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Will Markets Crash (again)?

“Wall Street exists to sell securities to people.”

-Jim Chanos


In a solid interview Lasse Heje Pedersen had with Jim Chanos in Efficiently Inefficient, Chanos went on to add that since people on the Old Wall are in the business of selling you securities, “most of the stuff you are going to hear all the time is bullish.” (pg 130)


Unless this is your first day on the job (if it is, it’s a great day to start short selling US Equities btw), I think you get that being bearish, skeptical, and cynical about Wall Street’s consensus (some of the time) can save (and make) you and your family a lot of money.


As Bernard Baruch taught Congress in 1917, “a market without bears would be like a nation without a free press… There would be no one to criticize and restrain the false optimism that always leads to disaster.” (Efficiently Inefficient, pg 123)


Will Markets Crash (again)? - Bear crossing cartoon 09.29.2015


Back to the Global Macro Grind


To be crystal clear on my view, I think the tail end of this 3-day short squeeze in everything “reflation” (commodities, stocks, junk bonds, etc.) is going to lead to another market disaster.


Not to be confused with the macro market disaster you should have already avoided in the past 6-18 months, I think this next leg down from classic slow-volume-lower-highs (total US equity volume -11% vs. 1mth avg in last 3 days) in Global Equities could be epic.


Yes, on the US Equities part, I get that more “people are bearish” than when we first started making this call (#Deflation call was 18 months ago; US Equities SELL call was July 2015). But ignorance never led to the end of a bear market – it perpetuates the epic part of a crash.


No matter how “bearish” you think “sentiment” is right now, I can assure you that consensus isn’t positioned bearish. If it wasn’t way too bullish in July, we wouldn’t have had the first -14% and -26% draw-downs (from July) in the SP500 and Russell.


If it wasn’t positioned too bullish in January 2016, we wouldn’t have A) seen the worst JAN ever and/or B) seen the crowd sell last week’s lows. And if they didn’t sell last week’s oversold lows (new weekly closing lows), we wouldn’t have had that kind of a bounce!


This is the point.


  1. The oversupply of fund managers who are selling low and chasing high (chasing momentum) is unprecedented
  2. Hedge Fund return correlation to US Equity Beta is at an all-time high (see Chart of The Day)
  3. And the amount of leverage hedge funds are using vs. daily market liquidity is also unprecedented


At both the lower-lows and lower-highs, that’s why I’d characterize my inbox as follows:


  1. Emotional
  2. Manic
  3. Frustrated


You see, I’m just a guy with a keyboard. I’m that new guy on a Wall St that isn’t trying to sell people securities. I’m the guy with 0% conflicts of interest (no prop desk front-running people, no positions, no banking/brokerage, etc.) who has been more right than wrong lately.


So, people vent to me. People talk to me. People trust me. I get a ton of feedback.


When I say “I”, it’s really the wrong thing to say. As you know, there is no I in Hedgeye. The collective feedback I receive has a huge multiplier since we’re not only the fastest growing Independent Research provider on the 2.0 Wall, but we also have one of the biggest research teams.


In rate of change terms, a day doesn’t go by where I don’t see #GrowthAccelerating direct messages about what people think (read: sometimes hope) is going on vs. what is actually going on. To summarize all of it:


  1. Most people missed calling the causal factors behind what I’ll call Phase 1 of asset #bubbles popping
  2. Many are constantly over-weighting what they need (the upside risk) instead of what is (the downside risk)
  3. The ever-changing “bullish” thesis drift away from our core bear case is as far from reality as it’s been


That’s why I think markets are entering what I’ll call Phase 2 of our Bear Case – the crash. Since many things are already crashing, it’s really not that hard of a word to use. You can forward this to your friends who are still debating our “recession” call, and just fast forward to #crash.


As we’ve documented, you don’t have to have a recession to have a US stock market crash. You simply have to have profits slowing to negative (year-over-year) for 2 consecutive quarters and/or credit spreads sustaining a breakout above their historical mean.


