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CHART OF THE DAY: Long Bond Investor Patience Continues to Pay | $TLT

CHART OF THE DAY: Long Bond Investor Patience Continues to Pay | $TLT - cod TLT


"FOMC voting member Jay Powell’s comment was a real-time one yesterday, whereas the Fed’s “Minutes” from their January meeting were not," Hedgeye CEO Keith McCullough wrote in today's Morning Newsletter. "That said, both helped drop the 10yr US Treasury Yield in a straight line from 2.16% 24 hours ago, to 2.05% this morning. The patient investor has bought every pullback in the Long Bond (TLT) for the last 8 months and made plenty of money doing so."


Investor Patience

“He that can have patience, will have what he will.”

-Benjamin Franklin


That’s a great fishing strategy inasmuch as it is a macro risk management one. While I don’t think Benjamin Franklin was talking about either, we can always learn something from a thought leader’s timeless quotes.


The Fed wants you to focus on being “patient” too…


And while it may be intellectually stimulating to consider the removal of that wording, yesterday the Fed’s Jay Powell (voting member of the FOMC) cautioned against rising expectations of “dropping the patient language” at the March 18th Fed meeting.


Back to the Global Macro Grind


Powell’s comment was a real-time one yesterday, whereas the Fed’s “Minutes” from their January meeting were not. That said, both helped drop the 10yr US Treasury Yield in a straight line from 2.16% 24 hours ago, to 2.05% this morning.


The key to the Fed Minutes was the FOMC acknowledging what I’ve been very concerned about – a policy mistake – i.e. raising rates as both the global economy is slowing and #deflationary headwinds continue to manifest.

Investor Patience - Yellen dove 09.17.2014 

“So”, I think our almighty overlords on the central planning committee did the right thing in suggesting that a “premature hike might dampen the recovery.” That is indeed, the truth.


Or is it?


I’m on the road seeing Institutional Investors in California this week, and THE question in every meeting surrounds this basic, but critical, question on rates rising or falling from here. What is going to be the truth?


  1. That all of the “data” drives rates? (PPI slowed -0.8% in JAN, CPI will slow again next week)
  2. That the only data that matters is the employment data? (FEB jobs report 1st wk of March)
  3. Or that none of the data really matters at this point, because raising rates is a political move?


I like to measure the truth with what the market does on data and  events:


  1. So far, all of the growth and inflation data has mattered to the rate of change in long-term bond yields
  2. As both #deflation data and US growth slowing data for DEC was reported in JAN, the 10yr hit new lows
  3. On the 1 major economic surprise (strong JAN jobs report) rates reversed, and ripped higher for 2 weeks


And obviously the politics, wording, and timing of all Fed comments have mattered along the way. Don’t forget that Powell’s comments were plugged into the marketplace to offset a non-voting Fed member’s comments about removing the “patient.”


So I’d say the truth is that it all matters – and that markets are reflexively reacting to price action which, in turn, is driving Fed rhetoric, as the Fed reacts (on a lag) to data that the market is already discounting.


If you don’t want to deal with all of the data, noise, etc., and want to take a longer-term and more patient view of this gong show of gaming un-elected-political-policy-expectations, this gets a lot easier:


A)     You have to decide if year-over-year GROWTH is going to accelerate or decelerate

B)      You have to decide if INFLATION is going to continue to #deflate or start to reflate

C)      Then you have to take a view on how to front-run the Fed’s behavior depending on answers to A) and B)


And/or you can just let Mr. Macro Market hold your hand along the way, signaling in real-time where the probabilities on A) and B) are rising or falling. He tends to do a better job than most on that.


I don’t get to take the easy path. I have to write to you every day and attempt to explain every little data wiggle and watch word. But I’m cool with that. It’s what makes this game of expectations the one that I love.  


To review how we’d answer A, B, and C:


A)     Global Growth will continue to surprise on the downside as US Growth has a solid Q1, then slows Q2/Q3

B)      Global #Deflation remains our Top Global Macro Theme for Q1/Q2

C)      Even if the Fed does a token 25bps hike, they’ll have to say no more of that by Q3 anyway


The patient investor has bought every pullback in the Long Bond (TLT) for the last 8 months and made plenty of money doing so.


