Editor's note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye U.S. macro analyst Christian Drake.
“We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time.” - T. S. Eliot
Is the USA a good business?
It’s the most fundamental question of all and one of ongoing import for both global capital suppliers and domestic residents as returns to capital increasingly accrue to foreign investors in the wake of decades of cumulative trade deficits and trillions in net capital inflows. It’s also a topic for a different Early Look.
Considering the “business of America”, however, leads to a question of equal import to Macro investors – and a relevant one alongside the release of the advance estimate of 4Q GDP this morning. Specifically, does it make sense to model the Macroeconomy as you would a company?
Think of it this way: Would you want to be long a company with accelerating topline, expanding margins and a competent management team while being underweight/short the converse? No brainer, right.
Conceptually, we view Macro investing in the same way. In the context of our GIP (Growth/Inflation/Policy) model, we want to be long accelerating topline (GDP), expanding margins (decelerating Inflation) and competent management (policy effective in supporting sustainable growth).
Q: How do you model companies?...or put differently, how many companies that you follow reported earnings results on a QoQ annualized basis this quarter? …I’ll take the under on “one”.
How does the U.S. report/ measure GDP? Officially QoQ, kinda….it depends
Conveniently, all this variation lets both policy makers and pundits speak to whichever estimate best fits the narrative du jour and/or writes the best revisionist history. Same goes for inflation measurement.
We’ve found modeling growth on a year-over-year basis - and backtesting it against equity/sector/asset class performance – to be an effective approach. It makes intuitive sense to us as well.
Relatedly, how many countries report GDP principally on a year-over-year basis? …. Most.
As it relates to this morning’s 4Q14 growth data - Consensus is expecting +2.95% QoQ SAAR and the Fed’s GDPNow model is estimating +3.5%. For illustrative purposes, if we simply split the difference and assume 3.2% for the quarter, full year growth for 2014 will be ~+2.4% YoY.
So, inclusive of two ~+5.0% QoQ prints, we’re still essentially a 2% plus-or-minus economy. We think 2% with cyclical oscillations above and below remains the right reflection of our intermediate term reality.
The GDP table below provides a redux ahead of this morning’s data. I’ll tweet out the updated table after the release (@HedgeyeUSA)
Yesterday’s Early Look explored the value of asking both a lot of questions and, importantly, the right questions in generating investing insight. Given some of the (superficially) internal inconsistency in recent macro data it makes sense to extend that discussion.
Consider yesterday’s Housing data:
Pending Home Sales: Pending Home Sales in December were pretty bad…..or pretty good
Household Formation vs Homeownership Rate - A Tale of Two (or Three) Metrics:
More broadly: The preponderance of domestic macro data has been slowing from a rate of change perspective the last couple months (retail sales, durable/capital goods, ISM/PMI’s). Less than 56% of SPX constituents have beaten topline estimates in 4Q thus far and less than a third of companies have registered sequential acceleration in revenue growth. Corporate earnings estimates are sliding and revenue revision trends are almost universally negative alongside decelerating global growth and the ongoing energy price cratering.
Does a modest deceleration in domestic growth matter for domestic assets in the face of the flood of global capital inflow and relative value reaching? While the US may benefit broadly from the inflow, with the long bond (TLT) up +7.9% YTD vs. -1.83% for the SPX, its seems that capital deluge is, indeed, discerning.
The YTD performance divergences across equity sectors are equally large…and the year is young. Performance chases price, particularly in the immediate term, and with the fundamentals rightly supporting deflation leverage and defensive yield flows, we think what has been working continues to work.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.70-1.82%
WTI Oil 43.22-46.26
Re-think. Re-work. Reward.
Christian B. Drake
U.S. Macro Analyst
Takeaway: Overall, the takeaway is on the margin negative: Wave momentum slowed in Jan Europe is struggling.
Summary from Wednesday's conf call with Mike Driscoll from Cruise Week
Yesterday, we held a conference call for subscribers Mike Driscoll Editor In Chief of Cruise Week. From Mike's commentary, we came away with the impression that Wave momentum slowed in January and European demand was softening. Overall, the call seemed to corroborate the findings of our latest cruise pricing survey.
Here are some more thoughts from Mike:
1st time cruisers
More bundled promotions
What do consumers value most today when booking?
This note was originally published at 8am on January 16, 2015 for Hedgeye subscribers.
