“Progress is impossible without change, and those who cannot change their minds cannot change anything.”
-George Bernard Shaw
Yesterday at our semi-annual, firm-wide meeting, Retail Sector Head Brian McGough asked Keith how many former Yale athletes Hedgeye employs now. In response, he had each of us stand up. Ten men from two sports (football and ice hockey), three generations (baby boomer, gen-x and millennial) and all walks of life arose – perfectly scattered about the room of 55-60 people. Coincidentally, if Brian had asked Keith what the total number of people employed at Hedgeye was when I joined what was then a startup research boutique in mid-2009, the same number of people would have stood up.
I thought that juxtaposition was really powerful – specifically because it really spoke to the progress we have made as a firm. In a generally difficult year for our industry, we have been blessed to experience another record year from the perspective of revenue (both absolute dollars and the associated YoY growth rate), employee headcount and charitable giving via our internal 501(c)(3) organization, Hedgeye Cares.
Irish Playwright George Bernard Shaw – the only person to have been awarded a Nobel Prize (Literature, 1925) and an Academy Award (Best Adapted Screenplay, 1938, for what would eventually become “My Fair Lady”) – was a lifelong supporter of philanthropy and socialism, as well as a longtime contributor to the efforts of the highly influential Fabian Society, which was a British organization founded to promote gradual (rather than revolutionary), left-leaning political change. The group would eventually become the foundation of the British Labour Party in 1900 – 16 years after its inception.
Back to the Global Macro Grind…
Shaw’s quote above is as much about “change” as it is “progress” – as was yesterday’s Hedgeye firm meeting. The bottom-up analysts among you can cite all-too-well a myriad of examples of confident-turned-cocky management teams after a recent trend of outperformance. Pro-cyclical management teams that overinvest at cycle peaks and/or underinvest at cycle troughs tend to be the best destroyers of value over time. Sometimes just changing things up by implementing well-timed counter-cyclical investment strategies can make all the difference between falling victim to an economic downturn and growing into a sustainable, value-creating corporation.
Running a company is not unlike running money. Investors need to know when and how to invest counter-cyclically – if for no other reason than the fact that there are and always will be economic and financial market cycles.
With respect to the current economic and financial market cycle, our Macro Team’s most differentiated view remains that the U.S. economy is in the early innings of a #LateCycle Slowdown, which implies domestic economic growth has moved past peak and is likely to decelerate on a trending basis into an eventual recession – likely commencing in mid-to-late 2016. Our #EuropeSlowing theme – whereby our models are forecasting a sustained deceleration from cycle-peak rates of European economic growth toward a likely recession as early as 1H16 – continues to register as fairly non-consensus as well.
These views continue to be confirmed across global financial markets and via the underlying economic data:
- Consumption Growth Slowing:
- In the U.S. Retail Sales growth slowed sequentially in AUG +2.2% YoY from +2.6%. While +2.2% is in line with the trailing 3 and 6 month averages, it remains a far cry from the TTM average of nearly +3%. Moreover, domestic consumption growth is likely to trend lower throughout the balance of the year amid negative trends in both Employment growth and Consumer Confidence as of SEP, as well as materially steepening comparative base effects.
- In the Eurozone, Retail Sales growth slowed sequentially from a cycle peak to +2.3% YoY in AUG. What’s interesting to note is that the current 3MMA growth rate of +2.4% is in the 93rd percentile of all monthly readings over the previous 10 years. Making the Case for Eurozone consumption growth to accelerate from these levels is a bold call with comparative base effects steepening to cycle highs over the next three quarters.
- In the U.K., Retail Sales growth is slowing on both a sequential and trending basis. The latest YoY growth rate of +3.5% (AUG) is below its 3MMA of +3.9%, which is below its 6MMA of +4.3%, which is below its TTM average of +4.6%.
- Manufacturing Growth Slowing:
- In the U.S., Industrial Production growth is slowing on both a sequential and trending basis. The latest YoY growth rate of +0.9% (AUG) is below its 3MMA of +1.0%, which is below its 6MMA of +1.5%, which is below its TTM average of +2.8%.
