“I believe you’re confident; I know I’m not.”
I was walking down the fairway last month with a thoughtful and respected Founder/Portfolio Manager from the South who has struggled in 2015 because some of this “value” stocks (Metals & Mning, Oil & Gas, etc.) haven’t been valuable.
Since he runs the firm, he effectively told another PM that he had to sell those losers because they really had no confidence in where the underlying commodity price (and subsequent cash flow implied in the company’s valuation) was going. #GoodCall
On #Deflation, are you confident? I used the aforementioned quote from The Angle of Repose as it was the point an American Frontier-Era wife made to her mining husband. These are cyclicals. And her husband was dead-wrong on the commodity cycle too.
Back to the Global Macro Grind…
Some people are so confident that they can wake up every morning and ignore not only the “data”, but how Mr. Macro Market (Bonds and Utilities up yesterday) is moving in reaction to that data. Are you that confident? I know I’m not.
Friday’s data on wage growth (the US Employment Cost Index) was not only a “miss” versus consensus macro expectations, but it confirmed that both inflation and growth are what they always are – #LateCycle economic indicators that are now rolling over.
Contrary to the humble-pies one might be eating this summer if forced to ignore the data, we also took note of yesterday’s US economic data as it was one of the 1st big readings on the US economy for Q3. Here’s how that looked:
- ISM headline slowed to 52.7 in July vs. 53.5 in June
- ISM Prices Paid deflated to 44.0 in July vs. 49.4 in June
- ISM Employment Index slowed to 52.7 in July vs. 55.5 in June
In other words, with both #Deflation and a slowing US Labor Market readily apparent in both real-time market prices and the data, we’re more confident in our non-consensus GDP #slowing view for Q3 than we were before we got the data.
To review where we’re at on GDP:
- For Q3 our predictive tracking algo is looking for a 1.6% y/y GDP number
- For consensus headline readers that implies +1.4% headline q/q SAAR
And to remind you of the #process that drives our confidence intervals – it’s called a Bayesian Inference process – and it’s very useful in dynamically updating the probability of our best forecast being more wrong or right, given the most recent data.
Using Bayes Theorem doesn’t really work unless you have a long-term cycle overlay of historical data. This is where what they call the “Frequentist” approach to weighing probability comes into play and is also critical in providing context.
As you can see in today’s Chart of The Day, once you’re more confident that the US economy is #LateCycle, you can see that the profit-cycle (for corporations) isn’t far behind. Revenues and earnings (SP500) are down -4.6% and -2.4% so far, respectively.
Then, of course, we have a quantitative risk management signal that helps me be more or less confident. Here’s what that’s telling me, across everything that should matter to a modern-day macro risk manager:
- TREASURY BOND YIELDS: down hard, across the board, after failing @Hedgeye TREND resistance
- FX: #StrongDollar remains firmly intact and has no headwinds until the Fed folds and moves “hikes” to 2016
- RUSSELL2000: down -4.9% from its YTD high and continues to signal bearish TRADE and TREND @Hedgeye
Dollar Up, Bond Yields Down. Are Bond Bears confident that’s not a #Deflation Risk signal? How about the relative performance of “growth” (as a Style Factor) vs. “value” in the Russell itself? This performance spread looks very 2011 to me.
As market/economy history fans will recall, from Q1 to Q3 of 2011 most consensus economists (i.e. the ones who missed calling both the 2000 and 2007 cycles rolling over) had to keep cutting their GDP growth estimates until Bernanke bailed the market out.
I’m not confident in “calling” for QE4 (yet) because A) the data has to keep “surprising” those who are actually focused on it to the downside and B) the Fed then needs to pivot from when they “raise rates” to what they can do next to “ease.”
