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The Macro Show Replay | December 16, 2015

 


December 16, 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
2.36 2.12 2.28
SPX
S&P 500
2,003 2,060 2,043
RUT
Russell 2000
1,105 1,163 1,131
COMPQ
NASDAQ Composite
4,901 5,045 4,995
NIKK
Nikkei 225 Index
18,498 19,203 18,565
DAX
German DAX Composite
10,145 10,683 10,450
VIX
Volatility Index
17.98 25.21 20.95
DXY
U.S. Dollar Index
97.01 99.54 98.22
EURUSD
Euro
1.06 1.10 1.09
USDJPY
Japanese Yen
120.34 123.67 121.69
WTIC
Light Crude Oil Spot Price
34.08 37.97 36.74
NATGAS
Natural Gas Spot Price
1.76 2.01 1.81
GOLD
Gold Spot Price
1,051 1,086 1,060
COPPER
Copper Spot Price
1.99 2.10 2.05
AAPL
Apple Inc.
109 116 110
AMZN
Amazon.com Inc.
641 681 658
GOOGL
Alphabet Inc.
747 782 760
FB
Facebook Inc.
102 107 104
VRX
Valeant Pharmaceuticals, Inc.
85.99 114.13 109.59
KMI
Kinder Morgan Inc.
13.53 17.66 15.84

 

 


Rates, Italy and Oil

Client Talking Points

RATES

Both locally and globally 10YR Yields are higher into the event risk. The UST 10YR is at 2.27% with an immediate-term risk range of 2.13-2.36%; the Swiss 10YR is up +19 basis points month-over-month (off all-time lows) to -0.17%; Italian and German 10YR Yields are up +11 basis points month-over-month.

ITALY

Italy is starting to diverge (bearishly) vs. DAX on a more consistent basis with the MIB index down -0.2% in a muted “green” European tape – keep this on your radar as Italy is a Top 10 GDP economy in the world and heading back into recession in 1H 2016.

OIL

Pre Fed hike = Dollar Up, Oil Down another -1.1% as raising rates into a slow-down is deflationary. Another important signal is that the top-end of my risk range for WTI is lower than the AUG closing lows; with the OVX at 50, that’s super bearish!

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE. Also don't miss today's Fed Day Live at 2:10PM ET with Keith and Darius Dale - CLICK HERE.

Asset Allocation

CASH 74% US EQUITIES 2%
INTL EQUITIES 4% COMMODITIES 0%
FIXED INCOME 12% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
MCD

MCD remains one of our top LONG ideas in the restaurants space. All indications are that all day breakfast is working, bringing back old customers and driving growth of new customers. Customers are pairing both breakfast and lunch items together in the lunch and dinner day, part which is helping drive additional sales.

 

McDonald’s Canada opened its first standalone McCafe this month. The much simplified concept intends to appeal to customers by offering both speed of service and low cost. They intend to be faster than their main competitor Tim Hortons and cheaper than Starbucks, carving out their own niche in the market.

RH

This RH quarter is going to draw a Mason Dixon line between the Bulls and the Bears. The key factors that the Bulls (including us) need to see were profoundly present – giving us confidence that revenue will double, that we’ll see a 16% operating margin, and $11 in earnings power. In addition, RH beat the quarter, delivered 33% EPS growth in what should be the slowest growth quarter of the year, and it took up 4Q revenue guidance based on what it’s seeing so far this quarter (to 20%+).

 

The Bears got a nice little gift in the form of weaker Gross Margins due to promotional activity, and renewed concerns about management. The reality is that this is a transformational growth story that will change on the margin more often than it doesn’t. Based on our confidence in the earnings power at play here, we’d use any weakness as an opportunity to buy.

TLT

Implicit in our long TLT/short JNK bias is an expectation for high-yield spreads to continue along their recent trend of widening throughout the YTD.

 

“The U.S. economy is #LateCycle and the probability of a recession commencing by mid-2016 is extremely elevated – both in absolute terms and relative to the belief held by the overwhelming majority of investors and policymakers. Moreover, the risk of a global recession is also great in this scenario.”

 

The economic cycle doing what it always does (i.e. decelerate into a recession before bottoming and then reaccelerating) is reason enough to be bullish on the long bond and bearish on junk bonds, which are accelerating into full-blown crisis mode (the JNK ETF declined another -2% on Friday and is down -4.1% WoW, -5.8% MoM and -12.7% YTD).

Three for the Road

TWEET OF THE DAY

VIDEO (2mins) Whoops! A Look Back At Some of Wall Street’s Worst Predictions This Year https://app.hedgeye.com/insights/48095-whoops-a-look-back-at-some-of-wall-street-s-worst-predictions-this-ye

@KeithMcCullough

QUOTE OF THE DAY

Know the value of time. Snatch, seize, and enjoy every minute of it.

