"I maintain that if the Fed hikes into a slowdown (they haven't since Volcker), markets could crash," Hedgeye CEO Keith McCullough recently wrote.
On The Macro Show this morning, Hedgeye CEO Keith McCullough discusses what he calls the “Central Planning War Gone Wild” and advises against waiting for a singular catalyst to usher in the “Big Thing.” According to McCullough, in rate of change terms, there's reason to believe that it's already happening. He adds that there’s no reason why anyone should be surprised if U.S. stocks fell 10-20% from here.
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Takeaway: If you don't do macro, rest assured that macro will do you.
Check out the chart below. What you're looking at is one of the most important #GrowthSlowing charts in Global Macro for the next three years. (If you don't get demographics, you don't get the "Slower-For-Longer" theme)
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Here's another reality check. Baby Boomers are past peak in spending.
Finally, here's China and its contribution to Global GDP. It matters a lot more than Old Wall is presently pitching.
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Client Talking Points
#Pattern: economic data disappoints = promise of more “stimulus” --> Nikkei +7.7% overnight in its best day since OCT 2008. Never mind what the OCT 08’ bear market bounce signaled, of the Top 6 moves (ever) in Nikkei 3 of them came in 1990 as the U.S. was entering recession and 1 was in 1987 where everything bounced, after the crash.
Classic Bear Market bounce in Copper (+5% yesterday, but still -10% in the last 3 months) after signaling oversold. Everything from KOSPI to the Dr. Copper looks the same “off the lows” – bear market bounces generally bounce higher than bull market rally days do.
Can you spot the noise within the consensus expectation? This is the 6th time in 6 months that the short-end of the curve has bounced to 0.75% - will it be 6 for 6 on failing here? If no (and the Fed Hikes into both a slowdown and Fed Fund Futures not expecting it), we think SPX can retest 1902, no problem.
|FIXED INCOME||28%||INTL CURRENCIES||0%|
Top Long Ideas
The franchisees voted YES on the proposal to launch All Day Breakfast nationwide at all 14,318 U.S. locations. This is a very important, monumental move by CEO Steve Easterbrook. It will define his legacy as the CEO that changed McDonald's (and the rest of the industry) for many years to come. In 2016, if MCD (with all day breakfast and an improved value message) can drive same-store sales up by 5%, the system will generate $1.9bn in incremental system-wide sales.
As noted in our survey we released on July 27th, it is evident that All Day Breakfast (ADB) will be a game changer for the company. Breakfast is the single most requested item by McDonald’s customers. Listening to the customer is a tried and true way to succeed.
Following our recent visit to Plainridge and meetings with senior management, we reiterate our positive Penn National Gaming thesis. Stability in regional markets provides good earnings visibility while expected strong contributions from Plainridge and Jamul next year should provide a nice 2 year growth story.
Regional gaming likely cooled off in August following a strong July. While that could provide some consternation as the states begin releasing August gaming revenues later this week, the YoY slowdown is more related to quantitative factors rather than the health of the regional gaming customer. September should quickly provide evidence of that.
The labor market peaks late cycle and the trend in key employment data suggest things are going from great to good (marginal changes matter). The ADP employment report showed a sequential acceleration, printing +190K vs. +185K in July. But to be clear, this series peaked at over +200K additions in the first couple of months of 2015. Initial jobless claims bottomed about six weeks ago. The trend in that series is moving back to the all-important 300K level. While the headline NFP number was a bomb on Friday, printing +173K for Aug. vs. estimates for +215K, the trend is also turning. This series also peaked back in February on a YoY rate-of-change basis.
Why do we point to all of this growth-slowing data? Because it’s meaningful.
Three for the Road
TWEET OF THE DAY
To Be Clear, The #Markets Don’t Care What You “Feel” https://app.hedgeye.com/insights/46234-mccullough-to-be-clear-the-market-doesn-t-care-what-you-feel… via @KeithMcCullough
QUOTE OF THE DAY
Success is on the far side of failure.
Thomas Watson Sr.
STAT OF THE DAY
42% of the domestic tablet market is controlled by Samsung and Apple, with Amazon’s tablets accounting for less than 1%. Amazon will be challenging Samsung and Apple by selling a 6-inch tablet for $50.
Takeaway: Mortgage activity was uneventful this past week, but Housing is quietly setting the stage for a major bull market run.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Purchase Apps: Soldiering into September | Purchase demand declined -0.9% WoW but held near the best levels QTD at 205 on the index. On a QoQ basis, 3Q is currently tracking -1.0% sequentially while, on a year-over-year basis, activity accelerated to +27% YoY against easing comps.
In short, purchase demand has seen a modest upswing to start September, remains “good” on an absolute basis and reported year-over-year growth should remain solid against easy 2H comps. However, as we’ve highlighted, the large-scale positive reversal in 1H15 which was characterized by remarkable YoY and QoQ growth is now rearview and organic strength will need to take the hand-off from easy compares to drive ongoing improvement. For now, Housing’s transit from Great --> Good remains a relative winner against the transit from Good --> Bad across the preponderance of global macro.
Refi & Rates: Rates ↓, Volatility & Affordability ↑ | Refinance activity dropped -10% in the latest week after ramping +16.8% the prior week ahead of back-to-school and alongside the expedited retreat in treasury yields. Rates on the 30Y FRM contract, meanwhile, rose +2bps WoW to 4.10% but remain well off the YTD highs recorded in late July. At current interest rates, affordability remains +4.4% better than the 2014 average and sits as a modest tailwind for HPI.
Big Picture | The big picture is that a potent factor cocktail alignment is occurring for housing on the long side as the confluence of seasonally strong 4Q/1Q trends (aka "the hope trade") converge with election year tailwinds (2016) (See our Note from earlier this morning: Election Cycle Analysis ==> Will Housing Trump the Market?. Meanwhile, HPI is accelerating (July +6.9% Y/Y vs June +5.6% Y/Y), and we've shown that HPI is a strong corollary to housing equity price performance. We'll delve into these topics and more in greater detail in our upcoming 4Q15 Housing Quarterly Themes call.
About MBA Mortgage Applications:
The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
Editor's Note: The following chart and excerpt are from this morning's Early Look which was written by Hedgeye Director of Research Daryl Jones. Click here if you would like to learn more about how you can subscribe.
...Speaking of "rattled," the short-duration Treasury market is completely rattled as it relates to digesting the Fed's intentions. In the Chart of the Day below, we show a chart of the 2-year Treasury yield, which emphasizes the inability of the 2-year to break through the 0.74% yield level. Certainly, it has made attempts to breakout, but alas, it continues to fail as the likelihood of the Fed increasing rates gets pushed out further and further.
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