That’s because they understood that the best way to play global #GrowthSlowing and #Deflation was to buy low-volatility duration as the manic had to unload commodity and energy related equity beta as Oil Volatility (OVX) went from 15 to 60.


Never mind Oil Vol 60 – that’s epic, 2008 style volatility! Can you imagine if US Equity Volatility (VIX) went from 15 (closed at 15.45 yesterday) to 20, 25, or 30 again? I can. And a lot of #patient equity investors will be happy to buy lower (again) on that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.74-2.16%
SPX 2075-2115
Nikkei 172
VIX 14.26-18.96
USD 93.64-95.39
EUR/USD 1.12-1.15


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Investor Patience - cod TLT

February 19, 2015

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This note was originally published at 8am on February 05, 2015 for Hedgeye subscribers.

“60% of the time it works….everytime”

-Brian Fantana, Anchorman (Clip)


Over the 2001-Present period (n = 160 months), the sequential, directional change in Nonfarm payrolls is the same as that of the ADP Employment series 64% of the time.


The ADP report for January released yesterday showed the sequential change in net payroll adds declined by -40K to +213K from an upwardly revised December total of +253K.


The current Bloomberg estimate for January Nonfarm payrolls is +230K, down sequentially from the +252K reported in November.  By the numbers, the sequential decline in net payroll gains reported by ADP suggests consensus is sitting on the right side of the 2:1 asymmetry into the print tomorrow.


What do you do with that? 


Not much really - it’s more analytical anecdote than investible projection.  Convictedly forecasting the NFP numbers on a month-to-month basis with precision is a quixotic endeavor.  We can generally handicap the balance of risk as it relates to consensus expectations but we haven’t found a method for reliably forecasting a point estimate – so we don’t.    


The current price/quant signals and our TREND view on domestic fundamentals generally drives our positioning into the number and we simply take what BLS gives us on jobs day and respond accordingly. 


We Get What We Get…& Don't Get Upset


Anchorman - EL Chart 1


Alongside its inveterate interest in wage inflation, the prospect for shale state employment pressure to derail the labor market recovery – and the current expansion more broadly - sits as an acute and rising investor focus into the January Employment report. 


We’ve discussed the energy economy and the developing macroeconomic impacts associated with the strong dollar driven commodity price cratering in scattershot over the last couple months but it’s worth compiling and recapitulating. 


Starting broadly and narrowing: 


Evolution of US Oil intensity:  U.S. Oil intensity - oil consumption per unit of (real) GDP – has declined by some 56% over the last 3 decades.  Summarily, as the economy has moved away from industrial production and towards ICT and Services production growth’s dependence on energy has declined.  The implication is that while the energy renaissance and the concomitant growth (& potential over-investment) in related industry makes it particularly vulnerable to an acute price shock, the transmission/amplification of that shock through the broader economy should be more muted relative to prior instances of heightened oil-price volatility. 


Oil Sector Employment:  The BLS catalogues oil & gas related employment within four major subsectors:  Oil and Gas Extraction, Oil & Gas Pipeline Construction, Support Activities for Oil & Gas Operation and Mining/Oil/Gas field Machinery. 

  • Share of Total:  Collectively, BLS estimates these industries employed 780K people as of November 2014.   Relative to Total Nonfarm employment of 140MM, those most directly employed in Oil and Gas extraction represent 0.6% of the NFP labor force.   
  • Growth From Trough:  Relative to the NFP employment trough in February 2010, Oil and Gas related employment is up +274K – a remarkable 54%.  This compares to growth of +8.1% for total NFP employment over the same period.  Further, Oil related employment gains represent 2.6% of the total increase in employment since trough (274K of 10.4MM total increase in employment) – certainly an outsized contribution relative to its share of total employment.  