Markets also crash when the “fundamentals” (growth and profits slowing) are being perpetuated by this thing called market volatility. That’s why the “biggest 3-day bounce since November of 2008” should remind you of a very important lesson: what happened after that.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):


UST 10yr Yield 1.61-1.84% (bearish)

SPX 1811-1938 (bearish)
RUT (bearish)

NASDAQ 4165-4564 (bearish)

Nikkei 147 (bearish)

DAX 8 (bearish)

VIX 20.99-28.97 (bullish)
USD 95.35-97.87 (bullish)
EUR/USD 1.09-1.14 (neutral)
YEN 111.65-116.68 (bullish)
Oil (WTI) 26.13-32.65 (bearish)

Nat Gas 1.89-2.09 (bearish)

Gold 1151-1252 (bullish)
Copper 1.98-2.10 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Will Markets Crash (again)? - 02.18.16 Chart

Growth & Profits Still Slowing

Client Talking Points


This is what, the 4th or 5th or 6th time (July, Oct, Feb = were the biggest “bottom is in” commodity led rallies) we’ve had to quintuple down on #Deflation being non-transitory. Australia and Russia (Equities) +2.3% this morning vs. Copper down -1%. Who has the intermediate-term call from here right? Copper.


After “covering” (Real-Time Alerts signaling product) SPY last week, the signal said to re-short the Russell (IWM) into the close yesterday. Fully loaded with the 3-day squeeze, don’t forget that the Russell 2000 is still in crash mode (-21.9% since July) and being long illiquidity (junk and small caps) is killing returns – short lower-highs; cover lower.


One of the major fade signals for the “reflation” trade (or was it “PMIs bottoming”?) has been using the top-end of our risk range – that’s currently $32.65 for WTI and don’t forget that the most important component of my signal is volatility. With OVX’s implying 63-80 volatility in the immediate-term, we would sell the Energy “bounce” here.


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


Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Utilities worked against us for a -2% loss on the week, but remain an outperforming sector YTD. New scares in the form of increased risk from the financial sector emerged last week. Deutsche Bank made headlines over liquidity concerns that tied into CEO Keith McCullough's favorite S&P Sector short, the Financials. Financials are the most over-owned group relative to its rate risk – XLF is now -14% vs. Utilities (XLU) +5.3% YTD.


Walmart is still having an effect on General Mills, but it isn’t any more or less severe than previously guided by management. They will begin to lap some of the effects caused by the retailer at the beginning of their 4Q16 (starting in March). Five years ago they dealt with a similar clean store policy implemented by Walmart. Coming out of that they seemed to have gotten more than their fair share of upside, specifically in cereal and fruit snacks, now they are seeing a little more than their fair share on the downside.


Investors continue to be confronted with our signal of #GrowthSlowing in the U.S. and globally. Even the White House came out to reduce 2016 U.S. inflation assumption to 1.5% from prior expectations of 1.9%!  We’ve called for yield compression alongside our signal of growth slowing and our expectation that global investors will continue to pile into US Treasuries as a “safe haven” liquid play. Last week, the US 10 year fell 13bps to 1.736%.Continue with our go-to macro market calls of long TLT and short JNK, and things don’t have to be so doom and gloom.

Three for the Road


Strong net buys from $WWAV insiders filed yesterday. #LONG



Life isn’t about getting and having, it’s about giving and being.

Kevin Kruse


42% of wine consumed in the U.S. last year that was consumed by millennials, according to an industry group. 

ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns

Takeaway: With the taxable bond category in a rare redemption cycle, investors are flocking to Treasuries in a flight to safety.

While the ICI taxable bond category is broad including investment grade corporates, high yield, government, and global bond issues, the across cycle pattern is clear. When rare redemptions in the category occur, a resulting decline in 10 year Treasury yields ensue as investors are likely rotating within the group, out of corporate and global bonds and into U.S. government securities. Only during the Taper Tatrum of 2013, did ICI taxable bonds redemptions (the white line below on a 5 week moving average), not result in lower 10 year Treasury yields (represented by the green line below). This week, taxable bond funds gave up another -$729 million, the 14th consecutive week of outflow.


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - Treasury Yields to Taxable flows

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending February 10th, volatility picked up, equity markets tumbled, and investors backtracked on their contributions to domestic equities. U.S. stock funds lost -$3.6 billion in withdrawals, negating the prior week's inflows and bringing demand for total equity mutual funds and ETFs to a negative -$1.2 billion on the week. In fixed income, investors continued to favor municipal bonds and ETFs over taxable bonds. Munis brought in +$1.4 billion in contributions with fixed income ETFs gaining +$932 million, while taxable bonds lost another -$729 million. Finally, investors shored up +$3 billion of cash in money funds.


