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Cartoon of the Day: A Bear Without Borders

Cartoon of the Day: A Bear Without Borders - global bear 12.11.2014

The bear is making his presence known around the globe as U.S. perma-bulls plunge their heads ever deeper into the decoupling, "It's Different This Time!" sand.

 

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McCullough on Fox Business: U.S. Becoming a "Gigantic Centrally Planned Project"

Hedgeye CEO Keith McCullough appeared on Opening Bell with Maria Bartiromo this morning.

 

In the segment below, he talks about the better than expected retail sales numbers, where the economy is now, and what to expect from the Fed moving into 2015. 

 

 

Regarding cost of living, Keith reiterates that despite some savings at the gas pump, two thirds of the U.S. is not feeling the economic recovery thanks to central planning.

 

 

Speaking of central planning, Keith talks about the impact of ECB President Mario Draghi's behavior on U.S. equities and what's next for European markets.

 

 

Lastly, Keith discusses the regulation of the financials sector, and why it's important to stay long the long bond:


#EmergingOutflows Round II: This Time Actually Is Different | CALL INVITATION

Takeaway: We will be hosting a conference call on Tuesday, December 16th at 1:00pm EST to update our outlook for Emerging Markets in 2015.

Emerging market equities, bonds and currencies are once again selling off HARD. Please join us for a conference call Tuesday, December 16th, at 1:00pm EST to discuss why this time actually is different.

 

#EmergingOutflows Round II: This Time Actually Is Different | CALL INVITATION - HE M emergingoutflows

 

Since our September 23rd [bearish] note titled, “EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER”, the MSCI EM Index has declined -7.2%, the JPM EM Currency Index has declined -6% and OAS on the Bloomberg USD EM Composite Index has widened +78bps to 385bps.

 

While it’s clear to us consensus among the investment community finally understands the negative impact of a stronger U.S. dollar upon emerging market asset prices, we don’t think the associated risks are even in the area code of being priced in at the current juncture. In fact, we anticipate considerable downside from current prices, citing a plethora of risks that aren’t even being considered by the preponderance of investors.  

 

Topics covered will include:

 

  • Where is consensus on emerging markets?: a review of recent literature to help appropriately frame the debate
  • Which countries, regions and asset classes are most risky?: using our proprietary EM Crisis Risk Model to quantify and summarize the dispersion of fundamental risks among EM economies (NOTE: we have long ideas too!)
  • What are the risks no one is talking about?: quantifying the systemic risk across the EM space and how said risk might spillover into broader systemic risk for global financial markets
  • What’s the bull case?: broadening our analytical lens to show why the #StrongDollar tightening cycle has only just begun – despite the fact that we DO NOT think the Fed will hike interest rates

 

All Hedgeye Macro subscribers will receive the dial-in information and presentation before the call on Tuesday, December 16th.

 

Darius Dale

Associate: Macro Team


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JOBLESS CLAIMS - 2014 VS 2007

Takeaway: Q: How can you tell when the cycle is turning? A: Rate of Change.

Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

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INITIAL CLAIMS: 2007 vs. 2014:

At this point in the cycle, we're less interested in the degree to which jobless claims are improving; rather, we're increasingly focused on any signs of claims beginning to negatively inflect. Here are a few different ways to think about how to evaluate the data for those signs.

 

First, one can simply look at the rolling trend (4-wk rolling average) in SA claims. Over the intermediate term (YTD) it's been steadily trending lower, while in the short-term (Last 3-4 months) it's been moving sideways. Looking back to 2007, by comparison (recall the S&P peaked in October 2007), rolling SA claims were trending higher by the October/November 2007 timeframe. We illustrate this in the first chart below. In blue we show the rolling SA claims with a second order polynomial trendline to illustrate the acceleration in claims in the fourth quarter. Claims had been running sideways between ~310k and 330k until week 43, when they broke above 330k and never looked back. That was late October, 2007. By comparison, the green line shows the 2014 trend.   

 

Second, one can look at the Y/Y rate of change in the rolling NSA data. The data inflected to positive 7% Y/Y rate of change (rising claims) by November, 2007 suggesting that the labor market was already showing early signs of deterioration, less than one month after the peak in the market.

 

We'll be keeping a close eye on the data for any signs of the beginning of the turn in the credit cycle.

 

JOBLESS CLAIMS - 2014 VS 2007 - 07 vs 14

 

The Data

Initial jobless claims fell 3k to 294k from 297k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.25k WoW to 299.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.0% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.2%

 

JOBLESS CLAIMS - 2014 VS 2007 - 2

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 



Jobless Claims - 2014 vs 2007

Takeaway: Q: How can you tell when the cycle is turning? A: Rate of Change.

At this point in the cycle, we're less interested in the degree to which jobless claims are improving; rather, we're increasingly focused on any signs of claims beginning to negatively inflect. Here are a few different ways to think about how to evaluate the data for those signs.

 

First, one can simply look at the rolling trend (4-wk rolling average) in SA claims. Over the intermediate term (YTD) it's been steadily trending lower, while in the short-term (Last 3-4 months) it's been moving sideways. Looking back to 2007, by comparison (recall the S&P peaked in October 2007), rolling SA claims were trending higher by the October/November 2007 timeframe. We illustrate this in the first chart below. In blue we show the rolling SA claims with a second order polynomial trendline to illustrate the acceleration in claims in the fourth quarter. Claims had been running sideways between ~310k and 330k until week 43, when they broke above 330k and never looked back. That was late October, 2007. By comparison, the green line shows the 2014 trend.   

 

Second, one can look at the Y/Y rate of change in the rolling NSA data. The data inflected to positive 7% Y/Y rate of change (rising claims) by November, 2007 suggesting that the labor market was already showing early signs of deterioration, less than one month after the peak in the market.

