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Invisible Shoots

“The effect was invisible to an observer of the overall market or someone studying just a few stocks.”

-Lasse Heje Pedersen

 

The aforementioned quote comes from a thick book I cracked open on the way to Houston, Texas yesterday titled Efficiently Inefficient, where the author (Pedersen) prefaces his learnings about markets with his experience working at AQR in 2007.

 

In the summer of 2007 quant fund AQR (co-founded by the colorful Cliff Asness who is a must follow on Twitter) “was profiting from some bets against the subprime market but was starting to experience a puzzling behavior of the equity markets…”

 

“… equity investors had started liquidating some of their long and short positions, which affected equity prices in a subtle way. It made cheap stocks cheaper, expensive stocks more expensive, while leaving overall equity prices relatively unchanged…”

 

Sound familiar?

 

Invisible Shoots - Bull goes... 07.11.2014

 

Back to the Global Macro Grind

 

With almost 2/3 of stocks in the Russell 3000 (98% of US stocks you could buy/sell) trading below their 200-day Moving Monkey, even the non-quant-one-factor-price-momentum-chart-chaser sees the decay in the internals of the US stock market at this point.

 

While every risk management overlay I use signaled the subtle bubble effect in US Equity prices at the summer 2015 high (1st time we went bearish on SPY = July 2015 Macro Themes call), after equity volatility went from 12 to 40 (VIX), it wasn’t subtle anymore.

 

As a result, consensus equity market bulls spent AUG-SEP “taking down gross long exposure” and “tightening net exposure” to the point that we had the biggest net SHORT position (CFTC futures/options contracts) of the year at the end of September.

 

Then the epic October squeeze…

 

Now, after consensus hedge funds have covered some of that -281,000 net short position (down to -181,291 contracts as of last Tuesday’s non-commercial CFTC positioning data), the SP500 has been down for 4 straight days.

 

But what does it all mean? Does it matter if the SP500 isn’t “down huge” (if you pick the lower-all-time-high as your reference point)? Or is that just a brain-dead thing to say for someone who is supposed to be selling active management products?

 

Remember, the SP500 was “flat” in 1987 too.

 

Much like how we measure everything else here @Hedgeye (in rate of change terms), after an epic OCT squeeze, both the SP500 and Russell 2000 are still -2.4% and -8.6% from their all-time closing highs.

 

Is that a buying opportunity?

 

How about in the expensive stocks that continue to get more expensive as the cyclicals (which looked “cheap” on the wrong numbers) continue to get cheaper?

 

Watching Priceline (PCLN) yesterday was interesting, if only because it tests the narrative of how expensive growth stocks can get in a top-down #GrowthSlowing macro market:

 

  1. Long-term “growth investors” could have bought all the PCLN in the world at $45/share in OCT of 2008
  2. Short-term chart chasers could have established a cost basis of $1454/share in OCT of 2015
  3. After losing -10% of its market cap in 2 weeks, the stock is still expensive at 28x trailing 12 month earnings

 

I personally have no opinion on PCLN, so please don’t take this subtle US equity market observation personally.

 

We’ve had an explicitly bearish opinion on inflation expectations (for almost 18 months now) and continue to see Red Shoots this morning when I look across the risk spectrum of Global #Deflation:

 

  1. Trending Foreign Currency (FX) #crashes around the world are firmly intact
  2. Both the Hang Seng and KOSPI were down -1.4% overnight after failing @Hedgeye TREND resistance
  3. Copper’s crash continues, down another -0.7% this morning to $2.21/lb (-22% YTD after starting 2015 at $2.82/lb)

 

So, if you’re still telling clients to buy “reflation” on some bogus PMI lag thing, they’re getting deflated by both marked-to-market risk and trending economic demand data. Reminder, last week’s ISM print in the USA was 50.1 (down -7.8% year-over-year).

 

But, if you’re being honest about everything that’s crashed (so far) in 2015 (Foreign Currencies, Oil, Commodities, Emerging Markets, Energy/Basic Material Stocks, etc.), you might just be subtly cautious about buying expensive stocks at their all-time highs.

 

To my sell-side competition, the effect of everything I’ve been signaling all year long is as invisible to them today as it was in November of 2007. And I’m totally cool with that. It’s what makes a market.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.06-2.38%

SPX 2050-2095
RUT 1149--1205
USD 97.68-99.55
EUR/USD 1.07-1.09
Copper 2.19-2.30

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Invisible Shoots - Chart of the Day


REPLAY: Healthcare Earnings Review with Tom Tobin | $HOLX $ATHN $VRX & MORE

Our Healthcare Team hosted a live presentation reviewing earnings season for their top names in their Position Monitor including AHS, ZBH, HOLX, CSLT, ATHN, and CPSI. 

