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The Night Before

This note was originally published at 8am on December 24, 2014 for Hedgeye subscribers.

“Twas the night before Christmas, when all through the house

Not a creature was stirring, not even a mouse;

The stockings were hung by the chimney with care,

In hopes that St. Nicholas would soon be there.”

-Major Henry Livingston Jr.



Whether you celebrate Christmas or not, undoubtedly many of you are familiar with the poem “Twas The Night Before Christmas”.  It is the classic story of children waiting for the mythological character Santa Claus to show up on Christmas Eve.


A side note on this poem is that there is some serious controversy surrounding the author.  The poem was originally published anonymously in 1823, but then attributed to Clement Clarke Moore, who acknowledged authorship in 1837. 


A graduate of Columbia University, Moore was an interesting character.   Among other things, his father officiated at the inauguration of George Washington, he was opposed to the abolition of slavery, he was also a vocal opponent to Thomas Jefferson for mostly religious reasons, and, ironically enough, founded the Chelsea area of New York City. 

Despite claiming authorship, Professor Donald Foster of Vassar, who is considered of the top forensic linguists in the world, has concluded quite definitely that true author was Henry Livingston, Jr.   Livingston was also a New Yorker, though primarily a gentleman farmer as opposed to being a political and religious activist, and wrote the poem for his seven children.


Admittedly, this story of disputed authorship, jolly men in suits bringing presents and a red nosed flying rein deer leading the way, remind us a little of the global stock markets.  On Nasdaq, on Dow, on Yen and on Ruble ! (Ok, not on Ruble.)

The Night Before - Yellen cartoon 12.23.2014


Back to the Global Macro Grind...


Yesterday, the market mildly cheered on not the arrival of St. Nicholas, due to a meaningful upward revision in GDP for Q3.  The most prominent area of revision from the initial GDP estimate was a +0.70% increase in consumption to +3.2% from last quarter.  But across the board, the other key components were revised higher as well.


The challenge with GDP for stock market operators, of course, is that it is often rightfully considered a lagging indicator.  Case in point is that we are just now getting the final GDP number for Q3 when we are seven days before the end of Q4 2014.  The key questions from here to ask are: a) Did GDP just peak? and b) How is Q4 and beyond shaping up?


On the first point, to us it certainly looks like Q3 GDP was the peak, or close to it.  On a sequential basis, GDP was up +5%, which was the best sequential increase since Q2 2011.  On a year-over-year basis, it was the second best print since Q2 2011.  Most importantly, on a two and three year average basis this was the best year-over-year growth rate since Q2 2011. The question from here, of course, will the rate of change accelerate or decelerate, on the margin?


Staying on the theme of consumption as a big driver of Q3 GDP, our Retail Sectorhead Brian McGough circulated a chart of “ICSC (International Council of Shopping Centers) YTD Comp Sales Trends”, which is in the Chart of the Day, and according to McGough:


“A big rebound in sales for the week, but this follows two big weekly declines in the context of an intermediate term downtrend.  The point there is that with sales trending down so much into the biggest holiday week, it makes sense that retailers would really turn the discounting machine into overdrive to have any shot at hitting numbers and prevent a glut of inventory in January.  Online sales trends per Channel Advisor are downright sobering.”


Certainly, this data doesn’t guarantee that Q4 GDP will slow from Q3, because it is still possible that old St. Nicholas has some last minute shopping to do!


It won’t all be coal in our stockings heading into 2015.  One area that we recently highlighted as likely to see improvement and outperformance in 2015 is U.S. housing.   A headwind to housing has been the inability, by some, to get credit.  Aside from the potential easing of down payment rules, another key area that might provide a credit tailwind is the improvement in subprime mortgage market.


According to an analysis by Barclays, subprime mortgage bonds have gained 12% this year, which is more than 6x the return of junk rated corporate debt.  In aggregate, subprime bonds have returned more than 75% since 2010.  To be fair, 30% of the subprime mortgages tied to these bonds are more than 60 days delinquent, but that too is an improvement from 41% in 2010.


Certainly, we aren’t hoping for a return to the days when mythical characters like Santa Clause took out mortgages with no paperwork, but incremental improvement in the ability to get financing for the younger and less wealthy demographic is a real positive.


As it relates to real-time data on housing, my colleague Christian Drake wrote a note yesterday that looked at new home sales and recent pricing data.  While in his words new home sales was still a bit muddling, on the pricing front FHFA Home Price Index accelerated to +4.4% in Oct from +4.2% in Sep.  All three primary price series are telling the same (2nd derivative) stabilization story.


