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CHART OF THE DAY: A U.S. Economic Cycle Reality Check

Editor's Note: This is a chart and brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information on how you can become a subscriber for $1 a day.


CHART OF THE DAY: A U.S. Economic Cycle Reality Check - z dd Chart of the Day


"...While I’m sure the Old Wall storytelling will be epic this morning on “why the jobs number wasn’t that bad” … and “stocks closed up on the day… the bottom is in…”, blah blah blah… allow me to re-interrupt with economic cycle-reality ... The jobs number sucked… and labor data will continue to suck into year-end."


Labor's Tragedy

“Without labor, nothing prospers.”



Tragedy comes from the Greek word tragoidia. “It is a form of drama based on human suffering that invokes in its audience an accompanying catharsis (or pleasure) in the viewing.” (Wikipedia)


Sound like the US jobs market? Thankfully, I don’t need to channel my inner Greek Tragedian anymore to make a call  that US Employment is A) #LateCycle and B) #Slowing. That’s now marked-to-market, in US Treasury Yield terms.


Both September Non-Farm Payrolls (NFP) and Private Payrolls (PP) slowed to their weakest rate-of-change growth rate of 2015. If your bottom-up work showed that August was slowing. Well done. They revised AUG to the lowest nominal NFP gain of the year too.

Labor's Tragedy - Jobs cartoon 06.05.2015


Back to the Global Macro Grind


While I’m sure the Old Wall storytelling will be epic this morning on “why the jobs number wasn’t that bad” … and “stocks closed up on the day… the bottom is in…”, blah blah blah… allow me to re-interrupt with economic cycle-reality:


  1. The jobs number sucked… and labor data will continue to suck into year-end
  2. Both the US Dollar and Rates hit oversold lows Friday morning (yes, markets discount pending news)
  3. After signaling immediate-term TRADE oversold, stocks got squeezed off those morning lows too


Sucked? Yes. See our Chart of The Day:


  1. SEP Non-Farm Payrolls slowed to 1.97% year-over-year vs. the cycle peak of 2.34% in FEB
  2. SEP #Slowing = 7th straight month of slowing and < 2% growth for the 1st time in 13 months
  3. NFPs of 136k and 142k (AUG and SEP, respectively) have crashed -32% from the NOV peak of 423k


Btw, if they didn’t suck, you wouldn’t have seen a re-test of the YTD lows for the SP500 (Friday pre 10AM)  as the 10yr yield dove to 1.93%... But, but, but… if only everyone would have been positioned for this 3-6 months ago.


“So”, let’s take a step back and review what really happened week-over-week, within the context of the last 6 months:


  1. US Dollar Index -0.4% week-over-week and -1.6% in the last 6 months
  2. SP500 +1.0% week-over-week and -5.6% in the last 6 months
  3. Russell 2000 -0.8% week-over-week and -12.6% in the last 6 months


Oh, wow, Russell down with the US Dollar and US economy slowing. Imagine that. Over 80% of the Russell’s revenues are tethered to US domestic revenue expectations (*note: not “China”).


And on Down Dollar, Down Rates (2yr = 0.57%, 10yr 1.99%) – here’s how they achieved that SPY Up, Russell Down score:


  1. Basic Materials (XLB) +2.9% week-over-week (even though still -15.5% in the last 6 months)
  2. Energy Stocks (XLE) +2.5% week-over-week (even though still -17.8% in the last 6 months)
  3. Financials (XLF) -0.5% week-over-week, despite the “up tape” on Friday…

*note: more US domestic Financials exposure in the Russell than in the SP500


In other words, as #LateCycle growth expectations slow, Dollar Down = “reflation” of crashing prices and Rates Down = Financials Down. It’s really not that complicated. If you extend the analysis to International Equities:


  1. Dollar Down = Euro Up +0.2% wk-over-wk, and German DAX -1.4% on the wk (crashing -20.2% in the last 6 months)
  2. Dollar Down = Latam MSCI Equities +0.9% wk-over-wk (inline w/ SPY) but crashing -25% in the last 6 months
  3. Dollar Down = Brazilian Stocks (Bovespa) +4.7% wk-over-wk but still -11.6% in  the last 6 months


Yeah. Dollar Down on Super #LateCycle US growth slowing is sweet. It stops things from crashing vs. #StrongDollar, and beats up on the things everyone who thought it was “mid-cycle slowdown” is long of!


