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A Precarious Global Growth Setup

Takeaway: U.S. GDP sliding toward zero, Europe struggling with deflation, Japan still flailing as China releases phony (but declining) growth numbers.

 A Precarious Global Growth Setup - stop sign

 

in case you missed it, We'll say it again ... Global growth IS slowing

 

The evidence is obvious to even casual observers by now. U.S. GDP continues its slow slide toward zero, Europe is struggling to beat back deflation, Japan is desperately flailing just to stay afloat, while the Chinese politburo releases phony, albeit still declining, growth numbers.

 

As a result... surprise > global equity markets are getting hammered.

 

Below is equity market analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:

 

"Buckle in Europe and Japan, that is… most European stock markets signaling immediate-term oversold but Euro not obeying overlord Draghi up at $1.149 this am; European Equities remain in crash mode from last year’s Global Equity Bubble highs; Spain now -26.3%  since this time last year w/ an election (for socialism) pending June 26."

 

 

Heading over to China... 

 

A spate of new reports shines light on the complicated situation evolving in everyone's favorite Communist country.

 

 

In related news, the China Securities Journal noted this morning, "Bad loan ratios rising at majority of Chinese banks in Q1." Meanwhile, Reuters noted the obvious, "Investors to remain wary of China for now."

 

Here's how all of this manifested in Chinese equities today. Spoiler Alert: It's not good.

 

 

it raises serious alarm bells For growth.

 

It also partly explains why Dr. Copper is down yet again this morning despite the recent reflation rally. (Incidentally, we've been warnings subscribers about global #GrowthSlowing for about a year and a half now.)

 

 

The slowdown in China is also handicapping the Australian economy, hence the Reserve Bank of Australia’s decision to cut interest rates to a record low 1.75%.

 

Nice.

 

(Yes, we're highly skeptical the Aussie central bank's efforts will yield fruit.)

 

 

A final rhetorical question... 

 

When global growth slows, what do you own?

 

That's simple... Long Bonds (TLT)

 


A Brief Update On Our Nasdaq Short Call

Takeaway: The Nasdaq is down -3.1% year-to-date and off -8.7% from it's all-time bubble high in July.

A Brief Update On Our Nasdaq Short Call - Bubble bath 9.9.14

 

Below is analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"I’m done apologizing for adding Nasdaq to our bearish US Growth Equity call on March 31; it was a battle, but month-over-month the Composite Index is -3.1% (SP500 is -0.2%, not up, so chart chasers are having some issues on the long side here); Big Cap Tech in a dead heat with Financial (XLF) and Healthcare (XLV) for worst S&P Sector YTD."

 

 

Notice the dead heat for last place in the year-to-date performance scorecard below (i.e. XLF, XLV and XLK):

 

A Brief Update On Our Nasdaq Short Call - sector update 5 4


The Macro Show with Keith McCullough Replay | May 4th, 2016

CLICK HERE to access the associated slides.

 

An audio-only replay of today's show is availabe here.


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#BeliefSystem Continues to Buckle

Client Talking Points

EUROPE

Buckle in Europe and Japan, that is… most European stock markets signaling immediate-term oversold but the Euro is not obeying overlord Draghi up at $1.149 this morning. European Equities remain in crash mode from last year’s Global Equity Bubble highs; Spain is now -26.3%  since this time last year with an election (for socialism) pending June 26.

NASDAQ

We are done apologizing for adding Nasdaq to our bearish U.S. Growth Equity call on March 31; it was a battle, but month-over-month the Composite Index is -3.1% (S&P 500 is -0.2%, not up, so chart chasers are having some issues on the long side here); Big Cap Tech in a dead heat with Financial (XLF) and Healthcare (XLV) for worst S&P Sector YTD.

UST 10YR

Getting us paid with 1.79% registered on the UST 10YR yesterday and that seems to be holding this morning ahead of the U.S. Jobs report this week; imagine jobs do what they always do at the end of #TheCycle (when profits are negative year-over-year)? Oh boy. All-time low in U.S. Yields a probable event on any kind of an NFP bomb.

