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CHART OF THE DAY: What Works When Yield Spread Hits YTD Lows

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.

 

"... Maybe that’s why everyone is getting long the Gold chart again. As you can see in today’s Chart of The Day, they did so when the Yield Spread started to break down in 2011 too.

 

With the 10yr Yield falling another -8 basis points last week to 1.71%, the Yield Spread (10yr yield minus 2yr yield) pancaked to a fresh YTD low of 95 basis points last week. Flapjack flattening is not bullish for the Financials. It’s bullish for Utes, baby!"

  

CHART OF THE DAY: What Works When Yield Spread Hits YTD Lows - 05.16.16 EL Chart


Absurd Forecasts

“Obviously, a forecast without a time-frame is absurd.”

-Phil Tetlock

 

Timing matters. Anyone who runs their own money and/or works on the buy-side knows this. That’s how we get paid. Wall Street & Washington Establishment economists and strategists have a different compensation scheme.

 

On the topic of timeliness, Phil Tetlock reminded us in a chapter of Superforecasting titled Keeping Score, “they’re relying on a shared implicit understanding, however rough, of the timeline they have in mind… as time passes, memories fade, and tacit time frames that once seemed obvious to all become less so” (pg 52).

 

We obviously make plenty of mistakes. But we try to be crystal clear on timing. Our call since July of 2015 has been that Q2 of 2016 has the highest probability of what looks like recessionary US economic data of #TheCycle. I wanted to reiterate that this morning.

 

Absurd Forecasts - recession cartoon 04.14.2016

 

Back to the Global Macro Grind

 

US Retail Sales “beat Wall Street expectations” on Friday and the US Retail Stocks (XRT) careened to the downside taking them to the edge of crash mode (greater than 20% decline from #TheCycle peak) at -19.4% since July of 2015.

 

For US Growth Bulls (not to be confused with stagflation realists) the month of May looks a lot more like #TheCycle than March did. The SP500 has been down for 3 straight weeks and, don’t look now, but is down for 6 of the last 8 and back to flat YTD.

 

In addition to the Retail Sector (XRT), leading last week’s US Equity decline were:

 

  1. Consumer Discretionary Stocks (XLY) -1.5% week-over-week to -0.1% YTD
  2. Small Cap Stocks (Russell 2000) -1.1% week-over-week to -2.9% YTD
  3. Financials (XLF) -1.1% week-over-week to -4.0% YTD

 

Since it would have been absurd for me to chase charts in March-April and tell you to buy #LateCycle Sector Styles while maintaining the most bearish US GDP forecast on Wall Street, I guess I don’t have to be the macro moron for May-to-date!

 

Meanwhile, the Old Wall’s media continues to run absurd headlines like this:

“SP500 Still Cheap Based On The Fed Model” –Bloomberg

 

So I still say short what appears to be “cheap” and keep buying what continues to get more expensive:

 

  1. Utilities (XLU) were up another +1.1% last week to +14.1% YTD
  2. The Long Bond (TLT) was up another +1.1% last week to +9.8% YTD
  3. Municipal Bonds (MUB) were up another +0.3% last week to +1.9% YTD

 

Oh, I know. Munis are so boring. Indeed. And so is the return of one’s capital during a #LateCycle consumption and employment slow-down vs. chasing hopeful charts to get a return on capital of greater than 0%.

 

Maybe that’s why everyone is getting long the Gold chart again. As you can see in today’s Chart of The Day, they did so when the Yield Spread started to break down in 2011 too.

 

With the 10yr Yield falling another -8 basis points last week to 1.71%, the Yield Spread (10yr yield minus 2yr yield) pancaked to a fresh YTD low of 95 basis points last week. Flapjack flattening is not bullish for the Financials. It’s bullish for Utes, baby!

 

In other macro market news last week:

 

  1. The US Dollar put together its 2nd up week in a row, closing +0.8% on the week to $94.60 and -4.1% YTD
  2. Gold dropped -1.5% on that, correcting to +20.1% YTD
  3. And Dr. Copper got pounded for a -3.6% Quad4 #Deflation, taking it back into the red at -2.2% YTD

 

Or was the Doctor ill due to “Chinese Demand Slowing”? Since mostly everything in macro (and life) is multi-factor and multi-duration, I won’t deny China’s export/import data slowing mattered. But so did markets looking more like Quad4 than Quad3.

