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CHART OF THE DAY: A Look At Yellen's Favorite Economic Indicator

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.


"... As you can see in today’s Chart of The Day, Janet’s favorite “indicator” is one she calls her “Change In Labor Market Conditions Index.” After being green for, drumroll, #TheCycle… it started to go red (like it always does)… as the US economic cycle had already peaked and rolled.


Since this data series goes back to the 1970s, you can see that the probable outcome (from here) is for the 3 red bars just reported to go really red sometime soon. Does Janet want to be the catalyst in expediting that? When it’s really red, she has to be dovish."


CHART OF THE DAY: A Look At Yellen's Favorite Economic Indicator - 05.27.16 chart

Will Yellen Cut?

“You know, and I know, that we do not live in a world of Econs.”

-Richard Thaler


I know, and you know, that isn’t true in our profession. We live in the world of an un-elected Federal Reserve’s inaccurate forecasts.


As for the other 99% of the world’s population, Thaler is quite right in emphasizing that “we live in a world of humans. And since most economists are also human, they also know that they do not live in a world of Econs.”


That’s how he introduces his new book, MisbehavingThe Making of Behavioral Economics. If you have friends who live in a world of linear-forecasting Econs, buy it for them. Humans need to learn that “the premises on which economic theory rests are flawed.” (pg 6)


Will Yellen Cut? - fed forecast crystal ball


Back to the Global Macro Grind


I spent all of this week speaking with Institutional Investors in California. From Santa Monica to San Francisco, there wasn’t one meeting that didn’t ultimately end up focusing on what the Federal Reserve is going to do next and why.


“I hear you on #TheCycle, but could they raise anyway?”


“What happens if they don’t raise? Do we rip?”


“If they raise, then when is the earliest they can start cutting again?”


Yep. Those are the three scenarios:


  1. Raise rates in June or July and September
  2. Do nothing
  3. Raise then cut in September


The last one might raise your eyebrows this morning as it’s the furthest away from your local hedgie hyperventilating about the “Fed’s Minutes” (Bond Yields have since pulled back and every Long Bond and Utilities Bull who bought that damn dip are getting paid).


But don’t forget that the only reason why the US stock market didn’t crash in FEB-MAR 2016 is because that’s precisely what the Fed did in going dovish and pulling “5 hikes” back to 2 (or now my boy Johnny Williams in CA says 2-3!).


Janet Yellen went dovish (i.e. cut rhetorically) AFTER she raised, making her the only American Econ of this decade to have RAISED RATES into a US Economic slow-down AND then immediately CUT them.


#Sweet. Now what?


Should she raise them into another slowing Q2 slowing GDP report, corporate profit recession, and a few more NFP #EmploymentSlowing reports? If she does, the proceeding cuts are going to be super sweet, no?


As you can see in today’s Chart of The Day, Janet’s favorite “indicator” is one she calls her “Change In Labor Market Conditions Index.” After being green for, drumroll, #TheCycle… it started to go red (like it always does)… as the US economic cycle had already peaked and rolled.


Since this data series goes back to the 1970s, you can see that the probable outcome (from here) is for the 3 red bars just reported to go really red sometime soon. Does Janet want to be the catalyst in expediting that? When it’s really red, she has to be dovish.


In other words, this summarizes my high probability forecast:


  1. In a dead-heat with being SP500 dependent, Yellen is labor data dependent
  2. If she hikes for the sake of hiking, she’ll be cutting faster than she hiked
  3. Because there is a 0% chance she stays tight during #LateCycle Employment slowing


So, instead of staring at an Atlanta Fed GDP Now forecast (that is subject to an intra-quarter downward revision of 200-250 basis points), gaze deeply again at Janet’s preferred indicator.


The last 3 months have registered the lowest readings since this time (June) of 2009. Can you imagine if Bernanke was clueless enough on #TheCycle to start raising rates in the summer of 2009?


