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A Look At How Yellen Is Moving Markets This Morning

Takeaway: Fed head Janet Yellen's speech Friday had key investment implications for Copper, Gold and Long Bonds.

A Look At How Yellen Is Moving Markets This Morning - Yellen cartoon 04.06.2016

 

Fed head Janet Yellen spoke at Harvard University on Friday and supplied her latest thinking on Fed policy. 

 

“It’s appropriate, and I’ve said this in the past I think, for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate," Yellen said.

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers this morning.

 

"Friday’s Yellen QA @Harvard was easily her most hawkish of the year – she said she’s “probably” going to raise in June or July based on her forecast. Since her forecast has always been the risk, there’s not a lot I can own into her making another policy mistake (tightening into a slow-down like she did in DEC); hence my sell signals in Treasuries, Utes, etc. Friday."

 

Look at the falling 10-year Treasury yield despite the Fed's December rate hike:

 

A Look At How Yellen Is Moving Markets This Morning - 10yr treasury 5 31

 

Meanwhile in commodities...

 

"Copper is down -0.6% this morning => Dollar Up, Rates Up deflates the “reflation” – Gold gets this too. Come June/July I can’t see why markets won’t look like they did by the end of DEC and through JAN. If you have Hedgeye’s GDP and profit cycle forecasts (Q2 will be the worst – Q1 was not the “bottom”), you might have our view of 1-3 month risk here."

 

 

As for Gold...

 

 

The risk to macro markets is that Janet Yellen makes her second rate hike mistake. 

 

Remember Yellen is a labor economist so ahead of Friday's non-farm payroll report, here's her favorite labor market indicator. Note: It's deteriorated for the fourth straight month:

 

A Look At How Yellen Is Moving Markets This Morning - yellen favorite indicator

 

More to be revealed.


Daily Market Data Dump: Tuesday

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: Tuesday - equity markets 5 31

 

Daily Market Data Dump: Tuesday - sector performance 5 31

 

Daily Market Data Dump: Tuesday - volume 5 31

 

Daily Market Data Dump: Tuesday - rates and spreads 5 31

 

Daily Market Data Dump: Tuesday - currencies 5 31


UST 10YR, Copper, VIX

Client Talking Points

UST 10YR

Friday’s Yellen QA at Harvard was easily her most hawkish of the year – she said she’s “probably” going to raise in June or July based on her forecast. Since her forecast has always been the risk, there’s not a lot we can own into her making another policy mistake (tightening into a slow-down like she did in DEC); hence my sell signals in Treasuries, Utes, etc. Friday.

Copper

0.6% this am -> Dollar Up, Rates Up deflates the “reflation” – Gold gets this too. Come June/July we can’t see why markets won’t look like they did by the end of DEC and through JAN. If you have Hedgeye’s GDP and profit cycle forecasts (Q2 will be the worst – Q1 was not the “bottom”), you might have our view of 1-3 month risk here.

VIX

Easiest call to make on all of this is raise cash and expect front-month equity vol to bounce where it has every time reflation has deflated (12-13 zone)… in our asset allocation model I am going from 49% Cash (2 weeks ago post the equity selloff) to 77% this morning. Many thanks to Janet for confusing what was a somewhat investable situation.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/30/16 58% 2% 0% 10% 26% 4%
5/31/16 77% 0% 0% 6% 11% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/30/16 58% 6% 0% 30% 79% 12%
5/31/16 77% 0% 0% 18% 33% 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
GLD

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.

MCD

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.

TLT

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

TWEET OF THE DAY

A Few Brief Thoughts On Janet Yellen's Speech Friday: app.hedgeye.com/insights/51267… @Hedgeye

@KeithMcCullough

QUOTE OF THE DAY

"Nature does not hurry, yet everything is accomplished"

-Lao Tzu

STAT OF THE DAY

Stephen Curry of the Golden State Warriors scored 36 points in last nights game 7.


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CHART OF THE DAY: Fed Forecast Versus #TheCycle

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.

 

"... And now, markets are “gonna rip” based on a low-probability scenario that the Fed’s forecast for growth to magically re-accelerate (into peak of #TheCyclecompares in Q2) is accurate? #Cool. Good luck with that.

 

We’re sticking with our forecast of GDP sub 1% for Q2 and the worst profits of #TheCycle in Q2 and Q3. Alongside #EmploymentSlowing, we remain The Bears on #EarningsSlowing. We expect The Financials (XLF) to lead on the downside of earnings with the Yield Spread (10yr minus 2yr) not budging last week (still at YTD lows of 94 basis points wide)."

