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.
"... But can they find a way to call today’s Chart of The Day (US Industrial Production) slowing indefeasibly into a recession “transitory”? Or shall we agree to agree that this rate of change dropping to its lowest level (-1.2% year-over-year) since 2009 is called cyclical?
If we’re going to call everything cyclical “transitory”, then we’ll probably get to what most economic ideologues actually believe – that they can bend gravity – and that there is no economic cycle to concern yourself with anymore because they can smooth that too."
“Our pleasance here is all vain glory – the false world is but transitory.”
After listening to Janet Yellen yesterday, I finally realized that the difference between our economic forecasts boils down to the difference in one word. What we call cyclical, she calls “transitory.”
To give her some air time on this, the Miriam Webster Dictionary defines “transitory” as “ephemeral, momentary, fugitive, fleeting, evanescent, meaning only lasting or staying a short time.”
Sounds like yesterday’s US stock market move, not the consistently slowing US economic and corporate profit data!
Back to the Global Macro Grind…
You see, even if you aren’t paid to see, this all became very clear yesterday. Despite both the data and market signals we’ve seen develop since July, the Federal Reserve had to maintain a bullish growth and inflation “forecast” that corroborated its political action.
Now that we have that out of the way, we can get back to measuring the non-transitory economic cycle.
The best part about the “rate hike” is that rates fell on that. Yep. The long-end of the curve is falling again this morning too. With the 10yr US Treasury yield down 7 basis points to 2.23%, that’s also flattening the curve.
So, forget the transitory spike you saw in most things equities for a minute and consider the causal factor that has driven long-term interest rates Lower-For-Longer, well, for a long time – both long-term inflation and growth expectations slowing. #Demographics eh.
Instead of having an un-elected-linear-economist characterize #LateCycle indicators like employment as non-transitory and everything she didn’t forecast as transitory, what does Mr. Bond Market think about this?
- Long-term rates are falling, despite a transitory rate hike
- The Yield Spread (10yr minus 2yr) just flattened to a YTD low of 123bps
- Credit Spreads continue to signal a classic cyclical breakout
Yes, we get that people are in the business of seeing stock prices rise into year-end. There are only 2 weeks left to get the Russell 2000 back to break-even. So you’ll need to get the sell-side to make up a narrative for a transitory +5% rally (from here) to get there.
They can be very creative.
But can they find a way to call today’s Chart of The Day (US Industrial Production) slowing indefeasibly into a recession “transitory”? Or shall we agree to agree that this rate of change dropping to its lowest level (-1.2% year-over-year) since 2009 is called cyclical?
If we’re going to call everything cyclical “transitory”, then we’ll probably get to what most economic ideologues actually believe - that they can bend gravity – and that there is no economic cycle to concern yourself with anymore because they can smooth that too.
But, if gravity fans just call cycles what they are – we won’t blow up our net wealth at every turn of every #LateCycle slow-down. Since the Federal Reserve has NEVER proactively predicted a recession, I’m thinking we stay with mother nature.
Back to tightening into a cyclical (and secular/demographic) slowdown…
- That’s US Dollar bullish
- That’s Bond Yield bearish
- When USD is RISING and UST Rates are FALLING, that’s deflationary
Mr. Macro Market nailed that yesterday too. It appears that he believes the inaccuracy of Janet’s forecasting process is inherent and unchallengeable. How else can you explain yesterday’s market reaction?
- Utilities (XLU) led gainers, closing up +2.5%
- Housing Stocks (ITB) came in 2nd place on the day, +2.4%
- Oil & Gas Stocks (XOP) led losers, deflating another -2.2%
As the legendary Herb Brooks would have said to Janet, “Again!”
On a historic day where the Fed “raised” into a both an industrial recession and corporate profit slow-down (hasn’t happened since 1967), Lower-For-Longer rate proxies rallied, credit did nothing, and commodities continued to crash.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.13-2.33%
Oil (WTI) 34.09-37.26
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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Client Talking Points
While there have been plenty of “reflation” and relief rallies across asset classes throughout 2015, the #1 thing to have stayed with from a TREND perspective is #StrongDollar and its deflationary force on bubbled up asset classes. What the Fed did (and maintained) in their dead-wrong growth forecast was keep a USD super spike > $100 on the USD Index in play.
Interestingly, but not surprisingly, that’s exactly how the macro market read the Fed’s hawkish statement – dovishly on growth! The CRB Index hit a fresh new low on the “news”, Oil (and its related equities) continued to crash, and Credit Spread risk didn’t change from a bearish TREND perspective either. Copper and Oil are down another -1% each this morning.
We thought they “raised rates”? This is what we mean by the market read-through being dovish on growth – UST 10YR is down -7 basis points this morning, Yield Spread (10s minus 2s) testing its year-to-date low at +123 basis points, and Utilities (XLU) led the relief rally +2.5% on the day!
*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE.
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Top Long Ideas
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.
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.
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
REPLAY | Fed Day Live with Hedgeye CEO Keith McCullough https://app.hedgeye.com/insights/48087-fed-day-live-with-hedgeye-ceo-keith-mccullough-wednesday-at-2-10pm-et… via @hedgeye
QUOTE OF THE DAY
Time and tide wait for no man.
STAT OF THE DAY
A new study found that heads of state lived 2.7 fewer years than the opponents they beat.
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
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10-Year U.S. Treasury Yield
Nikkei 225 Index
German DAX Composite
U.S. Dollar Index
Light Crude Oil Spot Price
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Copper Spot Price
Kinder Morgan Inc.
Valeant Pharmaceuticals, Inc.
Takeaway: We were looking at Web IV as the last leg to our short, but it didn't go our way. We’re evaluating the position from here
- THIS TIME REALLY WAS DIFFERENT: The CRB ruled for a bifurcated rate structure, which took us by surprise since there is no historical precedent for a dual rate structure outside of the Merlin or Pureplay agreement, and P was the only involved party requesting such a rate structure. The 2016 Web IV ad-supported/subscription per-track rates for 2016 are .17c/.22c vs. .14c/.25 under the Pureplay Rates, which translate to an effective rate of .18 for 2016 vs. the .23 that the Web III remand CRJs (same as Web IV CRJs) ruled for the 2015 period. In short, Web IV is massive reset off Web III.
- WEB IV ≠ POWDER KEG: The 2016 Web IV blended effective rate is .18c vs. .15c under the Pureplay Rates that P is paying today; translates to a manageable ~15% increase in royalty rates. P will continue to pay lower ad-supported rates (vs. subscription), which is how P structured its model. In short, the structure of the Pureplay agreement is largely intact, but the Web IV rate structure has essentially shifted more of P's margin profile further away from the ad-supported business into the subscription business.
- NOW WHAT? We were looking at Web IV as the last leg of our short. We wouldn't necessarily look at the pre-market squeeze/relief rally as a short opportunity since P would still be trading at basically a 2-yr low. We'll be monitoring consensus estimates to decide what to do with the position from here.
Let us know if you have any questions or would like to discuss further.
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