 

As a reminder, our non-absurd specificity on timing has the USA moving from Quad3 to Quad4 in Q2. What happens in Quad4 is that the US Dollar RISES as US Interest Rates FALL. This is what happens when bad equals bad. People go to cash.

 

The only outlier on Quad4 last week was Oil ramping +3.7%. That, of course, is a huge problem for US GDP. If the BEA doubles the Deflator to 1.6%, that is. If they used the Fed’s preferred calculation for inflation, the US would already be in a #Recession.

 

If you’re keeping score on all of this:

 

A) The Fed wants to call the stock market “cheap” using their “model”

B) But the Fed doesn’t want to calculate GDP using their model’s definition of inflation

 

Lol

 

Obviously, that’s absurd too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.69-1.79%

SPX 2033-2066
RUT 1096-1118
USD 92.97-95.11
Oil (WTI) 43.69-47.80

Gold 1
Copper 2.02-2.14

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Absurd Forecasts - 05.16.16 EL Chart


REPLAY | Special Free Edition of The Macro Show: Global Markets .. Grave Risk?

You're invited.

REPLAY | Special Free Edition of The Macro Show: Global Markets .. Grave Risk? - z ba ba

 

Hedgeye CEO Keith McCullough hosted a granular, no-punches pulled, deep-dive look at why markets are more vulnerable than ever and how to prepare for the uncertainty ahead.


As you may already know, Keith has been proactively warning our subscribers about the coming crash.

You do not want to miss this opportunity.

 

Click here to watch the replay.

 

Like what you see? Subscribe to The Macro Show here.


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Growth Bears

Client Talking Points

USD

Welcome to #Quad4 (Rates Down, Dollar Up). The USD has been up for 2 straight weeks and up for 3 of the last 4, holding our long-term TAIL risk level of 92-93 support. The 90-day inverse correlation between the SPX and USD is -0.77.

OIL

On its own path (for now) +3.7% week for WTI despite Dollar Up and up another +1.8% this morning getting closer to the top-end of our refreshed immediate-term risk range = $43.69-47.80. Oil Up = GDP Deflator needs to go up (GDP down).

UST 10YR

The Yield Spread got smashed to fresh year-to-date lows last week (10YR minus 2YR = 95 basis points) keeping the Financials (XLF -4.0% year-to-date) our favorite sector on the short side vs. Utes (XLU +14.1% YTD) our favorite on the long side.

 

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

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/15/16 60% 3% 0% 6% 25% 6%
5/16/16 58% 2% 0% 7% 27% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/15/16 60% 9% 0% 18% 76% 18%
5/16/16 58% 6% 0% 21% 82% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) remains our favorite sector on the long side as Financials (XLF) remains our favorite sector on the short side. Current global macro positioning is squarely behind a continuation in the reflation trade as evidenced by commodity leveraged credit spreads, global macro futures and options positioning, and forward-looking volatility expectations. Global macro futures and options positioning show a market that is leaning long of commodities and short of U.S. dollars. Corporate credit as a % of GDP remains at cycle highs, capital markets activity has dried up significantly, and credit extension is tightening nationwide according the most recent Fed Senior Loan Officer survey.

MCD

For some perspective on the Macro environment and why we favor companies like McDonald's (MCD), here's an excerpt from the Early Look written by Hedgeye CEO Keith McCullough:

 

Taking a step back, don’t forget where US Consumers (70% of GDP) were at this time last year:

 

  • US Employment Growth (NFP) was putting in a cycle peak
  • US Consumer Confidence was putting in a cycle peak
  • US Consumption Growth was putting in a cycle peak

 

Peak. Peak. #Peak!

 

And what happens when you start to lap the cycle peak? Well, instead of crappy Baby Boom capacity putting up mediocre (barely positive) same store sales at the peak, they look even crappier on the back side of the cycle."

 

That's why we like large-cap, low-beta, liquid companies like McDonald's in this tumultuous market environment. Case in point, earlier in the week, MCD hit an all-time high. Since we added the company to Investing Ideas, it is up almost 30%.

 

Stick with it. Restaurants analyst Howard Penney reiterates his "road to $150" call, implyling more than 15% upside from here.

TLT

Credit markets are one of the major beneficiaries (maybe the largest) of the reflation trade since February. While yield spread compression has been a positive for Long Bonds (TLT, ZROZ), a perceived monetary policy shift and a collapse in bond market volatility expectations have been a positive for Junk Bonds (JNK), but we don’t expect it to continue.

