“U-G-L-Y, You Ain’t Got No Alibi”
Every year around the holidays I make a point to pick up a stranger, fund a trip to the nearest fast food drive-thru and further them towards wherever “point B” happens to be.
I picked up my first hitchhiker in four years this past weekend.
My multi-year drought in holiday humanism hasn’t been intentional, there’s just been a secular bear market in central CT hitchhiking.
My father started the tradition when I was young. He passed away when I was 17 and I’ve carried on the tradition over the last decade+.
It’s an homage of sorts and my way of paying-it-forward.
Back to the Global Macro Grind….
The thing about ‘paying-it-forward’, in real terms, is that one generally has to get paid to begin with.
While the recent crescendo in Energy/Russia/Greece crashing captions has dominated newsflow the last couple weeks, accelerating wage inflation – and its seemingly perpetual imminence – remains a trending and favorite topic for headline writers.
Indeed, slack reduction and the hoped-for flow through to wage inflation has been the bull case for purveyors of panglossianism for the last year.
The flow of Wall Street wealth to Main Street income remains core to Janet Yellen’s policy calculus as well – and front-running reactionary central bank policy remains the game – so the iterative, Bayesian review of the monthly labor/wage data remains a ceaseless exercise.
THE THEORY: Conventionally, wages are viewed as a lagging indicator, with wage inflationary pressure building as the labor supply declines and the economy moves towards constrained capacity.
That an output gap still exists in the domestic economy remains readily apparent. The core of the slack debate continues to center on the magnitude of the shift in labor supply-demand dynamics and whether policy makers will move ahead of or behind any emergent inflationary curve.
THE (RECENT) SLACK DATA:
- Quits & Hires: Yesterday’s JOLTS data showed voluntary separations (Quits) held above 2.7MM for a second consecutive month – the highest level since February 2008 – while total hires held above 5MM for a second month for the first time since December 2007.
- Available Workers per Job Opening: Available Workers (the sum of Unemployed + those Not in the Labor force but Want a Job) per Job Opening (JOLTS reports) dropped to 3.21 in October – marking a new cycle low and dipping below the pre-recession average of 3.31.
- Short-term Unemployed, % of Total: The share of short-term unemployed - those unemployed for less than 5 wks – made another new cycle high, increasing to 27.6% of total in November. While the share of total has typically ranged between 40-50% at peak in prior cycles, the trend in the current cycle remains one of ongoing improvement.
- NFIB Hiring & Compensation: The Small business optimism data for November, released yesterday, showed hiring plans, compensation, and difficulty in filling positions all remain positive with each increasing sequentially and sitting jut below recent cycle highs.
So, the continued, albeit frustratingly slow, transition to tautness remains ongoing on the labor slack front. Does that portend material (imminent) upside in wage growth?
- Nominal Wage growth over the last 3 cycles (1) has peaked at just north of 4% and has averaged 3.3%. Real Wage growth, however, has been largely a phantasm – particularly for the median and lower income quintiles.
- The lone long-term data set on realwage growth – which focuses on production and nonsupervisory workers - shows real wage growth has been flat/negative for most of the last 4 decades. The current post-recessionary progression in real wage growth actually compares favorably with those observed over the last half century.
- Labor’s share of National Income only rises at the tail end of an expansion and after growth and profits have been strong for a protracted period.
Remember too that those averages were achieved alongside peak positive demographics, accelerating credit growth, and a favorable interest rate backdrop.
Is a return to a halcyonic 3-4.5% level of nominal wage growth in the face of persistently lower inflation, an aging workforce, top heavy demographics, lower productivity and lower credit growth a reasonable expectation?
We don’t think so.
Hourly wage growth for the private sector has been stuck at ~2% for the better part of the last four years. The trend in wage growth for production and non-supervisory workers (+2.4% in November) has been better but not great.
Assuming there is an intermediate-term to the current expansion (now 67 months old), there is probably some runway for further wage gains but with upside to something closer to ~+2.5% than to the ~4% (a double from current levels) of prior cycle peaks.