I can. And so can the world of Econs. He’d have blown our reflated asset price world to smithereens.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are now:


UST 10yr Yield 1.71-1.91% (bearish)

SPX 2038-2097 (bearish)
RUT 1081-1149 (bearish)

NASDAQ 4 (bearish)

Nikkei 166 (bearish)

DAX 99 (bearish)

VIX 13.16-16.98 (bullish)
USD 94.56-95.97 (bullish)
EUR/USD 1.11-1.13 (bearish)
YEN 108.42-110.74 (bullish)
Oil (WTI) 46.29-49.97 (bullish)

Nat Gas 1.97-2.20 (bearish)

Gold 1 (bullish)
Copper 2.03-2.12 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Will Yellen Cut? - 05.27.16 chart

UST 10YR, VIX, Italy

Client Talking Points


Last week’s hyperventilation about the Fed’s “minutes” (from April) turned out to be yet another buying opportunity in everything Long Bond, Utes, etc. – with the UST 10yr at 1.82% this morning, all tweets are on Yellen who speaks at 1:15 EST. Remember, she is a labor economist – that makes next week’s jobs report one of the most important of 2016.


Post another no-volume month-end markup in US Equity beta (Total US Equity Volume -23% yesterday vs. its 1 month avg!) to lower highs, my front-month volatility signal says we see another higher low in VIX in the coming week – VIX risk range = 13.16-16.90; buying stocks (chasing beta) at 12-13 VIX has not worked in 2016.


Yep, Italy. One topic that I wasn’t getting asked enough about on the road (I was in California all week) is the rising probability for Europe to enter a recession in the back half of 2016. We have a Street low GDP forecast of 0.2% for Q416 for the Eurozone and we’re at negative GDP for Italy whose stock market is -0.3% this am, -3.2% m/m, and -24.1% y/y.

Asset Allocation

5/26/16 58% 2% 0% 10% 28% 2%
5/27/16 58% 2% 0% 10% 26% 4%

Asset Allocation as a % of Max Preferred Exposure

5/26/16 58% 6% 0% 30% 85% 6%
5/27/16 58% 6% 0% 30% 79% 12%
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

When Janet does have to acknowledge the deterioration in U.S. growth, we expect the policy shift to be dollar bearish on the margin. And, to the contrary, if the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway. And there’s nothing Gold (GLD) likes more than a falling dollar and falling interest rates which is why we added it to the long-side of Investing Ideas this week. Remember, this is the same week various Fed members were in public calling for a rate hike with the worst jobless claims print since 2012. #GoodLuck.


McDonald's (MCD) continues to evolve. The company's latest step is testing never frozen burgers at 14 units in the Dallas, TX area. This initiative could give them the ability to compete with better burger concepts such as Shake Shack, In-N-Out and Five Guys.


Meanwhile, there has been chatter about the lack of identity for their value platform in 2Q16. MCD is truly still in the testing phase as to what their national value message will be. We can appreciate the fact that they are testing multiple formats before fully committing.


In the meantime, the tailwind from all-day breakfast will continue to propel growth going forward, until lapping this initiative in 4Q16. We continue to favor MCD as one of the best LONGs in the market right now, due to actual growth and style factors that are friendly in volatile markets.


If you haven’t yet, you got another chance to buy long-term Treasuries at lower highs this week. If you’re already long of Long Bonds (TLT, ZROZ), stick with it. None of the relevant data released this past week suggests that growth could inflect and trend positive:

  • Thursday’s Jobless Claims Report was the worst print, in Y/Y rate of change terms, since 2012, and it was the fourth consecutive week of increasing jobless claims
  • Industrial Production declined -1.1% Y/Y for April, marking the 8th consecutive month of Y/Y contraction: #IndustrialRecession

Tying together a continued deceleration in growth with policy expectations, the most important callout is that our expectation for growth in Q2 is well below consensus and Fed expectations (which have been horribly inaccurate). 

Three for the Road


A Closer Look At Yesterday's Durable Goods Data app.hedgeye.com/insights/51222… via @Hedgeye



"My fellow Americans, ask not what your country can do for you, ask what you can do for your country."

-John F. Kennedy


Julio Urias, age 19, will make his first MLB start tonight against the New York Mets.   

Early Look

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Hillary's Headache, Trump Triumphs; Bernie v. Donald?

