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Dazed and Confused

This note was originally published at 8am on May 08, 2015 for Hedgeye subscribers.

"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

CHART OF THE DAY: Existing Home Sales vs Pending Home Sales

Editor's Note: The chart and blurb below are from today's Morning Newsletter written by Hedgeye Macro and Housing Analyst Christian Drake. Click here for more information and to subscribe. 


CHART OF THE DAY: Existing Home Sales vs Pending Home Sales - EHS vs PHS


"...As can be seen in the Chart of the Day, the recent tendency has been for EHS to re-converge with PHS.  Given the prevailing pattern, unless PHS in April (released 5/28, next Thursday) are very soft and/or March sees a significant negative revision, the path of least resistance is for upside in Existing Sales over the next couple months.  Further, the trend in the high frequency mortgage purchase application data, which is currently running +14% QoQ and +13.3% YoY, argues in favor of that expectation more so than not..."   


It Gets Late Early

“It's tough to make predictions, especially about the future.”

-Yogi Berra


Yogi turned 90 last week.  Hedgeye will turn 7 in June.  From the mound to markets, deep simplicities and pithy aphorisms are still ageless. 


When Berra donned post-war pinstripes en route to 3 AL MVP’s, 18 All-Star appearances and 13 World Series championships, the U.S. was enjoying a productivity boon, the demographic tide was just beginning to come in, the middle class was ascendant, Buffett was still small enough to perform and the prospects of rising household leverage and modern central banking carried an air of secular opportunity. 


“The Future Ain’t What It Used to Be”


It Gets Late Early - Housing Signal


Back to the Global Macro Grind...


Hedgeye’s formal coverage of the Housing sector turned 1 last week and I’ve chronicled our evolving investment view of the sector recurrently in the Early Look over the last year. 


Our 2Q15 Housing Themes call, which we presented back on April 2nd, was titled “If it Ain’t Broke” … the allusion being that our reversal from bear to bull in late 2014 was working with Housing outperforming every other sector through 1Q15 and the fundamental strength looked set to continue. 


The core of the 2Q call could be sufficiently captured in the context of the following four factors:    

  • The Data:  The cocktail of easy comps, improving fundamentals, credit box expansion and rebound demand (i.e. deferred housing consumption due to weather) should conspire to drive accelerating rates of change in reported housing data in 2Q. 
  • The Dilemma:  Housing equity performance shows pronounced seasonality with 4Q/1Q being periods of marked outperformance and 2Q/3Q generally being periods of relative softness.  At the same time, the implementation of new TRID regulations on August 1st could emerge as a mild-to-large speedbump to reported activity.
  • The Distillation:  The convergence of performance seasonality and new regulation (TRID) – along with emergent issues such as the California drought and step function back-up in global bond yields - pose a collective risk to housing activity into the end of 2Q.  While we remain mindful of those quasi-latent risks, it’s likely accelerating rates of change in both demand and price dominate investor mindshare in the more immediate-term.  
  • The (tactical) Decision:  Let’s stay long accelerating improvement in the immediate-term and then look to lower exposure into the collective crescendo of concern as it builds into mid-late summer

To frame it another way:  If I told you housing would put up the best rate of change numbers in all of domestic macro – and, arguably, in all of global macro – would you want to be long or short that?


So, how has the data come in thus far in 2Q? 

  • Housing Starts:  New 7-year high in the latest month
  • Purchase Applications (existing market):  2Q15 Tracking +14% QoQ and +13% YoY, on pace for best quarter in two years. 
  • Pending Home Sales (existing market):  PHS are up an average of +11.8% year-over-year the last two months
  • New Home Sales (new market):  NHS are up an average of +22.5% year-over-year the last two months
  • HPI:  After a year of discrete deceleration in home price growth in 2014, 2nd derivative HPI has seen 3 consecutive months of acceleration through the latest March data. 

How have the stocks performed?

