prev

Denial To Acceptance: The Fed Stumbles Through The 5 Stages Of Grief

Takeaway: Despite the Fed's rosy economic narrative, the preponderance of economic data is rolling over.

We're not psychologists here at Hedgeye. But one thing seems increasingly clear to us following yesterday's FOMC statement. It appears the Fed is grieving the loss of economic momentum, but denying the reality of unfolding economic data. 

 

Denial To Acceptance: The Fed Stumbles Through The 5 Stages Of Grief - fed five stages of grief

 

The likelihood is rising that we enter a full-blown recession in Q2 or Q3 of this year. That's been our Macro call and we're sticking with it.

 

 

Back to Kübler-Ross...

 

First, the Fed will be forced to reconcile that everything they have predicted in the past year is wrong. It's a tough pill to swallow. As Hedgeye CEO Keith McCullough writes in today's Early Look:

 

"... the Reputational Bubble that is popping is that of an un-elected and un-accountable bureaucracy called The Federal Reserve. Until Bernanke’s legacy of linear forecasters embrace the non-linearity of it all, one of the most obvious risks remains their forecast."

 

It will take some time for the Fed to accept economic reality. But they'll eventually have to. We've got the charts below to help nudge them along the road to Acceptance.

 

Five economic data series that are already in #Recession:

 

1. industrial production

Following the industrial production print a few weeks ago, McCullough wrote: "Industrial Production down -1.8% y/y accelerating to downside and 1st negative prints since 2009."

Denial To Acceptance: The Fed Stumbles Through The 5 Stages Of Grief - industrial production keith

 

2. exports

The latest exports reading was the worst since November 2009...

Denial To Acceptance: The Fed Stumbles Through The 5 Stages Of Grief - export growth

 

3. Durable goods

"Durable Goods Slowing like this = one of the many predictors of recession risk rising (grey bar coming)," McCullough wrote earlier today.

Denial To Acceptance: The Fed Stumbles Through The 5 Stages Of Grief - durable goods

 

4. Capex

"Please ignore all red dots and grey (recession) bars," McCullough wrote today.

Denial To Acceptance: The Fed Stumbles Through The 5 Stages Of Grief - capital goods

 

5. producer prices

 

Analysis from a recent Investing Ideas newsletter:

 

"More on the depressed state of the producer. Deflationary PPI continued its march downhill with December reported numbers:

  • Headline PPI declined -1.0% Y/Y
  • PPI Final Demand declined -3.9% Y/Y
  • PPI Final Demand Services increased +0.4% Y/Y
  • PPI Energy declined -3.4% Y/Y"

Denial To Acceptance: The Fed Stumbles Through The 5 Stages Of Grief - PPI large

 

 

Do you still agree with the Fed's economic forecast?

 

We don't.

 

Denial To Acceptance: The Fed Stumbles Through The 5 Stages Of Grief - bull psych fed


Is That An Asteroid On The Horizon? A Closer Look At Jobless Claims

Takeaway: The cycle is late. We know it. Michael Crichton knows it. You should know it too.

This is a complimentary excerpt from a research note written today by our Financials team. If you would like more information about subscribing to our institutional research, please contact sales@hedgeye.com.

 

* * *

 

“Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled.”

-Michael Crichton

 

Is That An Asteroid On The Horizon? A Closer Look At Jobless Claims - asteroid

 

While consensus still regards the labor market as strong and improving, the simple fact is that the labor data is getting less good from a rate of change standpoint. This matters, as second derivates are the natural precursor/harbinger to first derivate changes. Initially, things get less good, then they get bad.

 

Initial jobless claims have hit their frictional lower bound and we're coming up on the anniversary of that lower bound meaning that the best they can do going forward is not get any worse. Imagine if that were a company at full earnings power/potential and the best it could is not see earnings decline going forward.