 

Healthcare Sector Head Tom Tobin and analyst Andrew Freedman also discussed data updates related to their #ACATaper theme and noteworthy takeaways from the October jobs report.  

 

Tom's slides are available HERE.

 

 


INVITE | GOLD FLUSH? Materials Sector Launch Call (NEM, ABX, GOLD Miners)

INVITE | GOLD FLUSH? Materials Sector Launch Call (NEM, ABX, GOLD Miners) - L.T. Gold Price Chart

 

We are hosting a kick-off call for Hedgeye Materials coverage on Thursday, November 12th at 1:00 P.M., and will illustrate our investment process in the Gold Mining industry.

                    

Gold Bugs Bitten:  Gold prices in dollars have declined since 2011, despite two incremental rounds of quantitative easing and perpetual zero interest rates.  US long bonds have performed well in a similar environment.  What are the gold bugs missing?  We’ll put forth our data-driven take in our Materials launch deck.

 

Differentiated Sector Approach: The Materials coverage team of Jay VanSciver and Ben Ryan applies our experience in cyclicals, macroeconomics, and commodities to produce Best-Idea focused, process-driven Materials sector research. 

 

Our research process has three key components:

  • Structural Weakness/Strength: Identify structural vulnerability or resiliency in commodity related business (e.g. over/under capacity, demand susceptibility, deteriorating/improving structural position) that should have a dominant impact on market prices.
  • Unidentified Supply/Demand Changes:  We then look within those industries to see if consensus estimates for production or consumption are likely to prove incorrect based on our data-driven proprietary forecasts ranges.
  • Identify Companies Valued Inappropriately Relative To Forecast:  Deep-dive company specific valuation work oriented toward finding effective exposure our broader commodity thesis.  We align with our firm's top-down macro view when applicable.

 

Coverage To Broaden: While we believe the Gold Mining Industry provides a clear platform to demonstrate our process, our coverage will expand in coming quarters to areas where we see the best alpha opportunities.  We plan to host at least one Best Ideas call per quarter and to publish daily/weekly sector highlights, in addition to key research notes.

 

Call Details:

 

Toll Free:

Toll:

Confirmation Number: 13623545

Presentation Link: Materials Launch

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to . Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

November 10, 2015

We've made some updates and enhancements to Daily Trading Ranges. You'll now receive risk ranges for 20 tickers each day -  the last five of which will be determined by what's flashing on Keith's screen and by what names you're asking about. Contact support@hedgeye.com if you have any questions or feedback.

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.38 2.06 2.36
SPX
S&P 500
2,050 2,095 2,078
RUT
Russell 2000
1,149 1,205 1,184
COMPQ
NASDAQ Composite
5,038 5,177 5,095
NIKK
Nikkei 225 Index
18,996 19,735 19,642
DAX
German DAX Composite
10,527 10,990 10,815
VIX
Volatility Index
14.80 18.94 16.52
DXY
U.S. Dollar Index
97.68 99.55 99.08
EURUSD
Euro
1.07 1.09 1.07
USDJPY
Japanese Yen
121.29 123.74 123.18
WTIC
Light Crude Oil Spot Price
43.08 45.99 44.11
NATGAS
Natural Gas Spot Price
2.20 2.40 2.31
GOLD
Gold Spot Price
1,073 1,120 1,091
COPPER
Copper Spot Price
2.19 2.30 2.23
AAPL
Apple Inc.
116 123 120
PCLN
Priceline.com Inc.
1,290 1,379 1,311
VRX
Valeant Pharmaceuticals International, Inc.
71.01 96.39 85.41
NSC
Norfolk Southern Corp.
82.21 89.41 88.62
RAX
Rackspace Hosting Inc.
26.81 30.02 27.09
GPS
Gap, Inc.
25.49 29.13 27.69

 

 


The Macro Show Replay | November 10, 2015

 


What's Driving Our Bearish Forecasts for Domestic and Global Growth?

Takeaway: In the note below, we respond to two very important questions in the context of our dour outlook for global growth.

 

Q: PMI’s in both Europe and China don’t seem to be trending as bad as in the U.S. In fact Europe seems to be growing and China stabilized. As such, why is the call for them to get worse from here if some leading indicators are better and they’ve been cutting [rates] already?

