prev

Keith's Macro Notebook 4/9: Japan | Commodities | Gold

 

Hedgeye Macro Analyst Ben Ryan shares the top three things in CEO Keith McCullough's macro notebook this morning.


Japan, CRB, Gold

Client Talking Points

Japan

With the Dollar Up and the Yen Down, the Nikkei rips to new 7 year highs (+0.8% overnight to +14.9% YTD vs SPX +1.1% YTD); the caveat here is that my FX risk ranges are tightening, so up here we’ll register an overbought signal in Japanese stocks .

Commodities

Dollar Up -> CRB Commodities Index has a big -2.5% down day (led by Oil’s -5.6% daily decline); while it’s tempting to get off the #Deflation theme, there’s no fundamental research reason to do so yet.

Gold

While it appeared to enjoy the 3 week Dollar Down, Rates Down combo move (you need those 2 things happening at the same time for Gold to really work), now you have USD Up and Rates trading in a lower, but tighter range – and Gold doesn’t enjoy that, -0.5% to $1196/oz and still signaling bearish TREND @Hedgeye.

Asset Allocation

CASH 34% US EQUITIES 13%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
MTW

Manitowoc (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. Recent nonresidential and nonbuilding construction data remains firm for 2015, which suggests that MTW’s crane sales should see a pickup in the first half of the year. The Architecture Billings Index (a survey of architects) typically leads nonresidential and residential construction spending by approximately 9-12 months. More importantly, the ABI Index leads MTW Crane Orders by 2 quarters.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007.  We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather.  

 

                                                  While labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market.  All else equal, we’d view improving demand as a net positive.  On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Most of the #Deflation trades bounced to something less-than-terrible (both absolute and relative) for 2015, whereas the real alpha trending in macro markets continues to play to the lower-rates-for-longer camp’s advantage.

Three for the Road

TWEET OF THE DAY

Looking forward to being LIVE w/ Maria @MariaBartiromo for the hour at 9AM EST @OpeningBellFBN 

@KeithMcCullough

QUOTE OF THE DAY

“While you’re sitting there thinking about it someone else is out there doing it.”

         -Rodger Halston

STAT OF THE DAY

Dwayne "The Rock" Johnson eats about 821 pounds of Cod per year.


CHART OF THE DAY | Got #Oil? Hedgeye's Quantitative Set-Up

CHART OF THE DAY | Got #Oil? Hedgeye's Quantitative Set-Up - 04.09.15 Chart

 

Editor's Note: Below is a brief excerpt from today's Morning Newsletter written by CEO Keith McCullough. Click here to learn more and become a subscriber.

 

Today’s note is more of a process one (let me know if you want more or less of these – there are many processes within The #Process – and processes are always evolving) but if you go back to yesterday’s Early Look on Oil, it explains what we signaled and why quite well:

 

    1. Analyst (Ben Ryan) doesn’t like Oil right now  
    2. In parallel, my risk management process, which includes cross asset class correlation analysis with USD…
    3. Picks WTI (instead of Brent) as the best way to express that = SELL at the top-end of the risk range = $53.68

 


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Hijacking A Hockey Player

“Don’t let your emotions hijack your thinking.”

-Ray Dalio

 

While we’d all love to be as objective as we can be in this profession, being human often challenges us on that front. Especially if we’re not running a purely rules-based strategy (which has its risks), we’re always going to have a qualitative debate bouncing around in our heads.

 

In another solid chapter from Learn or Die titled “Emotions: The Myth of Rationality”, Ed Hess reminded me of this basic reality by asking a simple question:“If cognition and emotion are inherently integrated, is it possible to leave emotions out of the discussion?”

 

Probably not. But that doesn’t mean we can’t create a risk management process that subordinates our individual emotions during the debate. If you’re like me, and you choose to work on a research team, keeping everyone else’s emotions in check is a big challenge too.

 

Hijacking A Hockey Player - z9

 

Back to the Global Macro Grind

 

If you’ve seen me play hockey (or look up my penalty minutes), you get that I can’t play the game without emotion. I get that – but I didn’t get how much that would affect me as a “stock picker” when I first became a buy-side analyst. It didn’t affect me in a good way.

 

Especially on the short side when you have a boss and/or a large audience of peers watching your position, when something is going against you, it’s doesn’t feel cool.

 

As I grew into a PM I used to tell my analysts: ‘you either fight it, or close it’ (as in the short position) – and depending on who I was talking to (and what their emotional state was that day), I’d get a wide array of reactions to a pretty basic ultimatum.