  • April (Rate Rise + Builder Margin Concerns):  Of the four categories we profiled in our 2Q themes call as being beneficiaries of Housing's ongoing improvement, only one, the Mortgage Insurers, beat the market in April.  The builders underperformed significantly and the Title Insurers and Home Improvement chains underperformed moderately.
  • May:  Housing got its mojo back in May, rebounding strongly over the last couples weeks alongside the moderation in rates and ongoing strength in reported price/volume data.

The somewhat confounding part is that even if I knew then, what I know now in terms of how the fundamental housing data would come in in 2Q, I would have made the same decision to lean long in April.   


What about Existing Home Sales yesterday, that missed right?


EHS in April were certainly underwhelming, missing estimates and declining -3.3% sequentially (although they were still +6.1% YoY).  Below is how we contextualized the data in our institutional note yesterday:


Here’s the primary issue at play:   Pending Home Sales and Existing Home Sales have shown recurrent bouts of divergence and re-convergence in recent quarters.   Definitionally, Pending Home Sales (PHS) represent signed contract activity while Existing Home Sales (EHS) represent actual closings.  The two measures are invariably tethered and, given the mechanical nature of the relationship, PHS serve as a strong leading indicator for EHS with the relationship strongest on ~1mo lag. 


There is some chop in the data from month-to-month but, absent some acute shock to the qualifying ratio, the two only diverge for so long and so much in magnitude before re-convergence between the two series occurs.  Practically, this can only occur in a few ways – one series can fully re-couple with the other on a lag, both see subsequent revisions in opposite directions and/or both series (for whatever reason) move in opposite directions with spread compression from both directions.  


As can be seen in the Chart of the Day  below, the recent tendency has been for EHS to re-converge with PHS.  Given the prevailing pattern, unless PHS in April (released 5/28, next Thursday) are very soft and/or March sees a significant negative revision, the path of least resistance is for upside in Existing Sales over the next couple months.  Further, the trend in the high frequency mortgage purchase application data, which is currently running +14% QoQ and +13.3% YoY, argues in favor of that expectation more so than not.   


Universality is the hallmark of acute observation.  Clever linguistics provide the effervescence and perdurability.   Ahead of the holiday weekend – and just because they’re good – I’ll leave you with a few of Berra’s best (annotated with associated investment applicability):


“It gets late early out there” (counter-cyclical investing… remember, the data always looks best before the crest)


Nobody goes there anymore because it’s too crowded” (consensus’s thinking about consensus’s positioning)


“You can observe a lot just by watching” (no annotation needed)



Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.97-2.24% 

SPX 2110-2144 
RUT 1 
USD 92.92-96.17 
EUR/USD 1.10-1.15 
Oil (WTI) 56.98-61.64 


Have a great weekend!


***Click here to watch The Macro Show live at 8:30am.


It Gets Late Early - EHS vs PHS

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The Macro Show Replay | May 22, 2015


Risk Managing German Equities

  • German Equities = Bearish TRADE (3 weeks or less); Bullish TREND (3 months or more).
  • TRADE: German fundamental data underperforming, EUR/USD strengthening, and Greek uncertainty. (Bearish)
  • TREND:  ECB head Mario Draghi will continue to ramp the QE machine, muting EUR/USD appreciation. Expect concessions made to Greece to advert default and Grexit. The macro team forecasts weakness in U.S. data that should perpetuate positive European equity flows, in particular to Germany. Bullish quantitative TREND & TAIL

Risk Managing German Equities - www. dax N


On 4/14 we presented a 40 page slide deck titled Germany: Still Bullish (CLICK HERE for a video replay).  Given the weakness in recent German data and the DAX (down -3% since our call), we believe it’s worthwhile to revisit and update our outlook. 