 

With growth continuing to slow alongside consensus positioning broadly, downside deflation risk is on the table. As we’ve highlighted on a daily basis, consumption growth and labor market growth peaked in Q1 2015 and both are slowing alongside a continued corporate profits slowdown. This mix:

  • Smells like incremental deflation on the margin;
  • Is a huge risk for high yield credit (JNK);

 

Did we mention TLT and ZROZ were up 4.4% and 2.1% respectively last week? Not bad with U.S. #GrowthSlowing.

Three for the Road

TWEET OF THE DAY

An Animated History Of U.S. #GrowthSlowing https://www.youtube.com/watch?v=KegxiDarBlM&feature=youtu.be via @YouTube

@KeithMcCullough

QUOTE OF THE DAY

Only he who can see the invisible can do the impossible.

Frank L. Gaines

STAT OF THE DAY

Today in 1866, Congress eliminated the half dime coin and replaced it with the nickel.


**Call REPLAY** - Bats Global Markets (BATS) | The Little Engine That Could

Takeaway: We have added BATS shares to our Long bench with a $34 per share fair value.

We hosted a BlackBook call on recent IPO Bats Global Markets (BATS) last week. We have added shares to our Long bench this morning with a $34 fair value and think a tactical entry point will come about after 2Q16 earnings which will make the stock a Best Ideas Long. Enclosed is the replay to our call and associated materials.

CLICK HERE TO WATCH THe VIDEO REPLAY:

<chart6>

 

BlackBook Presentation HERE

Audo replay HERE

 

Perversely, Recessions Are Best: While investors are in love with growth, counterintuitively recessions or phase transitions from growth to economic decline are a boon for the exchange sector. Volatility rises substantially late in the cycle and the onset of recession is a very profitable time for the sector. While a violent rise in volatility is not good for the broader trading community, a run-of-the-mill recession and volatility above current, historically low levels is a solid catalyst for the group.

 

**Call REPLAY** - Bats Global Markets (BATS) | The Little Engine That Could - chart2 VIX recession

 

**Call REPLAY** - Bats Global Markets (BATS) | The Little Engine That Could - chart3 cash and option

 

Mind Your Exposures: Another hallmark of economic declines is the consistent rise of corporate credit spreads over Treasuries, however we are confident that the agency-only operations of the exchanges is an all-weather business. With the highest ROIC and lowest cost of capital in Financials, the sector can outperform partly because it's a self-funding sector.

 

**Call REPLAY** - Bats Global Markets (BATS) | The Little Engine That Could - chart4 ROIC 

 

Not Bullish Enough: We see substantial opportunity in U.S. options and U.S. ETFs, as the recent merger of Nasdaq and ISE puts market share up for grabs. Furthermore, we don't think BlackRock is simply "spreading the chips around" with its recent BATS ETF listing. Rather, we think that once it gets through this trial period, BATS' lower-cost listing venue should gain more share. We are +10% above consensus for next year and think that, relative to a Financial sector with negative top line and earnings growth, investors will pay more for whatever growth is available.

 

**Call REPLAY** - Bats Global Markets (BATS) | The Little Engine That Could - New earnings table 

 

 

Please let us know of any questions.

Jonathan Casteleyn, CFA, CMT 

 



Joshua Steiner, CFA


REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy!   

 

1. McGough: Behind The Massive Spike In Retail Bankruptcies (5/13/2016)

 

 

In this brief excerpt from The Macro Show earlier today, Hedgeye Retail analyst Brian McGough explains why we’ve already seen more retail bankruptcies this year than in any full year in the last six.

 

2. As Neil Howe Predicted In March … ‘Trump Will Run To Left Of Clinton’ (5/10/2016)

 

 

Renowned Demographer and Hedgeye Sector Head Neil Howe is always one step ahead of the crowd. Case in point: A popular Washington Post article today lays out how presidential hopeful Donald Trump is “running to the left of Hillary Clinton.” In a then controversial video on HedgeyeTV, Howe predicted this would happen … back in March. Watch as Howe and Hedgeye CEO Keith McCullough review and update his prescient call in this brief excerpt of The Macro Show.

 

3. McCullough: Expensive? ‘I Love Expensive’ (5/9/2016)

 

 

In this brief excerpt from The Macro Show today, Hedgeye CEO Keith McCullough responds to a subscriber’s question about why he’s still bullish on McDonald’s (MCD), Utilities (XLU), and Long Bonds (TLT) even though they are “getting expensive.”

 


Early Look

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