This note was originally published at 8am on January 02, 2015 for Hedgeye subscribers.
“My prediction? Pain!”
For those who are in the business of being paid to issue wire-to-wire-JAN-to-DEC annual predictions, that is…
I can also predict, with 100% certainty, that market and economic risks (often two very different things) will accelerate and decelerate throughout the year, in rate of change terms. So let’s embrace the dynamic and non-linear uncertainty of that.
On behalf of everyone on my team, I wanted to wish you, your families, and firms the best of luck and health in 2015. Working together, I know we can make this year every bit as successful as 2014 was.
Back to the Global Macro Grind…
What defines a successful year in terms of professional growth is often different vs. the YTD performance that stares us in the face each and every day. Since I think of most things in rate of change terms, progression vs. regression is as important to me as anything.
Are we learning from our mistakes or are we making excuses? Are we challenging ourselves to evolve our processes or are we being complacent? Are we enjoying the path of progression or are we just trying to get paid?
For me personally last year was quite satisfying. It was the 1st year in my career that I was able to translate a bearish view on big Global Macro factors (rate of y/y change in growth and inflation) into an uber bullish position on the long side (the Long Bond).
To review the score:
Now if your job is to simply navel gaze at one of those US equity centric indexes (you can’t charge active manager fees for that), you’d probably say 2014 was a good year. And I don’t disagree with that. But being long the Long Bond was a great year.
How do you define “great” returns?
Well, being long the long end of sovereign bond markets from Germany to France to the USA and back again beat their local equity market returns on all 3 of those factors.
That last point on volatility is the most important. It’s also the one that tends to tackle most momentum oriented fund managers, eventually. There is nothing that crushes levered-long beta faster than a breakout in the volatility of an asset class’ price.
If you’re a US equity only investor, the lower-volatility + higher-absolute-and-relative returns came in mostly slow-growth, lower-beta, #YieldChasing sectors:
Yep, instead of being long #deflation (Energy stocks, XLE, DOWN -10.6% YTD), these slower-growth, lower-volatility sectors had similar returns to what? Yep – the Long Bond.
Tech (XLK) had a good year at +15.7%. But most of the outperformance in Tech came from the low-beta big cap names like AAPL and MSFT (+40% and +30%, respectively) where stock specific volatility got smashed inasmuch as small-cap social #bubble stocks did.
Then, of course, there was the rest of the world (no, it didn’t cease to exist) in Global Equities where you could have lost everything you made in your Russell or Dow allocations if your RIA’s pie chart had you “diversified” into:
And no, I won’t go into all of the #GrowthSlowing and #Deflation realities that train wrecked COMMODITIES as an asset class in 2014. I’m trying to be progressive this morning! “So” I’ll keep our net asset allocation to commodities right where it’s been, at 0%.
As far as my 2015 predictions go – I don’t have any. Or at least not on the JAN-DEC terms that the #OldWall and its media drives advertising revs. That said, I’ll tell you what wouldn’t surprise me in the next 6-10 months (because it’s already happening):
Yes, I predict pain (for myself) in cutting out my post Mite Hockey practice Mickey D’s meals on Tuesday nights too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.13-2.25%
Oil (WTI) 52.61-55.38
Best of luck out there this year,
Keith R. McCullough
Chief Executive Officer
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Takeaway: Energy states continue to see their labor markets decoupling from the broader US trend.
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
EYEING THE ENERGY STATES: The principal risk to the labor market's otherwise healthy disposition is the potential hit to energy-sector jobs from the collapse in energy prices. In an effort to stay vigilant and monitor the situation, we've been tracking weekly state-level filings for the eight energy-heavy US states relative the country as a whole. Those states include AK, LA, NM, ND, OK, TX, WV, WY and further details on them can be found here: Link.
What we've observed is that energy state initial claims are diverging from the country as a whole since the fall in oil prices began in earnest in late September last year. The first chart below illustrates. The black line represents US initial jobless claims, while the blue line represents the eight energy-heavy states (indexed into a basket). These are NSA claims so we’re interested in the divergence between the two series.
Prior to revision, initial jobless claims rose 22k to 316k from 294k WoW, as the prior week's number was revised up by 3k to 297k.
The headline (unrevised) number shows claims were higher by 19k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.75k WoW to 298k.
The 4-week rolling average of NSA claims, another way of evaluating the data, was -10.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -16.2%
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Hedgeye Macro Analyst Christian Drake shares the top three things in Keith's macro notebook this morning.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.