“The heart has its reasons, of which reason knows nothing.”
Leave it to a 17th century mathematician/physicist/philosopher (who was raised by a socialist tax collector in France) to nail what Mr. Macro Market thinks about your investment and risk management reasonings – he does not care.
Of course “he” could be a she – and if the market gods ever let me know on gender, I’ll let you know. The more important point I’m trying to make about markets is that they really don’t care about your political, social, or emotional leanings either.
They don’t care about your research, what school you went to, or your neighbor’s brother’s aunt’s dog. Macro markets care about what they care about – and those things are constantly changing. Your #process needs to embrace that uncertainty.
Back to the Global Macro Grind…
Got reasons for what is moving the US Equity futures intraday these days?
- Is it another bailout or a blowup in Greece?
- Is it a counter-TREND move higher in US Treasury Bond yields?
- Is it the Correlation Risk relationship between US Dollars and Oil?
Your portfolio may be affected by one, none, or all of these reasons. If you can tell me which one of them is going to trump all of the others, please tweet me – because, in the very immediate-term, I do not know.
Here’s what Mr. Macro Market thinks about the upside/downside in what I call my immediate-term Risk Ranges:
- Greek Stock Market (Athens General Share Index) = 680-883
- UST 10yr = 1.62-2.05%
- WTI Oil = $45.04-54.78
In other words, what just happened in all 3 of these counter-TREND bounces (newsflash: Greece, Bond Yields, and Oil have been crashing for the last year) was that they all recently tested the top-end of their respective risk ranges.
Unlike who I affectionately call Chart Chasers, Mo Bros, etc., I’m a fader. I don’t chase prices – instead, I try my best to:
- Have an intermediate-term TREND research view
- Sell/Short at the top-end of the immediate-term TRADE range
- Buy/Cover at the low-end of the immediate-term TRADE range
The least complicated part about this research and risk management process are points 2 and 3. It’s just math. The math generates the immediate-term ranges. It’s both dynamic (changing alongside price, volume, and volatility) and non-linear.
The most complicated is point number 1. What is your trending research view? Does it whip around daily? Or do you have a Bayesian inference #process that helps you change both fast, and slow, as critical rates of change undergo phase transitions?
From an intermediate-term research TREND perspective, here’s what I think:
- Greece remains bearish and broken
- Long-term Bond Yields are bearish inasmuch as our 1H 2015 inflation forecast is
- Oil remains a bearish TREND susceptible to ongoing Global #Deflation risk
Yep, there are multiple factors and multiple research and risk management durations incorporated in what I think. And no, Mr. Macro Market doesn’t care about that. But I certainly respect what he/she thinks, and try to listen to him/her very carefully.
Our immediate-term Global Macro Risk Ranges are:
UST 10yr Yield 1.62-2.05%
Shanghai Comp 3026-3201
Oil (WTI) 45.04-54.78
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: The positive fundamental momentum continues with more strong State January gaming revenue releases. More to come in February.
Chart Of The Day: A state by state look at the January performance of regional gaming
- Mature regional Same-store sales (SSS) is trending +8% in January with Louisiana and Mississippi still to report
- At the end of the day, January will grow faster than any month in 6 years owing to an easy, weather related comp, lower gas prices, and an improved economy
- So far, West Virginia has been the only disappointment with gaming revenues down ~6% in January. Fierce competition from Ohio, Maryland (Horseshoe Baltimore opened in Aug 2014), and Pennsylvania continue to weigh on the state.
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This note was originally published at 8am on January 28, 2015 for Hedgeye subscribers.
“The media's the most powerful entity on earth. They have the power to make the innocent guilty and to make the guilty innocent, and that's power. Because they control the minds of the masses.” -Malcolm X
Since starting Hedgeye, we have had two main strategic goals in mind. The first was to reinvent how Wall Street produces, packages and sells research. On this goal, we've succeeded in spades thanks to all of you.
The second goal was perhaps more bold, and has taken more time and planning, but it was to go head-to-head with the traditional financial media outlets and take mind share.