So really what we are saying is that if your loved ones were really well behaved in 2014, this is probably a very good time in the cycle to buy them a house!


Our Global Macro Risk Ranges are now:


UST 10yr Yield 2.04-2.27%

SPX 1957-2110

RUT 1125-1208

VIX 13.17-24.35

USD 89.08-90.66

YEN 118.43-121.18

WTI Oil 52.87-59.23


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Night Before - el

Cartoon of the Day: Hitting the Slope

Cartoon of the Day: Hitting the Slope - 10yr yield cartoon FIX 01.06.2015

The yield on the 10-year U.S. Treasury fell under 2% to its lowest level since May 2013. On a related note, yes... Hedgeye's macro team remains long TLT.

Captain Obvious: December ISM

Takeaway: ISM reflects the broader slowdown in December Macro. Labor gets more interesting from here.

In reviewing the domestic December PMI data (see:  (HEDG)EYE-CANDY | SURVEY SAYS...) we noted that the underlying Macro reality probably stood somewhere between the ongoing slowdown reflected in the Markit PMI measure (which slowed for a 6th consecutive month in Dec) and ongoing peak strength reported in the ISM survey. 


We posited that alongside a reversal in here-to favorable seasonals and a deceleration in global growth and export demand, the reported ISM/IP data would follow the Markit reading lower in the coming months. With both the ISM mfg and services surveys slowing in December, it looks like that trend is playing out.  


Captain Obvious:  December ISM - ISM vs Markit


The U.S.’ s world share of trade and GDP may be in retreat but its glacial transition towards global interconnectedness is not.  Is anyone particularly surprised that export orders (export orders don’t directly feed into the ISM index calculation but they obviously impact total activity) have slowed or domestically based global conglomerates remain hesitant to materially accelerate capex into OUS disinflation and discrete growth deceleration? 


The ISM employment sub-indices remain good on balance and the domestic labor market remains insulated from the broader global reality, for now.  Historical cycle precedents suggest labor market strength/improvement still has some runway before inflecting negatively. 


Captain Obvious:  December ISM - ISM Employment


Captain Obvious:  December ISM - IC Cycle


The acute collapse in energy prices and any associated (negative) flow thru to capital spending and net hiring introduces some significant uncertainty, but represents a risk that can be largely monitored and managed in real-time with the high frequency labor data.   


Captain Obvious:  December ISM - Energy State Claims


Bond yields and capital flows, meanwhile, continue to confirm the economic gravity of a global entre into Quad #4.  


We wouldn’t be incremental buyers of the long-end on weakness but TLT/EDV remains one of our favorite global macro positions.  Consensus disagrees (see net spec positioning), but #MacroMisfit has repeatedly proven to be profitable profile.


Captain Obvious:  December ISM - 01.05.14 Chart


Captain Obvious:  December ISM - 10Y US Japan German Anchor


Captain Obvious:  December ISM - 2004 vs Rates 



Christian B. Drake




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Keith's Macro Notebook 1/6: VIX | UST 10YR | RUT



Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

Hedgeye Morning Macro Call with CEO Keith McCullough: Crystal Ballers

On this morning’s institutional Macro Call, Keith discusses the importance of having a daily process rather than relying on a crystal ball or moving "monkey" averages.


Keith highlights the great run in bonds, how ugly things really are in Europe and the epic down move in commodities.


***This is a complimentary peek behind-the-macro-scenes of our daily Morning Macro Call for institutional subscribers.***


Grexit? Not So Fast

Constipation over Greece? You bet!  The political indecision leading to a call for snap general elections on January 25th has sent Greek bonds down -7.4% and Greece’s Athex Index down -24% over the last month.

Grexit?  Not So Fast - vv. yields greek

Grexit?  Not So Fast - vv. athex


There’s also spillover talk this week of Greece exiting the Eurozone as a result of an article in the German publication Der Spiegel over the weekend. The article cited an unnamed German government source who said both German Chancellor Angela Merkel and her Finance Minister Wolfgang Schaeuble have a contingency plan for a Greek exit, labeling it manageable.


The story helped send the EUR/USD to a 9 year low near $1.1865; however, Merkel’s government was quick to counter the article by saying it will continue to support Greece in the Eurozone. 


What can we as investors believe as the fate of Greece?


Below we give the puts and takes on why we believe it’s unlikely that Greece exits the Eurozone. While elections on January 25th threaten to increase global market risks over the next weeks (into and out of the event), the recent trend suggests downside risk is much more concentrated in Greek markets (rather than the broader Eurozone markets). WE EXPECT THIS TREND TO PERSIST. 


