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Cartoon of the Day: Happy April Fools' Day

Cartoon of the Day: Happy April Fools' Day - April foo cartoon 04.01.2016

 

See today's supposedly "bullish" non-farm payroll numbers? Nothing to celebrate. "Remember, whatever the bulls want to characterize as "good" news now = #Fed rate hike," says Hedgeye CEO Keith McCullough. 

 

On a related note, we've got big news.


Godot's Cycle | A Few Quick Points on March NFP

Those waiting for an inflection to Trend acceleration in domestic growth have been waiting for 9-months and will be watching the economic paint dry for a long while still.  Those looking for an imminent, acute collapse in activity and a Saturday recession will be similarly disappointed.      

 

Since 1K labor review notes have already hit your inbox and because my proclivity for brevity has become an increasing function of my age, # of kids, and proximity to the weekend, let’s go with the bullet-point set of tangible takeaway:

 

  • Sequential ↑, Trend ↓ | The March Employment data was good but not good enough.  Given the easiest comp in years (Last March = +84K) we knew we’d get a sequential, rate-of-change acceleration in employment growth.  The Trend, however, remains one of deceleration off the RoC peak of +2.28% YoY recorded in February 2015. 
  • Bro, Don’t be So Bro-Cyclical About It! Peak rate-of-change in employment growth doesn’t herald an imminent recession.  Over the last three cycles, on average, the expansion lasted 24-months after reaching peak employment growth.  Notably, however, the cycle consistently plays itself out after cresting.  In other words, we don’t roll off peak growth then re-breach it to the upside. 
  • Comps:  With 2Q16 comps being the hardest of the cycle, the trend toward deceleration won’t abate over the nearer-term.   Reported 1Q earnings will remain dismal and the slope of the line across most growth metrics will remain negative in 2Q.
  • Labor ↑, Profits ↓:  To the extent demand & output continue to decelerate, healthy employment gains effectively equates to (further) lower productivity and margin pressure for businesses.   The combination of rising labor costs and declining demand/profitability can only persist so long until it feeds back negatively on hiring and capex decisions. 
  • Income:  With growth in aggregate hours rising and wage growth accelerating modestly, aggregate income growth should reflect modest acceleration when the official March data are reported later this month.  If the savings rate retreats off the highs of recent months, consumption growth should see similar improvement.  Like the employment dynamics highlighted above, this would represent a sequential improvement inside a larger trend towards deceleration. 
  • The Cycle | We’ll review this in fuller detail on our 2Q16 Macro Themes call on Thursday but the following fundamental macro metric flow sufficiently captures the broader reality:
    • 4Q14: Income Growth, Corporate Profits and SPX Margins Peak --> 1Q15: Employment Growth peaks --> 1H15: Consumption Growth & Confidence Peak--> 3Q15: Equities Peak  ……So, not some mystical transcendental function, it’s simply the cycle playing out largely as a commonsense expectation of it would suggest.   
  • Good = Bad:  Perceived good news =  ↑rate hike risk = $USD ↑ = equities/commodities/everything-reflation ↓.  Correlations, of course, build and decay but nearer-term inverse correlations to the dollar remain strong at present.   
  • Quad #3/4:  As it stands currently, we’re walking the edge of stagflation’s blade.  Rising inflation + Slowing Employment Growth classically characterizes the late-cycle.  If, however, wage inflation fails to materialize alongside the rise in broader inflation (driven by excess price growth in key consumer cost centers of housing/healthcare) and consumption/income continue to slow then stagflation risk starts to percolate more tangibly.  Neither scenario  - late cycle and/or stagflation -  is particularly supportive of pro-growth positioning.  

A visual tour of the data is below.  Enjoy the weekend.

 

Godot's Cycle | A Few Quick Points on March NFP - Empl Summary table

 

Godot's Cycle | A Few Quick Points on March NFP - NFP YoY

 

Godot's Cycle | A Few Quick Points on March NFP - NFP vs Earnings

 

Godot's Cycle | A Few Quick Points on March NFP - Impled Income Growth

 

Godot's Cycle | A Few Quick Points on March NFP - Tech vs Energy

 

Godot's Cycle | A Few Quick Points on March NFP - EP

 

Godot's Cycle | A Few Quick Points on March NFP - LFPR

 

Godot's Cycle | A Few Quick Points on March NFP - Labor Share

 

Godot's Cycle | A Few Quick Points on March NFP - Prof Donw

 

 

Christian B. Drake

@HedgeyeUSA

 


McCullough: Is The Fed Dumb Enough To Hike On Today’s Jobs Report?

In this brief excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough discussed how the Fed will interpret today’s late cycle non-farm payroll numbers and its implications for investors.


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What Does Asia, LatAm and EEMEA Have to Say About Global Reflation?