 

Is That An Asteroid On The Horizon? A Closer Look At Jobless Claims - Claims6

 

Not to digress, but what would that be worth? Obviously, not much of a growth premium and yet the market is still trading at its 9th highest decile on CAPE since 1926. The analog here for Financials is peak earnings from a credit standpoint for balance sheet-intensive Financial companies. We've finally begun to see credit costs stop falling, and in some cases they have begun to rise. Even with some late-cycle loan growth, this spells peak earnings. Stairs up, elevator down.

 

Meanwhile, rolling SA claims are in their 23rd month below 330k. The last three cycles saw claims remain below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us 10 months from the average, 1 month from the min and 22 months from the max.

 

Any way you slice it, the hour is late and there's a faint glow of asteroid on the horizon. 

 

Is That An Asteroid On The Horizon? A Closer Look At Jobless Claims - Claims17

 


Kaiser: ‘I Think The Old MLP Model Is Dead’

 

In this brief excerpt from The Macro Show, Hedgeye Energy analyst Kevin Kaiser responds to a subscriber’s question about whether the entire MLP space is “questionable” and if not how he separates the “good from the bad.”  

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

PHS | Better Sequentially But Not “Better”

Takeaway: Existing home sales are stalling with tougher comps on the horizon.We continue to expect volumes to be flat to down Y/Y for the bulk of 2016

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

PHS | Better Sequentially But Not “Better” - Compendium 012816

 

Today’s Focus: December Pending Home Sales 

Sales in the existing home market continue to underwhelm.  Signed Contract activity rose +0.1% MoM and accelerated +170bps to +4.2% YoY as a softer comp supported the rate-of-change improvement.   There are probably four notable takeaways:

 

  • First, the step function rise in Purchase Application demand beginning in Mid-November has not similarly manifested in signed contract or closure activity reported by the NAR. In other words, you can take the recent strength in MBA numbers with a grain of salt. 
  • Second, with sales activity basically flat sequentially, mild weather doesn’t appear to have been an outsized driver of activity – and if it was, its masking further softening in the underlying trend.  For a broader discussion of the dynamics at play in the Nov-Jan housing data please see yesterday’s note  Watch The Trees, Not The Bark
  • Third, flat growth isn’t going to cut it against progressively steepening comps into mid-2016.  Demand growth will have to show some resurgent mojo to avoid negative YoY growth against Apr/May compares.  For reference, the average on the index over the last 4-months = 107.2 – almost -5% lower than the 112 level recorded in Apr/May of last year.
  • Fourth, The TRID backfill and PHS re-coupling dynamics that supported the strong rebound in EHS last month should reverse and augur a soft or similarly underwhelming Existing Home Sales release for January (release on 2/23).

In short, better sequentially but not “Better”.  The positive 2nd derivative trends observed over much of 2015 will continue to reverse as we head through 2016. 

 

 

PHS | Better Sequentially But Not “Better” - PHS vs EHS

 

PHS | Better Sequentially But Not “Better” - PHS Index   YoY

 

PHS | Better Sequentially But Not “Better” - PHS Regional YoY

 

PHS | Better Sequentially But Not “Better” - PHS LT

 

 

 

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake


INITIAL CLAIMS | JURASSIC MARKETS

Takeaway: The cycle is late. We know it. Michael Crichton knows it. You should know it too.

“Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled.”

-Michael Crichton

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims1 normal

 

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 

 

PAST PEAK: While consensus still regards the labor market as strong and improving, the simple fact is that the labor data is getting less good from a rate of change standpoint. This matters, as second derivates are the natural precursor/harbinger to first derivate changes. Initially, things get less good, then they get bad.

 

Initial jobless claims have hit their frictional lower bound and we're coming up on the anniversary of that lower bound meaning that the best they can do going forward is not get any worse. Imagine if that were a company at full earnings power/potential and the best it could is not see earnings decline going forward.

 

Not to digress, but what would that be worth? Obviously, not much of a growth premium and yet the market is still trading at its 9th highest decile on CAPE since 1926. The analog here for Financials is peak earnings from a credit standpoint for balance sheet-intensive Financial companies. We've finally begun to see credit costs stop falling, and in some cases they have begun to rise. Even with some late-cycle loan growth, this spells peak earnings. Stairs up, elevator down.