 

We'll be keeping a close eye on the data for any signs of the beginning of the turn in the credit cycle.

 

Jobless Claims - 2014 vs 2007 - 07 vs 14

 

The Data

Initial jobless claims fell 3k to 294k from 297k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.25k WoW to 299.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.0% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.2%

 

Jobless Claims - 2014 vs 2007 - 2

 

Jobless Claims - 2014 vs 2007 - 3

 

Jobless Claims - 2014 vs 2007 - 4

 

Jobless Claims - 2014 vs 2007 - 5

 

Jobless Claims - 2014 vs 2007 - 6

 

Jobless Claims - 2014 vs 2007 - 7

 

Jobless Claims - 2014 vs 2007 - 8

 

Jobless Claims - 2014 vs 2007 - 9 

 

Jobless Claims - 2014 vs 2007 - 10

 

Jobless Claims - 2014 vs 2007 - 11

 

Jobless Claims - 2014 vs 2007 - 19

 

<chart14>

 

Yield Spreads

The 2-10 spread fell -12 basis points WoW to 160 bps. 4Q14TD, the 2-10 spread is averaging 181 bps, which is lower by -18 bps relative to 3Q14.

 

Jobless Claims - 2014 vs 2007 - 15

 

Jobless Claims - 2014 vs 2007 - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


OIL: BOTTOMS ARE PROCESSES

OIL: BOTTOMS ARE PROCESSES - levels chart

 

Updated levels (BEARISH TREND/TAIL)

 

TRADE DURATION RISK RANGE: $60.48-$65.38

TREND RESISTANCE: $83.83

TAIL RESISTANCE: $92.97

 

After the Thanksgiving frenzy, the market failed to recover any ground last week. WTI finished down 80bps, and the selling has continued this week:

  • BRENT -6.4% WTD
  • WTI -6.9% WTD

Now the question becomes when will the wave of downwardly revised cap-ex plans in the E&P space for 2015 hitting the tape from Halcon, Continental, Conoco Phillips, Miller, Oasis Petroleum, etc. provide support for prices? If you’re a small-cap, over-leveraged E&P company, your cap-ex plans were predicated on the existence of the cheap funding in capital markets that has existed over the last several years in the energy space.

The shale surge has been unarguably fueled by cheap access to capital markets, and this source of leverage is now much more costly. High yield spreads in the energy space are touching record levels above 9%. We outlined the spread risk in the high yield space in our Q4 macro themes deck. Feel free to reach out for access or have a look at Darius Dale’s Macro Playbook from this morning.

With debt capital markets virtually un-accessible as of today, the sell-off in small and mid-cap E&Ps also crushes capital raising alternatives on the equity side (shareholder dilution constant). The small/mid-cap wildcatter's E&P index is down ~-60% from its June 2014 highs.

 

OIL: BOTTOMS ARE PROCESSES - chart2 hy index

 

OIL: BOTTOMS ARE PROCESSES - WCATI Index

 

The cap-ex slowdown will eventually flow through to actual production numbers, but it won’t happen until your book is closed for 2014.  

Over the short-term, our process for contextualizing daily market activity continues to indicate there is a risk of further downside into year-end. WTI and BRENT finished sharply lower yesterday with the kind of momentum we would want to observe as an indicator for more downside:

  • Price: -4.0%
  • Volume: +35/+27/+19/+28% above 5-day/1/3/6-month averages
  • Open Interest (short-term indicator): higher vs 5-day and 1-month averages
  • Implied Volatility in spot contracts: +7/15/32/69% above those same durtations  

While we have been in front of the downside risk in oil in Q4, the expectation for lower prices (from here) is certainly becoming a psychological and consensus expectation, which we will fade when the time comes. The expectation for future volatility is blown-out. The commitments of traders report from the CFTC shows that the sum of aggregate positions in futures and options markets is between 1-2 standard deviations shorter than it has been over the last year. As a contra-indicator should work, the longest market positioning of 2014 was at the June highs in WTI.

We have a simple back-test model that tracks 60-day price performance in oil markets once contract positioning becomes +/- 1 standard deviation extended over different trailing durations. The result is that market positioning that chases price is a very obvious indicator to fade.

The psychological consensus bias towards lower oil prices from here can be observed in fundamental-form with the release of DOE oil and gas inventory data yesterday which surprised to the upside sending energy prices lower:

  • DOE U.S. crude oil inventories 1454K vs. -3689K prior (-2625K estimated)
  • DOE Cushing, OK Crude Inventories 1020K vs. -694K estimated
  • DOE Gasoline Inventory 8197K vs. 2141K prior (2450K estimated)

With so much attention on the sell-off in energy, the event of this weekly DOE stockpile release has induced volatile market activity followed by the narrative of global "OVERSUPPLY." In reality, aggregate crude oil inventories in the United States have been constant over the last year. DOE inventory data also has no real credibility as a directional indicator that we know of. On a y/y delta basis, crude inventories have actually declined.

 

OIL: BOTTOMS ARE PROCESSES - DOE crude inventories

 

With that being said, timing is important and with Draghi sitting on sovereign QE/Euro devaluation the dollar strength could continue over the intermediate-term. With our economy CURRENTLY still positioned in #Quad4, the returns by asset class in the table below would not suggest that it’s a good time to "buy value" in the energy space.  

 

OIL: BOTTOMS ARE PROCESSES - returns by quad

 

While demand is clearly slowing globally and the top-down signals we use suggest further downside risk, should prices remain here, we expect a decline in production in the first quarter of 2015 should prices stay put. Efficiency in extracting North American energy sources is undoubtedly improving, but cheap leverage on top of leverage is not.  

 

Ben Ryan

Analyst

 

 


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