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CLAIMS | ENERGY - THERE WILL BE BLOOD

Takeaway: Energy states continue to show accelerating deterioration in labor conditions relative to the rest of the country.

As an oilman, I hope that you'll forgive just good old-fashioned plain speaking.

 - Daniel Plainview, There Will Be Blood (I'm An Oil Man Speech)

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims1

 

Let's speak plainly. The trend in energy state claims (chart below) shows the spread between indexed claims in energy states and the country as a whole has steadily increased from a low of 3 in early July to 34 as of the most recent reading for the week ending November 14. Energy hedges are rolling off broadly as the end of 2015 approaches. We expect this emergent acceleration in the deterioration in labor conditions throughout  the energy patch to continue into 2016. 

 

The takeaway here is that company's with high relative exposures to energy hubs like Houston and Calgary will see headwinds continue for some time. 

 

Meanwhile, the rest of the country continues, for now, to exhibit decent performance as evidenced by the fact that non-energy states are collectively more than offsetting the weakness in the energy footprint. Overall, initial jobless claims showed week-over-week improvement with the SA figure falling from 272k to 260k and the year-over-year rate of change in rolling NSA accelerating slightly from -6.5% to -8.2%. 

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims18 2

 

The Data

Prior to revision, initial jobless claims fell 11k to 260k from 271k WoW, as the prior week's number was revised up by 1k to 272k.

 

The headline (unrevised) number shows claims were lower by 12k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims was stable at 271k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -6.5%

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims2

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims3

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims4

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims5

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims6

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims7

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims8

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims9

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims10

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims11

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims19

 

Yield Spreads

The 2-10 spread fell -10 basis points WoW to 130 bps. 4Q15TD, the 2-10 spread is averaging 142 bps, which is lower by -11 bps relative to 3Q15.

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims15

 

CLAIMS | ENERGY - THERE WILL BE BLOOD - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


A (Not So) Happy Thanksgiving For U.S. Data

Takeaway: We're sticking with our reality-based recession call for 2016.

A (Not So) Happy Thanksgiving For U.S. Data - turkey

 

In a note to subscribers this morning, Hedgeye CEO Keith McCullough highlighted a few recent market developments that he's watching today: 

 

"It was another strong bounce-back morning for the greenback +0.4% vs. the Euro is taking the commodity crash right back to the woodshed – Oil -1.5% post yesterday’s +2.8% bounce (which helped Energy stocks lead the US equity rally off the lows intraday) - #Deflation Risk = On."

 

A (Not So) Happy Thanksgiving For U.S. Data - usd greenshoot

 

This evolving story has everything to do with monetary policy as the Yellen Fed looks to tighten in December while the ECB and Draghi ease. It's no surprise that the dollar is strengthening.

  

In other central planning news, the gap between 10yr and 2yr U.S. Treasuries is closing on speculation of a December rate hike. More analysis from McCullough:


"The yield curve continues to compress as the US economic data slows (Corporate profits -3.2% Q3 and Consumer Confidence tanked to 90.4) – this week the 10s/2s spread has compressed another 6bps to +129bps as credit trades like 1,000 pounds of stale pumpkin in a 100lb bag."

 

That further compression of the yield curve came after last week's -9bps.

 

Then again, the Fed apparently doesn't seem too concerned about raising rates into a slowdown. Here's the most recent spate of #GrowthSlowing data. Note the January peaks. 

 

Consumer Confidence

 

A (Not So) Happy Thanksgiving For U.S. Data - consumer confidence

 

Consumer Spending

 

A (Not So) Happy Thanksgiving For U.S. Data - gdp

 

Do you see any economic green shoots? We don't.


FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII)

Takeaway: We are flagging JPMorgan (JPM - Score: 93) (short) and Federated Investors (FII - Score: 15) (long) on sentiment and short interest.

This morning we are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.

 

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  

 

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

 

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

 

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - SI1

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - SI2

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - SI3

 

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

 

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

 

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   

 

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 

 

 

FINANCIALS SENTIMENT SCOREBOARD - JPMorgan (JPM) AND FEDERATED INVESTORS (FII) - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


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The Macro Show Replay | November 25, 2015

 


CHART OF THE DAY: This Economic Indicator Always Peaks Before Recession

 

CHART OF THE DAY: This Economic Indicator Always Peaks Before Recession - 11.25.15 EL chart

 

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. 

 

"... Unless you think it’s the 1990s (newsflash: it’s not), US Consumer Confidence always puts in a cycle peak in the 100-110 range, right before a US recession. Yesterday’s reading of 90.4 for November dropped almost 10% from 99.1 in October."