Post the US equity market squeeze, the best news for High Beta, Small Cap, US Equity Bears (ugly style factors) is that Consensus Macro hedge funds that shorted low (after being levered long higher) covered some of those hedges Friday afternoon.


The net SHORT position (CFTC non-commercial) in SP500 Index + Emini futures and options contracts moved from a YTD highs in the 2 weeks prior to -194,392 (that’s almost 32,000 contracts of less bearish positioning, week-over-week).


While the politicized and alleged US “labor market strength” remains a great tragedy in American storytelling, it will be interesting to see how fund manager performance problems morph from begging for a “rate hike” to cheering on more easing.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.94-2.09%

RUT 1070--1141
USD 95.25-96.70
EUR/USD 1.11-1.14

Gold 1125-1155

Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Labor's Tragedy - z dd Chart of the Day

The Macro Show Replay | October 5, 2015


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Bad Jobs, Dollar Down & Rates Down

Client Talking Points


Down USD on Friday as the rate of change in NFP hit another year-to-date. #Slowing low = EUR/USD up another +0.6% this morning testing $1.13 and the headline chase for everything “reflation” (from Glencore to Crude and Russian stocks) is on!


After 7 consecutive failed “breakouts” > 0.75% in the 2YR, it got hammered. The UST 2YR was down -11 basis points last week and is down at 0.57% this morning (10YR = 1.99%) as Bond Bear hopes of a rate hike get blasted into 2016; rates were oversold Friday on the lows.


But, but – “stocks are up” – sure, off those early Friday morning lows where both the Russell and S&P 500 tested year-to-date lows, and led largely by Basic Materials (XLB) reflation of +2.9% while Financials (XLF) were down with rates down  -0.5% on the week.


**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE


Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our Consumer Staples team remains positive on General Mills coming out of the 2Q15 earnings call. We have been LONG GIS for the last six months and continue to have a favorable view of the company due to the following reasons:

  • Sequential improvement in cereal
  • Growth in Natural & Organic categories
  • Snacking
  • Cost cutting initiatives
  • M&A activity

Many of the regional gaming states will release September revenues next week and as we’ve written about, they should look a lot better than August. Overall same store revenue declined 5% in August (we had predicted –2%) but most of the decline was due to the calendar and a difficult comparison. For September we are projecting an increase of 2% YoY


Our Missouri tracker is forecasting September gaming revenues to be up 3.6% YoY. This is a 6% sequential improvement from August's YoY change of -2.5%. Meanwhile, Pennsylvania slot revenues were up 4% in September. Our thesis for a sequential rebound in September remains intact. We like PENN on the long side from these levels.


It was an important couple of weeks for those who were still wrestling with our lower-for-longer views. The brevity of the macro moves post-report Friday proves just how non-consensus that call remains in a year where the S&P 500 is down -8%. The scary thing with regard to Janet’s credibility is that bad news is now being priced in as bad news. Moreover, we believe this late-cycle weakness is likely to remain ongoing.  

Three for the Road



"It’s Different This Time” Just Exploded https://app.hedgeye.com/insights/46680-mccullough-it-s-different-this-time-just-exploded… via @KeithMcCullough #markets



Never try to solve all the problems at once — make them line up for you one-by-one.

Richard Sloma


ITB (iShares U.S. Home Construction ETF) has seen average fourth quarter returns of +15% over the last five years.

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McCullough: “It’s Different This Time” Just Exploded

While discussing the disappointing (at best) jobs report on Friday’s edition of The Macro Show, Hedgeye CEO Keith McCullough explains why the the probability of a rate hike continues to fall and why Wall Street forecasters just can’t seem to get out of their own way.


Subscribe to The Macro Show today for premium access to this and all other episodes. 


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