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#CommodityCorrelations, Greece, Japan

Client Talking Points

#CommodityCorrelations

Welcome to chaotic macro. With cross-asset volatility rising and sideways FX trading, inverse commodity correlations to the USD have broken down over the last 1-3 months. Things like crude oil and copper, which typically sniff out the direction USD, are registering r-squared correlations of +.54 and -.14 to the USD on a 1-month basis and -.22 and +0.64 on a 3-month basis. History suggests this won’t last for an extended period of time, but strap your seatbelts for more non-linear volatility in the interim.      

Greece

All eyes are on Greece’s Sunday referendum vote (as it relates to credit proposals boiled down to YES you want to stay in the Eurozone, or NO you don’t).  Both Tsipras and Varoufakis have upped the ante by saying they will resign if there is a YES vote. We expect ~70% probability of YES, but if a NO comes through expect it to wreck havoc on the markets on Monday. 

Japan

The Nikkei closed up nearly +1% today, reversing week-to-date weakness on one of the three prongs in our bullish “win-win-win” thesis: subdued survey-based measures of inflation expectations. Specifically, the BoJ’s Tankan Survey showed little change to firms’ FY16 price expectations and its Consumer Survey showed no change to consumers’ price expectations one and five years out. The BoJ has too much demographic hay to bale to meet its inflation target, which effectively means QQE in perpetuity. We reiterate our intermediate-to-long term bullish bias on Japanese equities. 

Asset Allocation

CASH 48% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 7%
FIXED INCOME 27% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
ZOES

We came out of the earnings report being very positive about management doing all the little things right. They continue to prove that they are some of the best operators in the industry. Importantly, many small cap restaurant companies with an undisciplined unit growth strategy experience significant labor inefficiencies as they expand. ZOES is in a different class of companies.  In a quarter where ZOES opened 12 new company-owned restaurants they managed to decrease both COGS and labor. We view ZOES as one of the best small cap growth names.  The company is set-up for long-term success for the following reasons:

  1. Superior brand positioning
  2. Management philosophy and execution
  3. Unit opening geographic profile
  4. Early-stage average unit volumes and returns
PENN

PENN’s new property, Plainridge Park in Massachusetts, had a strong opening. We expect slot win per day of $400, above Street expectations. In addition, June state gaming revenues will begin to roll out in 1-2 weeks. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.

TLT

After a Fed-fueled week of strength in slow-growth, yield-chasing asset classes and long duration fixed income, both the Dollar and interest rates re-couped their losses from Fed Week. The dollar declined, rates increased, and as a result, those long of gold took some pain. Will this continue? Will a long, sustained rate liftoff ensue? We don’t think so. We continue to repeat that the chance of further downward revisions to forward looking growth estimates from the Federal Reserve and consensus macro is much more likely than not. The attempted suspension of economic gravity from policy makers weakens the currency and puts pressure on bond yields. We remain long of this set-up with gold and long-duration fixed income.

Three for the Road

TWEET OF THE DAY

CHART OF THE DAY: Is #Greece Just The Tip Of Europe's Iceberg? app.hedgeye.com/insights/44990… via @Hedgeye

QUOTE OF THE DAY

“People who say it cannot be done, should not interrupt those who are doing it.”

– George Bernard Shaw

STAT OF THE DAY

Joey Chestnut (USA) successfully ate 61 hot dogs last year at Nathan's Hot Dog Eating Contest.


We're Just One Bad Jobs Report Away From Significant Volatility

Not only is volatility back, but now it’s obviously back.

 

We're Just One Bad Jobs Report Away From Significant Volatility - z rough

 

We’ve had a huge move in volatility that’s been associated with multiple factors, not the least of which is global growth slowing fully-loaded with Europe, China and the U.S. slowing all at the same time paired with the epic political Gong Show in Europe with Greece leading the charge. The more you get of all that back-and-forth, the more volatility you get.

 

Instead of naval-gazing at how many points the futures are up or down, watch the breakdown in either the Trade or the Trend line of volatility. The intermediate-term trend (which has been bullish for volatility) has been well supported now for over a year. That’s a year. Not a week or a month... a year. 11.34 is the intermediate term trend line of support for volatility.

 

Then you have the intermediate-term breakout line currently at 14.21. The VIX closed at 18 and change on Tuesday and we’re going to go back and forth and back and forth.