“We were just us up there – 19 days on the wall.”
In case you missed it, two American free-climbers achieved greatness this week. After a 19-day epic #grind of human preparation, teamwork, and perseverance, Tommy Caldwell and Kevin Jorgeson successfully scaled Yosemite’s El Capitan.
Since you know I like to think and write in metaphors of historical feats and failures, there are obviously a lot of ways I can roll with this story. But the most important lesson is to have both patience and #process.
These guys spent 7 years planning to embrace the uncertainty of the climb… and 7 full days, literally stuck, hanging, on the most difficult face of mountain (Dawn Wall). If you think multi-duration and multi-factor like these guys do, you can achieve excellence too.
Back to the Global Macro Grind…
I’m not a fan of excuse making or mediocrity. I know that might rub some people the wrong way but, in case you didn’t notice, I don’t particularly care about what they think. My teammates and I are out here, every day, climbing an Old Wall that we know we can beat.
Does that mean that this is easy? Of course not. This is one of the highest paying professions on the planet because excellence isn’t allocated to job titles and/or academic standing – it’s earned out there on The Wall, every day.
The toughest climb we’ve had in the last 3 years hasn’t been making the bullish Long Bond (TLT) call. It was in building a #process (for 7yrs as a team) that was flexible and could objectively go both ways, calling for:
I don’t know if it was the 7 days at the end of September (before the Russell’s JUL-OCT drawdown capitulated at -15%) or the last 7 trading days of December when everything was going the wrong way vs. our plan…
But there were plenty of times where I questioned my every premise. I had to review everything I’d written in my notebooks, my teammates models, etc. and ask myself, over and over again, whether or not this was the right path to take.
Fortunately, it was.
This morning both the inability of central planners to arrest gravity (global #GrowthSlowing) and market expectations for #deflation are reaching an immediate-term capitulation point.
No, that’s not just staring at the “Dow 18,000 Bro” futures guys – remember, we do Global Macro – and there’s a lot more to beating this Old Wall than calling out the 50-day in spooz.
Today is capitulation day for Long Bond bears. If they didn’t get rates right, they’re going to be feeling plenty of pain in those asset allocations that are directly correlating to crashing bond yields. Their pain is your gain.
Follow #Deflation’s Dominoes:
Particularly on that last point (which is just equities following what bonds and commodities already did), that’s a nasty start to the year. And it fundamentally should be, because:
If all you do is US stocks (we don’t), here’s the YTD score:
Vs. the #alpha climbers:
In other words, if you are out-front, beating your competition on that absolute and relative performance wall, you are A) short/underweight what we don’t like and B) long what we like.
What’s next for bond yields, the late-cycle bank stocks, etc?
What if you woke up, every day, asking yourself not whether or not you like me as a person… but asking yourself about yourself, your process, and your performance path?
This isn’t Yosemite. This is Wall Street. And yes, you need to have a macro view. So #Timestamp it! The plan is always that the plan is going to change. And while you might lose a few fingernails, stressing yourself to not take the consensus route along the way…
If you can make that epic performance climb, you can sit up there at the top, smiling all day.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.70-1.93%
Oil (WTI) 44.43-47.93
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
We are big believers in accountability and transparency here at Hedgeye. And, like any truly successful athlete, team, company or organization, we have our fair share of loathers out there. But one thing is for certain ... no one can accuse us of not being transparent or accountable.
In that vein, we'd like to take a minute to highlight two big market calls recently made by Appaloosa hedge fund manager David Tepper.
As the first graphic below shows, exactly one month ago today Tepper was bulled up on stocks calling for 8-10% upside in 2015. He told CNBC's Melissa Lee the following:
"It's not the time to be careful now. Enjoy the ride."
The S&P 500 is down approximately -4% since.
As the second graphic below shows, Tepper's call on bonds back in September to Bloomberg's Stephanie Ruhle, well, it was #epically wrong.
“It’s the beginning of the end of the bond market rally,” Tepper said in a telephone interview. “We are done.”
Hedgeye CEO Keith McCullough and his macro team took a lot of heat during that time (we were non-consensus and long the long bond via TLT in 2014).
For the record, TLT is up over +17% since Tepper declared the end of the bond rally as 10-year Treasury yields flirt with record lows at 1.77%
Yes, we remain long the long bond.
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