 

Eventually, I just stopped letting my analysts trade and size their positions. That made our discussions more objective. The analyst either wanted me to have it on or not. Other than mapping calendar catalysts, all of the timing and trading of positions was up to me.

 

With responsibility comes a repeatable process, so I built my multi-duration “risk range” model as a result.

 

At a very basic level, here’s how my decision making process works:

 

  1. Analysts are constantly picking securities and generating new ways to express their ideas
  2. In parallel, I run multi-duration, multi-factor risk metrics on their ideas
  3. Then I pick the highest probability ideas defined by a math-based (objective) process

 

Trust me, I don’t have any emotional affiliation with any of their ideas. They are all just tickers to me. And once I pick from what they’ve picked, the risk range #process has the following decision making tree from a timing/sizing perspective:

 

  1. Immediate-term TRADE risk range gives me a high and low end of price probability… and
  2. I try my best to make sales at the high-end of the range and buys/covers at the low-end… as I’m
  3. Constantly trying to contextualize the TRADE within my intermediate (TREND) and long-term (TAIL) durations

 

That’s it. That’s what I do. And I can tell you that it took a long time to get that this is the best way to keep my competitive (emotional) risk factor at bay. To each their own, eh.

 

Today’s note is more of a process one (let me know if you want more or less of these – there are many processes within The #Process – and processes are always evolving) but if you go back to yesterday’s Early Look on Oil, it explains what we signaled and why quite well:

 

  1. Analyst (Ben Ryan) doesn’t like Oil right now  
  2. In parallel, my risk management process, which includes cross asset class correlation analysis with USD…
  3. Picks WTI (instead of Brent) as the best way to express that = SELL at the top-end of the risk range = $53.68

 

WTI Oil = down -5.6% on the day. So easy two hockey-heads (Ben was drafted by the Nashville Predators) can do it. And, fortunately, Ben is far less emotional than I can be – so we compliment one another as line-mates in decision making quite well.

 

For those of you who are new to evaluating our #process, every day (in our Daily Trading Ranges product) I give you A) the immediate-term TRADE risk range with B) our intermediate-term TREND research view in brackets. Here are all 12 of those big macros for today:

 

UST 10yr Yield 1.84-1.93% (bearish)
SPX 2070-2093 (bullish)
RUT 1 (bullish)
DAX 111 (bullish)
VIX 13.03-15.95 (bullish)
USD 96.95-98.99 (bullish)
EUR/USD 1.07-1.09 (bearish)
YEN 118.99-120.68 (bearish)
Oil (WTI) 46.53-53.68 (bearish)
Natural Gas 2.56-2.81 (bearish)
Gold 1180-1218 (bearish)
Copper 2.65-2.79 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Hijacking A Hockey Player - 04.09.15 Chart


April 9, 2015

April 9, 2015 - Slide1

 

BULLISH TRENDS

April 9, 2015 - Slide2

April 9, 2015 - Slide3

April 9, 2015 - Slide4

April 9, 2015 - Slide5

April 9, 2015 - Slide6

 

BEARISH TRENDS

April 9, 2015 - Slide7

April 9, 2015 - Slide8

April 9, 2015 - Slide9

April 9, 2015 - Slide10

April 9, 2015 - Slide11
April 9, 2015 - Slide12

April 9, 2015 - Slide13


Gizmo or Gremlin?

This note was originally published at 8am on March 26, 2015 for Hedgeye subscribers.

“No matter how much it cries or begs, NEVER feed it after midnight”

-Gremlins, 1984

 

According to 1980’s legend, feeding a mogwai after midnight catalyzes the transformation from cutesy, wellmeant Gizmo to mischievous, malevolent Gremlin.   Hijinks, hilarity, and the creation of the first PG-13 rating ensue. 

 

The spat of soft early March housing demand data had many wondering whether we’d already reached midnight on the current housing inflection and if the fund flows and improving sentiment feeding the multi-month run of outperformance were set to spawn a reversal in the related equity complex. 

 

We think the hour is nearer twilight than midnight… and Gizmo has more to give as it relates to housing. 

Gizmo or Gremlin? - 15

 

Back to the Global Macro Grind….

 

We reviewed our bullish thesis on Housing in a late-February Early Look – see: Dr. House-ing.  The subsequent ping-pong match in housing data over the last month has, at the least, been interesting.

 

In a recent note to institutional clients we compared and contextualized the competing realities promulgated by the March to-date data. 

