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See Jobless Claims? The Countdown To Recession Begins

Takeaway: Growth in the number of people filing initial unemployment claims isn't the growth you're looking for.

Editor's Note: Below is an excerpt from an institutional research note written by Financials analysts Josh Steiner. To access our institutional research email sales@hedgeye.com.

See Jobless Claims? The Countdown To Recession Begins - The Cycle cartoon 03.04.2016

WE HAVE GROWTH (Depending on how you look at it)

 

The latest NSA initial claims data grew on a Y/Y basis for the first time in a long time. While the increase was small at +2%, it's the first time since 2012 this has happened. Prior to 2012, you'd have to go back to 2007 to find the last time claims were rising. Initial claims are still at a low level in absolute terms, but rate of change matters. We wrote about this dynamic in detail back in February 2015 ("Initial Claims: Cognitive Dissonance & Mice"). 

 

Alternatively, in the last three cycles, claims have stayed below 330k for 24, 45, and 31 months before recession set in (33 months, on average). The current sub-330k run is now in its 27th month. That puts us 3 months past the minimum, 6 months from the 33-month average, and 18 months shy of the 1990s record-setting expansion. 

 

Click to enlarge

See Jobless Claims? The Countdown To Recession Begins - initial claims 5 19


The Macro Show with Keith McCullough and Neil Howe Replay | May 20, 2016

CLICK HERE to access the associated slides.

 

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


CHART OF THE DAY: Digging Into The Worst Jobless Claims Report Since 2012

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.

 

"... On that last point (#EmploymentSlowing), while the Old Wall was staring at the trees yesterday (‘omg, omg – what did Dudley say’), we were the only firm to write a research note contextualizing the worst US Jobless Claims report since 2012.

 

At +2% year-over-year, the latest non-seasonally adjusted (NSA) jobless claims report was the first year-over-year acceleration to positive since 2012. Prior to 2012, you’d have to go back to 2007 to find the last time claims were rising."

 

CHART OF THE DAY: Digging Into The Worst Jobless Claims Report Since 2012  - 05.20.16 Chart


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Beating Negative

“Cash is an easy way to defeat negative interest rates.”

-Jim Rickards

 

I don’t know about you, but I value my hard earned cash, big time.

 

When you think about the implications of the following pattern: #GrowthSlowing => Currency Devaluation (dovish monetary policy response) => and falling and/or negative interest rates … it’s not that hard to understand why you’d be overweight cash, positive absolute return holdings, and safe yielding assets.

 

In a nutshell, that’s The Bull Case for being long what I am long personally: Cash, Long-term Bonds, Municipal Bonds, Extended Duration Bonds, Utilities, and Gold (+ Real Estate + Hedgeye Equity + NHL Equity, and private stuff!).

 

Beating Negative - Cheap cartoon 05.16.2016

 

Back to the Global Macro Grind

 

You see, I’m not in the business of marketing the perma bull on “but it’s cheap.” That mediocre man’s excuse almost always aligns with one very basic reality: being long and wrong something that isn’t going up. I want to own things that get more expensive.

 

I know this might be way out there in an environment where many consensus portfolios are having a hard time Beating Negative, but when I think about building my personal net wealth I think:

 

  1. Don’t lose the money I have
  2. Try to earn a positive risk-adjusted return on the money I invest

 

I know. The first thing a reasonably good storytelling high-net worth broker is going to say back to someone like me on something like that is “but inflation is rising, Keith – you need to put your cash to work.”

 

My reply: growth is slowing faster than inflation is rising. And, in the intermediate to long-term, GROWTH slowing at an accelerating rate, trumps (pardon the pun) inflation rising at a decelerating rate.

 

That’s why I have a 49% position in Cash and 91% of my max asset allocation in Fixed Income right now. On this week’s redo of “oh, rates are gonna rip” that’s blown Long Bond Bears up for almost a year now, I was able to buy more TLT (on red).

 

What’s the catalyst for rates to stop rising at the 6th lower-high since I’ve been making this call (July 2015)?

 

  1. #TheCycle (economic, profit, and credit cycles all slowing now, at the same time)
  2. #LateCycle US Consumption Growth slowing from its 1H 2015 cycle peak
  3. #LateCycle US Employment Growth slowing from its 1H 2015 peak

 

On that last point (#EmploymentSlowing), while the Old Wall was staring at the trees yesterday (‘omg, omg – what did Dudley say’), we were the only firm to write a research note contextualizing the worst US Jobless Claims report since 2012.

