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Cartoon of the Day: The Cycle

Cartoon of the Day: The Cycle - GDP cartoon 04.11.2016

 

The U.S. growth outlook is getting pretty grim. The Atlanta Fed's GDPNow tracker for U.S. economic growth in Q1 2016 just hit 0.1% after a spate of new negative data.

 

We've been making this bearish call for a while now and highlighted in our Q2 Macro themes that "the U.S. economy faces its toughest GDP comp of the cycle in 2Q16."


Central Planning Delusions: From Helicopter Money To NIRP

Central Planning Delusions: From Helicopter Money To NIRP - central bank cartoon 02.17.2016

Falling behind on the latest central planning nonsense?

 

We think it's pretty clear that the central planning #Belief system is breaking down (see chart below... since the BOJ announced negative interest rates (1/29), the Yen is up +10.8% and the Nikkei is down -10.1%)

 

Central Planning Delusions: From Helicopter Money To NIRP - boj nirp nikkei jpy 

 

However, the links below are must-reads to stay up on the latest central planning shenanigans around the world. Whether you agree or disagree with the authors, insights abound, from Ben Bernanke's defense of "helicopter money" to German Finance Minister Wolfgang Schäuble comparing easy-money policies to drug addiction.

 

Enjoy!

 

  1. Ben Bernanke's Brookings blog: What tools does the Fed have left? Part 3: Helicopter money --  Helicopter money gets the Bernanke stamp of approval and how it would work... "Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future... However, under certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative. It would be premature to rule them out."
  2. IMF: The Broader View: The Positive Effects of Negative Nominal Interest Rates -- Insight on the IMF's latest thinking about negative interest rates... "Although the experience with negative nominal interest rates is limited, we tentatively conclude that overall, they help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability. Still, there are limits on how far and for how long negative policy rates can go."
  3. WSJ: Germany’s Schäuble: Time Is Near to End Central Banks’ Easy-Money Policies -- Refreshing sanity from ECB critic German Finance Minister Wolfgang Schäuble... "There is a growing understanding that excessive liquidity has become more a cause than a solution to the problem,” Mr. Schäuble said, comparing the move away from easy-money policies to ending a drug addiction."

  4. Bloomberg: Former Yellen Adviser Proposes Sweeping Reform of Fed System -- Good ideas... "Dartmouth College professor Andrew Levin targeted four areas of change for the Federal Reserve system: make the Fed a fully public institution; ensure the process of picking regional Fed presidents is transparent; set seven-year term limits for regional presidents and Board governors; and make the entire Fed subject to external review."

Retail: The Next Chapter ... 11

Takeaway: Three months into 2016 and we're already rivaling Great Recession bankruptcy rates. What say you, Sears?

Editor's Note: Below is an institutional research note written by Hedgeye Retail analysts Brian McGough and Alec Richards. To read more of our Retail team's research ping sales@hedgeye.com.

 

Retail: The Next Chapter ... 11 - retail island 1 14 15

 

It's so easy to succumb to the 'water torture' of Chapter 11 press releases in retail coming from the likes of Sports Authority, Vestis Retail Group (Eastern Mountain Sports, Bob's, and Sports Chalet), and Pacific Sunwear. But it's important to take a step back. Then another. And another. Then, and only then, does the big picture come into focus about the broader economic cycle.

 

Consider this...over the average economic cycle, we see 15 to 25 retail chains go under. Those represent roughly 1% of Retail Sales. Naturally, the filings are not even by year. Sometimes (like when the economy is ripping) there are none. Plenty of profits to go around for even the worst retailers. But some years there's upwards of 15 (Great Recession).

 

In just a little more than three months, we've already seen 4 parent bankruptcies (6 chains) in US Retail. Annualized, that's about 16, or 0.5% of retail. 

 

After an extremely tough winter selling season for shoes and apparel, it's only natural that we'd see this year push the 2016 tallies to a level close to what we saw in the Great Recession.

 

Sears, anyone?

 

Retail: The Next Chapter ... 11 - retail chapter 11


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INSTANT INSIGHT: The Key Implications Of Oversold U.S. Dollar

INSTANT INSIGHT: The Key Implications Of Oversold U.S. Dollar - dollar crumbled

 

Below are a number of important callouts this morning to help investors risk manage these manic macro markets.

 

Top of the list? The U.S. Dollar.

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"After falling another -0.4% last week to YTD lows of -4.5%, the US Dollar Index is signaling immediate-term oversold in my model for the first time in April (the 30-day correlation b/t USD and SP500 is -0.90)."

 

U.S. Dollar oversold implications?

 

As McCullough points out in this morning's Early Look, Commodities (CRB Index) have an inverse correlation (30-day duration) of -0.88 vs. the US Dollar, which explains Oil's pop last week:

 

"WTI +8% last week (after falling -7% in the week prior) will be as important to watch as anything US Equity Market Beta this week; risk range is signaling a lower-high of $39.99/barrel as Oil Volatility (OVX) signals a higher-low of 43.14."

