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BREAKING: Fed Is Still Out To Lunch (Here's How To Play It)

BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - Yellen cartoon 11.11.2015

 

BREAKING... Believing the Fed's serially optimistic economic forecasts remains the biggest risk to investors.

 

Today, Fed head Janet Yellen said "caution" about further rate hikes was "especially warranted." While she was speaking, Treasury yields continued their downward descent. 

 

Here's where we're at. The Fed continually dials back rate hike expectations and thereby jawboning Long Bond yields lower. The 10-year Treasury yield currently sits at 1.82%, 45 basis points below where it started at the beginning of the year. 

 

BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - 10yr treasury

 

Q: Who warned you?

A: Hedgeye

 

The dovish Fed commentary confirmed what we have long known. It was a mistake to raise rates in December and interest rates will have to stay #LowerForLonger to prop up an already flimsy economy. (Reminder: Wall Street's "top strategists" predicted the 10-year Treasury yield will end the year between 2.5% and 3.5%. We'll see about that.) 

 

As Hedgeye CEO Keith McCullough likes to say, it still pays to be "the most bullish guy on Wall Street" on Long Bonds (TLT). Take a look at the performance of TLT year-to-date versus the S&P 500:

 

BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - tlt v sp

 

What else has worked this year? Other Hedgeye Long calls...

 

  • Gold (GLD) up 16.6% year-to-date
  • Utilities (XLU) up 13.4% year-to-date

(*Not exactly macro market expressions of confidence in the Fed's "all is good" mantra, huh?)

 

And if you think things get easier from here for Yellen & Co. don't hold your breath. As McCullough wrote in today's Early Look:

 

"We’re reiterating that the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3."

 

Let's set aside for a second the fact that the Atlanta Fed's own Q1 2016 GDP forecast released yesterday just plunged 200 bps in the past month to a paltry 0.6%. It's our contention that as the developing corporate profit and industrial recession gets priced into the market (aka economic data continues to roll over), long-only equity investors can expect a lot more pain from here. 

 

stick with what's been working all year.


The Airbnb Impact On Hotels & Timeshare

 

Hedgeye’s Gaming, Lodging, and Leisure team hosted a presentation recently to introduce our proprietary Airbnb listings/price tracker and discuss the Airbnb impact on the lodging and timeshare space.


Millennials: Where the Wild Things Aren't (And The Investing Implications)

Takeaway: As Millennials have come of age, young adult entertainment has softened—a trend with profound generational undercurrents.

Editor's Note: Below is a complimentary research note written by world-renowned demographer Neil Howe who recently joined Hedgeye as Demography Sector Head.

 

<chart6>

WHAT’S HAPPENING

 

The U.S. nightlife industry is suffering. Over 10,000 bars have shut down in the past decade—with closures reaching a peak of six per day in 2014. Even big joints are going down, including four of Atlantic City’s 12 casinos last year.

 

Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide3

 

It’s not just a U.S. trend. Nightclubs in Britain fell over the last decade from 3,144 to 1,733—a 45 percent drop. In the Netherlands, the number of nightclubs and “discos” have meanwhile fallen by 38 percent.

 

Kids these days just want to live in their f---ing own little worlds in their bedrooms watching Netflix and becoming obese.” –frustrated UK bartender cited in The Economist (2015)

WHY IT’S HAPPENING

 

Young adults typically provide the top-line growth for drinking places. But today’s young adults are drinking (and smoking) less. This was a trend first noticed when the oldest Millennials were in highschool back around 2000, and the trend is aging with them as they grow older.

 

Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide6

 

When they do drink, moreover, Millennials are less likely to do so in anonymous settings with random strangers. Why?

 

(1)  Millennials use social media and smart phone to choose exactly who they want to be with. You no longer have to be with everybody in order just to meet somebody.

(2)  The demographic weight of the Boomers, as they age, is changing the social mood tone in a more sedate and conservative direction. When Boomers were young, the culture celebrated wild night life. Now it celebrates mindfulness and juice diets.

(3)  Millennials—a.k.a. “Generation Yawn”--themselves show a wide-ranging aversion to personal risk-taking of every variety, including the edgy nightclub/bar lifestyle. Assertive Millennial women may be taking the lead here: They are devaluing male-dominated hedonism, and the men are mostly going along.

BROADER IMPLICATIONS

 

In the media, Boomers (and Xers) are embracing the dysfunctional “wild child” label, even as Millennials abandon it. There is a burgeoning category of movies and TV shows centered on “Baby Boomers behaving badly.” Millennials, meanwhile, are flocking to the “new nice” in entertainment, hosted by never-nasty hosts like Jimmy Fallon and Trevor Noah.

 

Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide11

 

Sports brands are losing their bleeding edge. Nike e.g. is less into black and winning at all costs—and instead doubling down on neon and pastel and “athleisure.” Millennials who do color runs and tough mudder are not trying to beat each other. Activities associated with competition and danger (like snowboarding) are on the decline—along with bar games like pool and darts.