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI1


In the 5-day period ending February 10th, total equity mutual funds put up net outflows of -$1.4 billion, trailing the year-to-date weekly average outflow of -$993 million but outpacing the 2015 average outflow of -$1.5 billion. The outflow was composed of international stock fund contributions of +$2.3 billion and domestic stock fund withdrawals of -$3.6 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 6 weeks of positive flows over the same time period.


Fixed income mutual funds put up net inflows of +$690 million, outpacing the year-to-date weekly average outflow of -$1.2 billion and the 2015 average outflow of -$475 million. The inflow was composed of tax-free or municipal bond funds contributions of +$1.4 billion and taxable bond funds withdrawals of -$729 million.


Equity ETFs had net subscriptions of +$158 million, outpacing the year-to-date weekly average outflow of -$4.6 billion but trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$932 million, trailing the year-to-date weekly average inflow of +$2.3 billion and the 2015 average inflow of +$1.0 billion.


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.

Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI2


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI3


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI4


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI5


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI6

Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI12


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI13


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI14


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI15


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI16

Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI7 2


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI8

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors seeking safety poured +$588 million or +7% into the long duration Treasury TLT ETF. Year to date, the TLT has experienced a +37% inflow or +$2.6 billion. Of the flows in the table below, that is the largest percentage inflow by far.


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI9

Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI17


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI18

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$2.8 billion spread for the week (-$1.2 billion of total equity outflow net of the +$1.6 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$641 million (more positive money flow to equities) with a 52-week high of +$20.5 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI10 2


The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


ICI Fund Flow Survey | Taxable Drawdowns = Treasury Takedowns - ICI11 

Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA

the macro show

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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.

The Macro Show Replay | February 18, 2016


FL | Many ‘Un’happy Returns

Takeaway: FL spending is headed up on PP&E and SG&A in the face of significantly more challenging growth. How could this be good?

Foot Locker’s big capital spending plan announced last night is anything but good for the financial return profile, and the stock. The company’s capex number for the upcoming year is expected to clock in at $297mm. That’s the most FL has spent since 1999, and it represents a 26% increase from the already-elevated levels we saw in 2015.


As context, our extremely negative long-term view on FL is predicated upon an unsustainable financial model, and a mismatch between how much FL is spending on both the P&L (SG&A) and on PP&E to drive the business forward in a changing footwear retail selling model.

Specifically, Nike has been spending on building up a world-class e-commerce model for the better part of 8-years – basically this whole economic cycle – and we’re now seeing Nike’s growth go parabolic, while FL’s is rolling over. Over that same period, FL’s ‘Nike Ratio’ (percent of inventory purchases that are Nike) has gone from 50% to almost 80%. It literally can’t get much higher. The same directional trend holds true for almost every other retailer that sells Nike. We get so much pushback on this – but our strong view is that Nike was stuffing the wholesale channel in the US in order to fund over $1bn investment in its DTC model. ‘Stuff’ is a strong word in retail, but call it what you want. As that ratio goes up, so does traffic (otherwise in a secular decline), ASP, revenue, margins and ROIC. EVERY single one of those things has happened at FL.


Now the paradigm is changing. Nike’s spending growth is rolling off as it harvests its investment by way of adding another $10bn in e-comm sales in 4-years (off a $31bn base). It’s e-comm numbers are completely blowing out to the upside. It wears its ‘we love our wholesale partners’ face proudly in public, but in reality it does not need to GROW that channel, it just needs to sustain. That’s a disaster for anyone who hangs their hat on selling branded athletic footwear for a living.


For FL, we’re looking at a company with a near 80% Nike ratio, productivity and margins that doubled in 8-years, leading to EPS up 4x, and RNOA up from 5% to 30%.  Now we’re seeing capex push shift from OEM to the retailers, but that investment for companies like FL is still likely to result in declining earnings. One of the factors that so few talk about is the SG&A base at FL – which is only 19% of sales. That’s astoundingly low, but was easy to sustain while Nike was stepping up its commitment to the retail channel. Now, FL will need to spend more to stay still at a minimum.


This stock will be choppy quarter to quarter. But last we checked, stocks don’t go up when financial returns get cut in half.


