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Getting Paid? Mr. Market Remains Fond of Growth Bears

Takeaway: The S&P 500 is down 3 straight weeks and down 6 of the last 8 as US Consumption and global growth slows.

Getting Paid? Mr. Market Remains Fond of Growth Bears - bear 2

 

Growth Bears have been getting paid. this may is no exception.

 

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

 

"The Yield Spread smashed to fresh YTD lows last week (10yr minus 2yr = 95bps) keeping the Financials (XLF -4.0% YTD) our fav sector on the short side vs. Utes (XLU +14.1% YTD) our fav on the long side."

 

(We've been the unabashed bulls on the Long Bond via TLT which is up 9% YTD versus flat for the S&P 500.)

 

 

In other words, Utilities (XLU) is the top performing sector year-to-date. We've been recommending it to our subscribers since January.

 

Getting Paid? Mr. Market Remains Fond of Growth Bears - xlu 5 16

 

As growth has continued to slow, there's been an unequivocal bull market in Gold (GLD).

 

  

Meawhile, there are plenty of global #GrowthSlowing barometers out there...

 

Take a look at Italy:

 

 

... And China:

 

 

Here's the global equity drawdown map:

Click image to enlarge

Getting Paid? Mr. Market Remains Fond of Growth Bears - drawdown

 

 

While global growth slows we're sticking with what's worked all year...

  • Utilities (XLU)
  • Gold (GLD)
  • Long Bonds (TLT)

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS

Takeaway: Retail earnings cratered last week on weakening consumption, just as employment trends are flashing yellow.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM11

 

Key Takeaway:

There were three notables in the latest week. First, retailers collapsed due to weak consumption. As per our retail team, every department store aside from JCP put up its worst comp since 2009. The migration to online alone is not the culprit here; rather, there has been a recent, rapid and material decline in consumer spending. Second, Chinese steel prices fell 9.6% in the latest week, continuing the unwind of the mid-Februrary to mid-April artificial reflation trade. Third, US employment trends showed further signs of emergent weakness with a third consecutive week of rising initial jobless claims coming on the heels of a weaker-than-expected April NFP report. 

In spite of these factors, investors seem to be ebullient, ignoring both the risks of slowing consumer spending and weakening employment. Last week, most of the risk measures we track were positive, especially U.S. financial CDS, which tightened significantly by -4 bps to 90. Additionally, global measures of counterparty risk tightened week over week. The TED spread tightened by -7 bps to 36, the Euribor-OIS spread tightened by -1 bps to 8, and the CDOR-OIS spread tightened by -2 bps to 41.

 

Our heatmap below is more positive than negative across all durations.


Current Ideas:


MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 5 of 13 improved / 4 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM15

 

 

1. U.S. Financial CDS – Although poor retail earnings last week should have inflamed investor concerns, swaps tightened for 12 out of 13 domestic financial institutions; the median swap came in by -4 bps to 90.

Tightened the most WoW: JPM, AXP, C
Widened the most WoW: COF, AON, UNM
Tightened the most WoW: PRU, MET, BAC
Widened the most MoM: HIG, AIG, WFC

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM1

 

2. European Financial CDS – Financials swaps in Europe also defied poor data last week. While GDP was revised lower and Industrial production came in lower than expected, bank CDS mostly tightened in Europe last week.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM2

 

3. Asian Financial CDS – In Asia last week, Chinese bank CDS mostly tightened, Japanese bank CDS were mixed, and Indian bank CDS all widened.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portugal, however, was an outlier, widening by 8 bps to 261.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM18

 

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM3 2


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week, led by Brazil, whose swaps tightened by -12 bps to 329.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM16

6. High Yield (YTM) Monitor – High Yield rates fell 6 bps last week, ending the week at 7.40% versus 7.46% the prior week.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 1.0 point last week, ending at 1891.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM6

8. TED Spread Monitor  – The TED spread fell 7 basis points last week, ending the week at 36 bps this week versus last week’s print of 43 bps.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM7

9. CRB Commodity Price Index – The CRB index rose 1.5%, ending the week at 183 versus 180 the prior week. As compared with the prior month, commodity prices have increased 5.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - 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 tightened by 1 bps to 8 bps.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged last week at 2.00%. 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 | TURNING A BLIND EYE TO CONSUMERS - RM10

12. Chinese Steel – Steel prices in China fell 9.6% last week, or 281 yuan/ton, to 2634 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 | TURNING A BLIND EYE TO CONSUMERS - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% 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 | TURNING A BLIND EYE TO CONSUMERS - RM4

14. Chinese Credit Outstanding – Chinese credit outstanding amount to 148.7 trillion RMB as of April 30, 2016, which is up +11.9% year over year. Note: this data is only updated monthly.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM20

15. 2-10 Spread – Last week the 2-10 spread tightened to 95 bps, -9 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM13

16. 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 tightened by 2 bps to 41 bps.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 5 16

 

Daily Market Data Dump: Monday - sector performance 5 16

 

Daily Market Data Dump: Monday - volume 5 16

 

Daily Market Data Dump: Monday - rates and spreads 5 16


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 80.28%
  • SHORT SIGNALS 78.51%

PCLN | Is Airbnb a Threat?

Takeaway: The data suggests that the marginal impact from Airbnb should be negligible moving forward.