 

Consider the following juxtaposition: 

 

(False) Reality:   

  • 3/13:  Mortgage Purchase Applications | Purchase demand declined -1.5% sequentially with year-over-year growth sliding back towards the zero line at +0.7%.
  • 3/16:  NAHB HMI | Builder Confidence declined -2pts month-over-month in March, marking the 3rd consecutive month of decline and the lowest reading since July of last year.
  • 3/17: Housing Starts | New Home Starts in February dropped -17% sequentially, posting their biggest month-over-month decline since January 2007
  • March:  Seasonality | Performance in Housing related equities shows marked seasonality. In short, the housing complex outperforms from Nov-Feb ahead of the Spring selling season and subsequently underperforms modestly in March as (presumably) some of that cumulated optimism comes off and again in mid-year as the heart of the selling season concludes (see 1st and 2nd charts below).  We show the seasonal pattern that has typified the last 20 years in the Chart of the Day below.

So, certainly not the numbers accelerating recoveries and sustainable outperformance are made of. 

 

We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather. 

 

As it relates to builder confidence, the Current Traffic component of the index led the weakness in the composite reading, which is consistent with a severe weather related drop in the flow of active buyers.  The NAHB also cited supply chain concerns, particularly in terms of labor supply.   Residential construction employment saw its largest monthly increase in employment in nearly 10 years in January and employment at the industry level continues to run in the high-single digits.  

 

There is clearly strong demand for labor in the sector, however, wage growth has yet to really accelerate according to BLS data so it remains equivocal whether rising labor demand is, in fact, driving accelerating builder cost pressure and/or labor supply shortages at the aggregate level.  Further, while labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market.  All else equal, we’d view improving demand as a net positive. 

 

On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. The 57% collapse in starts in the Northeast drove the bulk of the headline decline, again consistent with unusually cold/severe weather weighing on activity.  

 

Sure, seasonality and weather are not new phenomenon but resolving the volatility and vagaries inherent in month-to-month changes in activity in seasonal industries remains challenging despite the best efforts of evolving seasonal adjustment methodologies.   

 

Further, staring at industry numbers from the aseptic environment of a spreadsheet has the sneaking ability to, at times, drive a wedge between expectations conceived in an analytical echo chamber and the practical realities of the underlying business.  Having been in the construction industry, digging a foundation or auguring down to below the frost line to pour piers in frozen terrain is a largely quixotic pursuit. 

 

Anyhow, we expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.

 

Reported Reality:  

  • 3/19-20:  Builder Earnings | Reported results for 1Q15 out of the Builders LEN and KBH had both companies beating sales and earnings estimates while reporting strong pricing and accelerating orders growth.  Further, they talked down the weakness in reported Starts in February and guided to incremental margin improvement over the balance of the year with the expectations for continued, ongoing improvement in the demand environment.  We’re not inclined to take management’s word for it but in this particular case, we’d agree on the intermediate term outlook. 
  • 3/23:  Existing Home Sales | Sales of Existing Homes accelerated to +4.7% YoY, marking the fastest rate of growth in 17-months. 
  • 3/24: New Home Sales | New Home sales in February hit their highest level since February 2008 rising +7.8% MoM to 539K vs an upwardly revised January estimate.  More notably, sales were up a remarkable +25% year-over-year and should continue to look strong from a second derivative perspective as we traverse a 5-month period of easy comparisons.  
  • 3/25:  Purchase Applications | Purchase application saw some positive mojo in the latest week, rising +4.9% sequentially and accelerating +200bps to +2.7% on a year-over-year basis.

 

What’s our suggested interpretation of this Tale of Two Housing Realities?

 

We’d argue that much of the weakness in the reported February data was weather related and, in effect, created a mini-ball underwater dynamic.  Over the next 6-8 weeks, we expect a modest backlog of deferred housing consumption in conjunction with healthy organic demand trends to manifest in accelerating improvement in reported activity.   

 

Indeed, behind the data volatility in March, the crux of our underlying thesis remains largely unchanged.   Labor market strength + credit box expansion + (very) easy compares should continue to support improving rates of change in housing demand over the intermediate term.  

 

We’ll be hosting our 2Q Housing Themes call next Thursday, April 2nd at 11am to update our outlook for the industry and the related equity complex.  Please contact sales@hedgeye.com if you are interested in attending. 

 

No matter how much it [your position] cries or begs, NEVER capitulate at a manic, short-term bottom.

 

Our immediate-term Global Macro Risk Ranges are now 

 

UST 10yr Yield 1.81-1.98%
SPX 2046-2084

DAX 11566-12143
VIX 14.03-16.97
EUR/USD 1.04-1.11
Oil (WTI) 42.37-52.28 

 

To hair bands, Hungry Hippos and Volker-style policy sobriety,

 

Christian B. Drake

U.S. Macro Analyst

 

Gizmo or Gremlin? - HB Seasonality


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next