What The Media Missed About Today's Jobs Report

Takeaway: February's jobs report isn't as rosy as many people think.

What The Media Missed About Today's Jobs Report - jobslatecycle


NEWSFLASH: Today's jobs report, with payroll employment increasing by 242,000 in February and the unemployment rate steady at 4.9%, isn't as rosy as the media or Wall Street is painting it.


"Anything sub-270K in February = further slowing in employment growth (Feb = hardest comp of the cycle)," Hedgeye US Macro analyst Christian Drake wrote this morning. And, as Hedgeye CEO Keith McCullough points out, the rate of change peak in non-farm payroll growth peaked in February of last year at 2.34% year-over-year.


Today's print? 1.9% 


Here's the key chart (click to enlarge)

What The Media Missed About Today's Jobs Report - Employment Growth


... And a more granular breakdown (click to enlarge):

What The Media Missed About Today's Jobs Report - employment summary


Why is this bad for the stock market? "This will keep the Fed hawkish and make it more likely that they continue to hike into an economic slowdown," McCullough reiterated on The Macro Show this morning. 



Bottom line: If the Fed continues to hike rates into an economic slowdown, it's going to get ugly. That's the real risk right now.

Euro, Italy and Gold

Client Talking Points


Newsflows are pointing to a potential ECB wavering into next week’s Draghi-walk-on-water-central-planning-event. That would be bullish (on the margin) for EUR/USD, which is up this morning +0.3% after holding the low-end of our $1.08-1.12 risk range.


Italy no likey Up Euro (hasn’t the entire time and this is important to watch as Italian stocks led the European Equity crash with the draw-down from last year’s peak reaching -33% at one point); #EuropeSlowing data remains obvious from 2015 cycle peak.


If you ask Gold (Dollar Down, Gold Up) today’s jobs report is going to be precisely what it’s going to be (#LateCycle); don’t forget that NFP rate of changed peaked in FEB of 2015 at +2.34% year-over-year growth (toughest comp of the cycle).


*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


A Few Thoughts On Permabulls, Volatility & Bear Market Bounces… @KeithMcCullough #Fed $IWM



The only person you are destined to become is the person you decide to be.

Ralph Waldo Emerson


After 340 days, watching 5,400 earth orbits and nearly 11,000 sunsets American astronaut Scott Kelly returns to earth 2 inches taller. He has spent almost a full year on the International Space Station floating 250 miles above the earth — setting a record for an American astronaut.

CHART OF THE DAY: 148 Reasons Why U.S. Growth Is Slowing

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.


"... Even assuming recent signals from “the market” are right about #Quad2 here in 1Q16, we still think it’s important to pound the table on the undeniable fact that growth continues to slow on a trending basis across every major category of high-frequency economic data, as highlighted by the Chart of the Day and below. This keeps our #USRecession theme firmly intact; see the “transitory” GDP growth accelerations of 2Q00 and 2Q08 for more details."


CHART OF THE DAY: 148 Reasons Why U.S. Growth Is Slowing - 3 4 16 Chart of the Day

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Bull Market Marketing

“They are who we thought they were.”

-Dennis Green


If you haven’t seen then Arizona Cardinals Head Coach Dennis Green’s ~30 second rant following a disappointing blown victory over the Chicago Bears back in 2006, do yourself a favor and watch it:


Lately, I’ve been feeling some moderated version of how Coach Green felt then. In short-term-performance-chasing terms, we are definitely in the process of blowing what had been a clear lead over the bulls – or at least that’s what the general tone of questions in my inbox has been implying.


In that vein, I haven’t seen our competition attempt to catch falling knives across the spectrum of economic data since the last time they claimed “global growth had bottomed” back in early-November. I’ve had a fair amount of Bull Market Marketing Material forwarded to me in recent weeks – you know, the perpetually evolving list of reasons why you should be buying stocks (especially “for the long run”) – and most of it was what I thought it would be.


Bull Market Marketing - bubble cartoon 11.02.2015


Back to the Global Macro Grind


Unlike its cousin “Bear Market Marketing” (e.g. Zerohedge) which only exists to drive advertising revenues for its proprietors, Bull Market Marketing is an important part of our industry and our economy. If your investment horizon is long enough, you will most assuredly make money being long of stocks. There is also a lot of money to be made in the marketing of said bull markets.


