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Real Conversations: A Paradigm Shift In Private Equity

Is the cloistered world of private equity opening up to more modest investors? In this recent Real Conversations interview, Hedgeye CEO Keith McCullough sits down with former Goldman Sachs partner Lawrence Calcano, a managing partner of the private equity platform iCapital Network. Calcano discusses how his firm’s technology offers private equity funds to wealth managers, registered-investment advisors and family offices who wouldn’t otherwise have enough scale to access them. 


Cartoon of the Day: Meow!

Cartoon of the Day: Meow! - Deflation cartoon 12.17.2015

 

"Investors who haven't understood our #Deflation call (for the past 18 months) got sucked into yesterday's transitory stocks market rally," Hedgeye CEO Keith McCullough wrote earlier today.


Meltdown: Jobs Market In U.S. Energy States

Takeaway: Energy jobs are sliding off the cliff into the abyss. Our energy tracker spread broke to a new higher high in the latest week.

Editor's Note: Below is an excerpt from an institutional research note from our Financials team today with an update to their previous note on energy-dependent state jobless claims. For more information on how you can become a subscriber please send an email to sales@hedgeye.com.

 

Meltdown: Jobs Market In U.S. Energy States - Oil cartoon 12.08.2015

 

The jobs market in energy states remains in accelerating meltdown. With energy companies set around year end to lose the last remaining cushion of their previously established hedges, job cuts in the 8 states with the most energy-dependent economies (AK, LA, NM, ND, OK, TX, WV & WY) are blowing out versus the rest of the country.

 

The chart below shows that in the week ending December 5, the spread between the indexed series of claims in energy states versus the indexed series of claims in the country as a whole increased from 47 to 51. That is the largest the spread has been since our analysis' May 2014 starting point. 

 

Meltdown: Jobs Market In U.S. Energy States - Claims18

 

Last week, we were asked why we didn't include the state of Colorado in our 8-state basket. Our response was that our basket was borne out of this article, which showed the 8 states with the highest energy-related employment as a % of total as of 2011.

 

We were then sent an interesting paper detailing the exposure of Denver to the oil and gas industry. In a nutshell, 11% of downtown Denver's workforce is employed in the oil and gas industry at an average level of compensation roughly 3x the rest of the workforce. From 2005-2014, one-third of the new jobs created in the downtown Denver area were oil and gas jobs. The point here is that while these 8 states represent some gauge of the fallout from energy's collapse, there are many other areas that are being impacted.

 

Apart from the carnage in energy claims, national claims data continues to show that the economy is late stage and the Fed's rate increase yesterday is unlikely to extend the duration of the recovery. 


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INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES

Takeaway: Energy jobs are sliding off the cliff. Our energy tracker spread broke to a higher high in the latest week.

Below is the breakdown of this morning's labor data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims1 2

 

ENERGY JOBS

The jobs market in energy states remains in accelerating meltdown. With energy companies set around year end to lose the last remaining cushion of their previously established hedges, job cuts in the 8 states with the most energy-dependent economies (AK, LA, NM, ND, OK, TX, WV & WY) are blowing out versus the rest of the country. The chart below shows that in the week ending December 5, the spread between the indexed series of claims in energy states versus the indexed series of claims in the country as a whole increased from 47 to 51. That is the largest the spread has been since our analysis' May 2014 starting point. 

 

Last week we were asked why we didn't include the state of Colorado in our 8-state basket. Our response was that our basket was borne out of THIS article, which showed the 8 states with the highest energy-related employment as a % of total as of 2011. We were then sent an interesting paper detailing the exposure of Denver to the oil and gas industry. In a nutshell, 11% of downtown Denver's workforce is employed in the oil and gas industry at an average level of compensation roughly 3x the rest of the workforce. From 2005-2014, one-third of the new jobs created in the downtown Denver area were oil and gas jobs. The point here is that while these 8 states represent some gauge of the fallout from energy's collapse, there are many other areas that are being impacted. If you'd like a copy of the paper (PDF) just let us know.

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims18

 

Apart from the carnage in energy claims, national claims data continues to show that the economy is late stage and the Fed's rate increase yesterday is unlikely to extend the duration of the recovery. 


THE BIG PICTURE

Some might argue that, as the first chart below shows, a cycle usually has significant track left following its first rate hike. However, while the Fed announcement this week marks the first increase in the fed funds rate this cycle, the Fed has actually been tightening policy for some time, ostensibly since late 2013 when it began tapering QE3. The Fed actually quantifies the effect of the current cycle's non-traditional policy action and the tapering thereof in the second chart below with a measure called the Wu-Xia Shadow Fed Funds Rate (HERE). The Shadow Rate is basically the rate the Fed has set by implementing non-traditional policies. The following chart shows that we have been in a rising rate environment since April, 2014 and the effective Fed Funds rate has risen ~300 bps to 0% from -3%. This is one of the main reasons why a) growth is now slowing and b) the cycle is late stage.

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims13

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims12

 

The Data

Initial jobless claims fell 11k to 271k from 282k WoW as the prior week's number was not revised. The 4-week rolling average of seasonally-adjusted claims fell -0.25k WoW to 270.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.3%

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims2 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims3 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims4 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims5 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims6 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims7 normal  1

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES

Takeaway: Energy jobs are sliding off the cliff into the abyss. Our energy tracker spread broke to a new higher high in the latest week.

