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BREAKING RISK: Fed Fights Economic Reality

Takeaway: Yellen's speech before Congress today was a nice bit of storytelling, but had little to do with the actual U.S. economy.

BREAKING RISK: Fed Fights Economic Reality - Yellen Yoda cartoon 12.01.2015

 

It's been a gangbuster year for economic storytelling. Unfortunately, most of the tall tales told have failed to come close to anything resembling reality.

 

We like a good yarn as much as the next person. But Fed Chair Janet Yellen's rate hike perpetuating speech before Congress today obfuscated so many key facts about what is actually happening in the U.S. economy that we thought we should set the record straight.

 

BREAKING RISK: Fed Fights Economic Reality - darius pmi

 

Hedgeye CEO Keith McCullough was particularly fired up discussing the #GrowthSlowing data during today’s preamble to a live Real-Time Alerts broadcast:

 

“Today we had some [economic] data that further corroborated the Hedgeye view that U.S. growth is slowing. I must say that ex-Housing and Autos, there hasn’t been any November data that hasn’t slowed. This morning’s ISM non-manufacturing data was horrible.

 

Now, earlier this year, you had all of these people who said ‘If you back out energy the economy looks fine.’ Well, now you have to back out energy, manufacturing and the consumer and then, and only then, is everything fine.

 

[Mccullough called up this chart. Click to enlarge...]

BREAKING RISK: Fed Fights Economic Reality - ism non manu

 

What you’re looking at here is a Late Cycle Slowdown.

 

You can see this month’s -2.2% Services number. It must have been the result of climate change or something. I’m going to eventually figure it out, especially, if I back out everything. But that’s the slowest number of the year. And if you didn’t know that the economy is slowing, just look at the retailers this quarter.

 

We we’re out front on this. And, to be clear, last year we were really bullish on the consumer and, coming out of 2012, we got really bullish in general. But the cycle top for U.S. consumption is corroborated by today’s ISM non-manufacturing readings.

 

Interestingly, that February top [circled in green above] was also the peak in non-farm payroll growth. So literally, both topped in February. Isn’t that amazing and ironic. Well, not so much. That is the cycle.” 

 

Here's the chart McCullough is referencing on non-farm payrolls...

BREAKING RISK: Fed Fights Economic Reality - 11.03.15 chart2

 

But the Fed is "data dependent." Right?

 

BREAKING RISK: Fed Fights Economic Reality - fed fail


INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN

Takeaway: Energy state labor conditions continue to deteriorate. Meanwhile, the Fed is poised to tap the brakes on the rest of the country.

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims1

 

The labor environment remains a two-state system for now. There are energy states and non-energy states. Energy states are continuing to decouple from the broader US, while the rest of the country remains reasonably strong. As the chart below shows, the indexed level of claims for energy states has hit a new high relative to the overall US. This is consistent with our call that energy company hedges roll off en masse at YE2015.

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims18

 

Separately, it's important to keep in context where we are in the cycle. We're now 22 months into a sub-330k claims environment. The last three cycles have seen claims stay below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us roughly in-line with the min, 11 months away from the average and ~2yrs away from the max. We think the amount of track remaining is inversely correlated with short rates. With the Fed poised to begin raising rates in a few weeks, we think the amount of track remaining in this economic cycle is getting shorter.

Bear in mind too that the Fed raising rates will serve to increase the pressure on energy state labor conditions by incrementally strengthening the dollar/furthering energy deflation.

 

 

The Data

Prior to revision, initial jobless claims rose 9k to 269k from 260k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.75k WoW to 269.25k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.9% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.2%

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims2

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims3

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims4

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims5

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims6

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims7

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims8

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims9

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims10

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims11

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims19

 

Yield Spreads

The 2-10 spread fell -6 basis points WoW to 124 bps. 4Q15TD, the 2-10 spread is averaging 140 bps, which is lower by -13 bps relative to 3Q15.

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims15

 

INITIAL JOBLESS CLAIMS | ENERGY STATES CONTINUE TO WEAKEN - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


RTA Live: December 3, 2015

 


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NEW VIDEO: This Was a Terrorist Attack, Stop Being So Politically Correct

On Mornings with Maria on Fox Business today, Former FBI Terrorism Task Force member Steve Rogers cuts to the chase in a frank discussion on the horrific shooting in San Bernardino, California which left 14 dead. Joining him are host Maria Bartiromo, Hedgeye CEO Keith McCullough and FBN’s Dagen McDowell.


P | Panhandling? (Note Offering)

Takeaway: The pending debt raise is not likely to come with favorable terms, and could cause more harm than benefit down the road.

KEY POINTS

  1. RAISING CAPITAL: P is looking to raise $300M in debt, with an option for another $45M available to the primary bookrunner.  All we know is that the debt will be convertible (cash + stock); terms and covenants haven’t been settled yet.  Note that P has recently committed ~$356M in capital primarily toward ancillary ventures away from its core business; leaving $87M in net effective cash (vs. 3Q15 balance) prior to this offering. 
  2. TOO LATE? P probably should have explored this option a little earlier than 2 weeks prior to the Web IV decision.  That said, it’s not likely that the offering will be completed before then, which means P is not likely to receive favorable terms.  P already struggles to generate positive cash flow under the Pureplay rates, which expire at year end, and will likely be considerably lower than what it will have to pay in 2016.    
  3. WHAT DOES THIS MEAN? We’re not sure if this is just a buffer to get by while P tries to strike direct deals with the labels, or if it is planning to keep its foot on the gas on with the ad-supported model.  An Incremental $300M is not a lot relative to P’s content costs, which should eclipse +$500M in 2015.  For context, P could blow through nearly all of that $300M in 2016 on the rate increase alone in a worst case Web IV scenario (rates up +50%), while paying interest to do so.  That said, this loan could introduce an extra level of risk to the story depending on how P plans to run its model next year.  

 

The Web IV proceeding should be concluded by Dec 15th and announced the following day.  See below for supporting analysis on the implications of Web IV on P's business model.

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

P | Changing Its Tune (Strategic Update Call)
11/17/15 08:35 AM EST

[click here]

 

P: Can We Still Be Friends? (3Q15)
10/23/15 08:14 AM EDT

[click here]

 

P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
[click here]

 

P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
[click here]

 

P: Losing the Critical Debate? (Web IV)
04/08/15 08:53 AM EDT
[click here]


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Join Hedgeye For Holiday Cocktails & Appetizers - he client holiday party DEC2015 normal


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