We were early on social media and now have a prolific presence. We hired a cartoonist, which was surprising to some, but has been a great way to communicate ideas and themes. (Case in point is the cartoon below highlighting the less-than-stellar start of earnings season.). Finally, we built out a state-of-the-art TV studio in our office in Stamford.
As it relates to TV, today we are hosting our first full day of interactive programming. We are calling it the Hedgeye Market Marathon and we'll be broadcasting it live from the stock market open to the close: real players, real analysis, and all in real-time. If you'd like to watch or ask Keith, our analysts or guests a question today, you can sign up here:
Back to the Global Macro Grind...
Other than watching Hedgeye TV, most stock market operators will be taking a break from earnings season to watch the Federal Reserve this afternoon. The consensus view of the manic media, and frankly a fair bit of the buy side, continues to be that it is not if, but when as it relates to the Federal Reserve reversing policy and beginning to raise interest rates.
For most 2014, as many of you know, we were of the view that rates were going down and not up. That was a stance that led to some real out performance for those that implemented it into their portfolios. We continue to believe that this is the right stance and that, if anything, the surprise from the Fed over the next few months and quarters is that they will be surprisingly more dovish than consensus expects.
There are two key reasons for that stance from our perspective. The first is that we think growth will slow incrementally in the U.S. On Friday, we will get the preliminary Q4 2014 GDP print, which will, we believe, show a sequential slowdown from the +2.7% year-over-year growth rate in Q3.
The key reasons we believe Q4 will slow from Q3 are as follows:
1) Comps – As you know, we model economies like companies and Q4 has the toughest comparison on a 1, 2 and 3-year basis of any quarter in the last seven years
2) High Frequency Data – The majority of high frequency data we track has slowed sequentially. In particular, PMI has slowed from 59.8 in Q3 2014 to 55.6 in Q4 2014. As my colleague Darius Dale recently highlighted, the three-month moving average in economy-weighted composite PMI has a r² of 0.83 to YoY GDP, so is highlight correlated
3) Yields – The last, and perhaps most obvious, signal of slowing sequential growth is 10-year yields. Frankly, if they aren’t indicating a growth slow down, then what are they indicating?
The second reason we believe that the Fed will ultimately be more dovish than consensus expects is deflation. As is highlighted in the Chart of the Day, which shows PCE and PCE ex-energy and food going back a decade, inflation is solidly below the Fed’s target of 2%. The charts also shows, of course, that deflation is far from transitory so far with PCE and PCE ex-energy and food tracking very closely.
Certainly, we don’t expect the Fed to be ahead of the curve on seeing the challenges of growth and deflation, so there is potential that we have a “hawkish” head fake, but nonetheless we continue to believe the path is to easier policy and not tighter.
Another important point to highlight this morning is the other derivative impact of deflation, which is a negative headwind to corporate earnings in the short run. On a basic level, it is hard to take pricing power when prices are declining. More acutely, as it relates to the SP500 and the near term, it will be difficult to have much aggregate year-over-year earnings growth for the SP500 with oil down more than 50% year-over-year.
This earnings impact is not just on energy related companies (although roughly 35% of SP500 earnings can be tied back to commodities). In fact, in our real-time alerts product yesterday, we actually shorted Keith’s former employer the Carlyle Group ($CG) on the back of the derivative impact from oil. According to Bloomberg estimates, the big three private equity firms' earnings are looking as follows:
- Carlyle’s expected to lead the decline with a 73% drop, “driven by its energy holdings”
- Apollo is expected to report a 63% drop in earnings.
- Blackstone Group LP (BX) is expected to have a 32% slide.
In particular, Carlyle’s biggest energy holdings were Sandridge (-58% in Q4) and Pattern Energy (-20% in Q4) . . . Yikes !
We hope you can join us for at least part of our market marathon today.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.75-1.85%
Oil (WTI) 44.02-46.81
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
We will be streaming a video today, Wednesday, February 11th at 11:00am ET for all retail subscribers. Sector Head Brian McGough and Retail Analyst Alec Richards will give a brief thesis overview on Hibbett Sports (HIBB) and then answer all your questions live.
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