 

 


Where The Winds Blow

“One ship drives East and another drives West

With the self-same winds that blow.

‘Tis the set of sails

And not the gales

Which tells us the way to go.”

-Ella Wheeler Wilcox

 

That’s how David McCullough introduces Chapter 3 of The Wright Brothers as he tells the story of the boys moving East (from Ohio) toward the Outer Banks of the Carolinas. We should all be thankful that they took the risk and made that trip.

 

Whether you’re headed toward Kitty Hawk, North Carolina this week or just staying close to home, the Hedgeye team and I want to wish you a very peaceful and happy Thanksgiving.

 

With a record 94 million Americans not in the US labor force and approximately 46 million people on food-stamps, I’m quite humbled by the blessed life my family and firm is living. I can never say thank you enough. Our collective responsibility remains being the change we all want to see in this world.

 

Where The Winds Blow - turkey

 

Back to the Global Macro Grind

 

While I’d like nothing more than to write about the prospects of US #GrowthAccelerating (like I did around this time in 2012), I don’t like to write fiction on economic matters. While hope often gives us the wonderful gift of life, it is not a risk management process.

 

Sadly, going into this Thanksgiving break, the US economy was dealt two of the Top 3 leading indicators for a US Recession yesterday:

 

  1. US Corporate Profits breaking down below their 12-month trailing average
  2. US Consumer Confidence rolling off its multi-year cycle peak

 

As you can see in the Chart of The Day, Consumer Confidence peaked in Q1 of 2015 in conjunction with:

 

  1. US Consumption Growth (Real PCE Growth) peaking at 3.3% year-over-year in Q1 of 2015
  2. Non-Farm Payroll Growth peaking at +2.3% year-over-year in Q1 of 2015

 

Unless you think it’s the 1990s (newsflash: it’s not), US Consumer Confidence always puts in a cycle peak in the 100-110 range, right before a US recession. Yesterday’s reading of 90.4 for November dropped almost 10% from 99.1 in October.

 

On the corporate profit cycle side, yesterday’s year-over-year #GrowthSlowing US GDP report had the following two realities:

 

  1. US GDP slowed to 2.2% year-over-year growth (that’s the lowest of the year)
  2. US Corporate Profits slowed to -3.2% year-over-year growth (that’s the lowest of the year)

 

Yep. Simply following the rate of change in a sine curve, it is. Don’t let someone who is in the business of writing reasons to always be bullish obfuscate the simple reality that US GDP growth went from 1 to 2 to 3% year-over-year into the cycle peak (Q1)…

 

And is in the midst of slowing from 3 to 2 to 1% here in Q4 of 2015.

*sine curve math wizards note: after 1% comes 0%

 

Unless, of course, “it’s different this time”, profits slowing to negative year-over-year growth is a leading indicator for people losing their jobs and becoming less confident. Of the 500 companies in the S&P, 490 have now reported an aggregate Q3 earnings decline of -4.4%.

 

Now if you’re still not aware of the #LateCycle call on both US employment and consumption growth – but still data mining for a 9-month lag chart of a PMI to bottom, the US Market PMI reading of 52.6 in NOV slowed vs. the head-fake-counter-TREND-bounce to 54.1 in OCT.

 

In other reality-check news:

 

  1. Last night, Argentina told the world that its central bank has “no Dollars left…”
  2. Chinese (and American) Corporate Bond Spreads continue to widen here in November
  3. Copper continues to crash (-30% YTD)
  4. US Treasury Yield Spread continues to compress (-6 basis points this week to +129bps 10s/2s)
  5. Japan announced they’re going to hand out 30,000 Yen to 100 million low-income people

 

To put the latest Japanese social plan in context, since a Yen isn’t what it used to be, 30,000 Yens = $245 US Dollars. So it will take roughly 300 billion Burning Yens to fund that.

 

If the US Federal Reserve didn’t do QE and just wrote checks to impoverished Americans like Japan has resorted to doing (post QE failing), at least we’d have a better conscience about the fact that it was QE’s asset price inflation that hurt the many, in lieu of paying the few.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):

 

UST 10yr Yield 2.18-2.30% (neutral)

SPX 2020-2109 (neutral)
RUT 1139--1193 (bearish)

NASDAQ 4 (bullish)

Nikkei 199 (bullish)

DAX 101 (bullish)

VIX 14.66-20.47 (bullish)
USD 98.81-100.19 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 122.04-123.73 (bearish)
Oil (WTI) 40.05-43.56 (bearish)

Nat Gas 2.15-2.35 (bearish)

Gold 1060-1085 (bearish)
Copper 1.98-2.09 (bearish)

 

Best of luck out there today and Happy Thanksgiving,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Where The Winds Blow - 11.25.15 EL chart


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