 

As I’ve said multiple times, we are one bad jobs report away from seeing significant volatility in US equities market.  Don’t forget we’ve seen significant volatility in U.S. equity markets whenever the growth data has been decisively negative. “Decisively negative” has happened multiple times, don’t forget. And that’s really what the late-cycle bulls have to see—they have to see something that can’t be obfuscated.

 

We're Just One Bad Jobs Report Away From Significant Volatility - zz 06.30.15 chart

 

Incidentally, at the end of a cycle being "good" is what you should expect from the economic data. That's the point. It's when it's about to go from “good to bad” that you really see the drop off. What you tend to see is the breakout in volatility associated with people being too long or too complacent on U.S. equities.

 

As far as U.S. equities are concerned, I would simply point out that halfway through the year, this is the worst start to the year we've seen in five years. Yet you're still seeing headlines from Bloomberg saying that Wall Street economists are looking for a fantastic recovery in the second half of 2015. Well, it better be. Because the reality is that it probably won’t be. These people have been routinely wrong on both their growth and S&P-500 forecasts.

 

We expect them to continue to be wrong.

*  *  *  *  *

 

Editor's Note: This is a small sample of our research here at Hedgeye. We invite you to learn more about our various product offerings by clicking here.


The Macro Show Replay | July 2, 2015

Today's edition of The Macro Show features deep-dive analysis of housing, Canadian banks, and jobs report from Josh Steiner and Christian Drake.

 

 


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HOLX | 3D UPDATE | SOFTER JUNE BUT ON PACE TO BEAT

HOLX remains a Best Idea Long

 

s-curve working Well

The s-curve model continues to forecast facility conversion to 3D with low variance between actual and predicted values.  Monthly average variance is 0.13% with a standard deviation of 0.09%.  The current 3D facility conversion percentage is 12.3% on the 14.737 total MQSA certified facilities.

HOLX | 3D UPDATE | SOFTER JUNE BUT ON PACE TO BEAT - HOLX s curve June15

 

June PLACEMENTS slow, but quarterly pace accelerating

Monthly facility conversions slowed in June 2015 after posting a record in May 2015. The quarterly average continues to accelerate consistent with recent conference comments from management.

HOLX | 3D UPDATE | SOFTER JUNE BUT ON PACE TO BEAT - HOLX 3D monthly June15

 

consensus Breast Health too low

Our revenue build uses the inputs from our 3D Tracker and the s-curve forecast to arrive at a facility count.  Consensus assumes little to no sequential growth in Breast Health over the coming quarters.

HOLX | 3D UPDATE | SOFTER JUNE BUT ON PACE TO BEAT - HOLX rev build June15

 

Please call or email with questions.

 

Thomas Tobin
Managing Director 

@HedgeyeHC

 

Andrew Freedman

Analyst

@HedgeyeHIT 

 

 

 


CHART OF THE DAY: Recession Watch (Keep An Eye On This Key Indicator)

Editor's Note: This is an excerpt and chart from today's morning strategy note written by senior macro analyst Darius Dale. Click here to subscribe.

 

...[T]he indicator that is probably the most consistent is Initial Jobless Claims. Specifically, the rolling six-month average in this series has oscillated in a band of ~300k to ~600k over the previous three economic cycles. Even more consistent is its signaling capability as it relates to timing the onset of recession. Specifically, a recession has commenced 18 months, 19 months and 20 months after this indicator has breached 300k to the downside and/or toughed as it did at 305k in April of 2006.

 

CHART OF THE DAY: Recession Watch (Keep An Eye On This Key Indicator) - z Chart of the Day


Obviously Unexpected

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”

-George Soros

 

Legendary global macro investor George Soros needs no introduction; nor does the aforementioned quote require any contextualization. So we will provide neither. It’s also Jobs Day so we don’t want to take up too much of your time with lengthy prose.

 

Back to the Global Macro Grind...

Obviously Unexpected - Jobs cartoon 06.05.2015

 

If nothing else, recent labor market strength is indicative of the #LateCycle nature of the current economic expansion insomuch as any trending deterioration from such strength would likely foreshadow the start of the next recession. Contrary to consensus across the investment community, there will be a next recession.

