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McCullough: Short Rich People?

 

In this recent clip from The Macro Show Hedgeye Demography Sector Neil Howe and CEO Keith McCullough discuss the income gulf between America’s “haves” and “have-nots” and why that gap may narrow in the years to come.


Why Atlanta Fed's GDP Forecast Is Crashing

Why Atlanta Fed's GDP Forecast Is Crashing - Fed cartoon 02.01.2016

 

The latest Atlanta Fed forecast for Q1 2016 GDP is now (drumroll please)... 0.6%.

 

That's down from 2.7% in February. Yes, that means the Atlanta Fed has lopped off more than 200 bps from its GDP forecast in a month.

 

Nice.

 

 

Here's a chart of the Atlanta Fed's latest hatchet job:

 

 

According to the Atlanta Fed, the estimate's recent decline, from 1.4% to 0.6%, was the result of revised down consumer spending growth and the added drag of declining net exports:

 

"The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 0.6 percent on March 28, down from 1.4 percent on March 24. After this morning's personal income and outlays release from the U.S. Bureau of Economic Analysis, the forecast for first-quarter real consumer spending growth fell from 2.5 percent to 1.8 percent. The forecast for the contribution of net exports to first-quarter real GDP growth declined from –0.26 percentage points to –0.52 percentage points following this morning's advance report on international trade in goods from the U.S. Census Bureau."

 

As Hedgeye Senior Macro analyst Darius Dale points out, the tracking error of the Atlanta Fed's forecast is a shocking 252 bps.

 

 

Hedgeye U.S. Macro analyst Christian Drake offers some critical context on the methodology underpinning the Atlanta Fed's estimate:

 

 

 

How useful is that? Not very.

 

On a related note, Hedgeye's Macro team has nailed the last five U.S. GDP numbers. Our current estimate?

1.0%


PHS | Leap Days, Midwest Marvels & Trend Deceleration

Takeaway: The PHS report this morning has a Leap Day asterisk on it, as does the reported strength in the Midwest. Trend deceleration remains.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - Compendium 032816

 


Today’s Focus: February Pending Home Sales 

Signed contract activity in February rose +3.5% sequentially against downwardly revised January estimates while decelerating to +0.7% YoY on a seasonally-adjusted basis as growth slowed to its weakest pace in 18-months.  On an NSA basis, year-over-year growth accelerated to +5.1%, bouncing off the worst rate of change print in 1.5 years in the previous month.   

  • Leap Day? It's unclear the extent to which the NAR adjusted the February report for the extra day in February.  The seasonal adjustment factor was less supportive of the reported, seasonally-adjusted figures than in prior years so it was seemingly part of the adjustment calculus but it wasn't mentioned in the release and we couldn't find a specific reference in a methodology search.  Unadjusted, the leap day would account for the entire +3.5% M/M increase. 
  • Midwest Marvel: Notably, the Midwest was responsible for most of the sequential strength with sales rising +11.4% MoM (+61% MoM NSA) – the largest increase ever with the exception of December 2008.  The NAR didn’t offer any commentary or speculation around the outsized gain in the region.
  • Trend = Deceleration:  January marks the 10th month of deceleration in PHS off the April 2015 peak.  While activity in the existing market saw some moderate mojo in February, the larger Trend remains one of deceleration and we continue to expect that trend to extend for at least the next three months with volume growth going negative as comps steepen into April/May. 
  • EHS vs PHS:  The risk to EHS in March is to the upside should closed transaction volume recouple with the trend in signed contract activity.

 

 

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - PHS SA   NSA YoY

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - PHS Midwest

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - PHS YoY   Index

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - EHS vs PHS

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - PHS Regional YoY

 

PHS | Leap Days, Midwest Marvels & Trend Deceleration - PHS LT

 

 

 

About Pending Home Sales:

The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.

 

Frequency:

The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake


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Not a Pretty Picture ... A Look At Corporate Profits, Small Caps & Bond Yields

Not a Pretty Picture ... A Look At Corporate Profits, Small Caps & Bond Yields  - Bull herd cartoon 03.18.2016

 

While the permabull marketing machine keeps churning, macro market internals are crumbling. Whether you're looking at performance of small cap stocks, declining bond yields, or the ongoing corporate profit recession, deteriorating economic data appears to be largely lost on Wall Street consensus.

