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McCullough: Fed Needs An Economic Reality Check

 

In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough responds to a subscriber’s question about the likelihood of the Fed raising rates in December. 

 

 

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

 

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Stop the Presses! Did Beijing's Grand Poobah Just Tell the Truth on China Slowdown?

Chinese President Xi Jinping had some rather interesting things to say about his nation's economy earlier today.

 

Stop the Presses! Did Beijing's Grand Poobah Just Tell the Truth on China Slowdown? - xi

 

Here's an excerpt from a note sent to subscribers by Hedgeye CEO Keith McCullough in response:

 

"Our man Xi was being way too honest overnight admitting the Chinese economy faces “considerable downward pressure” right now. They didn’t like that in Shanghai, closing the index down -1% as EM Asia continues to trade terribly (Thailand -1.1%)."

 

As you can see there was "considerable pressure" on Shanghai Composite shares. 

 

Stop the Presses! Did Beijing's Grand Poobah Just Tell the Truth on China Slowdown? - shanghai

 

Here's the full quote from President Xi who was speaking at the annual Asia-Pacific Economic Cooperation meeting: 

 

“The Chinese economy is still coping with a complicated internal and external environment, considerable downward pressure and the temporary pains of deep reforms,” Mr. Xi said. “The opportunities are unprecedented and the challenges are unprecedented.”

 

Investors are "coping" with their own "unprecedented challenges" as well. That of course is interpreting China's inherently suspect economic data. That's why Xi's candor here was so telling. 

 

Stop the Presses! Did Beijing's Grand Poobah Just Tell the Truth on China Slowdown? - China cartoon 10.19.2015


CAG | SMOOTH MOVES

ConAgra Foods (CAG) is on the Hedgeye Consumer Staples Best Ideas list as a LONG.

 

Today CAG announced their intentions to separate their business into two independent publicly traded companies. One will be comprised of their branded business named, ConAgra Brands, and the other consisting of their foodservice portfolio which is largely their frozen potato business called Lamb Weston.

THE TRANSACTION

The spin-off will be tax free to both the company and its shareholders. After the transaction current CAG shareholders will own 100% of both ConAgra Brands and Lamb Weston. Management is currently targeting to complete the transaction in the fall of 2016, subject to final approval by the Company’s Board of Directors, other customary approvals and receipt of an opinion from tax counsel on the tax-free nature of the spin-off.

 

This transaction coupled with the sale of the private brands business and the previously announced $300 million efficiency plan have CAG headed in the right direction. The steps that CAG have taken in such a short time period really demonstrate that this management team and Board are prepared to act on anything that creates long-term shareholder value.

CONAGRA BRANDS

The new company, called ConAgra Brands, will primarily consist of the branded business, currently reported as the Company’s Consumer Food segment, which generated approximately $7.2bn in fiscal year 2015. In addition ConAgra Brands will absorb some foodservice operations and certain private label products, which generated about $1.8bn in fiscal year 2015. ConAgra Brands is also expected to retain the company’s stake in the Ardent Mills joint venture

 

ConAgra Brands will focus on strengthening their branded position on the shelf while driving innovation and improving margins. They will be flexible in their ability to pursue acquisitions and possibly divest brands as well. In addition the new company intends to maintain an investment grade credit rating. Sean Connolly will be CEO and it will be headquartered in Chicago.

LAMB WESTON

Lamb Weston’s portfolio will consist of frozen potato, sweet potato, appetizers and other vegetable products, as well as a continued presence in retail frozen products under licensed brands and private label. In fiscal year 2015 Lamb Weston generated $2.9bn in revenue.

 

Management team and capital structure will be announced at a later date.

HEDGEYE OPINION

We view the separation of these two businesses as a large positive for the creation of long-term value. But we do question the reasoning behind the spin-off of Lamb Weston versus an outright sale of the business. The decision most likely came down to tax implications, it is our assumption that the sale of Lamb Weston would have created a large tax leakage, which is what made this route the best. As two public companies, the respective management teams will have greater focus on their respective goals which will lead to improved performance. The newly created ConAgra Brands will be predominately branded with a lesser private label and foodservice division. We expect to see management stay active on the M&A front within ConAgra brands, divesting non-core assets while acquiring more appealing brands.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 


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Starts & Permits / MBA Purch Apps | Neither One Is As It Appears

Takeaway: October Housing Starts aren't as soft as they appear and the latest MBA mortgage apps print isn't as strong as it appears either.

