prev

Trading Post The Jobs Report

Client Talking Points

USD

The USD is stabilizing in a narrowing risk range now (leading indicator for less FX volatility) and we think that takes out accelerating upside in both the CRB Index (+7% off the 213 lows) and Oil (WTI risk range = 43.07-53.88) from here, which would reverse plenty of sub-sector counter-TREND moves in the S&P 500 – we’ll see.

UST 10YR

Day 2 of consensus saying what they’ve been saying for a year (“rates up, litftoff, etc.”) and we guess we will have to endure this until the USA #deflation data (CPI and PPI) is reported for JAN (next week). China and Norway printed -4.3% and -12.4% year-over-year PPI’s this morning!

SPX

The S&P 500 (SPX) meandering at -0.6% year-to-date doesn’t exactly inspire fund flows, so it’s probably time to start adding to U.S. Equity exposures that are not affected by the #deflation factors coming back into the market place. We still like U.S. domestic consumption plays like XLY (Consumer) and ITB (Housing) on the long side.

Asset Allocation

CASH 50% US EQUITIES 7%
INTL EQUITIES 5% COMMODITIES 0%
FIXED INCOME 32% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

Going LIVE in 15 min. Send in your questions for @KeithMcCullough and @HedgeyeDDale via Twitter or the YouTube chat. https://www.youtube.com/watch?v=YmHcuyWSiH0

@Hedgeye

QUOTE OF THE DAY

Great works are performed not by strength but by perseverance.

 -Samuel Johnson

STAT OF THE DAY

The percentage of Russians whose opinion of the U.S. is very or mainly bad rose to a record 81% in January from 44% a year ago, according to the latest poll by the independent Levada Center, which has tracked attitudes since 1990.



Zero To Something

“Every moment in business only happens once.”

-Peter Thiel

 

I started reading Peter Thiel’s Zero To One on the treadmill yesterday. That’s the opening sentence of one of the better intros I’ve read in a while on independent thinking:

 

“… it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1.”

 

If I didn’t passionately believe in creating something new here @Hedgeye, I’d have just gone back to doing what I did before. While a lot of people have asked me about that over the years, a lot less have asked lately. That means building this only happens once.

 

Zero To Something - zero to one

 

Back to the Global Macro Grind

 

Whether it’s the birth of your children or an entrepreneurial business strategy that is unique to you and those around you, this is why you get up in the morning – to find special moments in your life that only happen when preparation meets opportunity.

 

This is one of the core problems I have with being centrally planned. There is no creativity or progression in that. To think that some room full of bureaucrats can smooth non-linear economic realities like growth and inflation is downright regressive.

 

But no matter how creatively destructive we are in building our businesses, we have to deal with these people, for now. What happens when the Fed goes from 0% to n? And what are the unintended consequences associated with moving preemptively?

 

Post a rainbows and puppy dogs jobs report, both US stocks and bonds have been down for 2 days… Why?

 

  1. Interest rates shot straight up from 1.64% on the UST 10yr to 1.99% this morning
  2. Rate sensitive (aka #YieldChasing) sectors of the SP500 went straight down on that

 

I’m not sure what got rates to go up more:

 

A)     The short-term alleviation of fear that the US jobs picture has hit its cycle-peak

B)      Legitimate fear that the Fed raises rates during global #GrowthSlowing + #Deflation

 

As I’ve said many times, what the Fed SHOULD do with a CPI trending towards (and below) 1% and COULD do are two very different things. Can you imagine they signal a rate hike into jobs reports that get as bad as the last 6 were good?

 

It isn’t just #deflation that the Fed should be concerned about – it’s their broken forecasting model. Janet Yellen is using a carbon copy of what Ben Bernanke used. In forecasting growth, they overweight the most lagging of late-cycle economic indicators.

 

For those of you that don’t know that Non-Farm Payrolls (Employment) are the latest of late-cycle, please see today’s Chart of The Day where Christian Drake reminds you of when the cycle of payrolls peak à AFTER the cycle is already slowing!

 

Back to the Global #deflation risk that blew up plenty of portfolios between late-September 2014 and January 2015’s lows:

 

  1. China just printed a PPI (producer price index) of -4.3% year-over-year for JAN (vs. -3.3% FEB)
  2. Norway reported, get this, -12.4% year-over-year #Deflation in their JAN PPI
  3. Switzerland reported a new low in CPI (Consumer Price Inflation) of -0.5% year-over-year in JAN

 

Sure, Oil (WTI) was +2.1% yesterday and is +9.5% for the month of February alone – but that’s just a counter-TREND move within a nasty deflationary risk. My immediate-term risk range can get you $43 oil as fast as this bounce can stop at $54-55/barrel.

 

Then what?

 

  1. The USA is going to report decelerating CPI and PPI reports next week (JAN reports)
  2. And there’s plenty of risk that the February employment report isn’t what January’s was

 

Then what?

 

Ahead of the March 18th Fed meeting, we could very well be sitting here in early March as concerned about Global #Deflation risk as we were at the beginning of January!

 

Is it easier for the Fed to keep using the same model that has rendered its growth and inflation forecasts inaccurate almost 70% of the time since 2007 than to create a new one?