Our immediate-term Global Macro Risk Ranges (within intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.14-2.25% (bearish)
SPX 2067-2124 (bearish)
RUT 1 (bearish)
Nikkei 205 (bullish)
VIX 11.89-15.23 (bullish)
USD 96.81-98.21 (bullish)
EUR/USD 1.08-1.10 (bearish)
YEN 123.24-124.95 (bearish)
Oil (WTI) 45.32-47.90 (bearish)
Nat Gas 2.68-2.82 (bearish)
Gold 1074-1100 (bearish)
Copper 2.32-2.44 (bearish)
Best of luck out there today,
daily macro intelligence
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THE HEDGEYE EDGE
LinkedIn (LNKD) is a company that has carved out its own identity within the social media space. LNKD’s value comes from its database of member profiles, which it has a virtual moat around it since we don’t believe another player could replicate that database at comparable scale. LNKD’s product portfolio is primarily paywalls: varying degrees of access to these profiles, for which LNKD charges premium pricing. LNKD’s average annual revenue per customer in its largest Talent Solution segment is roughly $45K.
The opportunity for LNKD currently is that it is investing in its salesforce into an improving selling environment. This investment created a near-term hiccup in the 1Q15 results, but the company is already showing improving trends in 2Q15, which we expect to continue into 2H15. Meanwhile, LNKD has bought themselves some breathing room on its overly conservative guidance on its last two earnings releases, which has come at the expense of its stock price; hence a good entry point.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
We see upside to LNKD share price of $240-$270 by year end. We suspect the relatively soft guidance LNKD provided on each of its earnings releases have spooked the street, and we believe LNKD should rebound once the street realizes that management was being overly conservative - something it is infamous for.
The good thing about the soft guidance is the low expectations that accompany it. We suspect LNKD has found a near-term floor, and the fundamental upside we see in the name should be reflected in the 3Q15 earnings release.
LONG-TERM (TAIL) (the next 3 years or less)
LNKD’s core segment is Talent Solutions, with its flagship product being its Recruiter product. We have broken down LNKD’s U.S. Total Addressable Market (TAM) for this product alone, which is multiples of what it is producing currently today. That said, LNKD has a long runway for future revenue growth.
However, LNKD’s selling environment is highly dependent on the macro environment, particularly around higher trends. While the long-term opportunity is substantial, LNKD could very see some fundamental pressure in a recession. That said we remain long on a quarter-to-quarter basis, and once we see a turn in the macro, we’re getting out of the way.
ONE-YEAR TRAILING CHART
***The roundup below is an example of our internal data-driven research process. Specifically, it helps our team contextualize the key economic releases and policy developments occurring across Developed Asia and Emerging Market economies on a daily basis. To the extent you'd like to be BCC'ed on such emails please shoot us a quick note and we'll add you to the list.***
- Key Takeaways:
- In China, the official July Manufacturing PMI data confirmed the slowdown we saw with last week’s flash PMI report. The slowdown was broad based, with every sub index except Supplier’s Delivery Time decelerating on a sequential and trending basis (see attached). While somewhat offset by the sequential nudge up in the Non-Manufacturing PMI report, the decline in the manufacturing segment of the economy calls into question the sustainability of the nascent recovery we’ve seen in the property market thus far through June (also attached). Still, mainland Chinese markets ended lower Monday, with Shanghai down -1.1%, Shenzhen down -2.7%, the H-Shares down -1.1% as margin debt continues to decline and capital outflows accelerate on a trending basis. We continue to believe a long H-Shares (FXI)/short A-Shares (CAF) is the best way to be positioned to the extent you are involved in China, as well as being naked long the yuan (CYB) and naked short base metals (DBB, JJC) and commodity currencies (CCX).
- With the advent of the July Manufacturing PMI data – which accelerated to five-month high across both the headline reading and Output sub index – Japan continues to be the bright spot of Asia from an economic and financial market perspective. We continue to see substantial upside in Japanese shares over the intermediate-to-long term as continued cyclical recovery + prospective structural economic improvement amid Abenomics is backstopped by aggressive monetary easing that is likely to remain in place amid the country’s debt and demographically challenged inability to meet the LDP’s aggressive growth and inflation targets.
- South Korea’s Manufacturing PMI improved slightly to 47.6 July from a reading of 46.1 in June, but it was still the second-weakest reading in the past two years and calls attention to the trending deceleration in South Korean economic growth that our models have been calling for amid the confluence of difficult base effects and mounting cyclical headwinds such as the recent MERS outbreak and slowing global growth. The deceleration in Export growth to -3.3% YoY in July is additional confirmation of the aforementioned dour outlook.