Lord Chesterfield

STAT OF THE DAY

Kohl’s will keep its doors open for more than 170 hours straight from 7am on Thursday, December 17 through 6pm on Christmas Eve, that is up from 100 hours last year.


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Best Ideas Call Invite | WisdomTree (WETF) - Not So Smart Beta

Takeaway: We will be hosting our latest deep dive BlackBook presentation tomorrow Thursday, December 17th at 11am EST.

watch the replay below.

 

We will be hosting our next BlackBook presentation tomorrow Thursday, December 17th at 11am EDT on asset manager WisdomTree (WETF). Our presentation will outline how there is substantial unrecognized risk in this high growth story:

 

  • Concentration Risk: The firm has the most concentration risk in the industry to its top two products, the HEDJ and the DXJ. Both of these international hedged products underperform benchmark in local terms and thus the main value proposition is that FX hedges offset their beta construction weaknesses. While the firm has cut its teeth on its innovative fundamental benchmarking process, our analysis finds consistent underperformance across most of its strategies. 
  • Dollar Risk: Because both HEDJ and DXJ are dependent on Dollar strength for returns, investors have embedded leverage to the fate of the U.S. currency. Our research shows that the dollar appreciates BEFORE rate hikes, but DECLINES after. Moreover, the dollar is a consensus long and there are numerous reasons to expect it to slow its rate of ascent. Currently the U.S. currency has put in a 3 standard deviation move within a 10 year period and has hit its +20% Y/Y rate of change, a key resistence level. 
  • New Product Risk: We see new product introduction waning as FX hedged products are successful to the extent that a cheap currency hedge is available. Only the Swiss Franc, the Euro, and the Japanese Yen are viable candidates for hedged equity products considering current interest rate differentials and liquidity, which means the firm has already launched its most successful funds.
  • Estimate Risk: WETF used to rely solely on its EM and fixed income products however those are in double digit decline now. Outside of the two important international hedged products the franchise is decaying its AUM by -4% Y/Y. The Street continues to have substantial expected growth for HEDJ and DXJ but this is risky considering local underperformance outside of FX gains. Our 2017 estimates are -25% below the Street and we see a high probability of the firm missing Consensus' lofty expectations.

 

CALL DETAILS - Thursday, December 17th at 11 am EST

  • Toll Free Number:
  • Toll Number:
  • Conference Code: 13626744
  • To Automatically add to your Outlook Calendar Click HERE
  • For Associated Materials Click HERE

 

Jonathan Casteleyn, CFA, CMT 
 
 

Joshua Steiner, CFA


Quantifying Why the Fed Is Wrong On Its Outlook For Inflation

Takeaway: The Fed is conflating what we view as a short-lived trough in reported inflation with a sustainable bottom in structural inflation trends.

This morning we received the NOV CPI report from the BLS; the big-picture takeaways are as follows:

 

  • Headline CPI came in at +0.5% YoY and is now accelerating on a sequential, trending and quarterly average basis; +0.5% represents the fastest YoY rate of change since DEC ’14.
  • Core CPI (i.e. excluding food and energy) came in at +2.0% YoY and is now accelerating on a sequential, trending and quarterly average basis; +2.0% represents the fastest YoY rate of change since FEB ’13.
  • Within Core CPI, the divergence between Goods and Services Inflation remains ongoing:
    • Core Goods Inflation accelerated +10bps to -0.6% YoY in NOV, but is still decelerating on a trending and quarterly average basis.
    • Core Services Inflation also accelerated +10bps in NOV and is accelerating on a sequential, trending and quarterly average basis. The current +2.9% YoY rate of change represents the fastest rate of Core Services Inflation since NOV ’08.
  • The strength in the U.S. dollar (up +10.9% YoY on a trade-weighted basis) continues to perpetuate the considerable divergence between Goods and Services Inflation, with Import Prices contracting -9.4% YoY in NOV.
    • Absent a material rip higher in the USD over the next few months, Import Price trends should continue their trending acceleration back towards 0% over the next couple of quarters in light of the dollar’s steep base effects.

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CPI

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CORE CPI

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CORE GOODS CPI

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CORE SERVICES CPI

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - Trade Weighted U.S. Dollar Index YoY   Change

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - IMPORT PRICES

What does this all mean for the U.S. consumer? For one, the pickup in Headline CPI in conjunction with the deceleration in Average Hourly Earnings means Real Wage Growth slowed to +1.6% YoY in NOV, which represents the slowest rate of change since NOV ’14. Moreover, Real Wage growth is now decelerating on a sequential, trending and quarterly average basis.

