prev

CHART OF THE DAY: New Bullish Narrative = Fed Hikes Into Downturn?

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.

 

"... Finally, since some of the perma bulls are now saying that everything they missed is “priced in”, here’s what sentiment looks like from a net positioning perspective (CFTC non-commercial futures and options):

  1. SP500 (Index + Emini) net SHORT position just closed at its LOWEST level in 3 months (-55,366 net short contracts)
  2. US Dollar net LONG position just came in at its LOWEST level this month (+36,858 net long contracts)"

 

CHART OF THE DAY: New Bullish Narrative = Fed Hikes Into Downturn? - 12 21 15Chart of the Day


Experiment or Demonstration?

“With us flying is not an experiment; it is a demonstration.”

-Wilbur Wright

 

Chapter 9 of what I think is one of the best non-fiction books of the year, The Wright Brothers, by David McCullough, is called “The Crash.” What I like most about this amazing story of American innovation is the obsession and objectivity of the #process:

 

“People think I am foolish because I do not like men to do the least important work on the machine. They say I crawl under the machine when the men could do the thing well enough. I do it partly because it gives me opportunity to see if anything in the neighborhood is out of order.”

-Wilbur Wright (pg 195)

 

As we move into the final weeks of 2015, it’s still very obvious that the Federal Reserve’s grand experiment has generated forecasts that are very much out of order. Both market prices and their commensurate volatilities demonstrated that again during last week’s “rate hike.”

Experiment or Demonstration? - Fed forecast cartoon 11.13.2015

 

Back to the Global Macro Grind

 

Trying to “demonstrate strength” by raising interest rates into a slow-down revealed the #1 weakness of the macro market last week. It’s called #Deflation. No, it’s not “transitory.” It’s been pervasive.

 

Here’s how that looked in #StrongDollar terms:

 

  1. US Dollar Index +1.2% on the week to +9.3% YTD
  2. Canadian Dollar -1.3% on the week to -16.6% YTD
  3. Brazilian Real -2.7% on the week to -33.4% YTD
  4. CRB Commodities Index -1.5% on the week to -25.1% YTD
  5. Oil (WTI) -3.0% on the week to -42.4% YTD
  6. Copper -0.4% on the week to -25.5% YTD

 

And that’s just a small but impactful snapshot of what is happening underneath the hood of the Global Macro market’s machine. Whether you’re a Brazilian farmer or a Canadian miner, you get it. Yep. That’s “ex-Energy.”

 

If you have friends who still aren’t yet aware of modern day macro and how experimental central-plannings impact Foreign Currencies, Commodities, and Credit markets, please send them a Hedgeye Macro subscription for Christmas!

 

With the SP500 dropping -3.3% in the 2 days following the Fed’s experiment, this is what happened from an Equity Sector Style perspective:

 

  1. Basic Material Stocks (XLB) -3.8% on the week
  2. Energy Stocks (XLE) -2.8% on the week
  3. Utilities (XLU) +1.7% on the week

 

Yep. Same signal. When the USD ramps and rates fall, Utilities rally and #Deflation (Energy and Basic Materials) continues.

 

This macro reality continues to get priced into the non-Energy Style Factors of the US stock market:

 

  1. HIGH BETA stocks dropped another -2.0% last week to -15.3% YTD
  2. SMALL CAP stocks deflated another -1.5% last week to -15.9% YTD
  3. HIGH DEBT stocks dropped another -0.7% last week to -13.8% YTD

*mean performance of Top Quartile vs. Bottom Quartile (SP500)

 

And from a Sales and Earnings perspective (SP500 companies):

 

  1. SALES: bottom 25% Sales Growers fell another -1.4% last week to -15.5% YTD
  2. EARNINGS: bottom 25% Earnings Growers deflated another -1.0% to -15.7% YTD

 

That’s why stock pickers finally agree that #GrowthSlowing is as good a macro call as #Deflation has been. In a slowing growth environment, companies that are growing are getting more expensive. Meanwhile “cheap” companies that miss numbers continue to get cheaper.