 

That’s a rhetorical question. Sadly, they’re going to go from zero to something – and there will be loads of cross asset class volatility associated with their own flip-flopping internally about timing that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.62-1.99%

SPX 1
VIX 16.06-21.44
USD 93.47-95.35

Oil (WTI) 43.07-54.88
Copper 2.42-2.62

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Zero To Something - Labor cycle table CoD


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

February 10, 2015

February 10, 2015 - Slide1

 

BULLISH TRENDS

February 10, 2015 - Slide2

February 10, 2015 - Slide3

February 10, 2015 - Slide4

February 10, 2015 - Slide5

February 10, 2015 - Slide6

 

BEARISH TRENDS

February 10, 2015 - Slide7

February 10, 2015 - Slide8

February 10, 2015 - Slide9

February 10, 2015 - Slide10

February 10, 2015 - Slide11
February 10, 2015 - Slide12

February 10, 2015 - Slide13


Late-Cycle Slowdown

This note was originally published at 8am on January 27, 2015 for Hedgeye subscribers.

“Each thing is of like form from everlasting and comes round again in its cycle.”

-Marcus Aurelius

 

Until you’ve survived a few cycles in this business, you haven’t really lived. Cycles come in many styles and durations. Sometimes they’re cyclical. Sometimes they’re secular. Most of the time, you can front-run them – in rate of change terms.

 

Yes, the ole rate of change. As in the thing that helps you analyze time/speed – accelerations vs. decelerations. No, it’s not what most traditionally-trained-linear-economists use. That’s why what you read here every morning is different.

 

What is not different this time is that there will be an economic cycle. While central planners will try their damndest to “smooth” and “stabilize” it… in the end, the gravitational force of the cycle will prevail.

Late-Cycle Slowdown - cycle arrows small 

Back to the Global Macro Grind


It’s a lot easier to make bold statements like that about the economic cycle when:

 

A)     The cycle is already slowing

B)      The Bond Market is already pricing it in

 

“So”, while our call on global #GrowthSlowing + #Deflation isn’t yet consensus on the sell side, the buy-siders (and self directed individuals) who are set up for it are the ones who are getting paid.

 

To review the #process of measuring markets and economies in rate of change terms, I always try to contextualize the rate of change in indicators as either EARLY-cycle, or LATE.

 

For the purpose of this morning’s discussion, I’ll focus on a USA trifecta of LATE-cycle macro factors slowing. Oh, and by the way, they started slowing in the following order (not all at once):

 

  1. INFLATION (classic late-cycle) has undergone a full phase transition to #deflation in the last 6-8 months
  2. JOBS (as late-cycle as late-cycle gets) peaked in the back half of 2014, and Jobless Claims are breaking out now
  3. EARNINGS (yes, they are cyclical) peaked, in rate of change terms, when pricing and FX impact did (2014)

 

That last one (EARNINGS) is going to drive the people who are pitching “SP500 isn’t expensive” (if you use peak sales growth and margins to derive SPX earnings) right batty. The rate of change slowing in cyclical data generally does.

 

With US Earnings Season underway, here are some early highlights (with ~20% of SPX constituents having reported – see Chart of The Day for color coded rate of change breakdown):

 

  1. From an operating momentum perspective this is about as ugly as it’s been in recent memory
  2. Only 33% of companies are registering sequential acceleration in sales growth thus far
  3. Only 40% registering sequential margin expansion, and 50% seeing sequential acceleration in EPS growth

 

Now if all you do is look at absolutes vs. Old Wall “expectations”, I lost you at rate of change. But, since most of you reading this pay for it, I’m highly confident that you get it. Calculus was a 12th grade pre-req to the Early Look.

 

For your stock picking friends who don’t do macro math and don’t get rate of change, ask them the following questions:

 

  1. If a company’s growth rate is about to slow, will the stock go up or down until the slow-down is priced in?
  2. What if a company’s margins are about to compress from an all-time peak?

 

Seriously. It’s not rocket science. You just have to doggedly track the second derivatives and #grind.

 

You also have to do the required #history reading to respect that #Deflation hasn’t been a sustained reality for nearly a decade now. If you expand your analytical horizons to past cycles, you’ll find ones like the 1927-1933 #Deflation (i.e. the ugly kind) and the more beautiful ones like 1983-1989 (even though America had to go through the ugly to get there).

 

Delaying the ugly (btw, Dalio coined the “ugly vs the beautiful deleveraging”, not me) via some cochamamy central plan only postpones the inevitable. Draghi and Yellen know that. They’ve been trying to delay the mismatch between falling demand and inflated prices with the illusion of growth (Policies to Inflate via currency devaluation), for what, 6 years?

 

Thankfully, not everyone shares our view of holding both large cash and long-dated Treasury positions (see Asset Allocation Model) so that we can buy the riskier things we like when they really deflate. Our current strategy doesn’t hold us hostage to an inevitable late-cycle slowdown, and makes us a nice, low-volatility absolute return, while we wait…

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.75-1.84%

SPX 1987-2074

VIX 14.64-23.04

Oil (WTI) 44.03-46.85

Gold 1240-1325

Copper 2.48-2.58

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Late-Cycle Slowdown - chart


McCullough: 3 Reasons the Russell Looks Better Than S&P 500

 

In this excerpt from today's RTA Live, Hedgeye CEO Keith McCullough responds to a subscriber question with the three reasons why he favors the Russell 2000 over the S&P 500 right now. 


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next