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - REAL WAGES

 

Thinking about CPI trends in the context of what the U.S. consumer is forced to spend money on just to survive, the Inflation Rate of “Everyday Essentials” remains rather muted at +0.2% YoY, but is now decidedly accelerating on a sequential basis and back above its TTM average for the first time since OCT ’14. As we’ve often said, everything that matters in Macro occurs on the margin.

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CPI ESSENTIALS

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CPI ESSENTIALS PLOT

 

It’s worth noting that the aforementioned +0.2% YoY figure is simply the weighted average inflation rate of the following CPI indices, scaled according to their respective shares of Aggregate PCE per the 2014 BLS Consumer Expenditure Survey (weights in brackets):

 

  • Rent (19.6% of Aggregate PCE; 37.6% of our proprietary “Essentials” Basket) Inflation decelerated sequentially to +3.19% YoY in NOV;
  • Food (12.6% of Aggregate PCE; 24.2% of our proprietary “Essentials” Basket) Inflation decelerated sequentially to +1.27% YoY;
  • Healthcare (8% of Aggregate PCE; 15.4% of our proprietary “Essentials” Basket) Inflation accelerated sequentially to +3.08% YoY;
  • Utilities (7.3% of Aggregate PCE; 14.0% of our proprietary “Essentials” Basket) Inflation accelerated sequentially to +2.64%; and
  • Gasoline (4.6% of Aggregate PCE; 8.8% of our proprietary “Essentials” Baskets) Inflation accelerated sequentially to -24.08% YoY.

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CPI RENT

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CPI FOOD

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CPI MEDICAL SERVICES

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CPI UTILITIES

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CPI GASOLINE

 

Looking ahead, it’s worth stressing that the next four quarters of base effects for Real PCE growth are the toughest since the four-quarters ending in 3Q08 and the next four quarters of base effects for Headline CPI are the weakest since the four quarters ended in 4Q11. Recall that Real PCE growth decelerated sharply from +2.7% YoY in AUG ’07 to -1.2% in SEP ’08 and Headline CPI recorded a massive acceleration from +1.1% YoY in NOV ’10 to +3.9% in SEP ’11.

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - Real PCE Comps Chart

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CPI COMPS

 

While base effects for Real GDP recede ever-so-slightly in 1Q16 – effectively implying the domestic industrial recession may bottom here in 4Q16 absent incremental #StrongDollar #Deflation – a continuation of the trending deceleration in Real PCE growth makes its appropriate to forecast a continuation of the marginal stagflation that is #Quad3 through 1Q16 – especially in the context of our #SecularStagnation and #LateCycle themes. Moreover, a return to #Quad4 by 2Q16 is equally as likely per our model.

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - UNITED STATES

 

Even still, it would behoove us to point out that the lack of sequential momentum in the series implies a rather muted acceleration in Headline CPI over the intermediate term. Moreover, the tight relationship between Headline CPI and the YoY rate of change in the CRB Index (r = +0.82 since JAN ’08 and +0.93 on a trailing 3Y basis) would seem to imply the former index is unlikely to sustainably breach +1.5% before returning to persistent disinflation in 1H16.

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - CRB YoY vs. CPI YoY

 

Viewing domestic inflation dynamics through a wider lens, we see that 5Y 5Y-Forward Breakeven Rates have fallen -38bps over the past 6M to 1.7% (-30bps shy of the Fed’s +2% target for Core PCE) despite every benchmark category of high-frequency growth and inflation indicators confirming the aforementioned #Quad3 setup. As such, we continue to signal risk of the Fed tightening monetary policy into an obvious #LateCycle Slowdown. Any investor who does not consider that scenario to be both highly and increasingly probable at this point is being willfully blind to recent developments in the high-yield credit market.

 

Quantifying Why the Fed Is Wrong On Its Outlook For Inflation - U.S. Economic Summary

 

Is the Fed conflating what we view as a short-lived trough in reported inflation with a sustainable bottom in structural inflation trends? We think so.

 

As such, we reiterate the factor exposure recommendations we outlined at the conclusion of our 12/9 Early Look titled, “Conviction Sells” (CLICK HERE to review). The biggest risk to our thesis isn’t whether or not we are “too bearish”, but rather if we are Bearish Enough to the extent a continuation of our G3 policy divergence theme is responsible for perpetuating incremental #Quad4 #Deflation in market price and global growth terms.

 

Please feel free to email us with questions, comments or concerns. Best of luck out there,

 

DD

 

Darius Dale

Director


Cartoon of the Day: Great Expectations?

Cartoon of the Day: Great Expectations? - FED cartoon 12.15.15

 

"... If the Federal Reserve was running a hedge fund, and they’re so convicted in the idea that #Deflation is “transitory” and the US economy isn’t slowing, why not go for the jugular tomorrow and raise rates by 50 basis points," Hedgeye CEO Keith McCullough wrote in today's Early Look.


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