Zone Defense

"When my time on Earth is gone, and my activities here are past, I want them to bury me upside down, and my critics can kiss my ass."

-Coach Bobby Knight

Let's play a game.  

I'll give you a pre-game quote from a player and you tell me what athlete said it:  

We just need to go out there and play our game..control the tempo…limit unforced errors…stay focused and put ourselves in the best position to win.” 

Stumped?

In truth, that quote could have come from any player, in any sport, before or after any game, in any decade over the last century.  

The same clichéd commentary and truthy but trite observations - season after season, year after year.

And still we listen….

In April of 2011, after 98 years of Central Banking omerta, Bernanke gave the first ever post-FOMC meeting press conference.  Policy makers globally followed suit and the Main Event in the Central Planning League was born.   

Now nearly 5 years into post-FOMC meeting press conferences, manic Jackson Hole media coverage, hyper-scrutinized congressional testimonies, and serial pre-and post central bank brinksmanship and bailout announcements, the policy maker press conference has graduated from intriguing newbie to dowdy veteran.   In the marginally insightful, boilerplate generalities genre, the pre/post-game presser now has a worthy rival.

Zone Defense - a. Knight

Back to the Global Macro Grind …..

Sports analogies tend to work for a host of reasons.  Most people have some athletic experience and on-the-field lessons carry transferability and real-life applicability. Further, sports strategy is typically tractable and straightforward and when invoked to describe an off-the-field dynamic, sports metaphors have the Occam’s razor’ish ability to help simplify the complex. 

Let’s simplify some Macro complexity with a tangible example.  

Last week we hosted both our 3Q15 Macro Themes and 3Q15 Housing Themes calls.  I’ll focus on our lead Macro theme this morning and touch on our Housing call – “Is Good, Good Enough” in 3Q15 - in the next missive. 

Scouting Report:  Our lead Macro theme was #ConsumerCycle in which we profiled the consumption cycles of the last half-century, contextualized the current cycle and detailed how best to be counter-cyclically positioned as the consumer cycle enters its twilight. 

The crux of our conclusion on growth – which is Slower for Longer – carries both cyclical and secular components. 

  • Cyclical:  Harder GDP comps and easier inflation comps alongside the ongoing rise in share of wallet in major consumer cost centers (think Rent) anchor our consumer squeeze starting line-up.  That this cyclical squeeze is occurring against the late-cycle backdrop of peaking employment, the cresting in consumer confidence and consensus over-optimism (see Chart of the Day below) around the capacity (or willingness) of the consumer to carry the recovery further buttresses the case.   
  • Secular:  Past-peak demographics (domestically and across the major DM economies), ongoing over-leverage, and select components of the secular stagnation thesis continue to get the Franchise tag as the slower-for-longer dynasty enters its 8th banner year.   

The Draft:  Who do you draft in the latter innings of a slower-for-longer game?

  • larger-cap, lower-beta, pricing-power, liquidity, defensive yield (think Long-term Treasures (TLT) or Healthcare (XLV))

The DL:  Who gets benched or Traded?

  • smaller cap, higher-beta, illiquidity, negative deflation/strong-dollar leverage, central bank Rotate-the-QE exposure (think EURO (FXE) or Industrials (XLI))

In sports speak, the asset allocation rotation essentially amounts to falling back into a half-court zone defense from full-court man-to-man pressure.    

The Game Plan:  Keith highlighted the “sell’ call in yesterday’s Early Look but the larger risk management strategy is worth reiterating.  When something is at the top end of its immediate-term risk range, you sell some.  When it retraces to the bottom end of its risk range, you buy some more – provided that the security holds TRADE support.  If it breaches TRADE support to the downside – that’s fine - you are out of the way (or underweight) and can wait for a test and hold of TREND support before buying back the exposure.   Repeat.

The Score:  The U.S. remains atop the standings in the best-house, bad developed market neighborhood division, but went 0 for 2 in yesterday’s macro double-header with both Retail Sales and Small Business Confidence sliding to close out 2Q. 

Headline Retail Sales declined -0.3% sequentially and decelerated on both a 1Y and 2Y basis in June.   While the sequential decline in Auto Sales in June (released on 7/1)  telegraphed the Headline deceleration, the magnitude of retreat was disappointing and the trend across the various sub-aggregates was similarly languid.   

Whether aggregate income growth can maintain its recent ~5% pace and Services and NonDurables consumption can continue to support household spending growth to the same extent they have in 1H15 remain TBD.  The broader trend is Wage Income and Services Consumption (~2/3rds of household spending) remains positive but the internals in the June employment report were soft and both employment and consumption comps steepen in 2H15.

Small Business Confidence, meanwhile, declined -4.2 points to a 15-month low in June with the Forward Expectations, Job Openings, Hiring Plans and Compensation Plans readings all retreating sequentially.    With small business (1-499 employees) representing over 99% of total U.S. Employer firms and >60% of net private sector hiring on a monthly basis, the state of sentiment matters in handicapping the prospects for labor and wage trends.

The (Policy) Commissioner:  middling-to-down confidence and consumerism is not what Team Janet wants to see - particularly with sanguine hopes of a September lift-off still lingering and a sustained attempt at policy normalization stirring restlessly in the queue.  

The Investment league has ~252 games a year.  It’s a marathon, not a race.  But it’s also a game of alpha inches with short-term performance compounding to long-term outperformance.

To emotional and cerebral durability and memorable performances,

Christian B. Drake

Zone Defense - Consumption Consensus CoD