Energy State Employment:  An alternate measure of the energy sectors impact on employment is to look at total employment gains in “energy” states relative to the rest of the country.   Analyzing employment changes at the state level provides an indirect (albeit largely imprecise) measure of the multiplier effects stemming from relative strength in the energy economy.  We have been using a basket of eight energy states  (AK, LA, NM, ND, OK, TX, WV, WY) in analyzing the initial jobless claims data for negative divergences in recent months.  We use the same basket here in analyzing state level employment changes

  • Share of total:  Collective Energy State employment is currently 12.9% of total.  This is roughly in-line with the baskets share of the economy with collective energy state GDP at 13.2% of total as of 2013.  
  • Growth From Trough:  Energy state employment has increased 1.998MM since the February 2010 employment trough with its share of total employment rising from 12.5% to 12.9% over the same period.  In other words, by this ‘crude’ measure, energy states have accounted for a moderately outsized 18.7% of the total gain in employment.     

Initial Claims:  We’ve been monitoring the trend in initial jobless claims for the basket of 8 energy state highlighted above for negative divergences from the National Trend.   

  • Energy State Decoupling:  We’ve indexed both the National and Energy State series back to May of last year and have monitored the spread between the two indices in the wake of the oil price collapse.  As can be seen in the Chart of the Day below the spread between the two series has held at around 15 points the last couple weeks.  In short, the accelerating decline in oil prices since late September has coincided with a moderate acceleration in energy state initial jobless claims relative to the US as a whole.  We’ll get the incremental update this morning at 8:30am.    

So, energy state labor market trends do appear to be deteriorating on the margin and (at least partially) corroborating anecdotes of energy companies reducing headcount and scaling back capex.  At the same time, the U.S. is significantly less oil intensive than it once was, employment directly tied to oil and gas extraction is a relatively small fraction of the total, and there are the oft-highlighted consumption benefits of lower energy prices – although these are likely to play out on a decidedly different timeline than oil sector employment adjustments. 


Practically, is a moderate retreat in energy employment clearly discernible above the seasonality and month-to-month noise in the monthly employment data?  Perhaps, but it would have to be a large percentage change if those losses are, indeed, concentrated in the narrow set of BLS classified oil & gas extraction industries.


Remember also that the standard error on the NFP estimate is approximately +/- 90K at the 90% confidence interval.  In other words, if we happen to get a print of +90K on Friday, that means the BLS is 90% sure we gained between 0 and 180K jobs. 


Further, with USD correlations as strong as they are, a weak dollar move could augur sizeable, expedited upside for stuff priced in those dollars.   According to the University of Michigan Consumer Sentiment report for January, American consumers aren’t convinced of the sustainability of the oil price retreat either.  In fact, the prevailing expectation is that gas prices rise 20 cents over the next year and ~$1 over the next few.


#MeanReversion: 100% of the time it works….everytime. 


Ultimately, the net impact of many of the oil price shock dynamics are equivocal and forecasting whether the collective impact will catalyze a negative, self-reinforcing inflection in the labor market is not one we’re comfortable making.  However, with the data context above and our weekly tracking of the high frequency labor data, we do feel comfortable in our ability to monitor incremental changes and dynamically update our view.


Plus….there’s bits of real panther in our risk management model  - so you know it’s good. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.65-1.87%

SPX 1987-2066

VIX 16.06-21.78
YEN 116.09-118.87

Oil (WTI) 42.24-51.97
Gold 1251-1301


Prepare. Perform. Prevail.


Christian B. Drake

U.S. Macro Analyst


Anchorman - EL Chart 2

VIDEO | Why Oil Prices Are Set To Go Lower


In today's Macro Minute, Hedgeye Director of Research Daryl Jones outlines three reasons why oil prices are likely to take a spill despite a recent rally.

Cartoon of the Day: Kuroda and the Inflation Killer

Cartoon of the Day: Kuroda and the Inflation Killer - Kuroda cartoon 02.18.2015

The Bank of Japan's Haruhiko Kuroda says he "will act" if crashing oil prices kill his Policy To Inflate. This is bound to get interesting.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%