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US Economy: WSJ Says "All Clear" ... Nope

Takeaway: Brighter economic data? Seriously?

US Economy: WSJ Says "All Clear" ... Nope - economic indicators cartoon 02.24.2016 

 

Head-scratcher of the day via the Wall Street Journal:

 

"Brighter economic data raises specter of Fed rate increase; yield curve is flattest since 2007."

 

Huh?

 

Here's a better explanation as to why... ugly S&P 1Q16 earnings:

 

The bond market is signaling a precarious reality... a.k.a. #GrowthSlowing. Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"Yield spread flattening = leading indicator of economic slowing – at 94bps wide this am (10yr minus 2yr) that’s a fresh YTD low and it’s driven by the 2yr popping to 0.84% on concern the Fed will hike on a rising CPI? If the Fed raises rates in June, they will make US Equity Beta Bears happy (reminder: rising inflation takes DOWN our Street low GDP forecast for Q2)."

 

Addressing all the supposedly "brighter" data, Hedgeye Senior Macro analyst Darius Dale provides this chart of the recently reported key economic releases. Dale writes:

 

"U.S. Economic Summary: green shoots where the trend remains bearish; red shoots where the trend has likely bottomed."

 

Click image to enlarge

 

US Economy: WSJ Says "All Clear" ... Nope - us economic summary

 

Dale continues:

 

"Not much to do with those [sequential green shoots] other than trust the forward-looking components of our process, such as Mr. Market himself."

 

... A.K.A. the 10s/2s spread. Here's the yield spread.

 

US Economy: WSJ Says "All Clear" ... Nope - 10y2y spread 5 18

Click to enlarge

 

What do you do with that?

 

Dale's conclusion:

 

"This is our third or fourth short-term headfake in domestic economic data since the cycle peaked in 1H15. Elongate your memory. FYI, the TSY 10s-2s spread compressing to new cycle lows is not exactly a bullish indicator... See through the S/T headfake in the data."

 

In other words.. stick with your #GrowthSlowing positions... Long Bonds (TLT) and Utilities (XLU).


Daily Market Data Dump: Wednesday

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: Wednesday - equity markets 5 18

 

Daily Market Data Dump: Wednesday - sector performance 5 18

 

Daily Market Data Dump: Wednesday - volume 5 18

 

Daily Market Data Dump: Wednesday - rates and spreads 5 18


Asia, Nasdaq and YieldSpread

Client Talking Points

ASIA

Both China and Copper rocked again overnight with the Dr. (Copper) -1.4% after failing @Hedgeye TREND resistance in April. Global Equity Bulls aren’t talking much about the Hang Seng as its -1.5% drop today takes it’s crash from the 2015 Global Equity Bubble peak to -30% (newsflash: global growth has not bottomed).

NASDAQ

Both China and Copper rocked again overnight with the Dr. (Copper) -1.4% after failing @Hedgeye TREND resistance in April. Global Equity Bulls aren’t talking much about the Hang Seng as its -1.5% drop today takes it’s crash from the 2015 Global Equity Bubble peak to -30% (newsflash: global growth has not bottomed).

YIELDSPREAD

Flattening = leading indicator of economic slowing – at 94 basis points wide this morning (10YR minus 2YR) that’s a fresh YTD low and it’s driven by the 2YR popping to 0.84% on concern the Fed will hike on a rising CPI? If the Fed raises rates in June, they will make U.S. Equity Beta Bears happy (reminder: rising inflation takes DOWN our Street low GDP forecast for Q2).

 

*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
5/17/16 58% 2% 0% 6% 28% 6%
5/18/16 58% 2% 0% 6% 28% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/17/16 58% 6% 0% 18% 85% 18%
5/18/16 58% 6% 0% 18% 85% 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

Huge thanks to @LincolnMotorCo for helping make our Hedgeye Cares charity golf challenge a success. @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

There is no exercise better for the heart than reaching down and lifting people up.

John Holmes

STAT OF THE DAY

A horse gallops on average 25 to 30 mph, the world record for a horse galloping over a short, sprint distance is 55 mph.


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

The Macro Show with Keith McCullough & Brian Mcgough Replay | May 18, 2016

CLICK HERE to access the associated slides.

 

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


CHART OF THE DAY: Housing Starts & The May-laise

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.

 

"... I’m going to give you a TTM slope and you tell me what macro series it belongs to:

  1. Slope = 0.00
  2. Slope = -0.00
  3. Slope = 0.02
  4. Last 4 Months Change: +0.0, +0.0, +0.0, +0.0

 

Answers:

  1. Housing Starts
  2. Pending Home Sales
  3. New Home Sales
  4. Builder Confidence" 

 

CHART OF THE DAY: Housing Starts & The May-laise - 5.18.16 Starts total zero Slope


May-laise

“The 1st step to being great is being grateful.”

 

Quants call it complexity, Soros would call it (social) reflexivity, Ray Dalio calls it The Truth. 

 

The populace struggles to define it explicitly, but its early essence was captured in the American zeitgeist that percolated below the surface of Occupy Wall street. 