***Below is today's summary of our internal analysis of recent key economic and policy developments emanating from economies in the aforementioned regions. We thought the summary might be helpful as you ponder the sustainability of this epic short-squeeze in global reflation assets.***

 

In China, the latest batch of high-frequency growth data point to near-term economic stabilization. In conjunction with reduced capital outflow pressures, greater transparency and recent CNY strength, it’s safe to say the bearish yuan overhang has been lifted – for now, at least. We expect that negative catalyst to resume here in Q2, however, as the USD should start to rise amid heightened risk aversion per our #Quad4 forecast for the U.S. economy. This is all part of our expected path for Chinese economic growth and the RMB (i.e. “walking down the stairs” vs. the consensus view of an inevitable crash).

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - China

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - UNITED STATES

 

In Japan, the sour 1Q Tankan Survey, terrible MAR Manufacturing PMI report and declining stock prices all call attention to the efficacy and limits of BoJ monetary policy. This has shifted the Japanese policy debate to the fiscal arena and it would appear that Abe is readying yet another [ineffective] supplementary budget amid his call for other G7 economies to dive into the expansionary fiscal policy pool with him. The frequency with which DM policymakers are acting to spur growth is increasing as the impact of marginal stimulus wanes and demographic headwinds gather steam.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Japan

 

In India, quiet week in terms of economic releases but sequential downticks in both growth and inflation readings of late have perpetuated expectations of dovish monetary policy out of the RBI, which has been a boon to Indian capital markets and the INR of late. That said, however, we do not view the aforementioned market deltas as sustainable amid another bout of global risk aversion – which is something we anticipate here in Q2.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - India

 

In South Korea, the preponderance of the latest batch of high-frequency growth and inflation data implies a #Quad1 outcome – as do trends across key metrics. That in conjunction with South Korea’s low score within our proprietary EM Crisis Risk Index affords us scope to remain favorably disposed to South Korean capital markets and the KRW.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - South Korea

 

In Australia, the latest batch of high-frequency growth data came in mixed, while the political situation has taken a decided turn for the worse – at least in units of investor uncertainty. We don’t have an explicit view on the outlook for Australian capital markets, but we do believe the AUD is grossly overbought in the context of what we continue to view as an unsustainable global reflation rally nearing its eventual end.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Australia

 

In Taiwan, economic growth appears to have stabilized per the MAR Manufacturing PMI report and trends across the preponderance of key high-frequency growth data. That in conjunction with inflation that is now accelerating on a sequential and trending basis would seem to support the TWD – if not on an absolute basis, then certainly on a relative basis to other EMEs – amid the next round of global dollar tightening, which itself should occur here in Q2.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Taiwan

 

In Indonesia, the latest batch of high-frequency growth and inflation data was generally positive, on the margin, but we strongly caution against chasing those deltas with increased allocations to Indonesian capital markets or via the IDR. Recall that Indonesia scored most poorly within our proprietary EM Crisis Risk Index, which itself underscores our bearish bias on Indonesia over the intermediate-to-long term.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Indonesia

 

In Thailand, the latest batch of high-frequency growth and inflation data came in decidedly mixed, highlighted by the contrast between decelerating BSI (FEB) and accelerating Export growth (MAR). Per Thailand’s low score in our proprietary EM Crisis Risk Index, we remain favorably disposed to the country with respect to the intermediate-to-long term.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Thailand

 

In Brazil, the latest batch of high-frequency growth data is generally confirmatory of two of the four reasons we think Brazilian capital markets and the BRL are currently priced to perfection: 1) growth contracted at a slower rate and 2) inflation inflected from a persistent trend of acceleration. That in conjunction with 3) the removal of the bearish CNY overhang and 4) consensus speculation that a post-Rousseff administration led by Michel Temer or Aecio Neves will implement much-needed fiscal and economic reforms (which may lend scope to BCB to ease) has value investors backing up the truck here. We think such actors are setting themselves up to be largely disappointed over the intermediate-to-long term as the path and pace of reform falls well shy of investor expectations amid a looming bankruptcy cycle in Brazil. Refer to Brazil’s elevated score in our proprietary EM Crisis Risk Index for more details.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Brazil

 

In Mexico, growth continues to slow on a trending basis. Much like in Indonesia, we find it imprudent for real money investors to chase the recent solid performance of Mexican capital markets and the MXN – the both of which benefited from what we continue to view as an unsustainable global reflation rally. Like its Latin American neighbor Brazil, Mexico scores poorly on our proprietary EM Crisis Risk Index, which underscores our intermediate-to-long-term bearish bias on the country.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Mexico

 

In Russia, both the RUB and Russian capital markets are starting to break down amid what may be the first signs of the resurgence of global dollar tightening here in Q2. Russia screens fairly poorly on our proprietary EM Crisis Risk Index, but not nearly as poorly as its oil-producing counterparts in Latin America (namely: Brazil, Mexico and Colombia). As such, we think those looking to re-short commodity-linked EM countries would do better to avoid Russia – which has a substantial degree more political and economic risks priced into its financial markets than its peers.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Russia

 