Strong dollar deflation and a protracted deceleration in global growth should only constrain the upside for domestic inflation.
To review the current state of the top 7 Global Economies:
- United States: Good - but slowing from a rate of change perspective
- China: Ugly - Growth slowing, Disinflation rising (printed 5Y low last night), central bank easing
- India: Good - growth improving & inflation worries ebbing with Dr. Raj doing a credible job at the helm of the RBI
- Japan: Ugly - Yen crashing, economy slowing, Abe/Aso scrambling
- Germany/Eurozone: Ugly – deceleration growth and disinflation prevailing, Incremental CB easing imminent
- Russia: Disaster – Ruble is crashing, GDP is looking like -6-8% at current oil prices, risk of a banking crisis is rising
- Brazil: Ugly - perhaps some interesting upside in another quarter or so but, for now, Brazilian policymakers/economy (still) can’t get out of their own way
If you’re keeping score that’s: 4 Uglies, 1 Disaster, and 1.5 Good
What say prices/markets about those macro realities?
- Global Growth and Inflation Revisions = negative
- 10Y Yield = -27% YTD, Bearish Formation, immediate-term downside to 2.16%
- Yield Spread (10’s -2’s) = 52 Week Low
- Inflation Expectations = Crashing
- Energy Equities & Commodities = Crashing
- Style Factor Performance = Low Beta, High Yield, Large Cap Outperforming (across durations)
- High Yield = Breaking Out and holding at 52-wk highs.
In his keynote address to the CATO institute, Jim Grant presaged that a summary analysis of the 2016 crash will sound something similar to the following:
“My generation gave former tenured economics professors discretionary authority to fabricate money…we put the cart of asset prices before the horse of enterprise…we entertained the fantasy that high asset prices made for prosperity, rather than the other way around.”
With hedge fund trailing correlations to beta >0.90 and rampant central bank interventionism starving the alpha from active management, most investors, wittingly or not, have just been along for the five-year ride.
Thumbing for central bank (helicopter) rides….no secular bear market there.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.16-2.26%
Oil (WTI) 60.94-66.99
To chickens & eggs, carts & horses, paying it forward & having it to begin with.
Christian B. Drake
U.S. Macro Analyst
TODAY’S S&P 500 SET-UP – December 10, 2014
As we look at today's setup for the S&P 500, the range is 32 points or 0.82% downside to 2043 and 0.74% upside to 2075.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.60 from 1.60
- VIX closed at 14.89 1 day percent change of 4.79%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, Dec. 5 (prior -7.3%)
- 10:30am: DOE Energy Inventories
- 11:15am: Bank of Canada’s Poloz news conference in Ottawa
- 1pm: U.S. to sell $21b 10Y bills in reopening
- 2pm: Monthly Budget Stmt, Nov., est. -$65b (pr -$135.226b)
- 9am: FDIC Systemic Resolution Advisory Cmte meeting on resolution of systemically important financial companies
- 9:30am: House Oversight subcommittee on energy policy holds hearing on EPA’s management of Renewable Fuel Standard
- 10am: Senate Banking Cmte hearing on cybersecurity for financial sector
- 10am: Senate Agriculture Cmte hears from Commodity Futures Trading Commission Chairman Timothy Massad on derivatives regulation
- 10am: House Foreign Affairs Cmte hears from Brett McGurk, U.S. representative to global coalition to counter Islamic State
- 10am: House Transportation and Infrastructure subcommittee on aviation hearing on unmanned aircraft systems
- 10:15am: House Energy and Commerce’s Health Subcmte hearing on FDA role in regulating genetically modified food ingredients
- 2:30pm: Senate Judiciary Cmte hearing on President Obama’s orders on immigration
WHAT TO WATCH:
- Global Airlines to Make Record Profit in 2015, IATA Says
- JPMorgan Is Seen Needing >$20b for Fed’s New Capital Rules