- Turkey’s transition to #Quad1 in the third quarter is being confirmed on the margin with the advent of the July Manufacturing PMI (50.1 from 49 in June), CPI (+6.8% YoY from +7.2% in June), Core CPI (+7.3% YoY from +7.5% in June) and PPI (+5.6% YoY from +6.7% in June) data. In spite of this cyclical economic improvement, the TRY remains under pressure vs. the USD, falling -3.1% MoM (7th largest monthly decline amongst the 24 EM currencies tracked by Bloomberg) due to elevated political consternation associated with the lack of a government and monetary policy reform.
- In Russia, the stench of stagflation is beginning to accelerate with the advent of the July Manufacturing PMI data, which declined to 48.3 from 48.7 in June. #Quad4 deflation risk is accelerating globally as the threat of a policy mistake out of the Federal Reserve intensifies as we inch closer to September. As Brent crude oil crashes to new post-crisis lows (-17.1% MoM), Russian capital and currency markets – like many other EM assets – are plunging alongside broad based commodity deflation. Specifically, the RUB -10.8% vs. the USD over the past month, the largest monthly decline amongst the 24 EM currencies tracked by Bloomberg.
- JUL Manufacturing PMI: 50 from 50.2
- JUL Non-Manufacturing PMI: 53.9 from 53.8
- JUL Caixin-Markit Manufacturing PMI: 47.8 from 49.4 in JUN and a flash reading of 48.2
- Most of the major sub-indexes increased the pace of pullback in July, but job shedding slowed from June and backlogs rose at a marginal pace as downside pressure on prices continued to mount.
- Commentary noted that average selling prices fell "at the sharpest rate since January, with a number of firms cutting their charges due to increased competition for new work."
- Capital outflows reignites debate over direction of markets (StreetAccount):
- FT discussed how a debate between China bulls and bears has been reignited after forex reserves have moved lower for four consecutive quarters.
- The paper noted that some see this as a sign to get out of the markets, while others see it as progress in China liberalizing its exchange rate.
- A separate FT article cited some more bullish fund managers and discussed some pockets of the market that they see as good opportunities to invest in, while a Bloomberg article also played down concerns surrounding capital flows.
- Sheng warns of downward pressure on China's economy in H2 (StreetAccount):
- National Business Daily cited comments from PBoC official Sheng Songcheng, who warned the economy was facing downward pressures in H2 amid slowing investment and anemic exports.
- He specifically highlighted concerns around the retail sector and the PBoC’s Q2 survey which indicated Chinese companies weren’t optimistic about their outlook.
- He added that the CNY2T bond swap program may be insufficient to cover maturing debt and also raised concerns over soft land revenues for LGFVs.
- However MNI cited comments from Monetary Policy Committee Fan Gang in the People's Daily saying slowing growth was transitory and GDP will expand at 7-8% annually for the next 20-20 years.
- JUL Manufacturing PMI: 51.2 from 50.1 in JUN and a flash reading of 51.4
- Japan's PMI came in at a five-month high of 51.2.
- Employment remained robust and manufacturers increased buying. Although input prices rose, they did so below the pace of the long-run average.
- The output sub-index, as well as the headline index, were both at five-month highs.
- JUL Vehicle Sales: -1.3% YoY from 5.4%
- Kuroda reiterates currently no need for additional monetary easing (StreetAccount):
- In an interview with the Yomiuri Shimbun, Bank of Japan governor Haruhiko Kuroda reiterated that he currently saw no need to expand QQE.
- He also reiterated his optimistic outlook on the economy, saying that the underlying price trend continued to rise, while acknowledging that private sector forecasts are more pessimistic than the BoJ's.
- A separate MNI article apparently citing the Yomiuri interview cited Kuroda as saying that "If China's economic-growth rate deteriorates it will have a big impact" on the Japanese economy.
- Motivation to raise minimum wage likely to garner political support (StreetAccount):
- The Nikkei speculated that Abe's move to push a minimum wage hike was likely to garner support amid falling rankings.