 

At +2% year-over-year, the latest non-seasonally adjusted (NSA) jobless claims report was the first year-over-year acceleration to positive since 2012. Prior to 2012, you’d have to go back to 2007 to find the last time claims were rising.

 

Yes, we get it. Initial claims are still at a “low level” (hint: they ALWAYS are at the END of #TheCycle), but RATE of CHANGE is what matters most in macro. Most of our long-standing subscribers (thanking all of you, again, btw) get that.

 

Here are some more questions to consider when you try seeing the forest instead of the daily trading trees:

 

  1. Does #EmploymentSlowing data qualify as the “data” Yellen is dependent on?
  2. Do the 2 worst (April NFP and this week’s claims) employment reports SINCE the Fed Minutes matter?
  3. In addition to employment, isn’t the Fed more SP500 Dependent than they are concerned about inflation?

 

On SPY Dependence, I highly suggest you don’t forget that the recent Fed Minutes (that consensus macro tourists are hyperventilating about) came before the SP500 dropped for 4 straight weeks (intraday yesterday was a 4 week low).

 

Perversely, this is why I’m at my most “invested” position of 2016. Basically, because I am so bullish on #GrowthSlowing I believe the Fed is going to have to agree with Hedgeye on that (again) by the time they waive their magical market wand in June.

 

No, that doesn’t mean I am buying #LateCycle S&P Sectors like Consumer Discretionary, Tech, and Financials. It means I bought more of A) what’s been working and B) what worked yesterday. In a down tape, my “expensive” Utilities (XLU) closed +1.0% at +11.3% YTD.

 

On the Cash position, my friend Jim Rickards does a good job explaining why people like me still like it:

 

“There are many good, legitimate reasons to hold cash. You might have a cash business. You might want to have cash for emergencies. If you live where I do, on the East Coast, we’re vulnerable to hurricanes and nor’easters that can knock out power for days or weeks…” (The New Bull Case For Gold, pg 141)

 

Unlike many people I compete with in giving you risk managed advice, I have a cash business where I personally back the firm’s line of credit. I have to meet payroll for 70 employees, bi-monthly. And I will not get bailed out if I slow and/or fail.

 

Unlike running a central bank, that’s the real world of running a business. I deal with cash-in vs. cash-out. And if I don’t beat a negative return on my invested capital, I will go away.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.68-1.88%

SPX 2029-2058
RUT 1082-1110
USD 93.36-95.65
YEN 107.77-110.62
Oil (WTI) 44.82-50.43

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Beating Negative - 05.20.16 Chart


USD Overbought

Client Talking Points

USD

To be clear, that means we’re down to 49% Cash! And that’s mainly because the USD is signaling immediate-term TRADE overbought, so many of the #Reflation trades signaled immediate-term TRADE oversold this week (i.e. buy/cover signals).

GOLD

Dollar Down, Rates Down is the other big reason for the setup (i.e. we can be long the Long Bond, Utilities, Gold, etc. in that scenario); Gold’s immediate-term risk range = $1250-1280, so not a ton of upside from here but we’ll take what we can get.

FINANCIALS

Not to be confused with a growth accelerating setup, both the employment data (jobless claims UP +2.2% year-over-year yesterday – first time positive year-over-year has happened since 2012) and Janet Yellen are your friend on Down Rates from here – keeping the Financials as our favorite Sector Style on the short side vs. long Utilities (XLU) which acted great yesterday +1% to +11.3% year-to-date.

 

*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
5/19/16 51% 5% 0% 8% 30% 6%
5/20/16 49% 6% 0% 10% 30% 5%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/19/16 51% 15% 0% 24% 91% 18%
5/20/16 49% 18% 0% 30% 91% 15%
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

(VIDEO 2 MIN) McCullough: History Is An Important Guide To Mr. Market https://app.hedgeye.com/insights/51063-mccullough-history-is-an-important-guide-to-mr-market… via @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

Be who you are and say what you feel, because those who mind don’t matter and those who matter don’t mind.

Dr. Seuss

STAT OF THE DAY

For the 24th consecutive year, the most popular breed of dog in the United States is the Labrador retriever, according to rankings released by the American Kennel Club.


Cartoon of the Day: Whole Lotta Bull

Cartoon of the Day: Whole Lotta Bull - Usidedown bull 05.19.2016

 

The S&P 500 is flat year-to-date. That explains a lot. "There's so much whining out there... Stop it. And start winning," Hedgeye CEO Keith McCullough wrote today. In other words, get long our favorite Macro Ideas... Long Bonds (TLT), Utilities (XLU), and Gold (GLD).


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