. We think the dynamic in the energy market was different; and,

 

2. The notion that OPEC curbed production by cutting quotas to jack-up oil prices in protest to the Arab-Israeli war is over exaggerated.

 

OPEC’s crude output in 1973 (embargo year) was 30.9MM B/D on average vs. 27.3MM B/D in 1972 (large increase), and OPEC maintained these price levels through 1974.

 

OPEC’s actions in that year were as follows:

  1. They increased posted prices (no longer in existence) which set the nominal price that international oil companies paid to extract oil from foreign fields. It was essentially a tax and royalty hike that followed what became a big spread in these royalty payments vs. market price per unit of oil. This did in fact lower oil company margins, and in 1973 OPEC raised posted prices from $2.90/barrel to $11.65 barrel
  2. OPEC made a push to encourage its members to nationalize their oil industries
  3. SOME OPEC members implemented a very short-term embargo against the U.S. and a few others. The embargo started in October 1973 and lasted for five months

Now posted prices are no longer a reality, the nationalization in the larger OPEC members is already complete, and the oil market is much more diverse, robust, and prepared to handle supply disruptions:

  • More sources
  • Higher stockpile levels in the major consuming countries
  • More short-termism in contracting

Although the market has seen continued selling into the meeting tomorrow, volatility expectations, market sentiment, and OPEC’s decreasing influence are creating a set-up that will disappoint to support a move off of the multi-year lows.

 

If there is a cut, it will provide a short-term pop at the most holding all big macro constant.

 

Please ping us with any comments or questions.

 

Enjoy your Thanksgivings.

 

Ben Ryan

Analyst


COLD TURKEY: 4Q Starts With a Dud

IN SHORT: Initial Claims deteriorated for a 3rd week, Durable and Capital Goods spending softened (again), and Household Spending and Income did a whole ‘lotta not much (with a notable negative revision).  We parse each of the releases below. 

 

COLD TURKEY:  4Q Starts With a Dud - Eco Summary 112614png

 

 

INCOME & SPENDING (Oct.):  And like that, it was gone…..  

 

Spending:  Another middling month for domestic consumerism with real spending rising +0.2% sequentially against a +0.0% comp.  Total Spending growth decelerated -10bps sequentially to +2.2% YoY and accelerated +10bps on a 2Y ave growth basis.

 

Spending on Services was flat sequentially while NonDurables spending growth accelerated on a MoM/1Y/2Y.  Notably, spending on Durables was negative MoM for a 2nd month and decelerated further on a YoY basis. 

 

Revolving consumer credit growth broke out of its 3Y slumber in 2Q alongside accelerated spending on durables and the two have moved in lockstep the last 6 months.  It’s likely card spending moderates alongside the moderation in higher ticket discretionary consumption. 

 

COLD TURKEY:  4Q Starts With a Dud - Consumer Spending TTM YoY   2Y Oct

 

COLD TURKEY:  4Q Starts With a Dud - Durables vs Revolving Credit

 

Income:  Estimates for personal income were revised for the April-to-September period and the PCE figures were revised for the July-to-September period.   The adjustments were noteworthy as total disposable income gains were revised down significantly with the net impact being downward revisions to both wage and income growth and the savings rate. 

 

As can be seen in the 1st chart below, while aggregate private sector wage growth ticked up sequentially and remains near post-recession highs, the slope of wage growth in 2Q/3Q goes from one of acceleration to one of flat-to-modest deceleration after the revision.    

 

A holiday Salute to Simplicity:  Growth in Disposable Income and the change in the Savings Rate explains ~95% of the change in household spending (i.e the multiple regression b/w DPI growth & the chg in the savings rate vs. Chg in PCE has an R-square of 0.95). 

 

 If ya ain’t got it (wages), and ya ain’t borrowing it (credit)…ya can’t spend it (PCE). 

 

And in a modern, Keynesian consumption economy, it’s the “spendin it” that counts. 

 

Macro can be as made as nuanced and complex as one wishes and the alpha, of course, is in correctly forecasting that change in growth/income, but it’s worth re-remembering that the trajectory of an economy boils down to some simple realities.  

 

COLD TURKEY:  4Q Starts With a Dud - Private Wage Income Growth Revision

 

COLD TURKEY:  4Q Starts With a Dud - DPI Revision

 

COLD TURKEY:  4Q Starts With a Dud - Income   Spending Table Oct

 

 

INITIAL CLAIMS: Past Peak?

 

SA:  Headline claims rose +21K sequentially to +313K, marking the first week above the +300K level in 11 weeks.  Seasonally adjusted rolling claims increased +6K WoW to +294K, marking a 3rd week of deterioration (not overly unexpected given the comp setup) and the highest level in 2 months.

 

NSA:  The rate of improvement in non-seasonally adjusted claims deteriorated to -3.6% YoY (vs -12.53% prior) while the 4-week rolling average, which we consider a more accurate representation of the underlying labor market trend, slowed for the 5th straight week, decelerating -330bps to -12.7% YoY.