And if you question exactly why the capital spending pressure is being felt by FL, check out this chart. It shows the athletic brands' e-comm visitation rate less FL. Nike is winning online in bursts of share gain. 


FL | Many ‘Un’happy Returns - FL NKE visitation 2 18


What’s More Important: the Short Squeeze in the Market or the Data?

Takeaway: Investors would do well to appropriately contextualize and actively risk manage head fakes in domestic economic data.

If I’ve heard Keith reference PTJ’s quote about the last third of the move being “the toughest to risk manage” in a meeting once, I’ve heard it a thousand times. In bear markets, those who mismanage “the last third of the move” are short sellers that cover too early (in fear of the policy response) and bulls that cite “valuation” as a reason to purchase securities – quite often far too early. Both are buy orders, FYI.


Did the shorts cover too early?


No, well at least not from the perspective of our short-term trading signals. Last Wednesday morning, we published an immediate-term risk range of 1 for the S&P 500, which was an explicit signal for investors to cover shorts well into last Thursday’s low (1810 to be exact).


That’s not to suggest that we’ve nailed it by any stretch of the imagination, but rather to reiterate the omnipotence of actively  managing risk in bear markets. We’ve been vocal in stressing that bear-market bounces are typically more sharp than their bull-market counterparts. The +645bps rally in the SPX from Thursday’s intra-day low to today’s closing price is allegedly the sharpest three-day rally since the thralls of our last bear market in late-2008.


Indeed, high short interest stocks are the 2nd best-performing style factor on a WoW basis, just behind high beta stocks. We consider that to be ample enough evidence of aggressive covering of crowded momentum shorts. I’m sure there will be plenty of research notes from prime brokers highlighting this very point tomorrow morning – if there haven’t been already. Obvious is as obvious does.


What’s More Important: the Short Squeeze in the Market or the Data? - WoW Style Factor Performance


In light of the aforementioned strength in the U.S. equity market, has anything materially changed, quantitatively speaking?


No, certainly not from the perspective of our Tactical Asset Class Rotation Model (TACRM), which shows that:


  1. Realized volatility continues to accelerate on a trending basis across asset classes.
  2. TACRM continues to generate a [bearish] “DECREASE Exposure” signal for U.S. Equities at the primary asset class level.
  3. Across the 47 sector and style factor exposures TACRM tracks within U.S. Equites, only two are signaling bullishly from the perspective of TACRM’s multi-duration, volatility-adjusted view of volume-weighted average price momentum.


***CLICK HERE to download the latest refresh of our TACRM presentation.***


What’s More Important: the Short Squeeze in the Market or the Data? - TACRM U.S. Equities 10 10


A much more difficult question to answer at the current juncture is, “Has anything materially changed, fundamentally speaking?”


On a trending basis, the answer to that question is a resounding “no” – especially with respect to: 1) the corporate profit cycle, 2) the C&I credit cycle, and 3) the monetary policy cycle. As we’ve detailed extensively in recent notes, the confluence of the likely progression of each will be the determining factor for ultimate downside in risk asset prices:


  1. The Domestic #CreditCycle Is About to Get A Lot Worse (1/26): “As the ongoing corporate profit recession deepens, we highlight the obvious risk of companies allocating earnings to buybacks and dividends, rather than preserving cash and paying down debt. If our explicitly negative view on the domestic economic cycle continues to be corroborated by the data, then the growth rate of such payouts will likely have to slow dramatically – if not decline outright. That is an obvious headwind to the broader equity market in terms of removing key cogs from the post-crisis secular bull case.”
  2. Ex-Energy? (2/3): “And even if the U.S. economy avoids recording a technical recession, we could just have an 2000-02-style corporate deleveraging cycle that drags down equity market cap alongside it. After all, it's EPS that matters most to stocks, not GDP. Recall that the 2001 downturn was the shallowest recession in U.S. history; that didn't preclude the stock market (SPX) from getting cut in half.”
  3. Sentiment Update: Three Things I Learned Today (and Three Weeks From Now) (1/20): “While ZIRP and LSAP have proven to be powerful tools in perpetuating income-inequality generating asset price inflation throughout this economic and corporate profit expansion, the Federal Reserve has yet to demonstrate the effectiveness of monetary easing during concomitant recessions in economic activity and corporate profit growth.”


