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Checking It Twice

“I never believed in Santa Claus because I knew no white dude would come into my neighborhood after dark”

-Dick Gregory

 

I made two lists last night.  I had to check the second one twice.

 

The first was my son’s Christmas List - which included a “space station”.  He doesn’t even know what that is but some other kid wrote it down so he needed it too. #GroupThink starts early.

 

Checking It Twice - fed rainbows

 

Back to the Global Macro Grind …

 

The second was a quick refresh of global Industrial data post the U.S. ISM’s sojourn to sub-50 for the first time in 3-years. 

 

Headfake or Harbinger?

 

Here’s a quick look at some of the current members of the PMI #ContractionClub

 

  • U.S.:  48.9
  • China: 49.6 (official) or 48.6 (Caixin)
  • Brazil: 43.8
  • Canada: 48.6
  • Russia: 37.1
  • South Africa: 47.5
  • South Korea: 49.1

 

How about 3Q Earnings Growth across the lead indices according to Bloomberg data:

 

  • U.S. (SPX) = -4.6%
  • Japan (Nikkei) = -9.5%
  • U.K. (FTSE 100) = -30.5%
  • China (Shanghai Comp) = -18.9%
  • Brazil (Bovespa) = -42.7%
  • Canada (TSX) = -32.4%
  • Russia (MICEX) = -5.6%

 

Contractions (& Stagflations) can happen slowly, then a lot at once … Ask Brazil.   

 

This isn’t USA circa 1960 so maybe recessionary Industrial and global earnings data doesn’t matter – domestic auto sales are en fuego (Nov marked a new YTD high at 18.2 MM units and 2015 is on pace for a record year), construction activity remains strong (+13% YoY, latest Oct data), consumer credit is expanding, income growth remains solid and consumption growth is decelerating but still running ~3%.      

 

Or maybe it does. 

 

  1. ISM: As the Chart of the Day shows, sub-50 ISM prints have generated some false positives vis-à-vis recession signaling but contraction in the industrial-manufacturing sector has accompanied pretty much every downturn over the last century. 
  2. Goods vs Services: Goods Consumption is more cyclical than consumption of services and, historically, weakness has manifest in cyclical demand ahead of the peak in demand for more inelastic consumption. Employment growth in the goods producing sector tends to presage the trend in services and aggregate employment and employment growth in goods-producing sectors has decelerated from +3.0% at the start of the year to +1% in October – and comps only get tougher the next few months. In energy states - where the trend in job separations has again begun to negatively diverge from the broader trend, the declines have been more pronounced. In Texas, for example, goods employment is currently running -2.6% YoY. We expect further concentrated weakness across energy levered economies as hedges roll off and if domestic policy drives further price deflation in dollar settled commodities (which is pretty much all of them, all the time). 

 

The risk posed by the contraction in industrial output would also be easier to look past if it was isolated and if the Fed wasn’t set to perpetuate further disinflationary pressure. But it’s not and they are. 

 

In many ways, the global Currency Wars and the current global production slump are outcroppings of the same secular malady – overleverage, oversupply and stagnant demand. 

 

Policy, of course, attempts to manipulate “price” both in response to and in the hopes of influencing prevailing supply and demand conditions. 

 

Recall, conventional policy easing is believed to act through two basic channels:

  1. Lower rates = higher domestic investment demand and higher demand for interest rate sensitive consumption = ↑ Growth
  2. Lower rates = less demand/more supply of dollars = depreciating Currency = ↑ Exports = ↑ Growth

 

Individual economies and central banks operate independently and conventional policy and currency devaluation can work sufficiently well when economic cycles across the globe are, to some extent, out-of-phase and traveling along different points of the macro sine curve.

 

But the world as a whole is a closed system. If no one is producing and/or exporting (see list above), global demand is flagging – it’s not just an isolated strong dollar = lower domestic exports and industrial profitability phenomenon. 

 

Granted, Euro-zone PMI’s are comparably better, in the mid-50’s, but EU “exports” are a bit of a misnomer as most of what is counted as exports is actually intra-Eurozone Trade (think Massachusetts “exporting” to New York).   

 

Is positive but decelerating late-cycle U.S. growth and modest growth in the Eurozone against trough comps enough to float the global equity boat until the world comps out of its current malaise? 

 

Perhaps but, broadly, it feels hard to get incrementally bullish at the highs and/or ramp gross/net long exposure to levered balance sheets and high beta illiquidity based on prevailing global fundamentals and their likely trajectory. 

 

I feel like I’ve expressed that same sentiment a number of times this year but with the S&P500 up just 2% YTD, the Dow up just +0.36% and many EM and developing Asia equity markets deep in the red, reality has supported that boring consistency.  

 

What said the market to yesterday’s ISM data:

  1. Bond Yields tanked: the 10Y fell -6.3 bps to 2.14, the 2Y fell -2.4 bps and the yield spread fell to a 52-week low at 124 bps. 
  2. The Dollar retreated: The $USD declined -40bps, re-breaching the 100-level on the index to the downside
  3. Stocks barely blinked: All 9-sectors closed higher with the S&P500 finishing up for just the 6th day in the last 19. 

 

Random walks and single-session reflations ≠ trend accelerations in real growth and Down Dollar + Down Rates is not a growth accelerating signal. 

 

Janet’s naughty and nice (indicator) list will be prodded and checked twice as she delivers speeches to both Congress and the economics club over the next two days. 

 

Whether the BLS elves filled Janet’s data sack with inside edge on what the November NFP stocking holds, I do not know. 

 

I do know that, on balance, the recent data has been underwhelming and the nearer-term forward outlook promises further deceleration.

