This one speaks for itself...
Poor economic data out of Germany and Japan continues to weigh on the DAX and Nikkei which are down -17% and -13% respectively from their recent highs. You can add the Russell 2000, here at home, to the list of market dogs. “The Russell looks like hell,” Hedgeye CEO Keith McCullough said on The Macro Show earlier this morning.
For the record, the small-cap index is down over -10% from its recent high hit earlier this summer. As McCullough notes, “The drawdown from the all-time high is currently two times the drawdown in the S&P.”
According to McCullough, the hedge fund community continues to use S&P futures as their short-selling mechanism, not the Russell, which does not have that same amount of short interest. So small-caps tend to fall much faster.
In addition, the Russell is anchored to a slowdown in U.S. growth to a greater degree than the S&P 500. In other words, it’s a pure play on flagging U.S. growth expectations (which happens to be our house view).
Our take: With the continual implosion of U.S. economic data – from PPI to Retail Sales – setting up an increasingly nasty-looking Holiday season, shorting domestic growth should continue to work out.
Editor's Note: Interested in getting a step ahead of consensus? Take a look at our suite of contrarian investment products.
This summer offered investors an epic buying opportunity to get long Long Bonds.
As our subscribers are well aware, we've been warning on global growth slowing and urging investors to get long via TLT and other related vehicles for some time now. It was a non-consenus call when we first made it and we’re sticking with it.
Check out the chart below. What a difference a few months can make.
Make no mistake, our recent macro calls — #Deflation, #GrowthSlowing, #LowerForLonger and one of our newest ... #SuperLateCycle — have been spot on. Is it possible that Old Wall consensus is warming up to our thinking?
Look no further than a slew of media stories yesterday. CNBC, Bloomberg, and a host of others are featuring front-page stories on themes our macro team has been warning about for some time now.
The icing on the cake? In this morning's paper Wall Street Journal Fed watcher Jon Hilsenrath delivered a beauty of a headline.
Hopefully you recall that just two months or so ago in a WSJ interview with Atlanta Fed President Dennis Lockhart, Lockhart suggested that the Fed was "close" to a rate hike in September. See headline below.
Close? Weeeell...not so much.
But thanks for the update Jon.
As for us, we'll stick with our #LowerForLonger call.
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Takeaway: Mixed messages on the state of the labor market abound. NFP data signals slowing while claims signal full steam ahead.
There's growing consternation around the strength of the labor market in the wake of consecutive disappointing NFP reports for August and September. The weekly initial jobless claims series, however, continues to show strength exemplified by this latest weekly reading -- the lowest reading in 42-years. What's an investor to do?
Our framework for thinking about late cycle risk is to start by looking at recent cycles. The last three cycles saw claims stay below 330k for 24, 45 and 31 months before the economy entered recession. The average duration of those three cycles was 33 months (max: 45, min: 24). With claims having just finished their 19th month of strong, sub-330k claims, we are 5 months from the min, 14 months from the average and 26 months from the max. While it's always possible that this cycle could exceed that of the 90s, we think that's a low probability scenario as the 90s cycle represented a near-perfect goldilocks confluence of tailwinds from demographics, technology, peace and government. In other words, we'd put our left tail/right tail boundaries at 5 and 24 months before the start of the next recession and we'll continue to watch the claims data for signals of deterioration. So far, it continues to print lower.
In energy states, indexed claims rose in the week ending October 3 while falling for the country as a whole. The chart below shows that the spread between the two series increased from 18 to 19 week over week.
Prior to revision, initial jobless claims fell 8k to 255k from 263k WoW, as the prior week's number was revised down by -1k to 262k.
The headline (unrevised) number shows claims were lower by 7k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.25k WoW to 265k.
The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -11.0%
The 2-10 spread fell -2 basis points WoW to 142 bps. 4Q15TD, the 2-10 spread is averaging 143 bps, which is lower by -10 bps relative to 3Q15.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: NKE BIG targets=Very Doable. Wouldn’t want to be a wholesaler while this occurs. WMT wage move=significant margin headwind for US retailers.
NKE | QUICK TAKE ON ANALYST MEETING
Takeaway: BIG targets = Very Doable. Say what you want, but the model’s changing for the better. Wouldn’t want to be a wholesaler while this occurs.
For Full Note CLICK HERE
For Our Black Book From 10/12 CLICK HERE
WMT | 4 REASONS IT'S HORRIBLE FOR RETAIL
Takeaway: WMT’s blow-up is far from over. It’s about as late-cycle as we can fathom, and will absolutely hit those who haven’t proactively prepared.
For Full Note CLICK HERE
On wages more specifically - WMT will have invested $5,400 per employee over the remainder of this year and the next. If we apply that amount the relevant number of employees at each of the following retailers (see table below) ,it equates to a mid to high teen EPS hit for each retailer, except KSS which is at 24%. We probably won't see it play out all at once, but the bottom line is WMT is going to $10 per hour. And the company employs 16.5% of workers in the Food & Beverage, Health/Personal Care, Clothing, and General Merch categories. It's not just those who are currently below WMT on the pay scale who will feel the pain because others at the high end will have to keep the competitive gap in order to attract the right type of talent. Maybe a company like JWN or FL which pay sales associates on a commission basis won't feel the full brunt of the WMT induced wage pressure. But, for everyone else -- especially those who have not proactively managed their expense line -- it’s a significant margin headwind.
2015 & 2016 WMT Wage Hike Equivalent
BRBY - Burberry noting weakness in China saying "demand from luxury consumers, particularly Chinese customers, was affected by a more challenging external environment."
JAH - Jarden Corp acquiring Jostens for $1.5bn, 7.5x EBITDA. Company sees synergy opportunities with Rawlings.
TGT - Target becoming first major card issuer to use credit cards with PIN number. The new system will increase security for Red Card customers.
COST- Maggie Wilderotter, Chairman of Frontier Communications, joins Costco board.
ETSY - Etsy launches Same Day delivery option in New York called Etsy ASAP. Service charges a flat rate $20 fee per order.
“Most people in our business are stock pickers, sector pickers or nose pickers, but they’re not history people,” said Hedgeye CEO Keith McCullough on yesterday’s The Macro Show. Kidding aside, understanding economic history is as critical as ever. And as Keith points out in this excerpt, a number of key economic indicators are flashing red.
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