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A Brief Appraisal Of Fed False Narratives

Takeaway: Recent macro market moves in the Long Bond contradict the Fed's "all is good" narrative.

A Brief Appraisal Of Fed False Narratives - Fed ducks in a row

 

Hurray! No recession, no bubbles and the Fed's December rate hike went exactly as planned.

 

That's the latest delusional takeaway from Fed head Janet Yellen. Last night, Yellen joined her predecessors Ben Bernanke, Alan Greenspan and Paul Volcker in NYC for a panel discussion to parade the U.S. economy's "tremendous progress" since the '07-'09 financial crisis.  

 

Where do we begin?

 

We've been steadfast in our criticism of the Fed's and Wall Street's serial overoptimism on U.S. economic growth. Here's Hedgeye CEO Keith McCullough, in the video below, explaining what we really think about Fed "data dependence."

 

 

Last night, Yellen's storytelling hit an all-time low. Here's analysis from McCullough in a note sent to subscribers earlier this morning: 

 

"Yellen has had quite the year of storytelling so far, but last night’s USD comment took the cake: “higher currency was a drag on the economy and consumer spending.” Wow. #StrongDollar (rising purchasing power, falling gas prices, etc.) perpetuated a 6yr cycle high in Real Consumer Spending in 2015; in Q1 Consumer Spending slowed alongside a weakening USD."

 

 

Another issue for the Yellen "all is good" narrative is the continually falling Long Bond (i.e. U.S. growth is slowing):

 

"Another great day for the Long Bond yesterday (best way to be long #GrowthSlowing); 10yr Yield of 1.71% is re-testing the FEB lows as Yellen tries to keep Oil/Commodities/Inflation higher. The Cycle call remains firmly intact; US Equity Beta (like at OCT and DEC end) is behind the curve pricing in what should be the worst quarter of the slow-down (Q2)."

 

 

Fading the Fed's false narratives has been a winning strategy all year.

 

Stick with it.


TROUBLE on the FARM – Key Call-Outs (MON, AGU, CF, MOS, POT)

Momentum in tighter credit standards for cash strapped farmers should continue to weigh on crop input expenditures. What we would call-out with respect to margins is that despite the consensus dour view on the sector, fertilizer companies still have a lot of margin to lose, something we will continue to highlight:

  • The divergence in the Chicago Fed Farm Loan Repayment Index and the Fed Farm Loan Demand Index continues its years-long divergence.
  • Farm Incomes (nominal and real) continue to decline against the increasing demand for loans. Lower incomes = credit needed. After last week’s quarterly WASDE report, the USDA’s Commodity Credit Corporation (CCC) tightened its borrowing rate-based charge for April to 0.625% vs. 0.50% in March. It also raised the interest rate for crop year commodity loans to 1.625%, up from 1.5% in March: LINK
  • Using the example of nitrogen, the multi-year divergence in nitrogen prices paid by farmers vs. prices received by farmers for crops remains pinned at the highs. The ammonia to nat. gas price ratio also remains near the most favorable level for producers – Margin to lose to a supply-side “price floor” argument.
  • How inelastic is the demand story in nitrogen? We’ll find out in 2016: “Randy Thompson plans to apply 30% less nitrogen fertilizer to his corn this year to save money in the face of crashing crop prices”: LINK

 

TROUBLE on the FARM – Key Call-Outs (MON, AGU, CF, MOS, POT) - Chicago Fed Farm Credit Indices

 

TROUBLE on the FARM – Key Call-Outs (MON, AGU, CF, MOS, POT) - Kansas City Farm Loan Demand Index

 

TROUBLE on the FARM – Key Call-Outs (MON, AGU, CF, MOS, POT) - Farmer Producer Price Index

 

TROUBLE on the FARM – Key Call-Outs (MON, AGU, CF, MOS, POT) - Ammonia Nat Gas Price Ratio

 

 


Yellen, UST 10YR and Europe

Client Talking Points

YELLEN

She’s had quite the year of storytelling so far, but last night’s USD comment took the cake: “higher currency was a drag on the economy and consumer spending.” Wow. #StrongDollar (rising purchasing power, falling gas prices, etc.) perpetuated a 6 year cycle high in Real Consumer Spending in 2015; in Q1 Consumer Spending slowed alongside a weakening USD.