 

Meanwhile, forecasts of our omnipotent Fed central planners remain disconnected from economic reality. As Hedgeye CEO Keith McCullough writes in a note to subscribers this morning:

 

"Treasury Yields stopped going down last week as Fed Heads jawboned about a rate hike (Dollar Up); immediate-term risk range on the UST 10YR is 1.84-1.98%; that’s a tight range – let’s see if they’re serious this time or just S&P 500 dependent (tightening into this Profit #Recession would be deflationary, again)."

 

 

More on the corporate profit recession reported friday...

 

It's getting pretty ugly. Corporate profits declined -10.5% year-over-year, slowing an additional -540 basis points versus Q3 when the data first went negative. We've been warning about declining corporate profits since January, with the release of our 1Q16 Quarterly Macro Themes. 

 

Declining profits have been hammering stocks since the data peaked in Q2, McCullough writes. 

 

"The Russell 2000 lagged (again) last week, dropping -2.0% on the week (vs. -0.7% for the S&P 500); at -16.8% from its all-time high in July. The RUT is back to within 330 basis points of being in crash mode (> 20% decline from the July peak); Russell 2000 peaked when U.S. corporate profits peaked (Q2 of 2015)."

 

Not a Pretty Picture ... A Look At Corporate Profits, Small Caps & Bond Yields  - russell

 

Where do we go from here?

 

Here's another callout from our 73-page 1Q Macro Themes deck. In the past 30 years, two consecutive quarters of declining corporate profits always precedes a stock market crash:

 

Not a Pretty Picture ... A Look At Corporate Profits, Small Caps & Bond Yields  - 3 28 Profits Down  Stocks Down Slide 39


MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR

Takeaway: Two consecutive quarters of contracting corporate profits have reliably signaled a meaningful NTM market downturn in the last three decades.

Key Takeaway:

Our Macro team published an interesting note late last week showing that in 4Q15 corporate profits posted their worst growth (Y/Y) since 4Q08. While U.S. 4Q GDP was revised up to +1.4%, the corporate profit component showed a -10.5% Y/Y contraction. Moreover, that marks the second consecutive quarter in which corporate profit growth was down Y/Y. Meanwhile, global uncertainty rose on the heels of the Brussels terror attacks. CDS spreads widened globally at both the sovereign and bank level, and high yield rose +22 bps to 7.89%. The chart below illustrates that in the 30 years since 1985, two consecutive quarters of shrinking corporate profits have preceded a material stock market downturn over the next twelve months in all five occurrences.

 

 

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM11 2

 

 

Current Ideas:

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 13 improved / 5 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 8 of 13 improved / 3 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM15

 

1. U.S. Financial CDS – Swaps widened for most domestic financial institutions as data showed the worst rate of Y/Y corporate profit contraction since 4Q08.

Widened the least/ tightened the most WoW: LNC, ACE, AGO
Widened the most WoW: MET, PRU, ALL
Tightened the most WoW: AIG, AXP, HIG
Widened the most MoM: JPM, RDN, MMC

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM1

 

2. European Financial CDS – Swaps mostly widened across European financials last week following the tragic terrorist attack in Brussels and poor corporate profit data out of the U.S.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM2

 

3. Asian Financial CDS – Swaps mostly widened for Asian financials following the global reaction to the Brussels terrorist attack and poor U.S. corporate profits. China Development Bank Corp CDS widened the most, by 33 bps to 149. Meanwhile, Mizuho Corporate Bank in Japan tightened the most, by -14 bps to 97.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly widened over last week. Portuguese swaps widened the most, by 30 bps to 273.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM18

 

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM3

 

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps widened across the board last week. Brazilian sovereign swaps widened the most, by 29 bps to 395.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM16

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 22 bps last week, ending the week at 7.89% versus 7.67% the prior week.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 4.0 points last week, ending at 1852.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM6

8. TED Spread Monitor  – The TED spread rose 1 basis point last week, ending the week at 35 bps this week versus last week’s print of 33 bps.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM7

9. CRB Commodity Price Index – The CRB index fell -0.9%, ending the week at 172 versus 174 the prior week. As compared with the prior month, commodity prices have increased 6.5%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 10 bps.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged last week at 1.99%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM10

12. Chinese Steel – Steel prices in China rose 2.3% last week, or 54 yuan/ton, to 2419 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 103 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM13

14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread was unchanged at 40 bps.

MONDAY MORNING RISK MONITOR | ANOTHER NEGATIVE INDICATOR - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT



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