- Costco 1Q EPS Beats Estimates on Same-Store Sales Bounce
- Santander Isn’t Weighing Buyout of U.S. Auto Unit
- N.Y. Supervised Banks to Face Tougher Cyber Security Tests: FT
- Honda Stops Sale of Acura Sedan in U.S. in Latest Quality Fault
- Abercrombie Buyout No Longer Off Limits After CEO Exit
- Woodside Preferred Bidder for Apache Assets, Australian Says
- RBS Said to Exit Japan Fixed-Income Trading With 200 Jobs Cut
- CIBC Said to Mull Offer for LSE’s Russell Asset-Management Unit
- Hong Kong Protesters Dismantle Tents Before Police Clear Streets
- Netflix CEO Says Broadcast TV To Last Another 16 Yrs
- Crude Resumes Slump as Iran Sees $40 If OPEC Solidarity Breaks
- Kepler Sees Early 2015 as Transition Period for Equities
- Ferrari Said to Consider Moving Fiscal Residence Outside Italy
- Ferrellgas Partners (FGP) 7am, ($0.25)
- Francesca’s (FRAN) 7:30am, $0.17
- Hovnanian Enterprises (HOV) 9:15am, $0.21 - Preview
- Laurentian Bank of Canada (LB CN) 8:37am, C$1.41
- Avanir Pharmaceuticals (AVNR) 4:01pm, ($0.06)
- Casey’s General Stores (CASY) 4pm, $1.17
- Men’s Wearhouse (MW) 5:30pm, $0.87
- Oxford Industries (OXM) 4pm, $0.02
- Peregrine Pharmaceuticals (PPHM) 4pm, ($0.07)
- Restoration Hardware (RH) 4:05pm, $0.47
- Wet Seal (WTSL) 4:05pm, ($0.28)
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- OPEC Says 2015 Demand for Its Crude Will Be Weakest in 12 Years
- El Nino Conditions Seen Forming by Japan as Pacific Oceans Warms
- Aluminum Leaving LME Seen by Jefferies Spurring More Volatility
- Texas Is Now Home to Bargain-Hunting Japanese Oil Buyers: Energy
- Gale Force Winds Batter Britain as Thousands of Homes Lose Power
- Glencore Expects Long-Term Thermal Coal Demand Growth at 4.5%/Yr
- Gold Trades Below Six-Week High as Dollar, Rates Outlook Weighed
- Further Easing in India’s Gold Curbs to Be Measured: Minister
- Glencore Sees Nickel Moving Into Substantial Deficits From 2018
- China’s Copper Smelters Jump After Getting Higher Treatment Fees
- Andy Hall Turns to Dollar for Commodity Fund Gain After Phibro
- Soybeans Rise to Highest in Almost Four Weeks Before USDA Report
- Iron Ore Miners Battling Price Slump Halt Exports From India
- China’s SRB Copper Buying at 700,000T Overestimated: Glencore
- Brent Crude Trades Near Five-Year Low With WTI Amid Surplus
The Hedgeye Macro Team
daily macro intelligence
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
This note was originally published at 8am on November 26, 2014 for Hedgeye subscribers.
“If we can get you a car in 5 minutes, we can get you anything in 5 minutes.”
Travis, how about a massage? Or some turkey day beers and, bonds?
Everyone who has created an anti-consensus company likes how the CEO of Uber, Travis Kalanick, rolls. If this morning’s headlines about T Rowe’s investment are right, it looks like Uber is going to price its final private round at a $35-40B valuation too!
That’s almost as bullish as I am in 2014… on the Long Bond (TLT). In less than 3 minutes, I can get you anything you need to explain the bull case. As growth and inflation expectations slow, globally, bond yields go lower. Ok, maybe that was less than 1 minute.
Back to the Global Macro Grind…
In less than 1 minute, I can get you a chart (see Chart of The Day) showing the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind.
To most of our “rate of change” fans, the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…
Yesterday’s Consensus Media headlines on US GDP were classic. Sadly, Bloomberg (who we pay a lot of money to for rate of change data), continued down the all-time-CNBC-ratings-lows-perma-SPY-bull-spin-path by writing:
BREAKING: “SP500 Little Changed Near Record On GDP, Consumer Confidence”
In other real-world news yesterday, “Consumer Confidence” actually tanked (falling to 88.7 in NOV from 94.5 in OCT), and the rate of change in year-over-year US GDP growth slowed (again) to 2.4% in Q3 versus 2.6% in Q2.
