Spillovers & Broken Records | Some Quick Thoughts on Services

Three quick points around today’s domestic Macro data: 


Spill Over?  The bullish foil held out against the ongoing industrial recession has been the purported strength in the services economy.  With the ISM Services reading sliding for a 4th consecutive month in February, the Markit Services PMI contracting for the first time since 2009 (outside of Gov’t shutdown) and the Chicago PMI (which includes both manufacturing and services) holding in contraction, that narrative weaving is slowly unraveling.


Yes, the industrial data is showing some fledgling sequential stabilization – 12 consecutive months of negative growth will do that to a comp.  But as it stands, Forward Capex Plans remain in decline, C&I credit is tightening, Small Business lending is in retreat, CRE lending is decelerating and aggregate income growth for consumers is slowing.  


Less bad is good but generally only if you have a catalyst and a fundamental underpinning for some amount of sustained improvement.  It’s hard to argue a sequential base-effect stabilization in manufacturing, in isolation, as a durable catalyst.  Indeed, the inability for weak demand, slowing income growth and tighter credit to support a sustained advance in investment and industrial activity feels like a tighter thesis than ‘easy comps’. 


In short, services consumption represents ~65% of household spending and ~45% of GDP so the trend obviously matters.  Peri-contractionary manufacturing activity and decelerating service sector activity is not an escape velocity macro factor cocktail.   


It’s the Cycle Silly! We’ve been in full broken record mode on this of late but month-to-month, counter-Trend oscillations in prices/fundamentals don’t obviate the reality of the cycle.  Employment Growth, Income Growth, Consumption Growth, Consumer Confidence and Corporate Profits all peaked in 4Q14/1Q15.   Not incidentally, all things equities peaked in 2Q15.   


Employment growth will continue to slow from here and unless you believe wage growth will continue to accelerate significantly faster than employment growth declines then the math says aggregate income growth will continue to decelerate and the peak in consumption growth will remain rearview.   Summarily, the prevailing negative 2nd derivative Trend across each of those macro factors will continue.   


Super Huge & Big (Conclusion):  Tomorrows NFP number might be worse sequentially … or it might be better.  We don't know and don't claim to have any particular edge on the monthly number.   One could argue that Gold is signaling the former …. Treasury yields the later.  Fortunately, on a medium-term duration, the investment conclusion is largely the same.   

  • If the data continues to deteriorate, in spite of favorable seasonal and comp dynamics, lower-and-slower-for-longer and its associated allocations continue to work.
  • If the data gets an optical boost – edifying policy makers conviction around their hawkish lean - we’d expect the further attempts at policy normalization to perpetuate the same deflationary and growth prohibitive forces that have characterized the last 8-months.   


Spillovers & Broken Records | Some Quick Thoughts on Services - ISM Services


Spillovers & Broken Records | Some Quick Thoughts on Services - Income   Consumption Past Peak


Spillovers & Broken Records | Some Quick Thoughts on Services - Empl growth past peak


Spillovers & Broken Records | Some Quick Thoughts on Services - Consumption Past Peak


Spillovers & Broken Records | Some Quick Thoughts on Services - Confidence past peak


Spillovers & Broken Records | Some Quick Thoughts on Services - Eco Summary Table



Christian B. Drake


Initial Claims | Energy Still Bad, Ex-Energy Still Meh

Takeaway: Feb Energy layoffs were 16,339, near the highest levels seen since the start of last year. Outside of Energy, layoffs were steady.

Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims1


The US labor market continues to look much as it has for the last several months:

  • Energy layoffs continue at an elevated rate
  • Ex-energy layoffs are flat to trending very slightly higher

Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims17


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims12


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims13


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims14


the data

Initial jobless claims rose 6k to 278k from 272k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.75k WoW to 270.25k.


Meanwhile, the 4-week rolling average of NSA claims, another way of evaluating the data, was -11.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -6.7%


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims2


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims3


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims4


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims5


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims6


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims7


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims8


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims9


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims10


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims11


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims19

Yield Spreads

The 2-10 spread fell -1 basis points WoW to 99 bps. 1Q16TD, the 2-10 spread is averaging 111 bps, which is lower by -25 bps relative to 4Q15.


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims15


Initial Claims | Energy Still Bad, Ex-Energy Still Meh - Claims16



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


The Bearish Case On Housing

Takeaway: As demand for housing slows, watch out for decelerating home prices.

We went from being bullish to bearish on housing for the simple reason that when the data goes from "good" to "less good," housing related equities start to decline. And while the U.S. housing sector has had a great run, its momentum has been slowing for several months now.


The Bearish Case On Housing - run down houses


Case in point: This week's Pending Home Sales data contracted -2.5% sequentially in January, which brings the rate of year-over-year growth to its lowest since late 2014.


The Bearish Case On Housing - 03.01.16 Chart 

not good.