 

Remember (again) we’re talking slope of the line, not absolute. Much of the data will remain “okay” on an absolute basis in the nearer-term, but the slope of the growth line is and will remain negative. 

 

As uber-dove Evans made headlines with yesterday … “I’m a little nervous”.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.15-2.23%

SPX 2045-2109

VIX 14.11-18.25 
EUR/USD 1.05-1.07

Gold 1050-1080 

 

Good luck out there today. 

 

Christian B. Drake

U.S. Macro Analyst

 

Checking It Twice - ISM CoD


Join Hedgeye For Holiday Cocktails & Appetizers Dec. 9th

'Tis the Season…. We hope you can join us at La Biblioteca (622 3rd Avenue at 40th Street – located inside Zengo restaurant) on Wednesday December 9th, from 5-9pm for some holiday cheer!

 

Please RSVP to Kerrie at  if you can join.

 

We look forward to seeing you!

 

-Your Hedgeye Macro Team

 

Join Hedgeye For Holiday Cocktails & Appetizers Dec. 9th - he client holiday party DEC2015


The Macro Show Replay | December 2, 2015

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

December 2, 2015

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.23 2.15 2.15
SPX
S&P 500
2,045 2,109 2,102
RUT
Russell 2000
1,161 1,214 1,204
COMPQ
NASDAQ Composite
5,049 5,169 5,156
NIKK
Nikkei 225 Index
19,588 20,093 20,012
DAX
German DAX Composite
10,903 11,441 11,261
VIX
Volatility Index
14.11 18.25 14.67
DXY
U.S. Dollar Index
99.04 100.39 99.84
EURUSD
Euro
1.05 1.07 1.05
USDJPY
Japanese Yen
122.37 123.88 123.89
WTIC
Light Crude Oil Spot Price
40.68 43.17 41.65
NATGAS
Natural Gas Spot Price
2.15 2.31 2.22
GOLD
Gold Spot Price
1,050 1,080 1,068
COPPER
Copper Spot Price
1.98 2.10 2.07
AAPL
Apple Inc.
115 119 118
AMZN
Amazon.com Inc.
648 686 679
PCLN
Priceline.com Inc.
1,218 1,305 1,282
VRX
Valeant Pharmaceuticals International, Inc.
69.97 100.35 98.78
MCD
McDonald's Corp.
111 116 114
MS
MOrgan Stanley
33.15 35.47 35.27

 

 


GDP, USD and the UST 10YR

Client Talking Points

GDP

In other news...consensus will try to ignore into year-end comp. The Atlanta Fed cut its GDP forecast closer to Hedgeye’s yesterday, taking Q4 to 1.4% - reminder that Q4 will be the slowest year-over-year growth rate of 2015 (half of where it was at the cycle peak) #GrowthSlowing.

USD

If the Fed was data “dependent”, they’d follow what the Bond market did yesterday. But we doubt they will – the Federal Reserve hasn’t raised rates with the ISM < 50 in 2 decades, FYI – you go Janet, you go!

USt 10YR

Smack down day for rates (post back to back 48s on PMI and ISM reports) taking the UST 10YR to 2.16% and compressing the Yield Spread to year-to-date lows of +124 basis points – as you can see in this chart, long-term risk managers have had economic gravity right #GrowthSlowing.

 

*Tune into The Macro Show with Macro analyst Darius Dale and Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 69% US EQUITIES 2%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 15% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
MCD

We added McDonald's to Investing Ideas on August 11th. Since then shares of McDonald's have risen over 16% compared to a 0.2% return for the S&P 500.

 

As Restaurants Sector Head Howard Penney wrote right around the time we added McDonald's (MCD), "We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."

RH

We believe that RH is to Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market.

 

RH is the preeminent brand in the space. We think that RH is in second inning of a game that may ultimately prove to be a double header. We believe the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we see a stock in excess of $300.

TLT

The consumption side of the economy is arguably the most important, as its 69% of U.S. GDP. From a rate-of-change perspective, consumption growth decelerated in October, and consumer confidence is waning along-side it. That's why we would like to reiterate our Growth Slowing=Long TLT call.

 

To be clear, the consumption side of the economy had been a point of strength over the last several months. We’re not calling for a crash in household consumption, but the comps (comparison vs. prior reporting period) are important in rate-of-change analysis. The next four quarters of comps for Real PCE growth are the most difficult since Q3 2008 while the next four quarters of comps for CPI are the easiest since the four quarters ended in 4Q11. Simply put, both are headwinds for the consumer and we expect that the consumption component of the economic equation will continue to decelerate.

Three for the Road

TWEET OF THE DAY

Join Now: Healthcare Analyst Tom Tobin Live Q+A

$ATHN $AHS $ILMN $MD 

Free access: https://app.hedgeye.com/insights/47812-healthcare-analyst-tom-tobin-live-in-the-studio-today-1-00pm-et-il… … cc @HedgeyeHC @HedgeyeHIT

@Hedgeye

QUOTE OF THE DAY

Thinking is the hardest work there is, which is the probably reason why so few people engage in it.

Henry Ford

STAT OF THE DAY

The U.S. ISM Headline figure dropped sub-50 for 1st time since November 2012 to 48.6. New Orders also slide below the expansion line to 48.9.  


Cartoon of the Day: Reality Strikes Back

Cartoon of the Day: Reality Strikes Back - Yellen Yoda cartoon 12.01.2015

 

As the steady stream of poor (recessionary?) economic data continues to come in, the Fed remains hell-bent on battling reality and raising rates into an economic slowdown.

 


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