Not to mention, the ingenuity of U.S. capitalism has been and continues to be a perpetual source of value creation over longer time frames. The economy would be much smaller and far less efficient if institutional investors did not generally remain fully invested, which itself effectively perpetuates the capital markets machine that helps to extend and lower the cost of credit across the economy.


All that being said, there have historically been periods where it has paid to be out of the market and we continue to think this is one of those instances. If all you did was buy cycle troughs and remain fully invested until you sold the ensuing cycle peak, you’d be the best investor in world history – irrespective of how good your stock picking or credit analysis skills are. While I can assure you that anyone expecting us to perfectly thread the needle on that goal will be as disappointed as they would be learning that I – a 6’4” black guy – cannot dunk, we will continue to work tirelessly towards it nonetheless.


As alluded to at the onset of this note, I think it’s important to revisit the debate about the state of and outlook for the U.S. economy. But before we do that, let’s just pretend for a few moments that the domestic credit cycle hasn’t inflected beyond the point of no return in recession terms. According to Reuters


U.S. small business borrowing fell 13 percent in January to the lowest level in more than a year… a fresh sign that economic growth could weaken in the coming months.”


Let’s also pretend that we’re not smack dab in the middle of a corporate profit recession and that those have not been consistent harbingers of stock market crashes domestically. If that’s not enough, I’m even willing to accept that corporate profits “are who we thought they were” – which would require a rather dubious eschewing of several important facts:


  • On a non-GAAP basis, S&P 500 EPS climbed a mere +0.4% in 2015 – which represents the slowest growth rate since 2009 (Factset).
  • On a GAAP basis, S&P 500 EPS plunged -12.7% last year – which represents the sharpest decline since 2008 (S&P/Dow Jones).
  • GAAP EPS in 2015 was 25% lower than the non-GAAP figure – which represents the widest spread since 2008.
  • Outside of 2008, the only other times the “GAAP gap” was as wide as it was last year was in 2001 and 2002. Recall that the domestic credit and corporate profit cycles had rolled over in each of those years as well.
  • Much to the chagrin of the “ex-energy” bulls, the aforementioned 2015 “GAAP gap” was broad-based. In fact, Energy only accounted for $93B (36%) of the $256B aggregate spread across S&P 500 constituents. Healthcare and Tech accounted for $53B (21%) and $42 (16%), respectively.

Source: WSJ


While we’re in the process of ignoring bad information, we might as well omit the potential for the FOMC to make another egregious policy error at its meeting in a couple of weeks.


On that note, Fed funds futures currently peg the probability of a hike at only 8%; we’d be willing to bet that the probability of the FOMC opting to further “normalize policy” in 12 days is actually in excess of the +10.1% rally off the February 11th intra-day lows in the SPY.


We know the bull thesis for stocks and high-yield credit is ever-changing, but common sense would seem to suggest bulls can’t have their cake and eat it too. At this stage in the cycle, asset price inflation has direct policy consequences


There. We’ve reset the macro debate to purely high-frequency economic data terms. With respect to the data, it’s been a fair fight between bulls and bears in recent weeks. On balance, domestic economic data has continued to surprise to the downside (per the Bloomberg U.S. Economic Surprise Index), but it has done so at the slowest rate since February ’15, breaking out above its ~8 month-long holding pattern in the process.


Aiding the aforementioned breakout were very solid Retail Sales, Real PCE and Durable Goods reports for the month of January, as well as the ISM Manufacturing PMI’s sequential uptick to 49.5 in February. As we discussed in section III of our 2/26 note titled, “We’re Wrong On U.S. Growth (Well, Kind Of)”, these data points, among others, nudged up our predictive tracking algorithm’s estimate for Real GDP growth in 1Q16 to +2.0% YoY and +1.0% QoQ  SAAR.


To the extent those estimates – which are well below the Street, including the Atlanta Fed – hold firm, we are looking at a very marginal delta into the hawkish #Quad2 (i.e. growth and inflation accelerating concomitantly) for the first quarter of 2016. Recall that we had previously been tracking in the stagflationary #Quad3 (i.e. growth slowing as inflation accelerates).


