CHART OF THE DAY: U.S. Economic Surprise Index

CHART OF THE DAY: U.S. Economic Surprise Index - Chart of the Day


Editor's Note: This is an excerpt from today's Morning Newsletter which was written by Hedgeye Senior Macro Analyst Darius Dale. If you're ready for some dynamic market and economic insight and analysis, we encourage you to subscribe.


Since this is probably the only strategy note you’ll read this morning that doesn’t focus on the jobs report, we’ll leave you with another piece of seemingly-random-but-useful analysis. The key takeaway from the Chart of the Day below is that over the next 2-3 months, the preponderance of high-frequency growth data is likely to look optically better relative to consensus expectations from here. It literally can’t get much worse as far as the surprise factor is concerned and we’re quite sure expectations for a broad swath of indictors were lowered after that soft 1Q GDP print. Also, 2Q GDP will accelerate on a headline (i.e. QoQ SAAR) basis.


We believe rates have likely priced in these dynamics and see no reason for bond yields to chase them any higher.

Dazed and Confused

"It is better to be a lion for a day than a sheep all your life."

- Elizabeth Kenny


Is it? In financial market terms that is.


While Nurse Kenny’s boldness served her well in her treatment of polio among other musculoskeletal illnesses (her controversial methods are credited with being the foundation for modern physical therapy), I’m not so sure she would’ve been able to manage global macro risks during confusing times like these with that attitude.


For example, what if you took on orange jumpsuit risk and got the look-see on today’s jobs numbers? Would you know how to appropriately position for it? Would you be a lion and bet big on red or black or would you be a sheep?


To be crystal clear, we don’t have any edge in accurately forecasting the rate of change in nonfarm payrolls. Between the seven analysts on our macro and financials teams, we have just shy of a cumulative 100 years of experience analyzing markets and economies in both buy-side and sell-side roles and not one of us has been able to build a model that consistently and accurately forecasts said number – or the rate of change in wages for that matter. The standard error on every model we’ve built is too high to rely on such estimates so we don’t bother to incorporate them into our views.


I guess we are the sheep.


Back to the Global Macro Grind


There is a reason our cash position in our model asset allocation is as high as it’s been since mid-December; we are dazed and confused and require the shepherding of Mr. Market. Like God, he doesn’t speak to you directly – or out loud for that matter. Fortuitously, we employ a number of rigorous quantitative methods to extract such guidance from the marketplace (like TACRM for example).


Our intermediate-term views of lower-for-longer and deflation has been wrong for several weeks now and we have no problem jettisoning such views if Mr. Market tells us to. In this regard, he hasn’t given us the signal(s) just yet, but he’s definitely thinking out loud enough for us to lack a high degree of conviction in those views.


One thing we do have a high degree of conviction on is our ability to forecast the rate of change in both growth and inflation. We are also pretty good at figuring out how trends in these omnipotent macro factors front-run changes in monetary policy.


On that front, inflation is likely to accelerate in 2H15 and the risk to that forecast is actually to the upside as far as timing is concerned. Our inflation tracker had forecasted a bottom in YoY CPI in June as of ~6 weeks ago, but we now have the disinflationary impact peaking in April (chart #1 and chart #2). You’ll note on our GIP model (chart) that the 2nd derivative delta on inflation (x-axis) is very small in 2Q. We’re still disinflating, but not by much from here.


As previously mentioned, the base effects for CPI get really easy in the 2nd half of the year (chart). Will the Fed use this as justification for “having confidence that inflation will return to their target over a reasonable timeframe” and set the stage for hikes in 1H16? Maybe. By then, however, real GDP growth will have likely slowed dramatically (chart).


Broadening our horizon, inflation is still slowing on a trending basis across the world’s key developed economies. Across many of the EM economies, however, it is accelerating due to annualized currency debasement (chart). From a forecast perspective, global inflation is in the same boat as the U.S. (chart).


The strong inflows into TIPs of late appear somewhat prescient in the context of those forecasts. Specifically, investors have piled into TIPS at the fastest pace in three years, with $3.6B of inflows into mutual funds and ETFs that track this market. This follows two consecutive years of outflows.


Can rates work when inflation is accelerating? Our backtest data shows that the long bond usually works in #Quad3, but certainly not as much as it does in #Quad4 and arguably not when the Fed is setting the table for rate hikes (chart #1 and chart #2). We are simply making the bet that those rate hikes are not coming; in fact, the narrative could be one of preparing markets for QE4 by the time we get the 4Q15 GDP report at the end of January 2016. We believe spread compression to be a high probability outcome from here (chart).