 

With the S&P 500 and Commodities inversely correlated to the US Dollar (-0.9), oil and equity investors are clearly begging for a “dovish” Fed.

 

That raises an important question...

 

What actually gets investors paid when the Fed goes dovish and tacitly agrees with our Macro team's U.S. #GrowthSlowing call?

 

Long Bonds (TLT)

(up +9.5% ytd versus +0.2% for S&P 500)

 

 

INSTANT INSIGHT: The Key Implications Of Oversold U.S. Dollar - tlt say cheese


REPLAY | HORSESHOES & HAND GRENADES - 2Q16 OUTLOOK

Takeaway: We hosted a call updating our Housing outlook for 2Q16 on Friday. The deck and call replay can be accessed via the links below.

Slide Deck: CLICK HERE

Audio Link: CLICK HERE

Video Link: CLICK HERE

 

REPLAY | HORSESHOES & HAND GRENADES - 2Q16 OUTLOOK - Bull Grenades

 

KEY DISCUSSION TOPICS: 

  • Fundamental Deceleration: Volume growth is slowing in the new and existing market. Home prices, meanwhile, are in a bitter tug-of-war between lagged demand trends and supply constraints.
  • Supply Side Economics: Supply has emerged as the big conundrum this cycle. Why is it so depressed and what is the outlook for it to change?
  • Seasonality Headwinds: Housing stocks follow a distinct seasonal trading pattern that offers a lot of alpha opportunity; 2Q/3Q are the weakest six month stretch of the year. 
  • San Francisco: A bubble or not? That is the question. We’ll take a deep look at the SF market. 
  • Big City Affordability: One of the more interesting phenomenon is where major metros stand in terms of affordability and what the outlook is for further price appreciation. 
  • Commercial Real Estate: The CRE market has run into some big speedbumps. Will this bleed into the Residential market? 

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE

Takeaway: Credit risk flashed warning signals with rising CDS spreads in the U.S., Europe, and Asia.

 

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM11

 

Key Takeaway:

Credit risk continued to flash warning signals last week with financial CDS spreads widening across the board in the U.S., Europe, and Asia. U.S. money center bank swaps were notably higher with Citigroup, Morgan Stanley, and Bank of America all seeing swaps up +5% week-over-week. German banks also flashed hard with Deutsche swaps up +7.7% and the rest of the group up over +5.0% on average. Italian lenders really gapped up with UniCredit and Intesa CDS up +13.6% and 11.0% respectively.

 

Our heatmap below is more negative than positive on the short and intermediate term and mixed on the long term.


Current Financial Sector Ideas:


MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 13 improved / 3 out of 13 worsened / 9 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 6 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM15

 

1. U.S. Financial CDS – Swaps widened for 10 out of 27 domestic financial institutions. Even with Fed minutes showing officials reluctant to raise rates, the median swap rose by 6 bps to 105.

Tightened the most WoW: HIG, MTG, PRU
Widened the most WoW: C, MS, BAC
Tightened the most WoW: LNC, AIG, HIG
Widened the most MoM: JPM, WFC, C

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM1

 

2. European Financial CDS – Financial swaps mostly widened in Europe last week. The median swap widened by 9 bps to 134.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM2

 

3. Asian Financial CDS – Swaps for Asian financial institutions mostly widened last week, led by Mizuho Corporate Bank in Japan which widened by 13 bps to 110. Meanwhile, all three Indian bank CDS tightened.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM17

 

4. Sovereign CDS – Sovereign Swaps were mixed over last week. At the extremes, Portuguese swaps tightened by -9 bps to 258 while Italian swaps widened by 11 bps to 136.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM18

 

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Brazilian sovereign swaps widened the most, by 26 bps to 390.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM16

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 1 bps last week, ending the week at 7.93% versus 7.92% the prior week.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 8.0 points last week, ending at 1858.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 40 bps.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM7

9. CRB Commodity Price Index – The CRB index was unchanged week over week at 171. As compared with the prior month, commodity prices have decreased -1.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - 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 was unchanged at 10 bps.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 3 basis points last week, ending the week at 1.98% versus last week’s print of 2.01%. 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 | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM10

12. Chinese Steel – Steel prices in China rose 5.5% last week, or 137 yuan/ton, to 2623 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 | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,274 billion Yuan as of Dec 31, 2015, which is up +51% year-over-year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly. 

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM4

14. 2-10 Spread – Last week the 2-10 spread tightened to 102 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM13

15. 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 41 bps.

MONDAY MORNING RISK MONITOR | FOLLOW CDS NOT EQUITIES...CREDIT RISK CONTINUING TO RISE - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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