 

Meanwhile, rolling SA claims are in their 23rd month below 330k. The last three cycles saw claims remain below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us 10 months from the average, 1 month from the min and 22 months from the max. Any way you slice it, the hour is late and there's a faint glow of asteroid on the horizon. 

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims6 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims17 normal

 

The following three charts show the continued labor market deterioration in energy states. The Y/Y rate of change in energy state jobless claims continued at a +13% pace in the week ending January 16 versus the -7% rate of improvement in the Total U.S. excluding those 8 energy states.

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims13 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims14 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims12 normal

 

The Data

Prior to revision, initial jobless claims fell 15k to 278k from 293k WoW, as the prior week's number was revised up by 1k to 294k.

 

The headline (unrevised) number shows claims were lower by 16k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.25k WoW to 283k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -3.1% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.2%

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims2 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims3 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims4 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims5 normal

 

INITIAL CLAIMS | JURASSIC MARKETS   - Claims7 normal

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Initial Claims | Jurassic Markets

Takeaway: The cycle is late. We know it. Michael Crichton knows it. You should know it too.

“Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled.”

-Michael Crichton

 

Initial Claims | Jurassic Markets - Claims1

 

While consensus still regards the labor market as strong and improving, the simple fact is that the labor data is getting less good from a rate of change standpoint. This matters, as second derivates are the natural precursor/harbinger to first derivate changes. Initially, things get less good, then they get bad. Initial jobless claims have hit their frictional lower bound and we're coming up on the anniversary of that lower bound meaning that the best they can do going forward is not get any worse. Imagine if that were a company at full earnings power/potential and the best it could is not see earnings decline going forward. Not to digress, but what would that be worth? Obviously, not much of a growth premium and yet the market is still trading at its 9th highest decile on CAPE since 1926. The analog here for Financials is peak earnings from a credit standpoint for balance sheet-intensive Financial companies. We've finally begun to see credit costs stop falling, and in some cases they have begun to rise. Even with some late-cycle loan growth, this spells peak earnings. Stairs up, elevator down.

 

Meanwhile, rolling SA claims are in their 23rd month below 330k. The last three cycles saw claims remain below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us 10 months from the average, 1 month from the min and 22 months from the max. Any way you slice it, the hour is late and there's a faint glow of asteroid on the horizon. 

 

 

Initial Claims | Jurassic Markets - Claims6

 

Initial Claims | Jurassic Markets - Claims17

 

 

The following three charts show the continued labor market deterioration in energy states. The Y/Y rate of change in energy state jobless claims continued at a +13% pace in the week ending January 16 versus the -7% rate of improvement in the Total U.S. excluding those 8 energy states.

 

 

Initial Claims | Jurassic Markets - Claims13

 

Initial Claims | Jurassic Markets - Claims14

 

Initial Claims | Jurassic Markets - Claims12

 

 

The data

Prior to revision, initial jobless claims fell 15k to 278k from 293k WoW, as the prior week's number was revised up by 1k to 294k.

 

The headline (unrevised) number shows claims were lower by 16k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.25k WoW to 283k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -3.1% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.2%

 

Initial Claims | Jurassic Markets - Claims2

 

Initial Claims | Jurassic Markets - Claims3

 

Initial Claims | Jurassic Markets - Claims4

 

Initial Claims | Jurassic Markets - Claims5

 

Initial Claims | Jurassic Markets - Claims7

 

Initial Claims | Jurassic Markets - Claims8

 

Initial Claims | Jurassic Markets - Claims9

 

Initial Claims | Jurassic Markets - Claims10

 

Initial Claims | Jurassic Markets - Claims11

 

Initial Claims | Jurassic Markets - Claims19


Yield Spreads

The 2-10 spread rose 1 basis point WoW to 116 bps. 1Q16TD, the 2-10 spread is averaging 119 bps, which is lower by -17 bps relative to 4Q15.

 

Initial Claims | Jurassic Markets - Claims15

 

Initial Claims | Jurassic Markets - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

next