UST 10YR

Another great day for the Long Bond yesterday, it continues to be the best way to be long #GrowthSlowing. The UST 10YR Yield of 1.71% is re-testing the FEB lows as Yellen tries to keep Oil/Commodities/Inflation higher. The Cycle call remains firmly intact; U.S. Equity Beta (like at OCT and DEC end) is behind the curve pricing in what should be the worst quarter of the slow-down (Q2).

EUROPE

Europe was just a train wreck this week, but they’re trying to bounce them again this morning (Spain +1.3% on the bounce but fully loaded with that still -29.1% from last year’s European economic cycle highs); we reviewed our European GDP forecast of 0.2% by Q4 on our Q2 Macro Themes Call yesterday in case you want to review the non-consensus view.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 7%
FIXED INCOME 24% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) hit an all-time highs last week. "They can't chase Energy Charts today, so they're just dog-piling into our long calls on GIS and MCD," wrote Hedgeye CEO Keith McCullough on Friday.

 

We've said it before, McDonald's has all the style factors that we like during these turbulent macro market times; high market cap, low beta and liquidity. The stock is up 7.5% this year beating the S&P 500 by more than 600 bps. In August 2015, Restaurants analyst Howard Penney wrote that "2015 will be the last time this stock is below $100."

CME

CME Group (CME) stock is among the small cohort of financial companies that benefit from volatile markets. With the exchange's open interest continuing to expand, which will drag trading volume higher, CME Group is one of the few lower beta longs that will hold up relatively better in the current environment.

 

The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts. Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.

TLT

Non-Farm payroll additions came in over +200 again (+215K to be exact) and private sector wage growth was also “good,” increasing +4.2% year-over-year on Friday. We’re most concerned with "better" or "worse" from a rate of change perspective. The non-farm payroll number is "less good" (i.e. "worse") from a year-over-year rate-of-change perspective. Growth in non-farm payrolls peaked in February 2015 at +2.3% year-over-year and the trend since then has been one of decline (+2.0% Y/Y for March 2016). And private sector salary and wage growth peaked on a year-over-year percent change basis in December of 2014.

 

We remain bullish on Long Bonds (TLT and ZROZ), Utilities (XLU) and short Junk Bonds (JNK). We expect more alpha after what was a great Q1, as the back-end of the Treasury curve continues to get flatter regardless of Fed rate hikes. We were alone in that camp, in December, when we first told you that a rate hike was in fact good for long-duration Treasury bonds. Stick with what's worked.

 

Here's the Q1 2016 Scorecard (data through 3/31):

  • TLT +8.3%
  • XLU +14.7%
  • JNK +1.0%
  • versus S&P 500 +0.7%

Three for the Road

TWEET OF THE DAY

A Brief Warning On Q1 #Earnings https://app.hedgeye.com/insights/50141-a-brief-note-on-q1-earnings-from-hedgeye-s-macro-team … cc @KeithMcCullough @HedgeyeDDale $SPY #Stocks

@Hedgeye

QUOTE OF THE DAY

If you could say it in words, there'd be no reason to paint.

Edward Hopper

STAT OF THE DAY

According to the World Health Organization, 422 million adults have diabetes, which makes the worldwide rate 8.5% (that is up from 4.7%).


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CHART OF THE DAY: Dear Janet, The Cycle Is Not Complicated

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. 

 

"... As Yellen and her colleagues who now read @Hedgeye Macro can see in today’s Chart of The Day (slide 12 of the Q2 Macro Themes deck), #TheCycle is not a mystery. This one has been both obvious and pedestrian in its sequence:

  1. Q2 2014 = Income Growth, Corporate Profits, and S&P 500 Margins #peaked (in rate of change terms)
  2. 1H 2015 = Employment & Consumption Growth, Confidence, Domestic Investment, and Multiples #peaked
  3. Q2/Q3 2015 = US Equities Peaked
  4. Q4 2015 = M&A #Peaked and the #CreditCycle (and market dislocations) began
  5. 1H 2016 = #GrowthSlowing from #TheCycle peak (in rate of change terms) continues"

 

CHART OF THE DAY: Dear Janet, The Cycle Is Not Complicated - 04.08.16 chart


The Cycle

“Time is like a book. You have a beginning, a middle and an end. It’s just a cycle.”

-Mike Tyson

 

In 1988, it took Mike Tyson 91 seconds to knock-out Michael Spinks for the Heavyweight Championship of the world. While you may not consider him a thoughtful economist, he is able to explain an economic cycle faster than he could knock out Bernanke.