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.

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Compendium 111815 

 

Today’s Focus:  October Housing Starts & Permits & MBA Purchase Apps

 

Housing Starts & Permits:

In short = not great but better than the headline as single-family starts dip -2.4% sequentially while MF permits suggest the decline in multi-family construction which weighed on the headline in October (-25.1% MoM) will likely reverse.  

 

SF:  Single Family Starts dropped -2.4% month-over-month and decelerated to +2% year-over-year while Permits did the exact opposite, rising +2.4% sequentially and making a new post-crisis high.  With Permits making an 8-year high, the larger trend in SF construction continuing to stair-step higher (1st chart below) and +42% mean reversion upside remaining back to average historical levels of activity, the MT/LT opportunity remains conspicuous.   In Texas and California where angst over state level drought/bubble and energy price issues have been real and rising, the trends have been somewhat divergent.  Whereas SF permitting activity in California has accelerated in 2015, permit volume growth has been in steady deceleration YTD (note: the Census Bureau provides state-level permits data, not Starts directly, on a 1-month lag) .

 

MF:  Multi-family Starts dropped -25% MoM to 338K while Permits rose +6.8% MoM to 439K – suggesting the smoothed, multi-month average in MF activity should remain Trend consistent. 

 

 

MBA Mortgage Purchase Applications

Purchase Demand rose +11.9% in the latest week, reversing 3-weeks of relative softness and taking November and 4Q15 back up to the YTD average.

 

The caveats:  Last week included Veteran’s Day and high frequency, weekly data is noisy in peri-holiday periods despite statistical adjustments.  We’d note that the seasonal adjustment factor this year was less supportive than what we’ve seen over the last four years so at face value the increase would appear quasi-legit or, at least, statistically non-anomolous.   

 

Additionally, with Rates up another +6bps WoW to the highest level in 4-months at 4.18% (and the first positive YoY change in rates since June 2014), its also possible we’re seeing some measure of demand pull-forward with prospective buyers pulling the purchase trigger in fear of further financing based affordability declines.   

 

So, what has become serial noise in the weekly Purchase Application data of late continued in the latest week.  More broadly, after accelerating signficantly off the 4Q14 lows, the multi-month trend in Purchase Demand has been largely flat.  Looking to next week, we expect a sequential decline in EHS as existing sales play catch-up to the trend in PHS. 

 

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Starts SF Stair Step

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Starts Total Stair Step

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Starts   Permits MF LT

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Starts   Permits MF TTM

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Starts   Permits SF LT

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Starts   Permits SF TTM

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Starts Total LT

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - SF Permits California

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - SF Permits Texas

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - CA TX Share of Total Permits

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - TX Goods vs Services Employment

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Purchase 2015 Monthly

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Purchase seasonal Adj

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Purchase Index   YoY Qtrly

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - 30Y FRM

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Purchase   RefiI YoY

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Purchase 2013v14v15

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Purchase LT

 

Starts & Permits / MBA Purch Apps | Neither One Is As It Appears - Purchase YoY  

 

 

About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 

 

 

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. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


CHART OF THE DAY: The $9,000,000,000,000 Problem

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe. 

 

"... Have you been of the view that the money that was printed was going to create a “velocity” of money or behavioral distrust? If the short-term policy was to create the illusion of growth (inflation expectations), isn’t the long-term risk a #Deflation of those expectations?

 

How about the $9 Trillion Dollar Problem (see Chart of The Day) that is US Dollar-denominated credit to non-bank borrowers outside of the US? That’s a massive contract. Does it have risks? As the economic cycle slows, in debt linked to inflation expectations do you trust?"

 

CHART OF THE DAY: The $9,000,000,000,000 Problem - 11.18.15 chart


In Debt, Do You Trust?

“The Dollar is money, money is value, value is trust, trust is a contract – and the contract is debt.”

-Jim Rickards

 

Who do you trust? Government monetary policy makers, markets – both? Or neither?

 

Have you been of the view that the money that was printed was going to create a “velocity” of money or behavioral distrust? If the short-term policy was to create the illusion of growth (inflation expectations), isn’t the long-term risk a #Deflation of those expectations?

 

How about the $9 Trillion Dollar Problem (see Chart of The Day) that is US Dollar-denominated credit to non-bank borrowers outside of the US? That’s a massive contract. Does it have risks? As the economic cycle slows, in debt linked to inflation expectations do you trust?