The Airbnb threat is a major tenet to the prevailing short thesis on hotels and the OTAs.  Indeed, our work on Airbnb, including the use of the Hedgeye proprietary Airbnb listings dataset, suggests a negative impact on the US hotel market and potentially the domestic OTA segment.  However, as we will show in this note, Europe is an entirely different market. With PCLN generating the majority of its bookings and revenues in Europe, we believe the marginal competitive impact from Airbnb going forward will be slight. 

 

KEY POINTS

  1. AIRBNB EUROPE: ALREADY DENSE/GROWTH SLOWING: As a reminder, PCLN is most exposed to the EU, which is where we will focus this analysis.  Our Airbnb density analysis suggests the EU was an early adopter of Airbnb, but we have yet to see any material impact on EU hotel RevPAR to date.
  2. EU MARKET ALREADY EXISTED: The alternative accommodation market was already well established in the EU well before Airbnb, which has had a mixed to muted impact on that market.  In turn, we suspect all Airbnb is doing is facilitating that market, vs. the US where it is essentially creating it.
  3. SHOULD HAVE SEEN IT BY NOW: It’s possible that Airbnb may have had an impact on PCLN already, but it wasn’t large enough for anyone to take notice.  Given that Airbnb density growth is already slowing, we believe the impact moving forward will be limited as the second derivate impact will likely continue to wane.

 

AIRBNB EUROPE: ALREADY DENSE/GROWTH SLOWING

There is little doubt that European consumers were early adopters of the Airbnb platform, most likely due to the alternative accommodation market that already existed there. As can be seen in the following chart, Airbnb density – defined as Airbnb listings as a % of total hotel rooms – was and is much higher than the rest of the world. Moreover, up until last year, Airbnb listings growth in Europe exceeded the rest of the world as well.

 

It’s difficult to gauge the Airbnb impact on European RevPAR over the last few years given the volatility of the region and exogenous factors (i.e. terrorist attacks, Greece, refugee crisis, etc.). Maybe hotels were affected, maybe not. However, we posit that given the high Airbnb density already in the European market, and slowing growth, the incremental impact to the hotel industry and PCLN is likely to be insignificant.

 

In contrast, US hotels may be more at risk. In our Airbnb presentation on March 17th, we estimated the 2015 Airbnb impact could’ve been around a negative 100bps. More importantly, the negative Airbnb impact is likely to persist given the relatively density yet higher listings growth. The chart below compares Airbnb density in the top European hotel cities with those in the US. The implications are clear: Europe may or may not have already felt the brunt from Airbnb already but it’s not likely to be much of a factor going forward. The risk to the US is more palpable.

 

PCLN | Is Airbnb a Threat? - airbnb density by region

PCLN | Is Airbnb a Threat? - airbnb european cities

 

EU MARKET ALREADY EXISTED

We believe one major reason why Airbnb is having a limited impact on EU hotel RevPAR is because the alternative accommodation market was already well established before Airbnb arrived.  Further, it appears the introduction of Airbnb in the EU is having a mixed to muted impact across this market. In the US however, it appears that Airbnb is expanding the alternative accommodation market; Phocuswirght estimates that the percentage of US travelers staying in alternative accommodation has grown from ~10% in 2011 to 25% in 2014.

 

 We have segmented the EU accommodation market by nights stayed at traditional hotels vs. that of holiday establishments, which are essentially self-contained lodging units with minimal, if any, complementary services (i.e. alternative accommodation).  The data suggests that the latter was already well established in the EU, particularly amongst the top 5 countries, which make up roughly 75% of all accommodations nights.  The percentage of holiday nights to total accommodation nights across these 5 markets has ranged from 11% to 41% dating back to 2006.

 

The impact from Airbnb on these markets has been mixed to muted at best.  Generally speaking, markets that have historically had a relatively low percentage of alternative accommodation nights have increased as a percentage of the total, with the UK seeing the most dramatic increase.  On the other hand, markets with a relatively higher percentage of alternative accommodation nights (i.e. Germany & France) have declined as a percentage of the total. 

 

These conflicting data points suggest that Airbnb isn’t necessarily expanding the alternative accommodation market, but rather facilitating a market that existed well before it got there. 

 

PCLN | Is Airbnb a Threat? - EU   Airbnb Impact Mute

 

SHOULD HAVE SEEN IT BY NOW

It’s possible that Airbnb may have had an impact on PCLN already, but it wasn’t large enough for anyone to take notice.  Airbnb experienced its sharpest growth in both absolute listings and density during 2015; a period where PCLN produced stable to accelerating room-nights growth.  Maybe PCLN’s growth rate would have been higher ex Airbnb, but we don’t have anything to suggest that would have been the case.

 

Moving forward, we suspect that PCLN has already experienced the brunt of any impact from Airbnb given that EU density is ~2x that of the ROW, and density growth has already started to slow into 2016. From a second derivative standpoint (accelerating vs. decelerating trends), that means Airbnb is likely to have a waning impact on PCLN into 2016, and likely moving forward barring a reacceleration in density growth.

 

 In summary, if Airbnb really was a material threat to PCLN, we should have seen it by now, and maybe we did.  But moving forward, we do not believe Airbnb will have a significant impact on PCLN’s room-nights growth.

 

PCLN | Is Airbnb a Threat? - PCLN   Airbnb Impact 2 

 

Let us know if you have questions, or would like to discuss in more detail.  

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet
 

 

Todd Jordan
Managing Director


@HedgeyeSnakeye

 


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


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