- In the Eurozone, Industrial Production growth is accelerating on a both a sequential and trending basis. That said, a confluence of factors suggests it is highly unlikely to accelerate from the +1.9% YoY reading in JUL – specifically this morning’s contracting sequential readings in Germany (-1.2% MoM) and Spain (-1.4% MoM) (Eurozone AUG IP to be released next Wednesday), as well as the region’s benchmark Manufacturing PMI slowing on both a sequential and trending basis to 52 in SEP. The ZEW Eurozone Economic Expectations Index is also slowing on both a sequential and trending basis as of SEP (to 33.3).
- In the U.K., this morning’s data showed Industrial Production growth is accelerating on a sequential and trending basis as of AUG. Is that sustainable with both the country’s Manufacturing PMI and Lloyds Economic Optimism Index slowing on both a sequential and trending basis to 51. 5 and 34, respectively, as of SEP and comparative base effects steepening to cycle highs over the next two quarters? Probably not.
- Export Growth Slowing:
- In the U.S., Export growth is slowing on both a sequential and trending basis. The latest YoY growth rate of -6.2% YoY (AUG) is below its 3MMA of -4.8%, which is below its 6MMA of -4.4%, which is below its TTM average of -3.5%.
- In the Eurozone, Export growth is slowing on both a sequential and tending basis. The latest YoY growth rate of +6.6% (JUL) is below its 3MMA of +7.2%, which is below its 6MMA of +7.6%.
- In the U.K., Export growth is slowing on a sequential basis and the breakdown is threatening to weigh on the formerly positive trend. The latest YoY growth rate of -1.0% (JUL) is well shy of its 3MMA of +2.5%.
- PMIs Slowing:
- In the U.S., the Markit GDP-weighted Composite PMI is slowing on both a sequential and trending basis. The current 55.0 reading (SEP) is in line with its 3MMA, but remains below both its 6MMA and TTM averages of 55.7 and 56, respectively.
- In the Eurozone, the Markit GDP-weighted Composite PMI is slowing on both a sequential and trending basis. The latest reading of 53.5 (SEP) is below its 3MMA of 54.2, which is below its 6MMA of 54.4.
- In the U.K., the Markit GDP-weighted Composite PMI is slowing on both a sequential and trending basis. The latest reading of 53.3 (SEP) is below its 3MMA of 55.1, which is below its 6MMA of 56.1, which is below its TTM average of 56.5.
- EPS Revisions Negative:
- NTM earnings revisions for benchmark equity indices in the U.S., Eurozone and U.K. are all flat-to-negative across any meaningful observation period going out to at least six months. Betting on multiple expansion as economic cycles roll over across developed markets is not a market call you will receive from Hedgeye.
- Markets Signaling Bearish:
- Despite the “bad news is good news” relief rally from generally oversold conditions and bombed-out sentiment, the S&P 500, DAX, EuroStoxx 600, FTSE 100 or FTSE All-Share indices are all still signaling bearish from an intermediate-term TREND perspective.
It’s worth noting that in both Hedgeye speak and in factor exposure performance, going from great-to-good and then from good-to-bad is bearish.
Sticking with the theme of change, if and/or when the aforementioned fundamental data and market signals become unsupportive of our view(s), we will be sure to change our minds with them.
Going back to yesterday’s company meeting, there are a myriad of planned changes to our mass market product offering and key additions being tacked on to our institutional research platform for Hedgeye subscribers all across the value-added curve to celebrate in the coming weeks and months. The most noteworthy of those changes would have to be our inaugural “Macrocosm” industry thought leader conference, which will be held Wednesday November 18th from 1-7:30pm at the Loading Dock in Stamford, CT.
Please note that there is a fee to attend the aforementioned conference and seating is extremely limited to existing top clients and key prospective clients of Hedgeye macro research. Email to the extent you’d like to RSVP. We look forward to enjoying the thoughtful debates with those of you who plan to attend and, to the extent you do, remember what George Shaw said about change:
“…those who cannot change their minds cannot change anything.”
Not even their prospective portfolio returns.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 1.96-2.09% (bearish)
SPX 1 (bearish)
VIX 18.55-28.77 (bullish)
EUR/USD 1.11-1.13 (neutral)
YEN 119.01-121.65 (bullish)
Oil (WTI) 45.59-49.68 (bearish)
Gold 1125-1161 (bullish)
Copper 2.24-2.39 (bearish)
Keep your head on a swivel,