What’s More Important: the Short Squeeze in the Market or the Data? - CORPORATE PROFITS VS. SPX


What’s More Important: the Short Squeeze in the Market or the Data? - U.S.  CreditCycle Bubble Chart


What’s More Important: the Short Squeeze in the Market or the Data? - Hedgeye Bank Credit Cycle Indicator


What’s More Important: the Short Squeeze in the Market or the Data? - U.S. Household Wealth as a   of Disposable Personal Income vs. Shadow FFR


On a shorter-term basis, astute investors have been asking us the right questions about sequentially improving high-frequency economic data. In the 1Q16 to-date, we’ve seen three releases that lend some pause to our bearish outlook for the domestic economy – if only for a brief moment:


  1. First, the ISM Manufacturing PMI ticked up ever-so-slightly to 48.2 in JAN from a reading of 48.0 in DEC. The New Orders index rose back above 50 for the first time since OCT; its 51.5 reading for the month of JAN is the highest since AUG.
  2. Then, the growth rate of Retail Sales – specifically the omnipotent “Control Group” therein – accelerated meaningfully to +3.1% YoY in JAN from +2.2% in DEC. Per the JAN release, the growth rate of Retail Sales – which accounts for a third of consumer spending and a fourth of GDP – is now accelerating on a trending basis.
  3. Lastly, the growth rate of Industrial Production accelerated to -0.7% YoY in JAN from a downwardly revised -1.9% in DEC. Sequential strength was recorded across all key product categories as Capacity Utilization arrested what had been five consecutive months of MoM contraction and YoY deceleration.


What’s More Important: the Short Squeeze in the Market or the Data? - ISM MANUFACTURING PMI


What’s More Important: the Short Squeeze in the Market or the Data? - RETAIL SALES CONTROL GROUP  2


What’s More Important: the Short Squeeze in the Market or the Data? - INDUSTRIAL PRODUCTION


What’s More Important: the Short Squeeze in the Market or the Data? - Industrial Production and Capacity Utilization


While it would be easy to poke holes in each of the aforementioned releases (for example, the Employment index of the JAN ISM report crashed to a new cycle low of 45.9), it’s not clear to me that that would be a valuable use of your time; nor would it be a valuable endeavor on which to expend analytical credibility. The risk of being perceived as arguing with the data for too long for a research outfit that doesn’t have banking, trading or asset management to support its revenues is arguably just as punitive as the risk of a money manager fighting the market for too long.


A better use of our collective time is attempting to determine the sustainability of the aforementioned positive deltas in economic data:


  1. With respect to a sustained recovery in domestic manufacturing activity, we flag sequentially declining U.S. dollar comps throughout the balance of the year as positive and consider the high likelihood that we tip back into #Quad4 – which has historically been positive for the USD – in the upcoming quarter to be a potential negative shock.
  2. With respect to a sustained recovery in consumer spending, we still believe the sharp acceleration in base effects through the third quarter of this year will continue to be a material negative catalyst for reported growth rates of household consumption. Specifically, base effects for Real PCE growth in the four-quarters ended 3Q16 are far and away the toughest since the four-quarters ending in 3Q08. Recall that Real PCE growth decelerated sharply from +2.7% YoY in AUG ’07 to -1.2% in SEP ’08.
  3. With respect to a sustained recovery in the industrial sector, we highlight generally receding base effects throughout the balance of the year as a positive catalyst. This is juxtaposed with the negative cocktail of rising credit costs, peak inventories and GDP-negative capital allocation decisions from major U.S. corporations (e.g. AAPL, IBM buybacks).


What’s More Important: the Short Squeeze in the Market or the Data? - Trade Weighted U.S. Dollar Index


What’s More Important: the Short Squeeze in the Market or the Data? - UNITED STATES


What’s More Important: the Short Squeeze in the Market or the Data? - Real PCE Comps


What’s More Important: the Short Squeeze in the Market or the Data? - Industrial Production Comps


What’s More Important: the Short Squeeze in the Market or the Data? - Barclays Agg Credit YTW


What’s More Important: the Short Squeeze in the Market or the Data? - Inventory to Sales Ratio


All that having been discussed, let us turn our attention to the Atlanta Fed’s recent revision of their “GDPNowcast” for Q1 to 2.6% per the latest release. That forecast is up from a trough of +0.6% as recently as mid-January and has the attention of many concerned short-sellers and confident bulls alike.