 

They feel it in a decade of underemployment, stagnate real wage growth and massaged government inflation calculations. They feel it in the broken promises of “the great moderation” and broken bubbles in equities, tech, real estate, and central planning.   

 

They feel it in protracted financial repression, negative real rates of return on savings and fixed income and in the volatility of their 401K.  They feel it in multi-year monetary policy initiatives discretely designed to drive a wealth effect which perversely, only serves to drive a bigger delta between the 99% and 1%.

 

It’s expressed in lower lows in congressional approval, in the exodus of retail equity inflows, and the fragility of confidence about the future and the dismay in the declining prospects of upward social and economic mobility for their children. 

 

It’s manifest in Sanders’ primary success and Trump’s ascendency. In the glacial but real “Fourth (generational) Turning

 

May-laise - occupy

 

In finance, the Wall Street 2.0 promise of transparency and an information/investment meritocracy is sounding the death knell for a financial services industry drowning in a pool of hindsight bias, overcapacity and cumulative distrust (outflows) of its own creation. 

 

I work at a financial firm, but I’m certainly not a millionaire. Maybe a thousand-aire but I’m pretty sure that doesn’t get me into the 1%. And most of the people I associate with regularly are trying to decide if they can save $10 or $30 this paycheck while keeping pace with excess inflation in key cost centers of housing and healthcare, let alone feasibly plan for the $1M in tuition costs for their two kids in 16 years.  

 

Democracy and Capitalism don’t promise equality but they should, holistically, breed opportunity and humanism and strive towards an ideal of frictionless social mobility. 

 

Thank you to everyone involved in making our Hedgeye Cares Fundraiser for the Bridgeport Caribe Youth League a huge success yesterday. It was a great opportunity to help support deserving families. We had a record turnout and we are grateful.         

 

Back to the Global Macro Grind

 

Let’s start with a little game that I think well ‘microcosm’s’ the current domestic Macro state.

 

I call it: Name That Slope (as in the slope of the line, the “m” in y = mx + b)

 

I’m going to give you a TTM slope and you tell me what macro series it belongs to:

 

  1. Slope = 0.00
  2. Slope = -0.00
  3. Slope = 0.02
  4. Last 4 Months Change: +0.0, +0.0, +0.0, +0.0

 

Answers:

  1. Housing Starts
  2. Pending Home Sales
  3. New Home Sales
  4. Builder Confidence

 

I haven’t explicitly touched on Housing in the Early Look in a couple months but those data points sufficiently characterize the state of the sector. The malaise that has blanketed domestic housing data over the TTM continues to manifest. 

 

The challenge for rate-of-change centric analysts concerned with marginal change is that nothing is really happening at the margin and a crawling 2nd derivative convergence to zero isn’t generally alpha’s playground. 

 

Next up for Housing is April Existing Home Sales data on Friday and our expectation is for modest sequential improvement as Existing Home Sales keep pace with the Trend in Pending Home Sales.

 

Recall, Pending Home Sales (PHS) = contract signings while Existing Home Sales (EHS) = closed transactions. PHS leads EHS by ~1-month and while the two series don’t always track precisely month-to-month, any multi-month divergences have resolved via a recoupling of EHS to PHS.    

 

While existing sales should improve sequentially, the trend over the last year has been one of deceleration and demand comps in the existing market get harder the next few months.

 

To quickly contextualize the nearer-term demand setup: At current levels of activity sales volumes (PHS) in the existing market (the existing market = ~90% of the total market) would be down ~-1% in Apr/May. If continued sequential improvement were to persist, demand growth would run 0% to +2% YoY over the next quarter+. 

 

So, -2%-to-+2% is your fundamental demand backdrop through the balance of 1H16. Note, also, that (unlike NHS/Starts) existing sales have already fully mean-reverted back above average historical levels of activity so the easy asymmetry/upside has already been captured. 

 

Summarily, with demand stagnating, price growth beginning to roll, supply constraints persisting, the preponderance of domestic macro data decelerating and no discrete, large-scale catalysts, we're not seeing much for housing bulls to hang their hat on here presently. 

 

Given the sizeable underperformance for the housing complex QTD, “cover in May and go away” isn’t an un-compelling option but we don’t have a catalyst for reversing our outlook, yet. 

 

To close, lets Oakum’s razor why the SPX has done nothing (net) in the last ~18 month.

 

Name That Sales Decline (S&P500):

 

  1. -2.95%
  2. -3.38%
  3. -3.73%
  4. -3.87%
  5. -2.27%
  6. -1.45%

 

Answers:

  1. 1Q15
  2. 2Q15
  3. 3Q15
  4. 4Q15
  5. 1Q16 (to-date, 460 of 500 companies reported)
  6. 2Q16 Est.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.70-1.80%

SPX 2034-2060

VIX 14.66-17.41
USD 93.51-95.26 
Oil (WTI) 46.08-49.98

Gold 1 

 

To effectively risk managing the macro May-laise the balance of the month,

 

Christian B. Drake

U.S. Macro Analyst

 

May-laise - 5.18.16 Starts total zero Slope


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%
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