Client Talking Points
UST 10YR Yield is straight back down to where it started 2015 (2.17%) after every Bond Bear cried wolf again on the moving monkey “breakout” in bond yields – this has been going on for 17 months now and it’s for one very basic reason = Wall Street’s growth expectations remain too high, especially on #LateCycle factors like employment, wages, and capex.
If you want to find the love we had for Gold in 2010-2011, you want to find Waldo on U.S. growth expectations pushing the Fed out to 2016 and beyond on “rate hikes” – Gold loves nothing more than the Big Mac Combo of Down Dollar, Down Rates – you have both this morning, and a nice +0.7% move for Gold with no resistance to $1240.
If you’re as bearish on Global Growth as we are, you probably own a ton of Chinese Equity exposure – if you only buy stocks when the growth data gets really bad, China is the poster child for that. The Shanghai Composite Casino ramps another +2.8% overnight to +44.2% year-to-date, crushing Macau gaming revenues as margin brokers rock the timestamps.
|FIXED INCOME||26%||INTL CURRENCIES||2%|
Top Long Ideas
One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). The reality is that we are in a #LateCycle slowdown and the jockeying around each incremental data point will continue to get more and more intense as the Fed’s only ammo for suspending the cycle that has unfolded many times over is to push out the dots on a rate hike. #LowerForLonger.
The ITB turned in modest positive absolute and relative performance in the latest week as the advance in interest rates ebbed and the high frequency mortgage purchase application data continued to reflect improving housing demand trends. This is a data heavy week for housing. NAHB Builder Confidence dropped for the 4th time in 5 months, dipping -2pts sequentially in May to an Index reading of 54. Confidence currently sits +9 pts higher than May of last year and is basically right on the average reading of 55 observed over the last three expansionary periods. Further, at the current reading of 54, the index remains well above the Better-Worse Mendoza line of 50, signaling builders continue to view conditions favorably.
The counter-TREND moves in the USD and commodities have been extensive and now confirmed: 1) U.S. Dollar: Down another 1.20% week-over-week to complete its BULLISH to BEARISH TREND Reversal. The dollar is now BULLISH on a TAIL duration (three years or less) and BEARISH on a TREND duration (3-Months or more) 2) CRB Index: +2.0% week-over-week and +5.5% 1-Month Change. The CRB is now BULLISH on a TREND duration and BEARISH on a TAIL duration.
Three for the Road
TWEET OF THE DAY
Is the Government Lying To You? I Weigh In on The Macro Show https://app.hedgeye.com/insights/44235-is-the-government-lying-about-the-economy-mccullough-weighs-in-on-the… via @hedgeye
QUOTE OF THE DAY
With freedom, books, flowers, and the moon, who could not be happy?
STAT OF THE DAY
The returns of the S&P 500 from peak cycle (April 15th, 2000) to the 2002 cycle low was -43% (moving from 1,356.56 to 776.76).
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%
Oil (WTI) 54.22-61.93
Best of luck out there,
Senior Macro Analyst
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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.
"...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's tough to make predictions, especially about the future.”
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”
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%
Oil (WTI) 56.98-61.64
Have a great weekend!
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