Since this is probably the only strategy note you’ll read this morning that doesn’t focus on the jobs report, we’ll leave you with another piece of seemingly-random-but-useful analysis. The key takeaway from the Chart of the Day below is that over the next 2-3 months, the preponderance of high-frequency growth data is likely to look optically better relative to consensus expectations from here. It literally can’t get much worse as far as the surprise factor is concerned and we’re quite sure expectations for a broad swath of indictors were lowered after that soft 1Q GDP print. Also, 2Q GDP will accelerate on a headline (i.e. QoQ SAAR) basis.


We believe rates have likely priced in these dynamics and see no reason for bond yields to chase them any higher.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.87-2.29%

SPX 2071-2099
VIX 13.63-15.84
USD 93.61-96.53
Oil (WTI) 54.22-61.93

Gold 1170-1214 


Best of luck out there,




Darius Dale

Senior Macro Analyst


Dazed and Confused - Chart of the Day

Before & After

This note was originally published at 8am on April 24, 2015 for Hedgeye subscribers.

"It’s like Speed 2 but with a bus instead of a boat.”

-Milhouse Van Houten, The Simpsons (season 12)


Progress is generally not a cosmological crapshoot; some mystical coming together of elements, which, through some random spontaneity, have come to form a specific, organized end. 


Black swans and accidental billionaires are real but success, by and large, is not an accident. 


Progress and change can, at times, be illusory however. 


You know those “Before” and “After” photos that grace the pages of pretty much every fitness and nutritional supplement ad you’ve ever seen?  I took part in one of those photo shoots one year following a natural bodybuilding show I did. 


The best part...


I did both the “BEFORE” and “AFTER” photo in the same day.  No twelve-week transformation, no sophisticated supplement cocktail, no sycophantic testimonial ...mostly make-up, lighting artistry and photo editing acrobatics.  Yep, the venerable before & after shot – that paragon of fitness marketing – can be (not always) the simple product of illusion and marketing malfeasance.


Back to the Global Macro Grind…


It’s been a tough last couple days for housing bulls with price volatility rising and performance whipsawing alongside company earnings and data seasonality.  However, similar to my illusional instantaneous physique transformation, the ‘Before’ and ‘After’ of Housing’s underlying fundamental reality is largely unchanged. 

Before & After - Housing cartoon 04.01.2015


Let’s review and contextualize the crush of recent data, starting with the (perceived) negatives.   


DHI:  D.R. Horton beat top and bottom line estimates for fiscal 2Q on Wednesday, reporting 30% growth in orders,  strong selling season demand and a rising backlog while raising full year sales and construction estimates.  The stock, however, closed down -5.4% on the day as management pared back its gross margin forecast by -50bps on account of the rising contribution from and increased focus on the lower-margin, entry level market (i.e. 1st time homebuyers). 


So, investors remain acutely focused on builder margins - a preoccupation and movie we’ve seen before with KBH reporting a similar quarter, with a similar investor response, at the start of the year.  To tie in today’s amusing but otherwise irrelevant headline quote - it’s like January but with DHI instead of KBH.   


The bullish rejoinder to the margin concerns is two-fold:

  1. It’s our view that the recent margin weakness is largely a product of the marked deceleration in  HPI (Home Prices) that occurred over the course of 2014.  In other words, it’s a product of rearview dynamics.  With home price growth stabilized and now beginning to accelerate over 2015 the forward outlook for margins is improving.   
  2. DHI is making a calculated bet that 1st time homebuyer demand is poised to accelerate meaningfully and the market disagree’s with the conclusion and/or the operating decision. DHI’s own results are testament to the improving trends in entry level demand.  With employment growth for the 20-34 year old group now positive for 2-years and accelerating over the last couple quarters the labor market dynamics are supportive of that expectation as well.  Further, the FHA loan cost reductions and low downpayment loan programs rolled out by Fannie/Freddie in January are all aimed at bolstering entry-level demand.   

We understand the margin consternation but, from a top-down perspective, it’s difficult to characterize accelerating demand as a negative fundamental development, particularly with a view that HPI should support margin improvement going forward.  This is why we've been recommending buying the dips on builders - such as KBH when it traded down to $11 (24% lower from yesterday’s closing price) back in January - that sell off on margin concerns. 


New Home Sales:  New Home Sales for March, reported yesterday, declined -11.4% MoM to +481K.  The sequential retreat was notable and captured most of the headlines but was, in fact, not overly surprising and deserves proper contextualization. New Home Sales in February were the highest since February 2008 and some 22% above the TTM average so a modest hangover on the heels of that comp should not be unexpected   


Further, as we show in the Chart of the Day below, given the favorable comp dynamics, New Home Sales in March – despite the sequential softness – were still up a remarkable +19.4% YoY.   Moreover, with comparison’s remaining favorable through July, year-over-year sales growth is likely to come in in the upper-teens to mid-twenties over the next four months - one would be hard pressed to find a better, rate-of-change chart in all of Global Macro. 