Why does this matter for housing related stocks? We may be "on the cusp of a negative inflection point for home prices," points out Hedgeye U.S. Macro/Housing analyst Christian Drake, as flagging housing demand (aka Pending Home Sales) "leads price growth by 9 to 12 months."


Click on the chart below to enlarge:  

The Bearish Case On Housing - housing demand


Equity markets will continue to discount this reality.


For more, watch the video below:


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.

SPECIAL INSIGHT | Demographer Neil Howe Discusses Key 2016 Election Trends

Neil Howe, best-selling author of "The Fourth Turning" and Demography Sector Head at Hedgeye, discusses important generational shifts, the role of millennials and boomers at the polls and many more key developments to keep a close eye on during this heated election. He is joined by Director of Research Daryl Jones.


Click here to subscribe to our YouTube channel for more Hedgeye video content.

[UNLOCKED] Keith's Daily Trading Ranges

Editor's Note: We've made some new enhancements to Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to view a brief video of McCullough explaining how to use it most effectively.


Subscribers now receive risk ranges for 20 tickers each day -  the last five are determined by what's flashing on Keith's radar screen and what tickers subscribers are asking about. Click here to subscribe.


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
1.87 1.65 1.84
S&P 500
1,899 1,992 1,986
Russell 2000
991 1,072 1,066
NASDAQ Composite
4,444 4,727 4,703
Nikkei 225 Index
15,607 16,999 16,747
German DAX Composite
9,030 9,863 9,777
Volatility Index
16.99 24.13 17.09
U.S. Dollar Index
96.69 98.90 98.22
1.08 1.12 1.09
Japanese Yen
111.75 114.39 113.44
Light Crude Oil Spot Price
28.93 35.66 34.73
Natural Gas Spot Price
1.63 1.90 1.67
Gold Spot Price
1,200 1,250 1,240
Copper Spot Price
2.05 2.19 2.19
Apple Inc.
93 102 101
527 585 579
McDonald's Inc.
114 120 118
Utilities Select Sector SPDR
45.27 47.62 46.31
J.P. Morgan Chase & Co.
54.06 60.29 59.76
Costco Wholesale Corp.
145 156 153

VIX, Russell and Russia

Client Talking Points


We really did need sentiment to pivot back to bullish (positioning was bullish until we hit the FEB lows, then they sold the lows – then the squeeze). That said the bullish TREND in equity volatility has a risk range of 15-30, and now we’re at 17 – next big move = up.


While we’ve been bearish on the Russell 2000 (and S&P 500) since July, we’ve had some massive opportunities to underweight, sell, short, etc. Small Cap (SIZE) as a style factor at obvious lower-highs (from the all-time bubble high of 1295). Now = another one of those opportunities with immediate-term down side to 991 – Costco comps of 0% is not “an economy that appears to be picking up.”


Forget your friends telling you “Oil has bottomed” or that they’re once again long levered Energy stocks (remember OCT?), the real fun was in being long Russian stocks for the last +14% ramp (in a month!); is this where the next 3-6 months of alpha is going to be? We say this and all Oil & Gas related exposures are happy hunting grounds for bears again.


*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

Our preferred growth slowing vehicle remains Utilities (XLU) in equites. Hitting on Friday’s revised GDP report (Q/Q SAAR Q4 GDP revised to +1.0% from +0.7%), a deep-dive into the number doesn’t support an incrementally stronger economy:

  • Consumption was revised down marginally but net exports were up with the negative revision to imports outweighing the negative revision to exports. That’s good for the number but lower global trade activity is not a good sign for global growth;
  • Much of the actual change in the revision was due to inventories, which contributed +0.31pts to the headline number

General Mills (GIS) hit an all-time high last week when it reached $60.18 on Thursday. Although this would not be a great entry point, it is also not a reason to get out if you have a long-term view. Nothing has changed in our fundamental story and we have no reason to lose faith in our thinking to date.


Over the course of the past few years, GIS has made strategic acquisitions within the natural & organic / wellness space (we call it the string of pearls approach). Although they are not largely meaningful to top or bottom-line right now, they are changing the way the company thinks about its broader portfolio.


We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization.


Our preferred growth slowing vehicle remains (Long-Term Treasuries) TLT in fixed income. A flattening in the yield spread (10YR Treasury Yield – 2YR Treasury Yield) continued last week into double digit basis point territory (currently at 96 basis points). Year-to-date the yield spread has declined 44 basis points while the 10YR Treasury Yield has dropped 47 basis points. As a reminder the yield curve flattens as the economy slows with policy and/or liquidity management driving the short-end higher and defensive positioning and/or discounting of lower future growth/inflation driving the long end lower. 

Three for the Road


Europe has rolled off its cycle peak and not enough investors have contextualized the impact this'll have on the USD



I don’t believe in luck, I believe in preparation.

-Bobby Knight                                                 


Airbnb now offers over 1 million rooms or units nationwide.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.