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Daily Market Data Dump: Thursday

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: Thursday - equity markets 6 2

 

Daily Market Data Dump: Thursday - sector performance 6 2

 

Daily Market Data Dump: Thursday - volume 6 2

 

Daily Market Data Dump: Thursday - rates and spreads 6 2

 

Daily Market Data Dump: Thursday - currencies 6 2


INSTANT INSIGHT: U.S. Dollar, Japanese Equities Crashing & Fed Rate Hikes

Takeaway: The U.S. Dollar was down in the last two days of trading sending commodities up and Japanese equities down.

INSTANT INSIGHT: U.S. Dollar, Japanese Equities Crashing & Fed Rate Hikes - dollar crumbled

 

The simple summary of the last two days of trading goes like this:

 

Dollar Down = Reflation Up

 

It's that easy...

 

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

 

"All it took was 2 down days for USD to ramp reflation, but this time to lower-highs for both the CRB Index (TAIL risk resistance = 192) and Oil – anything in the area code of consensus on jobs “probably” (her word) gives the Fed the greenlight they want on a rate hike (i.e. rate of change in labor market will still be slowing into that hike, which would be USD bullish from here)" 

 

INSTANT INSIGHT: U.S. Dollar, Japanese Equities Crashing & Fed Rate Hikes - rate hike cartoon 12.16.2015

 

Meanwhile, in Asia...

 

Yesterday it was China flash crashing. Today it's Japan getting smoked. Again, down Dollar is at play, this time wreaking havoc on Japanese equities. McCullough writes:

 

"No likey the Down Dollar, Up Yen move, eh? For your friends who think stocks can’t go down anymore, the Nikkei just lost another -2.3% overnight and -3.9% in 2-days, taking it right back into #crash mode at -21% since July. Into the jobs report, I say you book some gains on the short side of Japanese Equities, especially if USD Index holds this 94-95 level." 

 

 

Where does the U.S. Dollar go from here?

 

 

With future Fed rate hikes tethered to "improvements" in the labor market, all eyes are on tomorrow's Jobs Report. To be clear, barring some truly massive ramp in the non-farm payroll numbers, the trend in the jobs market will continue to fall off its February 2015 peak in rate of change terms.

 

Not that this matters to the linear, labor economists at the Fed. A headline beat would "probably" (Janet's own words) justify a rate hike in the coming months. And the simple summary goes like this:

 

Rate Hike => Dollar Up

More to be revealed


Do we need a terrible jobs report to keep reflation going?

Client Talking Points

USD

All it took was 2 down days for USD to ramp reflation, but this time to lower-highs for both the CRB Index (TAIL risk resistance = 192) and Oil – anything in the area code of consensus on jobs “probably” (her word) gives the Fed the greenlight they want on a rate hike (i.e. rate of change in labor market will still be slowing into that hike, which would be USD bullish from here).

 

Japan

No likey Down Dollar, Up Yen move, eh? For your friends who think stocks can’t go down anymore, the Nikkei just lost another -2.3% overnight and -3.9% in 2-days, taking it right back into #crash mode at -21% since July. Into the jobs report, we say you book some gains on the short side of Japanese Equities, especially if USD Index holds this 94-95 level.

OIL

Is the new intermediate-term risk range $46-56 or $36-50? The Saudis have a major drill program underway and Iran isn’t budging (our Energy Policy analyst Joe McMonigle is at the OPEC meeting); the Fed tightening into a slow-down matters in trying to answer the question on what the risk ranges are across durations – currently the immediate-term range = $46.87-49.99 WTI.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/1/16 77% 0% 0% 6% 11% 6%
6/2/16 80% 0% 0% 4% 8% 8%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/1/16 77% 0% 0% 18% 33% 18%
6/2/16 80% 0% 0% 12% 24% 24%
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
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)

 

GLD

Our Macro team’s proprietary Growth, Inflation, Policy Model (GIP Model) is a proven model that accurately front-runs the second derivative direction of inflation-adjusted growth. The most important call-out is that our growth estimates for 2016 (year-over-year) remain WELL BELOW Wall Street and Central Bank consensus forecasts:

 

  • Hedgeye: +1.4%
  • Bloomberg Consensus: +1.8%
  • Central Bank: +2.2%

 

In conclusion, the Fed remains out to lunch with their expectation for growth, and once they come around the Hedgeye view, the policy playbook calls for incremental easing on the margin.

Three for the Road

TWEET OF THE DAY

McMonigle: Why $50 Oil Is Likely Temporary app.hedgeye.com/insights/51329… … via @JoeMcMonigle on #oil at #OPEC meeting pic.twitter.com/cRHFPAQMOa

@Hedgeye

QUOTE OF THE DAY

"I didn't get over 1300 walks without knowing the strike zone."

-Wade Boggs

STAT OF THE DAY

Jeff Bagwell hit 449 HR's during his 15 year career.