 

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

Asset Allocation

CASH 59% US EQUITIES 2%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 30% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
GIS

Please note we are removed General Mills (GIS) from Investing Ideas (long side) on Monday. Hedgeye CEO Keith McCullough wrote in Real-Time Alerts: "While I like GIS from a Style Factor perspective (it did its job last week, closing up in a down tape - doing its job again this a.m. +1%), it's:

A) Signaling a series of lower-highs from a long-term perspective

B) Not as well loved by my analyst team (Penney and Laidlaw)

 

While we still like the long-term story, the stock’s performance in 2016 has been nothing short of spectacular. Year-to-date GIS is up +7.8% versus +1.3% for the S&P 500. The company’s 3Q15 performance was mixed with the company missing on revenues and beating on EPS with the benefit of cost cutting.

 

That being said, there are a number of one-time items impacting volume growth that should self-correct in 4Q16 and FY17. GIS is currently trading at 13.9x EV / NTM EBITDA an all-time high for the company. Looking past GIS, the entire Consumer Staples space feel like there is a Safety Trade/ZBB/M&A bid underneath the entire group. We maintain our long-term bullish stance on GIS, but given the rapid acceleration to all-time highs in the YTD period, a correction is inevitable.

MCD

In a recent note to Real-Time Alerts subscribers, Hedgeye CEO Keith McCullough asked rhetorically, "What to buy?" "On pull backs to the low-end of my immediate-term risk range, I'd be buying more:

1. Long-duration Bond Exposures (TLT, ZROZ, EDV, etc)

2. Low-Beta Big Cap Stocks With Safe Yields (MCD, GIS, NKE, etc.)

3. Gold (GLD)"

 

McDonald's (MCD) has all the style factors we like for these turbulent markets, which explains why it's up 27% since we added it to Investing Ideas in August. Stick with it here.

TLT

Despite the weak U.S. GDP print, growth is very unlikely to rebound here in Q2. Don't get caught up in residual seasonality hopium. The confluence of steepening base effects amid the trending deterioration in economic momentum support our GIP Model forecast of a continued deceleration in the YoY growth rate of real GDP from +1.9% in 1Q16 to +1% in 2Q16E. The latter growth rate translates to +0.3% on a QoQ SAAR basis, which is up from our previous forecast of -0.5% (a lower base rate implies a smaller delta to get to the same numbers, all things being equal).

 

Assuming Q1 isn’t revised in any material way, our forecast for 1H16E is represents the slowest pace of domestic economic growth on a multi-quarter basis since 2H12. Any downside surprises from there will surely translate to renewed recession fears.” Giddy up for continued #GrowthSlowing!

 

The good thing about each of our active Macro positions (i.e. TLT, ZROZ, XLU and JNK) is that each of them typically works on an absolute return basis when growth slows.

Three for the Road

TWEET OF THE DAY

PRESS RELEASE

Healthcare Policy Expert Evans Joins Hedgeye https://app.hedgeye.com/insights/50670-healthcare-policy-expert-emily-evans-joins-hedgeye… @KeithMcCullough @HedgeyeEEvans

@Hedgeye

QUOTE OF THE DAY

I never left the field saying I could have done more to get ready and that gave me peace of mind.

Peyton Manning

STAT OF THE DAY

Today in 1776, Rhode Island became the 1st American colony to renounce allegiance to King George III.


CHART OF THE DAY: Fed Growth Predictions = Pure Poppycock

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.

 

"... Given that a recently reported GDP of 0.5% isn’t in the area code of “as expected”, I don’t think Williams has a lot of credibility as a Wall St. forecaster. But Lockhart’s Atlanta Fed actually has a “GDP Now” tracking model (that has recently had an intra-quarter standard error of 200-250 basis points!) that is NOT mixed. It’s flat out bad. So he’s “favoring” non-GDP data."

 

CHART OF THE DAY: Fed Growth Predictions = Pure Poppycock - 05.04.16 chart


Sloppy Guesswork

“Isn’t it time for such sloppy guesswork drawing to a close?”