In South Africa, the latest batch of high-frequency economic data is confirmatory of what we’ve previously identified as the key cyclical risk to South African capital markets – hawkish monetary policy out of the SARB (which we expect to remain ongoing). While that has been a boon to the ZAR, we don’t view its recent gains as sustainable in the context of a the aforementioned global dollar tightening scenario we’ve identified for Q2. Additionally, South Africa scores particularly poorly on our EM Crisis Risk Index, which underscores our intermediate-to-long-term bearish bias on the country.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - South Africa

 

In Turkey, the latest batch of high-frequency economic data would seem to suggest Turkish economic growth is has likely inflected from its positive run ending in 4Q15. While that is certainly not a positive catalyst, we don’t have an explicit bias on Turkish capital markets or the TRY other than our expectation that both continue to trade in line with broader EM asset class beta from here.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Turkey

 

Works Cited:

 

 

Remember 2H14? That is a good summary of #Quad4’s impact on reflation assets. Don't disrespect what falling nominal GDP expectations (amid heightened recession fears nonetheless) might do to the collective risk appetite of investors. The Fed likely cannot opt for QE4 unless stock market declines force their hand. Moreover, there's a lot of time and space between April 1st and the FOMC's June 15th statement (in which they update their S.E.P. and Dot Plot). The April meeting offers no such [potentially bullish] catalyst.

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - U.S. Dollar Index

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - JPM EM FX Index

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Brent Crude Oil

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Barclays High Yield OAS

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Energy

 

What Does Asia, LatAm and EEMEA Have to Say About Global Reflation? - Industrials

 

Best of luck out there risk managing the aforementioned pivot!

 

DD

 

Darius Dale

Director


REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream

Takeaway: Enclosed is our REPLAY of our Best Ideas Short call we hosted on T. Rowe Price called Paddling Upstream.

REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 1

 

Video REPLAY 

Audio REPLAY

Link to MATERIALS

 

We hosted a Best Ideas Short call on shares of T. Rowe Price (TROW) yesterday. While a well managed, disciplined investment manager, the secular shift to ETFs and mostly importantly to Large Cap strategies is too pervasive for the firm to meet the Street's expectations in our view. In addition, this predominately equity mutual fund manager is at the wrong part of the cycle operating at peak margins and peak profits with the growing potential for a long overdue market decline to kick off negative operating leverage. The firm has unappreciated equity leverage in its most important product, its target date fund franchise with its "through" asset allocation. Our key takeaways are:

 

1.) The shift from active to passive continues to accelerate and 67% of passive inflows are going to Large Cap strategies. TROW has the largest percentage of Large Cap product of any public mutual fund manager and when including SMAs, TROW's Large Cap exposure goes to over 40% of total assets-under-management:

 

REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 2

 

REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 3

 

2.) The firm's Target Date franchise is its go to source of growth, however the oldest Baby Boomers turned 65 in 2011 and now three Series of TROW target date products are in redemption. The hump gets worse in the distribution into the 2020 series which is the second biggest pool of TD assets for the manager. Target date is the only source of growth currently in the overall complex.

 

REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 5

 

REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 6

 

3.) TROW is once again at peak margins and profitability and after setting a new high water mark in 2014 at over 50% pretax margins, results are set to recede. TROW will also be bumping up against a break point in fees at over $500 billion in mutual fund AUM which won't help margins. We have earnings at $4.06 for 2017, -17% below the Street before considering that the stock's multiple should also contract against the group.

 

REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 7

 

REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 8

 

 

Please let us know of any questions.

Jonathan Casteleyn, CFA, CMT 

 



Joshua Steiner, CFA

 

 

 

 


RH: We Are Removing Restoration Hardware From Investing Ideas

Takeaway: Please note we are removing Restoration Hardware from Investing Ideas (long side) today.

"Since this is a long-term investor product and Retail Sector head Brian McGough doesn’t want to be long it past the summer time (see below), I want to take advantage of this week’s ramp and take it off our long-term list," says Hedgeye CEO Keith McCullough. "Happy to revisit once our macro call plays out."

 

RH: We Are Removing Restoration Hardware From Investing Ideas - rh

 

Here's the bullish case for Restoration Hardware from McGough:

 

Fundamentally, the name looks outstanding on a TRADE and a TAIL basis. The question lies in TREND. 

 

My point is this…

  1. The results printed earlier this week were 4Q – they report REALLY late. The next quarter ends in just four weeks.
  2. If you bought a leather sofa today, you would not take delivery until early May. Therefore that would be 2Q revenue. In other words, RH already knows its 1Q number (which will be reported late May/early June). But people don’t look at it that way.
  3. RH just issued 1Q guidance that I think leaves room for upside – potentially a lot. Guided to $0.04-$0.06.

 

Then we get into mid-summer ... when you don’t want to own retail stocks anyway, and there’s 3-6 months before the biz accelerates again. During that time they’ll be spending on infrastructure. Don’t want to own it then.

 

Bottom line

We like it over the next month ... don’t like it again until Sept/Oct ... and we are WELL above the Street next year.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%
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