#PermaBull says pardon?
Yes. Evolve your process, just a little, and stop staring at a next to useless GDP quarter-over-quarter SAAR (sequentially/seasonally adjusted) report and look at it how you look at the companies you invest in (i.e. on a year-over-year basis).
This isn’t rocket science. I can get you these numbers (and a whole lot more of them) in less than 3 minutes!
Again, to review why US bond yields continue to crash (10yr yield -26% YTD to 2.25% this morning):
- After topping at +3.1% year-over-year growth in Q4 of 2013, Q314 US GDP growth slowed to +2.4% and…
- While the +1.9% year-over-year growth report for Q1 was much uglier than the +3-4% “expected”…
- You can look forward to a Q4 GDP growth print in 2014 that is closer to +1.9% than Q3’s 2.4% was
Put another way, we still have US GDP growth (year-over-year dammit!) tracking to +2.2% for 2014 – and, magically, that’s exactly where the 10yr US Treasury Yield is trading this morning.
#Tah-dah! Get growth’s rate of change right – and you get bond yields right.
My inbox is fun. I often get forwarded other people’s macro work and, most of the time, I can’t particularly understand what it means. Mostly, I think that’s because I only care about rates of change. And most of that work doesn’t.
It’s not personal. It’s simply my perspective. And it’s this anti-consensus process and perspective that had us as bearish on the Long Bond in 2013 (when the rate of change in US growth was #accelerating) as we are Uber Bullish now.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.22%-2.33%
WTI Oil 73.03-77.04
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
YUM continues to be on our Best Ideas list as a long.
YUM released updated FY14 guidance after the close today, estimating mid-single digit full-year EPS growth, below the 9% growth the street is currently projecting. Perhaps the more disappointing guide, however, was FY15 EPS growth of at least 10%, well below the 17% the street is currently projecting. Specific operating unit commentary was limited, although management noted an anticipated benefit from sales leverage as sales rebound in China.
This release doesn’t change much, in our view, and in fact strengthens our long thesis with what is yet another example of China dragging down the overall business. We continue to believe there is a strong likelihood management either 1) induces significant change from within or 2) is influenced by a group of influential shareholders to make significant changes.
All told, tomorrow’s anticipated sell-off could present a nice buying opportunity for investors, particularly when considering expectations are being reset to reasonable and, we’d argue, easily achievable levels. YUM is a powerful, global brand that has many levers at its disposal in order to immediately drive shareholder value.
We look forward to learning more at the company’s investor meeting on Thursday.
Ed. note: This content was originally published for Hedgeye subscribers on December 09, 2014 at 11:38AM.
POSITIONS: 6 LONGS, 2 SHORTS
If nothing else, watching 2014 macro markets (not just SPY!) and all of the storytelling embedded within their weekly moves is a crash course in #behavioral economics.
That said, with both growth and inflation expectations slowing (that’s why our Best Macro Idea remains long the Long Bond), the question remains as to when they attack the SP500’s intermediate-term TREND line (like they did in October).
My answer? Not yet.
The main reason for that answer isn’t some divine survey – it’s my #process. And, across all 3 of its core risk management durations, here are the levels that matter to me most:
- Immediate-term TRADE resistance = 2065
- Immediate-term TRADE support = 2040
- Intermediate-term TREND support = 1998
In other words, as they test and try that 2040 line, I expect volatility to get immediate-term TRADE overbought. If that line holds (on a closing basis) probability rises that SPY bounces. If that line breaks, probability rises that SPY retests 1998 TREND support.
As I outlined in my Early Look this morning, “Bayesian Answers”, that’s my probability-weighing #process and I’m sticking to it. I only know what the market tells me – beyond that I read every #history that I can find, just to remind me what very little I know.
Sell green, buy red.
Daily Trading Ranges
20 Proprietary Risk Ranges
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