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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.
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.
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.
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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:
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.
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.
“People who say it cannot be done, should not interrupt those who are doing it.”
– George Bernard Shaw
Joey Chestnut (USA) successfully ate 61 hot dogs last year at Nathan's Hot Dog Eating Contest.
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.
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.
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Today's edition of The Macro Show features deep-dive analysis of housing, Canadian banks, and jobs report from Josh Steiner and Christian Drake.
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.
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.
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.
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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.
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