 

Las Vegas casinos, seeing that Millennials are not as attracted to drinking and gambling as older generations, are ramping up on sociable skill games with leaderboards. They’re also investing more in spas, restaurants, and even underground wine caves to give Millennials more spectacular and “shareable” experiences.

 

Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide9


Daily Trading Ranges

20 Proprietary Risk Ranges

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McMonigle: An OPEC Oil Production Freeze? Get Real.

Takeaway: OPEC and Russia have set April 17 for the release of its production freeze. We're highly skeptical a meaningful agreement will be reached.

Editor's Note: Below is a research note on the oil industry and ongoing OPEC developments from Potomac Research Group Senior Energy analyst Joseph McMonigle.

 

McMonigle: An OPEC Oil Production Freeze? Get Real. - oil iran saudi

 

While we certainly expect that speculators will be swayed by the Doha discussions, we are highly skeptical that any meaningful agreement will be reached or that it changes the outlook for oil markets.

 

We view the freeze as OPEC's version of vaporware for two main reasons:

 

  1. A freeze is not a cut; and
  2. A freeze without Iran is not a freeze.

 

With Russia and many OPEC countries at or near maximum production amounts, a freeze will only continue the supply glut and add to record crude inventories.The freeze would only be meaningful with Iran's participation which is the only producer capable of ramping up production. But Iran has made it clear that it won't participate and even freeze proponents now concede that any agreement will exclude Iran.


There are increasing signs that Iran is achieving its production goal.  An official at the state-owned National Iranian Oil Company said on March 2 that February's crude exports had reached 500,000 bpd, and it expects an additional increase in March of 250,000 to 350,000 bpd. Shipping sources have also supported increased Iranian exports but we will standby for more independent confirmations.


Bottom Line

On June 2, OPEC will meet for its regularly scheduled meeting. We continue to see no chance of a production cut at this time and maintain our thesis that Saudi Arabia believes its market share policy is winning. 

 

CLICK THE IMAGE BELOW TO WATCH MCMONIGLE ON BloombergTV

McMonigle: An OPEC Oil Production Freeze? Get Real. - mcmonigle image today


Can Central Planners Save The World? Nope. (So Short Japanese Equities)

Can Central Planners Save The World? Nope. (So Short Japanese Equities) - central bank cartoon 02.17.2016

Don't believe all the central banking hoopla?

 

You're not alone.

 

Here's the latest way to play the breakdown in central planning via Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:

 

"The yen is down -0.2% vs. USD this this morning at 113.72 and that registers an immediate-term TRADE oversold signal inasmuch as Nikkei signaled immediate-term overbought late last week (buy Yen, short Japanese stocks remains our current view there as the #BeliefSystem in central-market-planning breaks down)"

 

 

To be clear, Japan's central planners can't arrest economic gravity. That's why we think the recent rally in Japanese stocks will prove short-lived. 

 

Can Central Planners Save The World? Nope. (So Short Japanese Equities) - boj nirp

 

Here's the abbreviated tip via Twitter McCullough sent to Real-Time Alerts subscribers yesterday:

 

 

Meanwhile ... things aren't shaping up too well in Europe either, where Draghi is attempting to save Europe's deteriorating economy. According to McCullough: 

 

"After an ugly last week, equities are trying to bounce but unimpressively so post the Easter break – Italian Stocks (MIB) were -2.4% last week and +0.6% early this morning, but -14.6% YTD and still in crash mode -24% vs. this time last year when many thought European growth was going to be just fine (its consistently slowing now)"

 

How about Italy?

 

 

Ouch!

 

Other European markets off significantly from their 52-week highs?

 

  • France (CAC 40): -17.7%

  • Germany (DAX): -20.7%

  • Spain (IBEX): -26.0%

 

The central planning belief system is breaking down.


Atlanta Fed GDPNow Model Jumps the Shark

Takeaway: How a “forecast” goes from +2.7% GDP only a month ago to +0.6% today boggles the mind.

Editor's Note: This is an abridged excerpt from today's Early LookClick here to subscribe.

 

Atlanta Fed GDPNow Model Jumps the Shark - z fonz

 

Wow. Is this Atlanta Fed “GDP Now” model getting ugly. How a GDP “forecast” goes from +2.7% GDP only a month ago to +0.6% today is beyond me, to be quite frank!

 

We’re sticking with what was the Street’s low Q1 US GDP forecast of 1% (our predictive tracking algorithm and mapping/measurement #process has been accurate, within 25-50 basis points, on GDP for the last 5 quarters – without the 200bps intra-quarter swings!).

 

And, more importantly, we’re reiterating that the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3.

 

Click to enlarge

 

...AND Here's Fonzie jumping the shark.


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