 

Finally, since some of the perma bulls are now saying that everything they missed is “priced in”, here’s what sentiment looks like from a net positioning perspective (CFTC non-commercial futures and options):

 

  1. SP500 (Index + Emini) net SHORT position just closed at its LOWEST level in 3 months (-55,366 net short contracts)
  2. US Dollar net LONG position just came in at its LOWEST level this month (+36,858 net long contracts)

 

To put both of those positions in context, the 3-month average net SHORT position in SP500 is -160,851 and the 3-month average net LONG position in US Dollars is +41,879.

 

Maybe that’s why Mr. Market demonstrated that the Long USD and Short SPY position didn’t crash last week. The Fed’s credibility did.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.12-2.32%

SPX 1
RUT 1104--1157

VIX 17.84-24.83
USD 97.68-99.41
Oil (WTI) 34.24-37.98

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Experiment or Demonstration? - 12 21 15Chart of the Day


Perpetuating #Deflation

Client Talking Points

VIX

With the S&P 500 down -3.6% for DEC, front-month VIX is back up at 20.70 – more importantly, it’s risk range is now 17.84-24.83 and this breakout on our TREND duration has been brutal for High Beta as a Style Factor, which was down another -2% last week.

SPAIN

Spain is down hard in a generally up tape for European Equities this morning. Post the Spanish election the IBEX is down -2% (-7.5% in the last month) while the 10YR Yield for Spain is up +11 basis points to 1.80%; we still think ECB President Mario Draghi wants to snap Euro $1.05 vs. USD.

OIL

Oil is down another -0.6% this morning to $34.49 after deflating another -3% last week.  #Deflation is not “transitory”, it’s been pervasive and since the U.S. is in an industrial recession right now, it’s finding its way into revenues/earnings for 1H 2016.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 69% US EQUITIES 2%
INTL EQUITIES 4% COMMODITIES 0%
FIXED INCOME 15% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
FII

Federated Investors (FII) profitability got a boost last week as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.

 

In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.

 

In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.

RH

We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer last week. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.

 

But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.

TLT

Now that the Fed finally hiked federal funds by 25 basis points into a late-cycle slowdown, the fact that TLT was up 1.8% (Wed-Fri.) on “lift-off” should be concerning to the growth accelerating bulls. After the dovish hike, the U.S. Treasury 10-Year Yield (THE GROWTH EXPECTATION PROXY) was down 10 basis points (2.3% to 2.2%). And yes, the most telegraphed rate hike ever was dovish.

 

Just look at the Fed’s projections and the language in the FOMC's statement. Yellen, essentially, acknowledged what we have said for ~ a year and a half now:

  • “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”
  • “Market-based measures of inflation expectations remain low; some survey-based measures of longer-term inflation expectations have edged down”
  • “Net exports have been soft”
  • ... And on the Fed’s forward-looking economic projections:
  • The Fed kept 2016 GDP estimates unchanged, and downwardly revised 2017 to 2.0-2.3% from 2.0-2.4%.
  • 2016 PCE Inflation was downwardly revised to 1.2-1.5% from 1.5-1.8%. 

Three for the Road

TWEET OF THE DAY

The Playbook (when it mattered) | Fed Day Live with Hedgeye CEO Keith McCullough https://app.hedgeye.com/insights/48171-must-see-fed-day-live-with-hedgeye-ceo-keith-mccullough

@KeithMcCullough

QUOTE OF THE DAY

A stumbling block to a pessimist is a stepping stone to an optimist.

-Eleanor Roosevelt              

STAT OF THE DAY

764 million TVs worldwide were tuned in for a minute or more of the final 2015 Women’s World Cup, it is also the most watched soccer broadcast ever in the U.S.


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Investing Ideas - Levels

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.

 

Have a great weekend.

LEVELS

Investing Ideas - Levels - 12 20 2015 10 18 13 AM

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

MUST SEE | Fed Day Live with Hedgeye CEO Keith McCullough

Interestingly, but not surprisingly, the macro market read the Fed’s hawkish statement as dovish on growth. 

 

In case you missed it... 

Outspoken Hedgeye CEO Keith McCullough hosted a live, in-depth discussion following the FOMC announcement Wednesday. In this no-punches-pulled analysis, Keith gives some valuable historical context and answers viewer questions. Watch the replay and learn how to position your portfolio going forward.

 

 

 


The Week Ahead

The Economic Data calendar for the week of the 21st of December through the 25th of December is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

The Week Ahead - 12.18.15 Week Ahead


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.

next