 

CHART OF THE DAY: Fed Forecast Versus #TheCycle - 05.31.16 Chart


Bad Fed Estimate

“A bad anchor can easily produce a bad estimate.”

-Phil Tetlock

 

On Friday @Harvard, Janet Yellen said that, based on her estimate of where the US economy is at, the Federal Reserve will “probably” raise rates in June or July… Ok. What if she raises and her estimates are wrong (again)?

 

As Phil Tetlock explains in Superforecasting: “When we make estimates we tend to start with some number and adjust. The number we start with is called the anchor. It’s important because we typically underadjust, which means a bad anchor can easily produce a bad estimate. And it’s astonishingly easy to settle on a bad anchor.” (pg 120)

 

Like they did when they raised rates into the Q1 slow-down (DEC), the Fed is anchoring on a +2-3% GDP scenario for Q2. They’re also anchoring on a #LateCycle view of US Labor, which has clearly slowed since their bad anchor led to bad estimates in Q1. Since the Fed’s forecast has always been one of the biggest risks to macro markets, I don’t see why consensus is complacent about that now.

 

Bad Fed Estimate - On your mark GDP 6.12.2014

 

Back to the Global Macro Grind

 

Complacent? “Keith, everyone is bearish – this is why markets are gonna rip.”

 

Let me get this straight – the only reason why markets didn’t keep crashing in FEB-MAR is that Janet Yellen went dovish as the data did, the US Dollar careened to the downside, and reflation ripped…

 

And now, markets are “gonna rip” based on a low-probability scenario that the Fed’s forecast for growth to magically re-accelerate (into peak of #TheCycle compares in Q2) is accurate? #Cool. Good luck with that.

 

We’re sticking with our forecast of GDP sub 1% for Q2 and the worst profits of #TheCycle in Q2 and Q3. Alongside #EmploymentSlowing, we remain The Bears on #EarningsSlowing. We expect The Financials (XLF) to lead on the downside of earnings with the Yield Spread (10yr minus 2yr) not budging last week (still at YTD lows of 94 basis points wide).

 

Back to the complacency factor, on last week’s slow-volume-month-end-markup (Total US Equity Volume including dark pool down over 20% vs. the 1-month average), here’s what CFTC futures & options net positioning did:

 

  1. SP500 (Index + E-mini) moved to its largest net LONG position of 2016 at +95,251 contracts
  2. 10YR Treasury net SHORT position came in small to -93,475 contracts
  3. Gold net LONG position came in bigger than small to +169,491 contracts

 

To put that net LONG position in US Equity Beta in context, that’s 2.73x its 1-year z-score!

*anything plus or minus 2.0x is usually a fade signal, from a sentiment perspective

 

Since I didn’t think the Fed would be stubborn enough to stay with a pseudo “mid-cycle” economic view, I didn’t think they’d pivot from hawkish (DEC) to dovish (MAR-APR) back to hawkish (MAY)… but I guess I thought wrong (I thought she was data dependent!).

 

That’s why I sent out SELL signals (i.e. take down exposures) to my favorite intermediate to long-term LONG ideas after listening to Janet on Friday. After having such a great start to the year by simply staying with #TheCycle call, why would I just let the Fed making a policy mistake eat into my family’s hard earned absolute returns?

 

In the end, I think the Fed will be proven wrong (again) and the curve will continue to flatten as the rate of change in US economic growth slows in Q2 and Q3. But in between now and the end, I have to deal with the risk these bad Fed estimates impose on my portfolio’s preferred asset allocation. So this is what the Hedgeye Asset Allocation Model’s key moves look like, in context:

 

  1. CASH going to 77% (from 49% when US Equities hit their May lows)
  2. Taking US Equities from 6% back to 0% (like I did in late DEC)
  3. Taking Fixed Income 31% to 11% (i.e. from 91% of my max exposure to 33%)

 

I’ve also cut my net asset allocation (I’m a former Hedge Fund PM so I think of all my positions on a net longs vs. shorts basis) to commodities from 10% net long to 6%. Yeah, I know – maybe I should cut that to 0% too (Gold, which I like, was -3.1% last week).

 

After writing this letter to many of you for going on 8 years now, I realize that how I think about my personal asset allocation isn’t for most Institutional Investors. That said, I’m ok with that because instead of some marketing message, it’s the transparent truth. I’m not an institutional investor anymore and many of you who are can still go to 77% cash in your own accounts anyway!

 

Since there are no rules against the Fed flip-flopping from hawkish-to-dovish-to-hawkish, why shouldn’t I operate with the same short-termism? Rates can easily rise from 1.70% (where they went to post the recent rate of change #EmploymentSlowing report) to 2.00% on Fed rhetoric, only to crash right back to 1.70% again.