- The article noted that the government was more vocal than usual in supporting the legislation, while a source at the Cabinet Office said that the government support was unexpected.
- A second Nikkei article also discussed Prime Minister Shinzo Abe's falling poll numbers.
- JUL Manufacturing PMI: 51.2 from 50.1 in JUN and a flash reading of 51.4
- JUL Manufacturing PMI: 52.7 from 51.3
- Pimco Lobbies India to Ease Bond-Buying Curbs as Rupee to Shine (Bloomberg):
- Pacific Investment Management Co. wants India to ease foreign-investment curbs so it can buy more of the nation’s sovereign debt, its top pick in Asia after China.
- “We’ve spoken to policy makers in May to increase that limit and as and when that happens, we are happy to buy more of local government bonds,” said Luke Spajic, Singapore-based head of Asia portfolio management at Pimco, which manages $1.52 trillion of assets globally. “What makes India attractive is the prospect of a broad-based growth opportunity, which can lead to a lot of returns on the financial assets.”
- Regulators in Asia’s third-largest economy have capped overseas holdings of sovereign debt at $30 billion, seeking to limit the impact of capital outflows due to global events such as the Federal Reserve raising U.S. interest rates. Rupee government notes handed investors the region’s best returns in the past year as slowing inflation allowed Reserve Bank of India Governor Raghuram Rajan to cut borrowing costs and the government acted to shore up its finances.
- JUL Exports: -3.3% YoY from -1.8%
- JUL Imports: -15.3% YoY from -13.6%
- JUL Trade Balance: $7.76B from $10.24B
- Sentiment was broadly downbeat surrounding South Korean data, with most of the focus on trade.
- Although exports remained in negative territory, much of the downside pressure was attributed to falling energy prices, but a global oversupply in goods was also cited.
- JUL Manufacturing PMI: 47.6 from 46.1
- South Korean PMI also improved slightly to 47.6 July vs 46.1 in June, but it was still the second-weakest reading in the past two years.
- Commentary noted that manufacturers saw slowing demand from both domestic and international clients in July, and also cited MERS as a headwind.
- JUL AIG Manufacturing Index: 50.4 from 44.2
- JUL TD Securities Inflation Gauge: 1.6% YoY from 1.5%
- JUL Manufacturing PMI: 47.1 from 46.3
- JUL Manufacturing PMI: 47.3 from 47.8
- JUL CPI: flat at 7.3% YoY
- JUL Core CPI: 4.9% YoY from 5%
- JUL CPI: flat at -1.1% YoY
- JUL Core CPI: flat at 0.9% YoY
- Other Asia
- Other LatAm
- JUL Manufacturing PMI: 48.3 from 48.7
- Bank of Russia Scraps Easing Pledge, Setting Policy Adrift (Bloomberg):
- The four words Russia’s central bank didn’t say have brought new intrigue to its monetary policy. By omitting the phrase from June that it will be “ready to continue cutting” borrowing costs as inflation decelerates further, Governor Elvira Nabiullina left economists searching for clues to the path of interest rates.
- After a half-point cut to 11 percent on Friday extended the easing cycle that began in January, data due Tuesday or Wednesday will show inflation quickened in July to 15.8 percent from a year earlier, the first uptick in four months, according to a Bloomberg survey.
- Policy makers warned that “the balance of risks is shifting toward considerable economic cooling” and said faster price growth last month was temporary, caused by an increase in state-regulated utility tariffs.
- South Africa
- JUL Manufacturing PMI: flat at 51.4
- JUL Manufacturing PMI: 50.1 from 49
- JUL CPI: 6.8% YoY from 7.2%
- JUL Core CPI: 7.3% YoY from 7.5%
- JUL PPI: 5.6% YoY from 6.7%
- Other Emerging Markets
DM Asia Investment Ideas Summary (as of 10:10am):
Emerging Market Investment Ideas Summary (as of 10:10am):
ETF Divergence Monitor (as of 10:10am):
Data Source (unless otherwise noted): Bloomberg L.P.
-Darius Dale, Director
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.