 

Before I start calling out Janet Yellen again, I wanted to sincerely thank all of you who tuned into our Q2 Macro Themes Call yesterday. It was, by far, our biggest audience, ever. In a tough business environment like this I don’t take that for granted.

 

Building a modern model that maps and measures global economies in real-time alongside my teammates has easily been the most rewarding phase of my analyst career. Without your attention, we’d have no one to hold us to account. Thanks for that.

 

The Cycle - tyson

 

Back to the Global Macro Grind

 

First, on Yellen. I couldn’t make this up if I tried, but last night at the International House she explained to Bernanke, Greenspan, and Volcker that a strong US Dollar was a “drag on the economy and consumer spending.”

 

Ex-her-low-Energy and communication/leadership style (i.e. allowing her regional Fed Presidents to communicate a hawkish policy path and then routinely surprising markets to the dovish side), she’s been in my good books this year. Now she’s not.

 

It’s as clean cut an absolute fact that a strengthening US Dollar (*rising Purchasing Power for Americans) helped strengthen US consumer spending from 2013-2015, as the sun rising in the East:

 

  1. US Dollar Index went from $79 at the end of 2012 to $100 in Q1 of 2015
  2. US Consumer Spending (Real PCE Growth) went from 1.6% to 3.3% (y/y) during that same time period
  3. In Q1 of 2016, with the US Dollar dropping -4%, US Consumer Spending has slowed to 2.7% (y/y)

 

Is a #StrongDollar a drag on commodity and debt addicted cyclical sectors of the US economy? Didn’t Bernanke’s US Dollar Devaluation scheme (capitulating to the 2011 lows) perpetuate a series of illusions of growth (I.e. asset inflations, in Dollars)?

 

A: Yes and Yes.

 

Does a #StrongDollar that deflates Wall Street’s asset prices (and puts that incremental margin in the consumer’s pocket instead of a leverage banker’s) equate to a “drag on consumer spending”? Did it under Reagan and Clinton in 1 and 1?

 

A: C’mon Janet, you’re (allegedly) a lot better than that.

 

Blame China, The Dollar, and now Europe & Japan. But, whatever you do, do not blame yourselves or #TheCycle.

 

As Yellen and her colleagues who now read @Hedgeye Macro can see in today’s Chart of The Day (slide 12 of the Q2 Macro Themes deck), #TheCycle is not a mystery. This one has been both obvious and pedestrian in its sequence:

 

  1. Q2 2014 = Income Growth, Corporate Profits, and S&P 500 Margins #peaked (in rate of change terms)
  2. 1H 2015 = Employment & Consumption Growth, Confidence, Domestic Investment, and Multiples #peaked
  3. Q2/Q3 2015 = US Equities Peaked
  4. Q4 2015 = M&A #Peaked and the #CreditCycle (and market dislocations) began
  5. 1H 2016 = #GrowthSlowing from #TheCycle peak (in rate of change terms) continues

 

Nope. Not that complicated, is it Mike?

 

“Not at all bro-heem. Every non-rate of change economist has a plan until they get punched in the face.”

-Michael Gerard Tyson

 

If Janet wants to try to absolve herself and Ben Bernanke from having nothing to do with a US Dollar appreciating from the post-Nixon 40-year low they perpetuated in 2011 (and all of the commodity, asset, and debt #bubbles embedded therein), fine…

 

But by the time #TheCycle plays out in full, history will be their judge – not each other.

 

In other real-time macro and market signaling news, yesterday we saw the SP500 break-down below our long-term TAIL risk level of 2066 again. This came in conjunction with US Equity Volatility (VIX) once again holding long-term TAIL support of 11.73.

 

Since Yellen seems to be gearing up to go down a path Bernanke didn’t have the spine to mention (he’d NEVER mention USD while is he was devaluing it), the big question I have now is all about what we outlined on yesterday’s call as the #BeliefSystem.

 

Since targeting weaker currencies and lower-yields (in many cases negative yields) has absolutely crushed Europe and Japan this year, what happens to the USA if and when Janet goes there? What happens to bank earnings, credit, and lending capacity?

 

Give it time. It’s like a book. And, sadly for these central-market-planners, we’ve reached the beginning of the end.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.68-1.79%

SPX 2025-2059
RUT 1069-1106

VIX 14.08-19.22
USD 94.01-95.79
YEN 108.06-111.68
Oil (WTI) 35.05-39.88

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Cycle - 04.08.16 chart



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