 

Due to a variety of fiscal and monetary policy support measures, economic growth in China has indeed stabilized – for now at least. We discuss these dynamics in great detail on slides 38-57 of our 9/15 presentation titled, “Our Latest Thoughts On C-H-I-N-A”.

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - China Central Govt Expenditures

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - China Central Govt Budget Balance

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - China 7 day Repo Rate Monthly Avg

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - China Composite PMI

 

We do not, however, think it would be wise for investors to bet on a material acceleration from here – especially considering that Chinese growth continues to slow on a trending basis across a variety of key metrics, specifically: industrial production, exports, composite PMI, consumer confidence, business confidence and PPI.

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - China Economic Summary

 

We think the structural headwinds to Chinese fixed asset investment growth and household consumption are incredibly dour and wildly misunderstood by consensus. Refer to slides 7-19 of the aforementioned presentation for more details.

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - China Fixed Assets Investment Growth

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - China Fixed Assets Investment Percentile

 

Looking to Europe, we continue to cite steepening base effects as the primary driver of our dour outlook for European economic growth. All else being equal, difficult GDP compares in 1H16 represent a meaningful headwind to the trend in various European high-frequency growth data. The Eurozone and U.K. are not unlike the U.S. in this regard.

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - DM Comparative Base Effects 1H16

 

In terms of cratering a narrative around the aforementioned mathematical reality of steepening base effects in the Eurozone, industrial production, exports, consumer confidence, business confidence and PPI are all slowing on both a sequential and trending basis throughout the region. Its composite PMI is still slowing on a trending basis and household consumption growth is trending at an unsustainably elevated rate in the context of our outlook for ECB monetary policy and it’s likely [negative] impact on the EUR.

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - Eurozone Econ Summary

 

In terms of cratering a narrative around the aforementioned mathematical reality of steepening base effects in the U.K., global headwinds have caused U.K. export growth to slow on both a sequential and trending basis, which is negatively impacting business confidence (also slowing on both a sequential and trending basis) and perpetuating a negative inflection in industrial production growth per the most recent data. Additionally, consumer confidence is slowing on both a sequential and trending basis, which may cause the unsustainably elevated trend in household consumption growth to subsequently inflect. The trend of deceleration in the U.K. composite PMI would seem to imply as much.

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - U.K. Economic Summary

 

Q: Why do you not seem to heavily weight PMI’s [in your growth forecasts]? These seem to have a pretty good record as predictive indicators [of growth], at least for industrial stocks.

 

We tend to weight any given high-frequency indicator on a country-by-country basis relative to that sector’s contribution to the economy. For example, our expectations for U.S. economic growth will never deviate too far from the trend and/or our outlook for household consumption or the services sector, which account for 68.7% and 77.7% of U.S. GDP, respectively. That compares 13.4% and 20.7%, respectively, for exports and the manufacturing sector.

 

We run a predictive tracking algorithm that pulls a number of core indicators into our growth and inflation forecasts and analyzing them from a rate-of-change perspective allows to make forward-looking inferences that many investors tend to rely on mere conjecture for.

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - U.S. Economic Summary Table

 

With respect to PMIs specifically, we do place a decent amount of weight on them as a directional indicator of domestic economic growth. For reasons alluded to above, the ISM GDP-Weighted Composite PMI series has a tighter correlation to YoY U.S. real GDP growth than the ISM Manufacturing PMI series. Both indicators carry the same weight in terms of being a directional indicator for QoQ SAAR real GDP growth.

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - PMI vs. YoY GDP

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - PMI vs. QoQ SAAR GDP

 

That PMI readings continue to slow on a trending basis across both the domestic manufacturing and services sectors should lend a significant degree of pause to any bullish narrative surrounding domestic economic growth. We continue be among the most accurate firms (if not the most accurate) on the Street with respect to forecasting both trends and inflections in U.S. and global GDP growth and our forecasts for both remain well below consensus with respect to the intermediate-term.

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - ISM MANUFACTURING PMI

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - ISM NON MANUFACTURING PMI

 

What's Driving Our Bearish Forecasts for Domestic and Global Growth? - ISM COMPOSITE PMI

 

All told, we continue to view the “global growth has bottomed” claim as reckless at best and we detail precisely why that is the case in our 11/5 note titled, “Global Growth Has Not Bottomed”.

 

Best of luck out there,

 

DD

 

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.

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