On Fox Business' Mornings with Maria today, Hedgeye CEO Keith McCullough discussed why investors shouldn't buy equities on today's pullback and why he still likes the Long bond (TLT).
We'll say it again... Growth IS Slowing.
That's been our mantra here at Hedgeye for a year and a half now. As we turn the page on 2015, many on Wall Street woke up to that simple fact this morning.
Global equity markets are almost universally selling off following a contractionary PMI reading out of China coupled with last week's PMI bomb in the U.S. The Shanghai Composite Casino plunged 7% today on the manufacturing report.
Here's some analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:
"... I guess the year-end markups on no volume lost their luster – China had already devalued Yuan to a 5yr low as the economy continued to slow – today the casino in Shanghai is halted (again) at -7% on the day – the “EM/China Growth” story reminds us of Ned Stark in Game of Thrones (it died early in this cycle call and it is not coming back)"
(From our October Q4 Macro Themes presentation)
In other #GrowthSlowing news...
"Copper tagged for another -2.7% drop to kick off 2016 - friendly reminder that PMIs have not “bottomed” and the bearish credit cycle is still early relative to some of the crashes we’ve seen in commodity linked currencies, countries, and equities," McCullough wrote.
We're watching all of the data, not navel-gazing at the Dow. In addition to #GrowthSlowing, our #Deflation call in commodities, is 18 months old now too.
As the data evolves, so do our Macro calls. That's why tomorrow at 1:00pm ET McCullough is hosting our Q1 Macro Themes conference call. Ping firstname.lastname@example.org for access.
Our top theme for 2016?
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Takeaway: The TED Spread has been moving higher for a month and is now at levels last seen in Fall, 2011 (EU Sov Debt Crisis / S&P D/G US AAA).
While most of our risk monitor measures were quiet last week, the one that caught our attention this morning was the TED Spread. The TED Spread is notable both for its trajectory/trend and for its absolute level. It stands at 45 bps now, which is +5 on the week and +25 bps on the month. That's a large rise in a short span of time and brings the gauge to levels last seen in the Fall of 2011 - an environment characterized by growing angst over the risk of an EU Sovereign debt/banking crisis coupled with the fallout from S&P's downgrade of the US Credit rating.
As a reminder, the TED Spread - the spread between 3M Libor and 3M Treasuries - is the gauge of perceived systemic risk in the US banking system. In other words, it's a quantitative measure of the risks to the banking system posed by energy, EM, recession, etc. For more, see our labor note from Thursday last week (Initial Claims: Raise Shields!) highliting the recent degradation in the domestic labor market.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 12 improved / 4 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged
1. U.S. Financial CDS – Swaps were little changed for US Financials on the week.
Tightened the most WoW: ALL, WFC, MMC
Widened the most WoW: COF, PRU, ACE
Tightened the most WoW: MMC, ACE, AIG
Widened the most MoM: ALL, COF, PRU
2. European Financial CDS – Swaps mostly widened in Europe last week. Portugal's Banco Espirito Santo widened by the largest margin, by +174 bps to 862.
3. Asian Financial CDS – Swaps of Chinese and Japanese banks were uneventful last week. However, Indian bank swaps had notable moves, both widening and tightening; changes in Indian bank CDS ranged from -7 bps to +19 bps.
4. Sovereign CDS – Sovereign swaps in developed markets were little changed on the week.
5. Emerging Market Sovereign CDS – Brazilian sovereign swaps remain a major concern trading just below 500 bps.
6. High Yield (YTM) Monitor – High Yield rates fell 3 bps last week, ending the week at 9.06% versus 9.09% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1805.
8. TED Spread Monitor – The TED spread rose 5 basis points last week, ending the week at 45 bps this week versus last week’s print of 40 bps.
9. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 176 versus 175 the prior week. As compared with the prior month, commodity prices have decreased -3.8%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 3 bps to 8 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 6 basis points last week, ending the week at 1.99% versus last week’s print of 1.93%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China rose 2.2% last week, or 43 yuan/ton, to 2001 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread tightened to 122 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
We will be hosting our highly-anticipated Quarterly Macro Themes conference call on TOMORROW, January 5th at 1:00PM ET. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.
Q1 2016 MACRO THEMES OVERVIEW:
- U.S. #Recession?: Industrial activity and corporate profitability are already trending at recessionary levels. Meanwhile, domestic employment, consumption and income growth are all past peak and policy-driven deflationary pressures should persist in perpetuating soft external demand, EM distress, weak import pricing, HY credit risk and further flagging in corporate capex. We’ll contextualize the current macro data and handicap the probability of recession as the late-cycle U.S. economy traverses its steepest GDP base effects of the cycle.
- #CreditCycle: An extended breakout in corporate credit spreads has preceded recessionary periods in prior cycles, and since we introduced our deflation theme in 2H14, both high yield and investment grade spreads have marched higher off all-time lows in cross-asset volatility and all-time highs in corporate credit outstanding. In effect, we are loudly reiterating our call that the unwind of ZIRP and QE will continue to deflate the easy money credit boom it fabricated in the form of continued recessionary earnings growth as the business cycle gets dangerously long in the tooth.
- #CurrencyWar: Historically, Fed tightening cycles, #LateCycle slowdowns and #Quad3 outcomes have all been independently been bearish for the USD. As such, our expectation for a continuation of #StrongDollar commodity and asset price deflation appears misguided in the context of our dour fundamental outlook for the U.S. economy. That said, however, currencies cannot be analyzed in isolation and our proprietary analysis of the world’s top-10 economies renders the [dollar-bullish] global monetary policy divergence theme we authored well intact.
CLICK HERE to watch Keith McCullough walk through this presentation live.
- Toll Free:
- Confirmation Number: 13627300
- Materials: CLICK HERE
As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to . Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.
-The Hedgeye Macro Team
Takeaway: Bombed-out sentiment + no immediate catalysts = Cover. Question now is mgmt's commitment to diversifying its model
- BOMBED-OUT SENTIMENT: The Web IV expectation heading into the ruling amongst the sell-side was primarily calling for down to flat rates. But we now realize that the actual buy-side expectation into the ruling was more aligned with our expectation (+.20c) than the sell-side’s since Web IV rates came in about 15% higher than 2015 rates, and the stock rallied. But the rally was fairly muted, closing up 14% off a near two-year low on lower volume than its last earnings release; it lost roughly half of those gains the following day. In short, we now realize that buy-side sentiment was bombed out into the ruling, and hasn’t really improved since.
- NO IMMEDIATE CATALYST: We suspect mgmt sandbagged 4Q15 guidance to bring down 2016 estimates. Consensus is now looking for revenue growth of only 23%. The Ticketfly acquisition should provide incremental revenue growth of roughly 5%-6% based on the limited info mgmt has provided. Net-net, consensus is only looking organic revenue growth in 2016 of ~17%, which is roughly half the rate at which P has onboarded sales reps YTD in 2015. While we still expect Active Listeners to decline on y/y basis, potentially as early as 4Q15 (see notes below for supporting analysis), we can’t pinpoint the exact quarter when that happens.
- HAS THE STORY CHANGED? Our thesis heading into the Web IV ruling was that P’s ad-supported model couldn’t survive the outcome. We suspect P came to same conclusion following final arguments, and hastily took steps to diversify its model. In the following months, P acquired both Ticketfly and Rdio’s assets, and extended multiple olive branches to the major labels in the pre-1972 settlement and publishing deals with Warner and Sony. More importantly, P has continued to strike additional deals with the industry despite a favorable Web IV ruling, suggesting P may actually be committed to working toward direct/interactive licenses, and pushing into the higher ARPU/margin subscription market. If that is the case, then P could be a different story.
Let us know if you have any questions, or would like to discuss further.
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