More importantly, in recent weeks asset markets have been pricing in the material change in implied performance between these two GIP Model quadrants (i.e. expectations shifting from #Quad3 to #Quad2):


  • Equities: The SPX has historically appreciated +1.1% on average per quarter with a 77% positive hit rate in #Quad2 vs. -0.2% with a positive hit rate of 48% in #Quad3 [INSERT massive short squeeze HERE]. REITS, Tech, Industrials and Healthcare have historically led the way in #Quad2 vs. Utes and REITS in #Quad3.
  • Fixed Income: The performance of factor exposures in #Quad2 is almost the complete opposite of that in #Quad3. Specifically, yields and spreads tighten across the corporate credit spectrum in #Quad2 vs. widening across the board in #Quad3. The opposite is true for Treasury bond yields. The 10Y Treasury yield has backed up +17bps since its February 11th YTD low while the Bloomberg HY Index has rallied +5.4% over that same time frame.
  • Commodities: The performance divergence in Gold between the two quadrants is not immaterial. Specifically, Gold has historically returned +1.6% on average per quarter in #Quad2 vs. only +0.6% in #Quad3. Gold is up +9.4% MoM.
  • Currencies: The most important performance divergence between the two quadrants is that of the U.S. Dollar Index. Specifically, the DXY has historically returned +0.4% on average per quarter with a 62% positive hit rate in #Quad2 vs. only +0.1% with a 48% positive hit rate in #Quad3. The DXY is up +2.1% since its February 11th YTD low.


Even assuming recent signals from “the market” are right about #Quad2 here in 1Q16, we still think it’s important to pound the table on the undeniable fact that growth continues to slow on a trending basis across every major category of high-frequency economic data, as highlighted by the Chart of the Day and below. This keeps our #USRecession theme firmly intact; see the “transitory” GDP growth accelerations of 2Q00 and 2Q08 for more details.



And by the way, it turns out “the market” actually does agree with our assessment of the data – the bond market that is. The U.S. Treasury 10s-2s spread has actually compressed -4bps over the past three weeks and by -14bps over the past month. At 100bps wide, it’s the narrowest it’s been since late-2007.


We all know what happened after that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.66-1.87% (bearish)

SPX 1 (bearish)

R2K (bearish)

DXY 96.58-98.72 (bullish)
Oil (WTI) 29.25-35.46 (bearish)

Gold 1 (bullish)




Darius Dale



Bull Market Marketing - 3 4 16 Chart of the Day

The Macro Show Replay | March 4, 2016

CLICK HERE to access the associated slides.

Click here for an audio-only replay of today's show.


JT Taylor: Can Anyone Beat Donald Trump... & Marco Rubio's Last Stand

Takeaway: What to watch on the election 2016 campaign trail.

Below is a brief excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning.



JT Taylor: Can Anyone Beat Donald Trump... & Marco Rubio's Last Stand - trump pic


Exit polls from this week's primaries yielded some insight into what's making Donald Trump's supporters tick -- and how their motivations are changing. Across the Super Tuesday states, 71 percent of Republican voters are "very worried" about the economy -- and among those voters, more broke for Trump than any other candidate.


Remember -- the issue that originally gave him traction was national security and the border. Additionally, independents showed up in large numbers and they mostly broke for Trump. He's bringing in new supporters into the process, but at the cost of losing support from traditional Republicans.



JT Taylor: Can Anyone Beat Donald Trump... & Marco Rubio's Last Stand - cruz kasich rubio


Trump has outperformed expectations everywhere except the caucus states. Much of his support comes from new voters who are less likely to participate in caucuses. It's important to keep in mind that KS, KY, ME, and HI are caucus states holding their contests on March 5th and 8th -- making up half of the number of states voting between now and March 15th.  


If Trump continues underperforming, it will allow Marco Rubio, Ted Cruz and John Kasich a shot at denying him some of the 128 delegates. 



There's less than two weeks until the Republican field has a date with destiny in the Sunshine State. Florida and its 99 winner-take-all delegates will determine the fate of Rubio's campaign. His campaign is already on the brink, a loss in his home state would put him away for good. Despite their protestations otherwise.


Floridians hold the power to end Rubio's campaign and propel Trump to the nomination -- but will they be moved by the tens of millions of dollars that will be spent on anti-Trump ads (the establishment to the rescue!) between now and March 15.

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