 

Back to the Global Macro Grind

 

The aforementioned quote comes from the original author of Currency Wars, Jim Rickards. I’m honored that he’ll be kicking things off at Macrocosm this afternoon in Stamford, CT alongside Jurrien Timmer, Director of Global Macro and Investment Research at Fidelity.

 

In Debt, Do You Trust? - Card house cartoon 12.03.2014

 

I think you’d guess that I don’t trust governments – certainly not on monetary policy matters. The idea that an un-elected human being whose economic forecasts are wrong 70% of the time can smooth and bend economic gravity is a little too much for me.

 

Not everyone at our inaugural macro conference is as bearish on the Central Planning of markets as I am, but that’s what makes a market. And I’m really looking forward to this afternoon’s Dock Debates – Macrocosm 2015.

 

On the heels of China’s Premier Li reminding the world that the Chinese economy has “relatively large downward pressure” overnight:

 

  1. Centrally planned Chinese stocks in Shanghai fell -1.0%
  2. The Hang Seng in Hong Kong dropped another -0.3%, taking its decline in the last month to -3.8%
  3. Emerging Asian Equities (Thailand down another -1.1%) resumed their bearish TREND @Hedgeye

 

This all came after another ugly session for those long “reflation” and “green shoots”:

 

  1. CRB Commodities Index dropped another -0.9% yesterday making lower-lows vs. its AUG crash lows (-20% YTD)
  2. Copper remained no bid, all-day yesterday, taking its lower-lows beyond the summer-time lows to $2.09/lb
  3. Both Oil (WTIC) -1.5% and Oil & Gas Equities (XOP) -1.9% led losers in yesterday’s Global Macro trading session

 

Combined with the reluctant confirmation of demand slowing from the Chinese, these appear to be red shoots to me.

 

US stocks tried to have their 2nd up day in a row and closed down for the 8th day in the last 10, instead:

 

  1. Big Cap Energy Stocks (XLE) showed no follow-through from the day prior, closing -1.1% at -14.8% YTD
  2. Financials (XLF), which are supposed to go up on a “rate” hike, dropped to -2.3% YTD
  3. Small Caps (Russell 2000) underperformed the SP500 (again), moving back to -4.4% YTD

 

Yep. Ex-Energy, Small Cap Domestic Growth, Financials, and most of US Retail (XRT -10.7% YTD), everything is fine YTD.

 

For those of you who have real-time quotes and an account with real-money in it, you’ll note that an -11% draw-down in the Russell 2000 (and/or US Retailers YTD) from its all-time #Bubble high in July is a problem. (hint: you need to be up +12.4%, from here, to break-even)

 

And it’s an even bigger credibility problem that the people who are still looking for 3-4% GDP and +8-10% “Earnings Growth” in 2015 are seeing Q3 Earnings Season wind down with the following reality:

 

  1. 468 of 500 S&P 500 companies have reported
  2. Aggregate Q3 Sales Growth is down -4.3% year-over-year
  3. Aggregate Q3 EPS Growth is down -4.6% year-over-year

 

I know. I know. If I back out Energy, Industrials, Retailers, etc. I still see the Financials with a -7.6% year-over-year earnings recession for Q3, so we should definitely raise rates so that Jaime Dimon can fix his NIM (net interest margin) pressure and get back to paying bonuses.

 

With Industrial Production Growth (IP) for October slowing to its lowest rate of change of the year at 0.3%, as the US industrial/cyclical economy enters a recession, what Dimon really needs to do is ignore that and cheer-lead some non-data-dependence @FederalReserve.

 

With all this politicization, it’s no wonder why Janet is having a fit about this proposed “FORM Act” (Fed Oversight Modernization Reform Act) suggesting to Congress that it would “undermine the Fed’s ability to implement policies that are in the best interest of Americans”…

 

On the other hand, US Presidential candidate Marco Rubio says he wants Janet Yellen out of her un-elected seat because the “Fed often times ends up making policies that dramatically alter the economy in very negative ways”…

 

This is still America where the Dollar is the hard-earned money of The People. The Dollar is our money, not theirs. Trust in USD policy isn’t allocated to Mr. Bernanke or Mrs. Yellen - it’s earned. Transparency and accountability is trust – and the contract is free-market liberty.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.17-2.30%

SPX 2016-2068

RUT 1134--1172

VIX 16.77-20.98
USD 98.20-100.13
Copper 2.07-2.18

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

In Debt, Do You Trust? - 11.18.15 chart


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