S&P 500 year-to-date SECTOR performance...
... And a look at global equity markets.
This Thursday the ECB meets and we expect it to announce additional simulative policy. According to our Big Bang Theory, after 600 rate cuts globally, there’s a new regime of investors that has given up on the belief that central bankers can artificially produce stimulus and weaken their currency for economic benefit. This policy hasn’t worked in Japan, and it isn’t going to work in the Eurozone. We expect the EUR/USD to bounce on a simulative announcement: to our TREND ($1.12) and TAIL ($1.13) resistance levels. We also expect associated selling of European equities.
Alongside another rate-of-change slowing in employment and income last week, High Beta (+8.4% on the week), Small Cap (+6.2%) and High Debt (+7.2%) stocks led the counter-Trend move higher. In other words, the leverage and illiquidity that got you crushed over the last 8-months reflated. With growth slowing and the economic, profit and credit cycles past peak we don’t think the 3-week squeeze off of the mid-February 2016 Global Equity crash lows is sustainable.
In a Keynesian economy consumption is king and income growth drives the capacity for consumption growth. With hourly earnings growth decelerating and average hours worked per week declining in Friday’s NFP data, aggregate income growth will decelerate both sequentially and year-over-year when the official data are released for February later this month. Unless credit growth accelerates meaningful and/or the savings rates declines materially, consumption growth for February should show further deceleration and the labor, income, consumption peaks (4Q14/1Q15) will remain rearview.
*Tune into The Macro Show with Hedgeye Healthcare Sector Head Tom Tobin live in the studio at 9:00AM ET - CLICK HERE.
|FIXED INCOME||29%||INTL CURRENCIES||6%|
If you were long energy over utilities last week, nice trade! We'd remind you that Utilities (XLU) are outperforming the S&P 500 by +10% year-to-date. And that’s with the bounce. By contrast, Energy (XLE) was up 6.5% on the week but is up only 1% year-to-date.
General Mills (GIS) faces some headwinds across their portfolio, and although the 1H of FY16 was a challenge, the company has robust merchandising and consumer plans in the 2H that should improve results.
GIS has embarked on a mission to drive their top 450 SKUs, which represent 75-85% of their volume. Calling it their ‘Power 450’, surprisingly these 450 SKUs aren’t even in all retail locations and formats, broadening the distribution footprint of these top SKUs is priority number one for GIS’s sales team. The organization is also looking at the bottom 450, representing 1-2% of volume and making critical decisions on what products can be discontinued.
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.
We can’t emphasize enough the bigger picture from both a data and top-down market signaling perspective. To contextualize the relief rallies and short squeezes in asset classes and instruments that are counter to our more longer-term view. Here’s what how we think the macro environment plays out from here:
Once the policy catalysts are out of the way in the next few weeks, our expectation is a return to outperformance in growth slowing asset classes (TLT and XLU). If you’re in for the TAIL and the TREND call, focus on the data, not the desperate attempts of central planners to arrest economic gravity. A brief reminder: ECB chief Mario Draghi will attempt to walk on water Thursday.
VIDEO (15 mins) The Last Commodity Bubble Still Standing https://app.hedgeye.com/insights/49558-the-last-commodity-bubble-still-standing…
There is only one way to avoid criticism: do nothing, say nothing, and be nothing.
Alibaba affiliate Ant Financial is valued at nearly $50 billion, the internet-finance company plans to raise up to $3.1 billion in its current funding round.
Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.
Takeaway: Must-see insights from Hedgeye's non-consensus Healthcare team.
IN CASE YOU MISSED IT. Our all-star Healthcare team was live and interactive in our HedgeyeTV studio earlier today presenting their latest update and answering viewer questions in real-time.
Sector Head Tom Tobin and analyst Andrew Freedman discuss key topics below:
CLICK HERE to access the associated slides.
Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.
"... Notwithstanding the newfound bull market narrative that rising gas prices are going to stimulate the consumer, here’s what you had to be long last week (in US Equity Style Factor terms) to have crushed my bearish view:
*Mean performance of Top Quintile vs. Bottom Quintile (SP500 Companies)"
“Who was the first guy that looked at a cow and said, I think that I’ll drink whatever comes out of those things?”
-Calvin & Hobbes
Well, if you want to believe that this 3-week squeeze off of the mid-February 2016 Global Equity #crash low is sustainable, drink up! High Leverage and Low Liquidity (Small Cap) is back, baby.
Of all the bad weeks I’ve had since the US profit cycle peaked (when US and Japanese stocks peaked in July of 2015), last week ranked right at the top of them.
And, to be clear, since I was telling you to buy the Long Bond at 2.53% on the 10yr (in July), I’ve had some really bad weeks. But you’ve had to be able to endure those to have been right for the last 8 months.
Back to the Global Macro Grind…
Actually, there was one move that was more impressive than this most recent 3-week squeeze: October 2015. Imagine you got sucked into owning those highs (and kept averaging down from November to February)?
No one said getting this big macro phase transition right (as the economic, profit, and credit cycles are moving from bullish to bearish) was going to be easy. But if you’re just chasing moving monkey charts, it’s going to be super hard.
Notwithstanding the newfound bull market narrative that rising gas prices are going to stimulate the consumer, here’s what you had to be long last week (in US Equity Style Factor terms) to have crushed my bearish view:
*Mean performance of Top Quintile vs. Bottom Quintile (SP500 Companies)
Yep. Non-pasteurized. Straight from the cow’s nipple. Since most American farmers are in #Recession right now, you should be able to get some cows “cheap” and squeeze yourself as much “value” out of these exposures as you need.
Since the SP500 and Nasdaq were only +2.7% and +2.8%, respectively, last week (to -2.2% and -5.8% YTD), you’d have underpeformed the weekly chart chasers if you bought those exposures or, God forbid, Healthcare stocks.
Here’s how the US Equity Sector Styles did last week:
I know. Isn’t it odd that the “economy feels like it improved” while Consumer Confidence, Pending Home Sales, and ISM Services all slowed to multi-month lows? Healthcare: no bid in a “recovering” economy too? Totally weird.
Reality is that unless you have a bullish view on Oil and its related (and crashing) equity and fixed income exposures, you probably sucked wind like I did last week.
The real “reflation” bulls (who have lost 20-60% of their capital chasing headfake rallies for the last 18 months) had an awesome week last week – check this out:
Yeah, I know. Lula (Brazil) went to jail (sort of). So you would have had to know that was coming (and see a +9.6% weekly ramp in crude oil coming too) to have nailed all of that – but everything is doable. Mooo!
While we’re ignoring anything that actually went down last week (Natural Gas prices dropped another -7% on the week, crashing to -30.2% YTD) we should definitely give some rant time to European Equities.
On some of the worst European Economic data we’ve seen all year:
*Note: negative YTD returns
But you don’t have a complicit US-style Establishment Financial Media that cheerleads European market moves with cherry picked economic data, so we’ll just have to call Greece and Spain rallying something that feels bullish.
It’s all about how the economy “feels”…
And while I did not enjoy the squeeze part, I’m not feeling too good about sucking on whatever came out of those things last week.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.67-1.90%
Oil (WTI) 29.86-36.98
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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