 

That’s what we call moving the MOVE Index (Bond Market Volatility). And there’s no historical precedent for that being a short-term bullish catalyst for either high beta stocks or junk bonds. You’ll be able to thank the Fed’s bad estimates for that. I know I will. That’s when I get to buy-back everything I sold higher, lower (again), by having a better estimate of intermediate-term growth.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.75-1.91%

SPX 2040-2110
RUT 1105-1160

VIX 12.74-17.18
USD 94.58-95.95
Oil (WTI) 46.53-50.14

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bad Fed Estimate - 05.31.16 Chart


OPEC Meeting Preview: No Policy Change Now But Potential Signals About the Future

Takeaway: We don't expect any OPEC policy change at the June meeting. But still important meeting for potential signals of future action at year-end.

NOTE: Hedgeye will host a client conference call on Wednesday, June 1 at 1:00PM Eastern Time with Senior Energy Analysts Joe McMonigle from Vienna and former US Energy Secretary Spencer Abraham from Washington. Participating Dialing Instructions -- Toll Free: ; Toll: ; UK: 0 ; Confirmation Number: 13638678.


VIENNA, AUSTRIA – May 31, 2016 – Greetings from Vienna where I have arrived over the weekend in preparation for this week’s OPEC meeting on June 2. Several months ago, we forecast not to expect any policy change at the June meeting, and we do not have a different view now.


However, we see Thursday’s meeting as important for gathering potential signals about what OPEC, and in particular, Saudi Arabia might do as it approaches the December meeting amid declining US and non-OPEC production.  While we are not predicting a policy change at the year-end meeting in December, we do believe it may be under consideration for the first time in two years. Much will depend on reductions in US, other non-OPEC and perhaps even OPEC (i.e. Venezuela) production in the fall.

 
The June meeting is also important for two other reasons. Primarily, it will be the first OPEC meeting since nuclear sanctions against Iran have been lifted resulting in an additional 700,000 barrels a day (b/d) in Iranian crude exports to the market in April. You may recall that since December 2015 we have been bullish at Iran’s re-entry to oil markets and forecasted Iranian crude exports to increase by 700,000 b/d in March. We were off by one month but it's safe to say that the speed of Iran coming back to the market has surprised most observers. These developments are significant because Iran is focused solely about getting its own market share back post-sanctions. Therefore, it is very unlikely that there will be any agreement on an OPEC policy change until Iran meets certain internal production and export objectives.

 
In addition, as we saw at the April Doha meeting, the Saudis are standing firm that all members, most especially Iran, must participate in any production policy change such as a freeze. We don’t expect the Saudis will change this view going forward regarding any future coordinated OPEC action on production.


The other chief reason we are closely monitoring Thursday’s OPEC gathering is that it will be the first meeting to be attended by the new Saudi Arabian Energy Minister Khalid Al-Falih. As the former CEO of Saudi Aramco, Al-Falih is well known to the energy community but we will be watching the new minister for signals about what the Kingdom may do later this year when non-OPEC production should have declined significantly.

 
The Saudi delegation arrived late Monday night and has already thrown a surprise to reporters. Several pre-meeting press articles profiling the new minister predicted that he will be more out-spoken and transparent than his predecessor. Reporters who were staked out in the Park Hyatt hotel lobby expecting comment from the arriving Minister on Monday night were disappointed that he slipped in through the hotel’s back door. Likewise, he departed the hotel this morning again through the back entrance without comment. Many reporters on Twitter expressed surprise that the Minister avoided engaging the press. We wonder if they will start staking out the hotel’s back entrance now.


While there is no specific proposal regarding production policy on the meeting agenda, OPEC will use the occasion to admit Gabon with 250,000 b/d production as a new member. In addition, the issue probably getting the most attention from members is a decision on a new OPEC Secretary-General. The group is considering three outside candidates of which we view Nigeria’s Mohammed Barkindo as an early  favorite. However, a disagreement could result in a continuation of Secretary-General el-Badri’s “acting” term. Alternatively, a disagreement could also result in a rotating figure-head administrator by the OPEC President for annual terms. The current Presidency held by the Qatar Minister will end in December and would rotate to the next member in alphabetical order which would result in Saudi Arabia serving as the next OPEC President and potentially as a figure head Secretary-General. While this may provide incentive for consensus on one of the three candidates for Secretary-General, there is no question that Saudi Arabia will be assuming the OPEC Presidency at a time when a policy change may be under consideration for the first time in two years.


 


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