Hillary's Headache, Trump Triumphs; Bernie v. Donald? - JT   Potomac banner 2 


HILLARY’S HEADACHES: The State Department’s IG released an in-depth report regarding Hillary Clinton’s controversial email use when she was Secretary of State. The report comes as Clinton continues to struggle with trust and favorability numbers. Although Clinton did not break any laws, it’s clear that she didn’t follow the rules. Despite her confidence moving forward, the controversy will continue to saddle her throughout her campaign - and if that doesn’t give one a big enough headache - the FBI is conducting a criminal investigation that could result in the DOJ pressing formal charges.  Did you hear that roar coming from Trump Tower?


TRUMP TRIUMPHS: Well, it’s official. Donald J. Trump is the official Republican nominee garnering enough delegates to secure his spot on the ballot come November. Although Trump has surpassed the amount of delegates needed to win the nomination outright, look for Senators Ted Cruz and Marco Rubio, and Governor John Kasich to play roles in this year’s convention agenda as they attempt to leverage their respective delegates.


THE BERN V. THE DONALD: Another primary debate is the last thing this country needs, but what if it’s between two diametrically opposed candidates (with a few exceptions) - one who has his nomination locked up and the other who doesn’t and won’t?  Sure, we’ll tune in. Bernie and the Donald are considering debating each other on the main stage ahead of the CA primary on June 7.  Now for two minutes ponder all of the issues that will come to the fore. In our opinion, Sanders has an opportunity to inflict more damage given that “he’ll do everything to defeat Donald Trump” hence softening him up for Hillary - or will it backfire and end up hurting her?


ZAPPING ZIKA: The House and Senate have now both approved appropriations measures that will allow funding to combat the Zika virus. H.R. 5243, the Zika Response Appropriations Act, passed the House last week, allowing for Majority Leader Kevin McCarthy (CA) to move forward with a conference with the Senate; after differences are ironed out, supplemental appropriations will be provided to HHS and the State Department for Zika virus response.


ENERGY AND WATER BILL DROWNS: House Republicans shot down a normally uncontroversial energy and water appropriations bill after Democrats attached an amendment preventing LGBT discrimination by federal contractors. Conservatives blamed party leadership this morning for accepting Rep. Sean Maloney’s (NY) amendment while moderates lamented the ease with which ‘poison pills’ can be introduced under Speaker Ryan’s “open” amendment process. Although Ryan’s process should benefit the team as a whole, it has taken much criticism – as he’s identified - for allowing the appropriations process to be sabotaged and derailed.


NEUSTAR’S NUMBER PORTABILITY CONTRACT: IT AIN’T OVER TILL IT’S OVER: Our Telecommunications-Media Policy Analyst Paul Glenchur released his thoughts on how Neustar's portability contract is playing out - “Neustar's Number Portability Contract: It Ain't Over Till It's Over (NSR, ERIC)


THE ENERGY ELECTION: TRUMP PROVIDES MORE CLUES ON ENERGY PRIORITIES IN NORTH DAKOTA SPEECH: Our Senior Energy Analyst Joe McMonigle gives us insight on what Republican Presidential nominee Donald Trump’s energy priorities look like - “The Energy Election: Trump Provides More Clues on Energy Priorities in North Dakota Speech


WHY $50 OIL CREATES TENSION AT OPEC MEETING NEXT WEEK: Oil bulls are no doubt pleased that oil passed the $50 threshold on Thursday but the recent rally may create tension at the June 2 OPEC meeting. Our colleague Joe McMonigle departs tonight for Vienna to attend various pre-meeting receptions and the meeting on Thursday. Joe will publish from Vienna and hold a client call on Wednesday, June 1 to provide the latest updates. While the rally is certainly welcome news for many OPEC members, Joe believes the Saudis see the price rebound as premature serving as a lifeline for U.S. shale production. Stay tuned for daily reports on OPEC week in Vienna from Hedgeye in the bullets.


Have a great Memorial Day weekend.  We’re back on Wednesday.





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The Energy Election: Trump Provides More Clues on Energy Priorities in North Dakota Speech

Takeaway: Trump's energy speech was short on details but it likely provided some reassurance to those in the oil, natural gas and coal sectors.