Clearly the data over the TRADE has taken a leg lower.  Below we show some key German and Eurozone fundamental data points that have recently missed estimates:

  • Germany Manufacturing PMI  51.4 MAY Prelim (vs exp. 52 and 52.1 APR)
  • Germany Services PMI  52.9 MAY Prelim (vs exp. 53.9 and 54 APR)
  • Germany Retail PMI  52.6 APR vs 53 MAR
  • Germany Construction PMI  51 APR vs 53.3 MAR
  • German ZEW Sentiment  41.9 APR  (YTD low) vs 53.3 MAR
  • Germany PPI  -1.5% APR Y/Y vs expectations -1.4%
  • Germany Q1 GDP  0.30% (vs exp. 0.50% and 0.70% prior)
  • Eurozone Inflation (CPI) 0.0% APR Y/Y
  • Eurozone MAY Flash Consumer Confidence  -5.5 vs consensus -4.8 and prior -4.6

Recent economic data points to weakness, but our bullish call on Germany was not predicated on the data (as the economics YTD have been weak at worse or grinding slightly higher at best). Rather focused on Draghi’s QE program and the benefit that the German economy would reap from a weak EUR/USD. 


We believe the recent data misses in concert with the Greek consternation (everything from Grexit to Greek bankruptcy) has roiled European markets (especially the DAX) over recent weeks.


In addition, we’ve seen strengthening in the EUR/USD over the near-term TRADE duration (~ +4.5% since our Germany: Still Bullish call) which has further pressured the DAX lower. And as we move forward over this TRADE duration, here are the key macro calendar catalysts that we think will take the USD lower, and therefore the EUR likely higher:

  1. May 29th – ugly headline Q1 2015 GDP report will keep political pressure on the Fed to push out the dots
  2. June 5th – watch out for the cycle on the labor front; especially if we get the 2nd bad jobs report in the last 3
  3. June 17th – Fed Day in America (FOMC meeting); sleep in until 9AM and just buy everything

Risk Managing German Equities - www.EURUSD


All that said, our TREND view on the DAX remains intact. While it’s tenuous ground, we have eyes wide open of the centrally planned world we live in. We expect Draghi to continue to have his foot squarely on the QE gas pedal, especially as fundamental data underperforms.  In this light, we see Draghi poised to win the currency debasement war versus Janet Yellen’s Fed, if conditions warrant.


Here’s why we think German equities get a lift over the TREND:

  1.  History has shown that the Eurocrats cave against any and every pressure of a member state to default or threaten to break-up the Eurozone. Therefore, once again, we expect the current Greek debt issues to “settle” (some sort of concessions will be made to kick the can down the road). This should boost most European equities that have been held down in recent weeks by (more) great uncertainty over the Greek state
  2. All-In QE.  We expect the QE machine to ramp higher over the coming months (see recent buying in the chart below).  We got a preview of this on Tuesday in remarks from the ECB board member Benoit Coeure who said the Bank will frontload QE purchases in May and June and will backload in September if needed.  Expect such commentary from Bank members to chase the EUR/USD lowe.
  3. ECB Minutes confirm united board. Minutes released today show unity on policy measures (QE and no change in rates). We expect Draghi’s firm hand of “whatever it takes” to prevail –he’ll will Eurozone equities higher even if he struggles to inflect growth and inflation.
  4. US data weaker.  Hedgeye’s macro team forecasts weaker data ahead, which should help fuel  the Eurozone equity trade.

Risk Managing German Equities - www. purchases




Takeaway: Claims continue to show strength, posting the best numbers since April 15th, 2000.

Below is the breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 


New Lows...& A Cycle Reminder:  Seasonally adjusted jobless claims came in at 274k last week, slightly higher than expectations for 270k. Even with the slight miss, this is a strong print. The rolling 4-week SA figure dropped to 266.3k. This is the lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266.3k. In the first chart below, the 4/15/00 data is circled in red. It is important to bear in mind, though, that that date also corresponded to the peak in equities two cycles ago.


In the second chart below, indexed claims in energy heavy states improved more than the country as a whole in the week ending May 9th. The spread between the two series fell from 25 to 21.






The Data

Initial jobless claims rose 10k to 274k from 264k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -5.5k WoW to 266.25k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -16.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -14.2%














Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT