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Are You Fixated?

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

“The real issue is not whether you have a mental model, but whether you’re fixated.”

-Gary Klein

 

That’s an excellent risk management #process quote from a conversation Ed Hess had with Dr. Gary Klein (senior scientist with Macro Cognition) in chapter 8 of Learn Or DieUsing Science To Build A Leading-Edge Learning Organization.

 

Klein made an astute point about expectations in reminding me that “so much of decision making is taught and treated as if you can pre-define the options” (pg 90). My experience with markets is that the options are both non-linear and constantly changing.

 

Sometimes expectations change fast; sometimes slow. It isn’t my job to tell the market which catalyst or correlation to fixate on. It’s my job to try my best to accept change.

 

Back to the Global Macro Grind

 

Since the last Fed meeting (March 18th) I’ve been fixated on whether or not the Fed is for real on raising interest rates into both #Late-Cycle (see our Q2 Macro Themes deck) employment gains and Global #GrowthSlowing.

Are You Fixated? - FED cartoon 12.18.2014

While it may have sounded a little over the top, our “buy everything” call on that March 18th Fed decision to go dovish, since then (from Chinese to Japanese stocks and/or US stocks and bonds), that was the right asset allocation decision to have made.

 

Front-running central planning expectations (especially when they are changing, on the margin, from hawkish to dovish – or dovish to uber dovish) will remain a major macro market fixation, until this epic experiment has nothing left to give.

 

In US Dollar devaluation terms, here’s what macro markets saw last week:

 

  1. US Dollar Index down another -0.6% week-over-week, taking its 1-month correction to -1.5% (+7.4% YTD)
  2. Euro (vs. USD) up another +0.6% in kind, taking its 1-month counter-TREND bounce to +1.3% (-10.1% YTD)
  3. Canadian Dollar up +0.5% vs. USD last week, taking its 1-month counter-TREND bounce to +4.1% (-4.6% YTD)

 

In other words, the closer you got to being long anything that looked like a Commodity Correlation trade (for the last month) – from oil itself, to energy stocks and junk bonds, to a resource driven currency – you crushed it.

 

With the Dollar off its highs, Rates #LowerForLonger, and the SP500 closing at her all-time highs on Friday, could all of this dovishness be priced in? I’m not so sure it is, yet. Chinese stocks closed up another +3% overnight to a 7yr high, +40% YTD!

 

With USD Down, the other big obvious last week in Global Equities was the outperformance of inflation oriented markets:

 

  1. Brazil’s Bovespa was +4.9% on the week to +13.2% YTD
  2. MSCI Latin American Equity Index bounced back to break-even YTD with a +4.5% wk-over-wk move
  3. Emerging Markets Equities (MSCI Index) had another big week, +1.7% to +10.9% YTD

 

If you boil all of this down in growth vs. inflation terms (using a 1-2 month duration), this is all one massive macro re-rating of inflation expectations (to the upside) within the context of what was a nasty 6 month #deflation scare.

 

On a reported basis (from governments) #deflation or disinflation (or whatever you want to call it) is going to be reality through the summer time. Government data is reported on a year-over-year basis, don’t forget.

 

But what if the Fed not only backs off on rate hikes, but starts to talk about incremental easing again? I don’t think they’ll do that. But being fixated on what the Fed should do vs. what they will do has proven to be quite costly for the past 6 years.

 

In the meantime (as in this week), this is where US stock and bond investors are at:

 

  1. SP500 was +1.8% week to an all-time closing high of 2117 = +2.9% YTD
  2. Tech Stocks (XLK) led the charge at +4.0% wk-over-wk = +4.3% YTD
  3. Consumer Discretionary (XLY) stocks squeezed the shorts +3.2% last wk = +7.6% YTD

 

Especially when I look at moves in big cap Tech names like Amazon (AMZN) and Microsoft (MSFT) of +14% and +10% (on the day!) on Friday, last week’s beta chasing move in the US stock market tells me that:

 

  1. Hedge funds are getting squeezed again (forced to cover shorts high and get net longer)
  2. Long-Only funds are being forced to chase performance again into month-end
  3. It’s going to be really hard to be bearish into the Fed meeting on Wednesday

 

To accentuate this view, the net SHORT position (CFTC non-commercial futures/options contracts) in SP500 Index (+ E-minis) hit a new monthly high of -45,673 contracts last week. To put that in context (when consensus didn’t respect the risk of #deflation) the trailing 6 month average net LONG position in SP500 futures/options contracts is +32,687.

 

In this game, the real issue is not whether or not you’re “smart”; it’s whether or not you can be mentally flexible enough to fixate on the right things, at the right time.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.85-1.99%
SPX 2103-2124
RUT 1255-1275
USD 96.71-99.01
EUR/USD 1.06-1.09

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Are You Fixated? - z chart


REPLAY VIDEO: MACAU MONTHLY UPDATE APRIL

Watch the replay of our conference call last Friday.

 


May 11, 2015

May 11, 2015 - Slide1

 

BULLISH TRENDS

May 11, 2015 - Slide2

May 11, 2015 - Slide3

May 11, 2015 - Slide4

 

BEARISH TRENDS

May 11, 2015 - Slide5

May 11, 2015 - Slide6 

May 11, 2015 - Slide7

May 11, 2015 - Slide8

May 11, 2015 - Slide9

May 11, 2015 - Slide10

May 11, 2015 - Slide11

 


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The Week Ahead

The Economic Data calendar for the week of the 11th of May through the 15th of May is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

CLICK TO ENLARGE.

The Week Ahead - z 05.08.15 Week Ahead


May-nia | Employment Returns to Middling

This note was originally published May 08, 2015 at 13:49 in Macro

The May employment report was “okay”.  The moderate rebound in net monthly payroll gains to +223K in April was largely offset by the negative revision to the March estimate with the revised +85K gain the lowest since June of 2012. 

 

The early market vote is mixed but with a dovish shading as the $USD is up small alongside gains in both equities and bonds.  More broadly, the return to middling – and the discrete lack of either collapse or escape velocity improvement – will mostly serve to perpetuate further uncertainty/volatility as another month is devoted to speculation and spurious investor activity in the attempt to front-run a Fed faced with somewhat equivocal data. 

 

We’re not big on adding to the noise of manic data reporting on employment Friday but below are some quick highlights.  If you have any specific questions or would like to dig/discuss a particular dimension of the labor market in more depth, let us know.

 

May-nia | Employment Returns to Middling - Century Cycles

 

May-nia | Employment Returns to Middling - E Table

 

Earnings & Income:  Average hourly earnings in the private sector accelerated +10 bps sequentially to +2.2% YoY.  However, earnings for nonsupervisory and production employees – which BLS estimates to be ~80% of the workforce – grew just 1.8% YoY, marking a 3rd consecutive month of sub-2% growth.  While labor slack continues its slow march towards tautness, a sustained acceleration in both wage and broader core inflation remains very much a phantasm.    

 

In terms of the read-through to spending and aggregate personal and salary/wage income for April.  The combination of little change in hours worked and earnings growth,  a moderate gain in total employment and modest positive mix in high-wage/low-wage employment on the month should support continued Trend improvement in aggregate income in April. 

 

As we’ve highlighted, with income growth accelerating alongside the rise in the savings rate in recent months, the capacity for consumption growth has increased more than actual reported household spending.  That trend showed a moderate reversal last month with income gains softening, savings declining and spending rising.  As it stands, consensus forecasts for accelerating PCE continue to buttress full year GDP growth estimates which remain at +2.8% despite what will be another 1st quarter of negative growth following revisions to the 1Q15 estimate.    

 

May-nia | Employment Returns to Middling - payroll growth vs. earnings growth.png May Empl

 

May-nia | Employment Returns to Middling - Workers per Job Opening

 

May-nia | Employment Returns to Middling - GDP seasonality

 

Unemployment & Participation  The U-3 Unemployment rate dropped to 5.4% while the U-6 rate (Underemployment Rate) ticked down 10.8% from 10.9%.  In contrast to last month, the improvement stemmed from largely positive fundamental developments as the flow of workers out of the labor force ebbed, the number of total employed (+192K) changed at a premium to total unemployed (-26K) and the Labor Force Participation Rate ticked back up to 62.8% from last months multi-decade low of 62.7%.  

 

Participation by prime working age adults has troughed but has yet to really inflect.  Whether the nascent return to positive employment growth in the 45-54 year old bucket can tip the scale in that direction will take time to discover.

 

May-nia | Employment Returns to Middling - LFPR Prime Working Age

 

May-nia | Employment Returns to Middling - Employment By Age

 

 

Energy Sector:  Job loss in the energy sector extended into March/April according to both BLS and Challenger Job Cut data.  Oil & Gas extraction employment - which includes data thru April  - saw a employment decline -3K on the month, marking a 3rd month of negative gains in the last four.   Broader energy sector employment  - data thru March - showed a 5th consecutive month of net decline, dropping by -9K sequentially with the rate of YoY growth dropping to -0.6,  the first month of negative year-over-year growth in 58 months.

 

The weakness accords with the Challenger Job Cut data for April released yesterday which showed energy sector job cut announcements re-ramping to +20K in April after a brief March respite.  Note also that we’ll get the state level employment numbers on May 27th where trends in the shale states will again be the focus.   Collective net employment gains across the primary basket of energy states was -56K in March, the first delta negative month since September 2010.  The notable -26K decline in Texas led state level job losses as angst over a prospective state-level recession continues to percolate.  

 

May-nia | Employment Returns to Middling - Energy   of Total

 

May-nia | Employment Returns to Middling - Challenger

 

May-nia | Employment Returns to Middling - Oil   Gas Industry Emp April

 

May-nia | Employment Returns to Middling - Oil Industry Emp March

 

Industry Employment:  Manufacturing employment followed-up last months brick with a paltry +1K estimated gain in April.  The confluence of strong dollar, declining export demand, cratering energy sector investment, and residual port shutdown impacts all continue to weigh on the industry.  The softness was not unexpected given the lackluster gains the last two months, the declines in energy sector employment and the slowdown observed in the ISM employment sub-indices.  

 

May-nia | Employment Returns to Middling - Diffusion Indices

 

Housing:  Key housing employment demographics remained solid in April and should continue to flow thru to housing demand at a modest rate. 

  • 25-34 year old employment growth made a higher cycle high, accelerating +80bps sequentially to +3.2% year-over-year.  
  • Residential Construction employment rose +3K in April alongside the strong rebound in broader construction employment which was up a big +45K on the month as activity rebounded alongside the thaw in the weather.   On a year-over-year basis, employment growth continues to hold in the mid-single digits as conditions in the resi construction labor market continue to tighten.  

May-nia | Employment Returns to Middling - 20 34YOA

 

May-nia | Employment Returns to Middling - Resi Construction May Empl

 

Christian B. Drake

cdrake@hedgeye.com

@HedgeyeUSA

 

 


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