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

The Macro Show with Keith McCullough and Joe McMonigle Replay | June 2, 2016

On a special edition of The Macro Show, Joe McMonigle reports from Vienna to discuss today's OPEC Meeting.

 

CLICK HERE to access the associated slides.

 

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


CHART OF THE DAY: What The Fed's December Rate Hike Did To High Yield Spreads

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.

 

"... How about the credit cycle? Oh right – another true but unimportant factor for weekly chart-chasers to consider until it matters again… What happened to High Yield Spreads last time (i.e. the only time in modern history) that the Fed tightened into a slow-down?"

 

CHART OF THE DAY: What The Fed's December Rate Hike Did To High Yield Spreads  - 06.02.16 EL Chart


True But Unimportant?

“It was too easy to brush aside bounded rationality as a true but unimportant concept.”

-Richard Thaler

 

“Bounded Rationality” is the term coined by one of the great non-linear minds in American history, Herbert Simon. He wrote about it “well before Kahneman and Tversky came along… saying that people lack the cognitive ability to solve complex problems.”

 

Oh don’t get your under-pants in a bunch this morning. I’m not suggesting you can’t solve complex problems. That’s your job. When Thaler says “people” aren’t that smart, he meant The People – as in the bros on Main Street don’t do efficient market hypothesis.

 

As Richard Thaler goes on to remind us in Misbehaving (The Making of Behavioral Economics), “economists are fine with the idea that their models are imprecise and that predictions contain error” (pg 23). But what happens when their mistakes affect The People?

 

True But Unimportant? - Fed cartoon 12.21.2015

 

Back to the Global Macro Grind

 

Will the Fed make another monetary policy mistake and raise rates into a classic #LateCycle slow-down? Janet’s latest answer to that question is “probably.” And I spent all of yesterday debating institutional investors in the Midwest on timing another mistake.

 

Just to set the table here for what may be true, but not yet important:

 

  1. Fed goes HAWKISH and tightens into a slow-down in December
  2. Fed then goes DOVISH and devalues the DOLLAR in March/April
  3. Fed then goes HAWKISH in May and the DOLLAR rallies for 3 straight weeks

 

Everyone agree with that? Ok. Now what?

 

  1. What if the US Jobs report for May (tomorrow) is another rate of change slow-down?
  2. What if the US Jobs report for May “beats” a headline expectation that implies continued slowing?
  3. What if both the May and June jobs reports are #LateCycle Employment slowing reports?

 

You know that Janet “probably” raising rates in July has 2 jobs reports pending in front of it, right? Oh, right – “but if you’re right on #TheCycle, Keith… and labor continues to slow, then she’ll just go dovish again and not hike.”

 

Do you agree with that? If you do, in the span of 6 months, the Federal Reserve will have gone from:

 

  1. HAWKISH to
  2. DOVISH to
  3. HAWKISH … and back to
  4. DOVISH!

 

As one Portfolio Manager (who has been very long of Utilities, which are now +13.6% YTD) said to me after this exchange yesterday, “lol – good luck landing on all four of those dots.”

 

And doesn’t that summarize the guessing game that we are in? Not only do we have to strive for excellence in our forecasting of the trending rates of change in growth and inflation, but we have to solve for what inaccurate forecasters are going to do in the meantime!

 

As a reminder, on Janet Yellen’s publicly stated preferred LABOR MARKET INDICATOR (her “Change in Labor Market Conditions Index”), including the April reading, US Employment has slowed to NEGATIVE for 4 STRAIGHT MONTHS.

 

In addition to the labor cycle, back to what is also true and important – i.e. the profit cycle:

 

  1. 493 of 500 S&P 500 companies have reported Q1 2016
  2. Aggregate SALES were -2.2% y/y and EPS -8.4% y/y
  3. 6 of 10 SECTORS were negative y/y EPS, including Financials -14.2% y/y

 

Never mind that the aggregate numbers are non-GAAP. We’re having a tough enough time trying to understand why both US GDP and Personal Consumption are being overstated by “Deflators” that are being understated by 40-60% vs. the Fed’s own calculation of inflation. Even on a non-GAAP to non-GAAP (apples to apples) basis, the USA is in a profit #Recession.

 

How about the credit cycle? Oh right – another true but unimportant factor for weekly chart-chasers to consider until it matters again… What happened to High Yield Spreads last time (i.e. the only time in modern history) that the Fed tightened into a slow-down?

 

Economic Cycle => Profit Cycle => Credit Cycle?

 

Instead of flailing like a dove pretending to be a hawk, maybe Janet should consider the causal factor in perpetuating the #Deflation risk across asset classes (Rate Hike => Dollar Up) that she completely underestimated in December. It’s a true and important concept.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.80-1.90%

SPX 2043-2110

NASDAQ 4

VIX 12.59-16.93
USD 95.01-96.02
Oil (WTI) 46.87-49.99

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

True But Unimportant? - 06.02.16 EL Chart


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 80.43%
  • SHORT SIGNALS 78.35%
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