What’s More Important: the Short Squeeze in the Market or the Data? - Atlanta Fed GDPNow Tracker


How important is the aforementioned estimate within the context of the Atlanta Fed’s ~4.5 year-old track record at forecasting U.S. GDP growth? Not very.


The following chart shows us the Atlanta Fed’s peak (green line) and trough (red line) estimates 47 days into any given quarter as we are currently. These figures are juxtaposed with the actual recorded QoQ SAAR growth rate of U.S. GDP (blue line) and the maximum tracking error of the Atlanta Fed’s GDPNowcast (black line). The average maximum intra-quarter-to-date tracking error is a startling 248bps over the duration of this study. That is a whopping 113% of average growth rate of GDP over that same time frame (i.e. 2.2%)!


What’s More Important: the Short Squeeze in the Market or the Data? - Atlanta Fed Tracking Error


PLEASE NOTE: We are not showing this analysis with the intention of undermining the Atlanta Fed. Their GDPNowcast estimates are a good barometer of what consensus thinks about near-term growth prospects and their work in charting the “Shadow” Fed Funds Rate has been equally additive to the Macro discussion. We simply highlight the elevated risk of their current forecast for Q1 2016 being revised materially lower (or higher) as the quarter progresses. It’s worth noting that we’ve hardly received much in the way of January data – let alone enough data points to have statistical validity in any regression model.


As we highlighted in our 9/2 Early Look titled, “Do You QoQ?”:


“In the context of modeling the economy, the more we learn about sequential momentum, the less we are able to know about the underlying growth rate of the economy. Recall that headline GDP growth accelerated +660bps to +7.8% in the 2nd quarter of 2000 and that it accelerated +470bps to +2% in the 2nd quarter of 2008. If you were prescient in forecasting these second-derivative deltas, you could’ve bought all the stocks you wanted en route to peak-to-trough declines on the order of -49.1% and -56.8%, respectively (S&P 500)… Going back to the aforementioned head-fakes, it’s clear that those read-throughs on sequential momentum failed to signal pending material changes to the underlying growth rate of the economy.”


In the aforementioned note, we also highlighted the poor track records of both Bloomberg Consensus and the Fed in forecasting quarterly and annual GDP growth rates in the post-crisis era:


  • “Over the past five years, Bloomberg consensus forecasts for headline GDP just one quarter out have demonstrated a quarterly average [maximum] tracking error of 145bps. This means that at some point within 3-6 months of any given quarter-end, Wall St. economists’ estimates for QoQ SAAR real GDP growth were off by an average of 145bps. That’s flat-out terrible in the context of actual reported QoQ SAAR growth rates averaging just 2.1% over this period."
  • “Over the past five years, the FOMC’s intra-year U.S. GDP forecasts have demonstrated an annual average [maximum] tracking error of 100bps. Worse, the maximum deviation of their intra-year forecasts from the actual reported annual real GDP growth rate was an upside deviation in every single year, meaning that the Fed’s growth forecasts are consistently far too optimistic.”


As the following charts demonstrate, the aforementioned updated quarterly and annual average maximum tracking errors are now 164bps and 91bps, respectively (data through EOY ‘15). These updated figures continue to reflect the fact that investors should remain highly skeptical of even the nearest-term growth forecasts from economists and/or policymakers. At best they’re playing a game of Marco Polo; at worst, they are feeding potentially hazardous information to market participants.


What’s More Important: the Short Squeeze in the Market or the Data? - Bloomberg Consesus Real GDPTracking Error


What’s More Important: the Short Squeeze in the Market or the Data? - FOMC GDP Tracking Error


All told, as we discussed at length in our 1/29 note tilted, “What Recession?!”, predicting headline (i.e. QoQ SAAR) GDP is a fool’s errand. Don’t get caught up in the current strength of the Atlanta Fed’s GDPNowcast or what may actually turn out to be a decent Q1 GDP report on a headline basis. We strongly consider both of those catalysts to be head fakes in the context of the underlying sine curve of U.S. economic and capital markets activity.


Best of luck out there,





Darius Dale


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%