Global macroeconomic conditions continue to deteriorate.
Takeaway: A look at volatility and what it means for the Russell 2000.
Phew... the bulls who missed calling the slowdown appear to be back with the re-acceleration call!
Remember, the Federal Reserve hasn't proactively predicted a recession in the last 20 years. Meanwhile. Old Wall consensus (i.e. strategists who love to call bottoms in stocks and predict "face-ripping" rallies) missed the last three U.S. economic cycle peaks (2000, 2007 and 2015).
Here's analysis on volatility from Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:
"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"
What does this mean for equity markets?
"While I’ve been bearish on the Russell 2000 (and SP500) 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.”
In other words, it's fine if you want to believe Old Wall storytelling that "the bottom is in." But remember all stories come to an end.
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.
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.
Christian B. Drake
Takeaway: Feb Energy layoffs were 16,339, near the highest levels seen since the start of last year. Outside of Energy, layoffs were steady.
The US labor market continues to look much as it has for the last several months:
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%
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.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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.
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.
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."
Equity markets will continue to discount this reality.
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