 

CYCLE ACCOUNTING: As we’ve highlighted, historical cycle precedents suggest peak improvement in initial claims (3Mo rolling ave basis) consistently occurs ~7months before the peak in the economic cycle. 

 

It’s been our contention, from a fundamental view of the labor market data, that while an economic peak isn’t immediately imminent, the trough is currently being put in and once the inflection occurs the ticking of the clock gets increasingly louder – particularly when the ~330K level gets re-breached to the upside.   

 

Its also worth re-highlighting that while peak improvement in claims has been a consistently good lead indicator for the economic cycle, using it to time the market cycle has proven more dubious – particularly in recent cycles where market peaks have occurred quasi- coincident with the trough in claims.  

 

COLD TURKEY:  4Q Starts With a Dud - Claims SA 112614

 

COLD TURKEY:  4Q Starts With a Dud - Claims NSA 112614

 

COLD TURKEY:  4Q Starts With a Dud - Claims Cycle

 

 

DURABLE GOODS: A Second Month of Softness

 

The Headline was a bit more flattering than the core with total new durable goods orders rising +0.4% MoM (against a -0.9% comp) and accelerating on a YoY basis.   However, for a 2nd month, almost every sub-aggregate reported negative MoM growth with most decelerating on a year-over-year and 2Y ave basis as well.

 

Durables Ex Defense & Aircraft - the goods the ave household buys – declined -0.7% MoM and decelerated on both a 1Y and 2Y.  On the business demand side, Core Capital Goods declined a sizeable -1.3% MoM for a second consecutive month and has now been negative for 7 of the last 12 months. 

 

COLD TURKEY:  4Q Starts With a Dud - Capital Goods Orders MoM Oct

 

COLD TURKEY:  4Q Starts With a Dud - Druables Goods Ex Defense   Aircraft Oct

 

COLD TURKEY:  4Q Starts With a Dud - Durable Goods table Oct 

 

 

A Quick Look Globally:  For the last couple quarters we’ve suggested both fundamental trends and market prices were heralding slowing growth, disinflation and a move into what we refer to as Quad #4.  

 

Domestically, the inflation, spending and manufacturing data is slowing from a second derivative perspective into 4Q but the convergence to slower growth and transition into Quad 4 has been global. 

 

Below is our “Global Macro for Dummies” table which consolidates global estimate trends for growth and inflation.  One need only observe the ubiquitous red (i.e. negative growth/inflation estimate revisions) to see the Quad 4 reality manifesting in real-time. 

 

Until we see the slope of growth inflect and market prices confirm, we’ll remain better sellers of strength in equities and buyers of the long bond on weakness.  

 

COLD TURKEY:  4Q Starts With a Dud - GPL

 

Christian B. Drake

@HedgeyeUSA

 

 

 


QE Conundrums – Draghi’s Misguided Intervention?

Key Takeaways:

  • Eurozone equities are Bullish TRADE and TREND (see levels below). Tactically we are recommending shorting France’s underperformance via the etf EWQ.  (See France GIP model below)
  • Draghi’s latest comments (last Friday) have accelerated the prospect of sovereign QE  – Draghi said the ECB must drive inflation higher “as fast as possible,” and the Bank will broaden its asset-purchase program if needed to achieve that
  • The market’s expectations on timing of potential sovereign QE have also accelerated – the Bank has targeted the Q1 2015 horizon, and we do not think the ECB will be ready to act at its next meeting on DEC 4th. In addition, we would caution that legal and political (German in particular) hurdles are still plainly apparent. QE may in fact NOT be a snap of the fingers
  •  On balance over the shorter term, we expect EUR/USD (etf FXE) weakness (broken on its TREND and TAIL durations – chart directly below),  and equity strength
  • We do not expect that the ECB can will growth through financial engineering, and the rate of change of the quarterly “comp” will remain difficult for at least the next 3 quarters (see Eurozone GIP chart below)
  • Our intermediate-term bearish bias on the economic region remains grounded in our Q4 2014 Macro theme #EuropeSlowing

QE Conundrums – Draghi’s Misguided Intervention? - vv. eur usd broken

 

Economies are not financial markets – this point is not to be confused.

The Hedgeye macro team continues to tout that central planning will not fix the economies across the globe; the interventions have everything to do with trying to resuscitate drowning inflation expectations, and in the short run may inflate stock markets.

 

Specifically, ECB President Mario Draghi’s speech in Frankfurt last Friday once again tilted expectations. He said the ECB must drive inflation higher “as fast as possible,” and the Bank will broaden its asset-purchase program if needed to achieve that.

 

Read: Open the sovereign QE buying flood gates!