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims1 2

 

ENERGY JOBS

The jobs market in energy states remains in accelerating meltdown. With energy companies set around year end to lose the last remaining cushion of their previously established hedges, job cuts in the 8 states with the most energy-dependent economies (AK, LA, NM, ND, OK, TX, WV & WY) are blowing out versus the rest of the country. The chart below shows that in the week ending December 5, the spread between the indexed series of claims in energy states versus the indexed series of claims in the country as a whole increased from 47 to 51. That is the largest the spread has been since our analysis' May 2014 starting point. 

 

Last week we were asked why we didn't include the state of Colorado in our 8-state basket. Our response was that our basket was borne out of THIS article, which showed the 8 states with the highest energy-related employment as a % of total as of 2011. We were then sent an interesting paper detailing the exposure of Denver to the oil and gas industry. In a nutshell, 11% of downtown Denver's workforce is employed in the oil and gas industry at an average level of compensation roughly 3x the rest of the workforce. From 2005-2014, one-third of the new jobs created in the downtown Denver area were oil and gas jobs. The point here is that while these 8 states represent some gauge of the fallout from energy's collapse, there are many other areas that are being impacted. If you'd like a copy of the paper (PDF) just let us know.

 

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims18

 

Apart from the carnage in energy claims, national claims data continues to show that the economy is late stage and the Fed's rate increase yesterday is unlikely to extend the duration of the recovery. 


THE BIG PICTURE

Some might argue that, as the first chart below shows, a cycle usually has significant track left following its first rate hike. However, while the Fed announcement this week marks the first increase in the fed funds rate this cycle, the Fed has actually been tightening policy for some time, ostensibly since late 2013 when it began tapering QE3. The Fed actually quantifies the effect of the current cycle's non-traditional policy action and the tapering thereof in the second chart below with a measure called the Wu-Xia Shadow Fed Funds Rate (HERE). The Shadow Rate is basically the rate the Fed has set by implementing non-traditional policies. The following chart shows that we have been in a rising rate environment since April, 2014 and the effective Fed Funds rate has risen ~300 bps to 0% from -3%. This is one of the main reasons why a) growth is now slowing and b) the cycle is late stage.

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims13

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims12

 

 

The Data

Initial jobless claims fell 11k to 271k from 282k WoW as the prior week's number was not revised. The 4-week rolling average of seasonally-adjusted claims fell -0.25k WoW to 270.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.3%

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims2

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims3

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims4

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims5

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims6

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims7

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims8

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims9

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims10

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims11

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims19

Yield Spreads

The 2-10 spread was unchanged WoW at 130 bps. 4Q15TD, the 2-10 spread is averaging 138 bps, which is lower by -15 bps relative to 3Q15.

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims15

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


INSTANT INSIGHT | Recessionary Data Is Not "Transitory"

Takeaway: The latest round of economic data is the "cycle" rolling over. No, it's not "transitory."

INSTANT INSIGHT | Recessionary Data Is Not "Transitory" - fed in a box

 

We think you deserve the truth.

 

Yesterday, the divide between truth and economic storytelling stretched to the point of ridiculousness. Between the Fed, Old Wall and the mainstream media we just don't know what to say anymore.

 

Forget this troika of economic storytellers. Here's the reality that the market told us yesterday as summarized by Hedgeye CEO Keith McCullough in a note to subscribers earlier this morning:   

 

"Wait ... I thought they 'raised rates' yesterday? This is what I mean by the market read-through being dovish on growth – UST 10yr down -7bps this morning, Yield Spread (10s minus 2s) testing YTD low at +123bps, and Utilities (XLU) led the relief rally +2.5% on the day!"

 

INSTANT INSIGHT | Recessionary Data Is Not "Transitory" - treausry 10yr

 

The fact that #LowerForLonger rate proxies rallied yesterday — i.e. XLU and Housing stocks (ITB) — while credit did nothing and commodities continued to crash — see Oil and Dr. Copper below — confirms what we've long argued about growth, namely the Fed just hiked into an industrial and corporate profit slowdown.

 

INSTANT INSIGHT | Recessionary Data Is Not "Transitory" - CRB crash

INSTANT INSIGHT | Recessionary Data Is Not "Transitory" - oil fed

INSTANT INSIGHT | Recessionary Data Is Not "Transitory" - copper fed

 

Yellen & Co. continues to assert that these #LateCycle indicators are "transitory." While crashing industrial production or sustained deflation may appear "transitory" to the academic central planners in Washington, other Americans would likely disagree.

 

Talk to the 10,000 workers at Caterpiller (CAT) who are projected to lose their jobs in the coming year. Or ask a cattle rancher — beef cattle prices are off more than 25% this year — whether these factors feel "transitory" or not. We are confident that you'll hear a much different story. 

 

Clearly, we disagree with the Fed. We think there's a more apt term for the recent spate of data that's been rolling over since the beginning of the year. It's cyclical. This data is undoubtedly cyclical and falling off its peak. 

 

Of course, time will tell but we're sticking with our original conviction perhaps best articulated by Hedgeye Senior Macro analyst Darius Dale during our coverage of the Fed yesterday:

 

“This is the most obvious slow-moving economic train wreck that we’ve ever seen.” 

 

And that's not transitory...

 

To hear more economic truths (with tons of analysis) from McCullough and Dale on the Fed's economic storytelling, click here to watch a replay of our post-FOMC coverage yesterday.   


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