Energy promises to play a big role in the 2016 presidential election and will provide sharp contrasts between the candidates on energy policies. The November election will be a key catalyst on several issues of interest to investors. This is the first in a series of client notes on The Energy Election.


As with most issues, Donald Trump has not provided much if any details on his energy policies to date. There is no energy plan on his campaign web site so we have been left with some campaign trail rhetoric with some snippets in press interviews and tweets.


Today we got a little more visibility on Trump’s energy policies during the candidate’s speech to the annual Williston Petroleum Conference in North Dakota. It was an important venue and the home state of Trump energy advisor - Congressman Kevin Cramer.


While the speech was still lacking details, it likely provided some reassurance to those in the oil, natural gas and coal sectors.


As expected, Trump offered strong support hydraulic fracturing in the heart of North Dakota shale country and vowed to defend the industry from attacks from environmental activists. Trump said that if the US would ban fracking “you’re going to be back in the Middle East and we’re going to be begging for oil.”


It will serve as an important contrast to Hillary Clinton who has moved further left to appease environmental groups in the Democrat coalition. Clinton has said she will oppose fracking where states and local governments have enacted bans but we suspect liberal groups will want her to voice tougher opposition as the campaign continues. Bernie Sanders has said he opposes fracking, period.


This is mostly campaign rhetoric as states have the lead role on regulating hydraulic fracturing and the federal government’s role is currently limited to development on federal lands. However, we believe environmental groups will try to push EPA and congressional Democrats to find novel ways to increase the federal government’s regulatory reach into fracking. Therefore, the party that wins the White House will have significant influence on the outcome for the industry moving forward.


Trump also said he would “100 percent approve” the Keystone XL pipeline but he would seek a cut of the profits. The takeaway here is that he will likely approve KXL in the first few days of his administration. The part about getting a cut of the profits is just rhetoric so ignore it.


Energy independence was another theme of the speech as Trump said he favors US crude exports. Since the law lifting the US crude export ban was enacted last year, there is not much Trump or any politician can do on this front. Market forces will be the key decider on US energy production as producers need higher oil prices to reverse flat and declining production. However, the populist rhetoric will be noted by OPEC member and Russia.


The other main topic of Trump’s speech today was his support for coal and his opposition to EPA’s clean power plan (CPP) and carbon regulations. In a Reuters interview a few days ago, Trump said that he would “renegotiate” the Paris climate agreement which prompted environmental groups to say it was impossible to renegotiate with over 100 countries and cited a little-known provision of the agreement that disallows countries to withdraw for four years.


Here’s where a little interpretation of Trump-speak is needed. The media and environmental groups are focusing too much on Trump’s use of the word “renegotiate”. What Trump really means is that he opposes the climate pact and will likely disavow the Obama Administration commitments. The White House asserts that international pressure will preserve the US commitments to the Paris agreement but any Republican President will surely abandon the pact. As far as the four-year ban on withdrawals, the Paris pact is not a treaty so therefore it is not legally binding on future Administrations. Of course, we would expect that Clinton would honor the agreement and continue to pursue aggressive carbon reductions.


Trump said he opposes the CPP and will likely try to withdraw the rule or greatly modify it in the rule making process. Environmental groups and others believe it is now impossible for any Republican President to nullify or change the CPP regulation but President Obama has already provided the example of pushing the bounds of executive authority. Look for Trump to start referring to the CPP as a Washington power grab.


In contrast, Clinton supports the CPP and will likely proceed with implementing the regulation and expand carbon rules to other sectors, like refineries.


Finally Trump gave more nuanced positions on the Renewable Fuel Standard (RFS) and wind energy in the North Dakota campaign stop. In past appearances in Iowa, Trump said he was “totally in favor of 100 percent ethanol.” Today he said “we’re going to look at the ethanol mandate past 2022” implying that he might extend the mandate after the law expires in 2022. While it was less emphatic support than his previous comments, we view this as generally positive for biofuel producers. Still, we somehow think his RFS position is a moving target.


On wind, Trump said it was not economical without subsidies but added that he was “into all types of energy.” Again, Trump seems to be hedging his earlier comments of support for wind energy on the campaign trail in Iowa. We would view a Trump Administration as negative for federal subsidies and other support for wind and renewables in general.