 

With respect to the “r” word, our analysis shows that a recession is not an imminent threat to the U.S. economy and the financial markets that underpin it. That said, however, the purpose of our macroeconomic analysis is to help investors “discount the obvious and bet on the unexpected”. In light of that, the following bullets contextualize the #LateCycle nature of the domestic labor market in order of leading to lagging:

 

  • Over the previous three economic cycles, the 3MMA of the YoY % Change in Nonfarm Payrolls peaked an average of 22 months prior to the onset of recession.
  • Over the previous three economic cycles, the 3MMA of Average Weekly Hours Worked peaked an average of 8 months prior to the onset of recession.
  • Over the previous three economic cycles, the 3MMA of MoM Nominal Change in Initial Jobless Claims troughed an average of 7 months prior to the onset of recession.
  • Over the previous three economic cycles, the 3MMA of the MoM Nominal Change in Nonfarm Payrolls peaked an average of 7 months prior to the onset of recession.
  • Over the previous three economic cycles, the 3MMA of the Unemployment Rate toughed an average of 6 months prior to the onset of recession.
  • Over the previous three economic cycles, the 3MMA of YoY % Change in Wage Growth peaked an average of 1 month prior to the onset of recession.
  • Over the previous three economic cycles, the 3MMA of Total Employees on Nonfarm Payrolls peaked an average of 0 months prior to the onset of recession.

 

What this data should tell you is that if you’re anchoring on the trending deceleration in annualized employment growth, you’re likely way too early in expecting the economy to be in the latter innings of an economic expansion. Conversely, if you’re one of the many investors who are anticipating wage growth to accelerate fervently from here, you’ll likely be way too late in getting out of the way.

 

As such, the key indicators for investors to focus on with respect to the business cycle would be: average hours worked, initial jobless claims, sequential nonfarm payrolls growth, as well as the unemployment rate. Trends across each of these indicators prospectively signal the top in the economic cycle 2-3 quarters out, on average.

 

Of each of these, the indicator that is probably the most consistent is Initial Jobless Claims. Specifically, the rolling six-month average in this series has oscillated in a band of ~300k to ~600k over the previous three economic cycles. Even more consistent is its signaling capability as it relates to timing the onset of recession. Specifically, a recession has commenced 18 months, 19 months and 20 months after this indicator has breached 300k to the downside and/or toughed as it did at 305k in April of 2006.

 

For reference, June ’15 represented the eighth consecutive month the rolling six-month average of Initial Jobless Claims has been below the critical threshold of 300k. Additionally, the latest monthly average reading of 285k is the lowest since April of 2000 on a delta-adjusted basis (i.e. still trending down).

 

For the record, April of 2000 proved to be a difficult time for an equity investor to celebrate #LateCycle labor market strength as many are doing now, given that the stock market (S&P 500) was in the very early innings of a multi-year, (49.2%) correction.

 

Also for the record, April of 2006 proved to be a good time for an equity investor to celebrate #LateCycle labor market strength, given that the stock market (S&P 500) rallied +19.4% from 4/30/06 though its 10/9/07 all-time closing high.

 

All that being said, investors need to decide whether or not the current #LateCycle labor market strength is more indicative of April ’00 or April ’06 because the expected outcomes are extremely binary in financial market terms.

 

Going back to the aforementioned quote, if Soros’ investment framework is indeed appropriate, then investors need to “discount the obvious and bet on the unexpected” with respect to the labor, economic and financial market cycles.

 

This we know:

 

  • Per a recent Bloomberg article, sell-side strategists expect the S&P 500 to shake off its worst first half since 2010 and rise +8.2% by year-end.
  • The article summarizes consensus sentiment as: “The economy is too strong for the second-longest rally since 1950 to end now.”
  • The FOMC – with its infamous “dot  plot” projecting interest rate hikes beyond 2017 – is implicitly forecasting the 2nd longest economic expansion in U.S. history.

 

It’s “obvious” that consensus remains bulled up on each of the aforementioned cycles and, while we are not calling for an immediate inflection in either, we do think “bet[ting] on the unexpected” requires distancing oneself from the herd of near-universal bullishness. In financial market terms specifically, we offered our latest asset allocation thoughts in the following video: http://app.hedgeye.com/m/ZG+/aQXNs6/consumerslowing-again

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.19-2.49%

SPX 2052-2093 
Nikkei 19
VIX 14.21-19.01
USD 94.01-96.41 
Oil (WTI) 57.80-61.20

 

Best of luck out there and enjoy the long weekend with your friends and family – I sure will!

 

DD

 

Darius Dale

Director

 

Obviously Unexpected - z Chart of the Day


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