-Phil Tetlock

 

Yesterday was a good day. The Long Bond was up big and I spent the day meeting with some of the largest hedge funds in my home state of Connecticut. I absolutely loved the debates.

 

The aforementioned quote (from a great book I’m reviewing called Superforecasting) really nails a common thread we hear from the sharpest institutional investors in the world when it comes to The Establishment’s US GDP forecasting process.

 

In one meeting in particular, the PM (who oversees an entire office of hedge fund PMs) read an excerpt from a sell-side note that said “GDP feels like it’s going to be 2.5% in Q2.” A feel? Really? I don’t feel anything in our predictive tracking algo, but we’re at 0.3%.

 

Sloppy Guesswork - GDP cartoon 05.29.2015

 

Back to the Global Macro Grind

 

Let me take that back. I do feel something. I feel really good when A) our GDP forecast is a long way from Old Wall consensus and B) consensus positioning in the SP500 (Index +E-mini futures/options contracts) is leaning as long as it has been for all of 2016.

 

Oh you bombastic Hedgeye boy, you.

 

Yep. I’m proud of both my people and process. We’ve actually been, on average, within 20-30 basis points of getting the US GDP number right for the last 5 quarters (the historical standard error in our model is 35 basis points).

 

The main reason why we’ve been so much more accurate than any other research department on accurately forecasting one of the most important factors in any economic model (growth) is that, instead of “feeling” it, we use modern-math and machines.

 

“After all, we live in an era of dazzlingly powerful computers, incomprehensible algorithms, and Big Data… isn’t it time for such sloppy guesswork drawing to a close? … The point is that if you have a well-validated statistical algorithm, use it.”

-Phil Tetlock, Superforecasting (pg 20-21)

 

While I am sure our forecasting #process will continue to evolve alongside technology and time, for now I probably sound overly confident that what we do crushes what they keep doing. With statements like this, how do you feel about it?

 

  1. “A rate hike could be appropriate, if the data is as expected.” –John Williams (San Francisco Fed Head, yesterday)
  2. The economy is offering mixed signals, but favors unemployment data.” –Dennis Lockhart (Atlanta Fed, yesterday)

 

Given that a recently reported GDP of 0.5% isn’t in the area code of “as expected”, I don’t think Williams has a lot of credibility as a Wall St. forecaster. But Lockhart’s Atlanta Fed actually has a “GDP Now” tracking model (that has recently had an intra-quarter standard error of 200-250 basis points!) that is NOT mixed. It’s flat out bad. So he’s “favoring” non-GDP data.

 

I know. I know. You’re probably saying to yourself that the Fed is obviously dovish now (US Dollar at a 16-month low, post Janet Yellen’s recent rate-cutting-of-the-hikes), so this banter from Williams, Lockhart, Bullard, etc. is just popycock and posturing.

 

I don’t disagree with that. Neither would most people I meet with.

 

In modern forecasting, we deal with everything in rate of change terms and then probability-weight surprises vs. expectations.

 

As the rate of change in the economic, profit, and credit cycle continues to slow, the probability continues to rise that the Fed’s latest of #LateCycle indicators (Employment) starts slowing at a faster pace.

 

In other words, you’re one NFP (non-farm payroll) jobs bomb away from both Trump and Sanders sounding really right on the economy.

 

I’m sure we have absolutely nothing to worry about if Trump or Sanders becomes President of the United States. But last night’s voting machine in Indiana reveals that it’s more than just Hedgeye (and the Bond Market) that gets what’s really going on in the US economy.

 

Instead of those who were “feeling” US GDP was going to be 3-4% with “falling gas prices” (last year), now they have to spin that into rising gas prices are good for US Consumer Confidence as both the conference board and Univ. of Michigan report hit new YTD lows.

 

It’s either sloppy guesswork or just the conflict of interest ridden cabal of The Establishment consensus doing what they think they have to do before it becomes obvious to The People right before The Election.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.72-1.87%

SPX 2053-2083
RUT 1101-1140

NASDAQ 4711-4844

VIX 14.26-17.83
USD 92.35-94.50

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sloppy Guesswork - 05.04.16 chart


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