This new dynamic, where Greek news and events do not drag down international markets (or at least to a much lesser extent), may in fact suggest that Greece’s risk profile is different this time as is the sovereign community and banking industry who are much more prepared for the potential of a fallout. 


That said, we assign less than a 10% chance that Greece exits the Eurozone, as we believe both the Greek and Eurozone/international community will be incentivized to make concessions where needed (regardless of how a coalition forms after elections) so as not to rock the cradle of the Eurozone project.


We continue to expect weakness in the EUR/USD (the cross remains broken across its TRADE, TREND and TAIL duration levels). Eurozone headline risk mixed with the prospect of QE with which ECB President Mario Draghi continues to tease the market (along with outlining for a Q1 2015 release). We’re not buyers of Greek or European equities here. Note that both the STOXX50 and STOXX600 are broken across our TRADE and TREND levels.


Grexit?  Not So Fast - vv. eur usd


The Political, Cultural, and Financial Climate Spell NO Exit

Eyes on January 25th – the date of the Greek snap general election:  keep in mind that despite polls suggesting that the far left anti-austerity Syriza party (headed by Alexis Tsipras) leads in polls (by around ~3% ahead of the ruling conservatives New Democracy) his party stands far from an absolute majority even if it takes the top spot.


Some Key points that suggest the likelihood of No Exit:

  • Tsipras will have to form a coalition and his potential partners are decidedly against an exit. Based on a survey poll by Rass conducted on December 29-31, Syriza is holding a 3.1% lead at 30.4% vs 27.3% for New Democracy. This compares to a 3.4% lead in a poll carried out a week prior.
  • Tsipras/next government must play to an electorate that is decidedly against an exit:  a recent poll by Rass last month showed 74.2% of Greeks said the country must stay in the Eurozone at all costs, while 24.1% disagreed.
  • Tsipras himself has moved away from a past position that Greece should exit the Eurozone. In fact in the last weeks he’s been very vocal suggesting that Greece should stay in the Eurozone, which makes sense given populous sentiment in favor or staying.
  • Tsipras/next government wants to play ball with Troika (The EU, IMF, and ECB):  Despite numerous bailouts (public and private) since the sovereign ‘crisis’ began in 2010, the public debt load remains a monster €317 billion (~ $386.7 billion) or about 175% of Greek GDP. If Tsipras/next government can strike a deal with them on a “path to reform” they may forgive some of the country’s debt. 
  • Troika Wants to play ball with Greece:  most of Greece’s debt, around €250 billion, is held by the official sector: the IMF, the ECB, the European Financial Stability Facility (EFSF) and bilateral loans by Eurozone member states. This means there is a strong incentive to not see these loans default, nor any investor ripple effects that may bring further downside to the broader European markets.
  • Eurozone officials remains committed to Greece:  in late December the board of the European Financial Stability Facility (EFSF) granted Greece a 2-month extension of funding from originally December 31, 2015 to an extended February 28, 2015 cutoff. This allows an additional/remaining €1.8 billion of funds to be disbursed.  This “charity” further shows the commitment of the Eurozone to Greece and its ability to amend/make compromises on fiscal matters. 

Risk Rising – This Time Is Different?

The dynamic around Greece may in fact be different this time. While in past years since the crisis began, the smallest of Greek news had the power to tank global markets. 


If we look to our European Financial monitor as an indicator, this time around we see a major spike in Greek banks' CDS (widened between 159 and 229 bps last week), whereas Bank CDS throughout the region was flat to slightly down, on the whole. Additionally the big downside moves in the Greek equity and debt market since PM Samaras called an early presidential election were largely contained domestically.  Surely these are partly indications that governments and market participants are more comfortable with the prospect of a Greek exit.


However, we believe the political, cultural, and financial points mentioned above spell the very unlikely probability that Greece exits the Eurozone anytime soon.  Given the interconnectedness of markets and also the still very bloated and weak sovereign and fiscal state of Greece, it appears that any gains that could be realized by its own currency and central bank to set interest rates are trumped by fears of weak growth and the inability to pay down its debt and raise credit if were to go at it alone.


Once again it appears that the Eurocrats will continue to trumpet their Eurozone project and the Greeks believe their own prospects are better if they stay IN rather than OUT of the union. 


We’ll be waiting and watching (with an investment in Greece on sidelines) as we approach elections on January 25th


Matthew Hedrick



Grexit?  Not So Fast - chart1 FInancials CDS

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