So, DHI’s earnings were disappointing and New Homes Sales in March were soft…but not really.  Moving onto this week’s discretely positive housing data….


Purchase Applications:  Purchase demand, as measured by the MBA’s weekly survey, rose +5.0% week-over-week to 205.4 on the Index – the highest level since June of 2013.  On a year-over-year basis, purchase demand accelerated to +15.4% - the fastest rate of growth YTD and the 15th consecutive week of positive growth.   Purchase activity in 2Q15 is currently tracking +13% QoQ and +12% YoY. 


Existing Home Sales:  Existing Home Sales rose +6.1% MoM in March to 5.19M Units SAAR – marking the highest level in 18-months.  On a year-over-year basis, EHS accelerated to +10.4% YoY as the confluence of easy comps, improving organic demand and weather related catch-up all supported the rebound in reported demand.  That same constellation of factors should continue to support strong 2nd derivative improvement in demand over the next couple/few months. 


FHFA HPI:  the FHFA Home Price series for February released this morning showed home price growth accelerating to +5.5% YoY (vs. +5.1% prior), further corroborating the acceleration reported by the CoreLogic series earlier this month.  Tight supply should continue to support home price growth and given the strong relationship between housing related equities and 2nd derivative HPI, the existent demand/supply/price dynamics should support performance across the complex.   


We turned positive on Housing back in November but having been on both the long and short side of housing multiple times since 2008 as our model is both data sensitive and dynamic. 


Looking forward, there are a trinity of known risks to housing activity whose likely magnitude of impact remains largely unknown.  Specifically, the convergence of negative seasonal performance, new regulation (TRID) and the impacts of the California/West Coast drought pose a collective risk to housing activity into late 2Q/early 3Q. 


However, while we remain mindful of those quasi-latent risks, we continue to think improving fundamentals and accelerating rates of change in both demand and price should dominate investor mindshare and related equity performance in the more immediate-term.  


Enjoy your weekend.


Christian B. Drake

U.S. Macro Analyst


Before & After - NHS CoD

Early Look

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The Macro Show - Special Jobs Report Edition (Today at 8:30AM ET)

You don't want to miss today's LIVE special edition of The Macro Show featuring Hedgeye CEO Keith McCullough and special guest, U.S. Macro Analyst, Christian Drake. The show will feature a live play-by-play breakdown of April's all-important jobs report, what it means, and how investors should position themselves.


Tune in at 8:30AM ET.



The Macro Show - Special Jobs Report Edition (Today at 8:30AM ET) - HETV morning call title

YELP: Mayday, Mayday!

Takeaway: Just because YELP may be for sale doesn't mean there would be buyer. All it means is that mgmt is terrified...maybe they finally get it.


  1. WHAT'S FOR SALE: A business that is facing declining revenue if it doesn't grow its salesforce in perpetuity.  YELP's model is predicated on hiring enough new sales reps to drive new account growth in excess of its rampant attrition, which is the overwhelming majority of its customers annually.  The issue is that its TAM isn't large enough to support its model.  That has manifested into a persistent decline in salesforce productivity, which is now devolving into a mounting exodus of its sales reps (see note below).  The latter means the story is going to turn much sooner, and get much uglier, than we initially expected.  See note & deck below for detail.
  2. WHO'S THE BUYER? There are very few who can afford, and much fewer (if any) who would be desperate enough to consider.  Remember that in any M&A transaction, the would-be seller has to open its books.  If we all can see YELP's attrition issues in its public data, any would-be acquirer would see it in its private data.  Combine that with the negative goodwill surrounding YELP's alleged business practices, and the likely sell-off of the acquirer's stock on the news, and it's basically Russian Roulette for any acquiring CEO (except there isn't an empty chamber).
  3. WHAT THIS MEANS: This could just be a manufactured story to squeeze the shorts.  If not, then management is just terrified.  The company went public in 1Q12 and now may be looking to sell in 2015 at what was a 52-wk low before yesterday's headlines.  Management may finally be coming to the realization that its model is unsustainable.  We suspect the wake-up call was what we believe was a sequential decline in its salesforce in 1Q15 after targeting 40% sales-rep growth for 2015 (see note below).  Mgmt may be hoping to eject before the model starts crashing, but we doubt it can find a buyer.  If we're wrong, let's hope none of us are long the acquirer.


For supporting detail, see below for our most recent deck and note .  Let us know if you have any questions, or would like to discuss further.


Hesham Shaaban, CFA




YELP: Short Thesis Update Deck & Replay 


Deck: [click here] 

Replay: [click here] 


YELP: The New Major Red Flag (1Q15)

04/30/15 08:53 AM EDT

[click here]

May 8, 2015

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