 

QE Conundrums – Draghi’s Misguided Intervention? - z. EL 11.24 Mid pic

 

But, but, if expectations are the root of all heartache, massive amounts of hospital beds will be needed given the indecision of both the ability and impact of issuing QE. Here’s select commentary over recent days:

  • Victor Constancio (ECB VP) said that the ECB will consider buying government bonds in the secondary market if the current measures prove insufficient. He went on to say that the ECB would wait until Q1 2015 to gauge the impact of current programs.
  • Jens Weidmann (Bundesbank President) said there are high legal hurdles for ECB to buy government bonds and that monetary policy alone cannot lead to growth.
  • Ewald Nowotny (Austria Central Bank President) said that Q1 2015 was too early for taking further measures to boost the Eurozone economy and does not see a point of time where that could happen. He pointed out that the ECB has taken a series of measures and should observe the impact of these.
  • Benoit Coeure (Member of the Executive Board of the ECB) said the ECB won't make a hasty decision to add more stimulus and will hinge any measures on incoming economic data. He added that there is unanimous agreement on the Governing Council that situations may arise where it has to do more.
  • Victor Constancio (ECB VP) said that Europe is not at risk of sliding into full deflation but the current rate of inflation is dangerously low. He said that living with inflation so close to zero is dangerous because it makes it harder to repay public and private debt, and impedes economic growth.
  • Klaas Knot (Dutch Central Bank President) said that the ECB could move to take additional easing steps, including purchases of government bonds, but it is uncertain whether this would be effective to fight low inflation. He was skeptical on a sovereign debt-targeted QE program because many governments were already borrowing at historically low rates. In addition, he said that the prior measures would take time to feed through.

Despite heightened expectations that the Bank may act when it next meets on December 4th, we doubt that the council will be ready to act. Specifically, it only just started to purchase ABS (November 21) and the 2nd tranche of the TLTROs will only be allocated a few days following the ECB meeting. Further, we do think VP Constancio’s reiteration of Draghi’s dovish remarks and Q1 2015 timetable offer clear evidence that the bank will wait until 2015 to act. 

 

 

Q) What’s Fallen?  A) the Data


Growth & Expectations Down – while a classic lagging indicator, the OECD in its latest Economic Outlook warned that the biggest worry for the global economy is the Eurozone falling into a persistent stagnation trap. The OECD’s downward growth revision brings it close to Hedgeye’s forecast (see GIP model below), however we are not of the camp that a sovereign QE program (like the ABS, covered bond, or TLTROs) will in and of itself lift growth. Here’s a look at the revised forecasts:

  • Eurozone GDP Forecast:
    • 2014: +0.8% vs prior +1.2%
    • 2015:  +1.1% vs prior +1.7%
    • 2016:  +1.7%

QE Conundrums – Draghi’s Misguided Intervention? - vv. EUROZONE

 

Inflation Expectations Down – 2014 is the year that Draghi has attempted to resuscitate drowning inflation expectations, but so far, he continues to fail miserably. Even with the prospect of QE, we don’t see much of a shift upwards (the ECB target is below but close to 2%). As our GIP chart shows, we expect CPI for 2015 at 0.7% versus Bloomberg consensus at 0.8% and its current level of 0.4%.

QE Conundrums – Draghi’s Misguided Intervention? - vv. cpi draghi

 

Sovereign Bond Yields Down – with growth and inflation expectations lowered and the heightened prospect for the ECB to buy sovereign bonds, it comes as no surprise that sovereign bond yields are approaching all-time lows. Below we want to flash a chart that shows in particular the periphery dramatic declines in the cost of capital and interestingly, that at 1.98% and 2.16% for Spain and Italy respectively, their 10-year yields are both lower than the 10-year for the United States at 2.24%. 

 

QE Conundrums – Draghi’s Misguided Intervention? - vv. sov yields

 

 

Short France (EWQ)


On 11/24 Keith added short France (via the etf EWQ) in our Real-Time Alerts. We presented this investment idea in our Q4 2014 theme of #EuropeSlowing, expressed as short “Socialism”.  As we show in the GIP chart directly below, there’s a giant delta between our growth expectations and those of consensus.  We therefore expect the economy and its equity market to underperform the region and fortuitously shorted EWQ at the top of its immediate-term risk range.  The CAC remains broken TREND @ 4388 as we show in the second chart below.

 

QE Conundrums – Draghi’s Misguided Intervention? - vv. FRANCE

QE Conundrums – Draghi’s Misguided Intervention? - vv.  cac

 

Long European equities as long as TRADE and TREND hold (etf EZU as potential investment vehicle).

 

As we show in the chart below, the STOXX Europe 600 is bullish TRADE and TREND. We’ll be managing this position closely, as again, we see little prospect of Draghi’s QE halting a continuation of decelerating inflation and growth, which we expect to be reflected in the equity market over the intermediate term.

QE Conundrums – Draghi’s Misguided Intervention? - vv. stoxx600

 

A wonderful Thanksgiving to you and yours!

 

Matthew Hedrick

Associate


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