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Got #GrowthSlowing? European Equities Hammered

Takeaway: We again reiterate our call for slowing growth in the Eurozone beginning in Q2.

Got #GrowthSlowing? European Equities Hammered - growth cartoon 10.08.2014

 

Below is analysis from our Macro team in a note sent to subscribers earlier today:

 

"Got #GrowthSlowing? We again reiterate our call for slowing growth in the Eurozone beginning in Q2 and today got classic "late to the party" confirmation from the German economy ministry who said the country’s economy had a decent start to the Q2 but its growth pace is likely to slow during the course of the April-June period."

 

The 1yr drawdowns in European equities are unequivocally terrible:

 

Got #GrowthSlowing? European Equities Hammered - european equities 6 10

 

This isn't a trend exclusive to Europe:

 

"No matter what side of the reflation/deflation trade you’re on, the growth in global demand continues to decelerate on a trending basis. Only 35% of country and regional PMI figures across manufacturing, services and composite readings are both expanding (i.e. > 50) and accelerating sequentially as of last month. The rest are either expanding but decelerating or in outright contraction (i.e. < 50).

 

With continued evidence of economic contraction, we’re confident stick with growth-slowing allocations (TLT, XLU) while waiting and watching on deflation/reflation exposure."

 

Here's the S&P sector scorecard:

 

Got #GrowthSlowing? European Equities Hammered - sector performance 6 10


FINANCIALS SENTIMENT SCOREBOARD | MONEY CENTERS REMAIN IN FOCUS

Takeaway: JPMorgan (JPM) still has extremely bullish sentiment according to our quantitative screen of Financials.

JPMorgan, Bank of America, and Citigroup (Scores: 95, 92, and 92) continue to stand out as three of the most overly bullish stocks on our scoreboard. All three bulge bracket/money center banks have high sell side ratings combined with low levels of short interest which historically have made them underperformers according to our score.

 

We are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.

 

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  

 

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

 

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

 

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 

 

FINANCIALS SENTIMENT SCOREBOARD | MONEY CENTERS REMAIN IN FOCUS - SI1

 

FINANCIALS SENTIMENT SCOREBOARD | MONEY CENTERS REMAIN IN FOCUS - SI2

 

FINANCIALS SENTIMENT SCOREBOARD | MONEY CENTERS REMAIN IN FOCUS - SI3

 

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

 

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

 

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   

 

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 

 

 

FINANCIALS SENTIMENT SCOREBOARD | MONEY CENTERS REMAIN IN FOCUS - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


Got #GrowthSlowing?

Client Talking Points

Germany

Got #GrowthSlowing? We again reiterate our call for slowing growth in
the Eurozone beginning in Q2 and today got classic "late to the party"
confirmation from the German economy ministry who said the
country’s economy had a decent start to the Q2 but its growth pace is
likely to slow during the course of the April-June period.

#Materials

Next to the growth slowing Utilities (XLU +17.4% YTD) crusher in 2016, Energy and Materials are leading sector outperformance MTD and YTD. XLB and XLE are +10.8% and +14.2% YTD respectively. From a large consensus short bias to inflation leveraged sectors in Q1, much of the
energy and materials sector were immune to strong USD deflation in May, arguably for a number of reasons, as USD correlations are broken (especially in energy). With most of these commodities trending higher on healthy signaling, consensus has chased the momentum and/or capitulated on shorts and is positioned for a continuation in said momentum. A marginally hawkish policy turn this summer is a huge risk to market sentiment right now.

Global Demand

No matter what side of the reflation/deflation trade you’re on, the growth in global demand continues to decelerate on a trending basis. Only 35% of country and regional PMI figures across manufacturing, services and composite readings are both expanding (i.e. > 50) and accelerating sequentially as of last month. The rest are either expanding
but decelerating or in outright contraction (i.e. < 50). With continued evidence of economic contraction, we’re confident stick with growth-slowing allocations (TLT, XLU) while waiting and watching on deflation/reflation exposure.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/9/16 69% 0% 0% 5% 16% 10%
6/10/16 69% 0% 0% 5% 16% 10%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/9/16 69% 0% 0% 15% 48% 30%
6/10/16 69% 0% 0% 15% 48% 30%
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

McDonald's (MCD) is testing fresh beef in 14 Dallas-area restaurants in an attempt to become a modern progressive burger company and better compete with smaller, premium chains. Part of the reason they haven’t done this in the past is because there hasn’t been enough supply of fresh beef for their demand.

 

The initiative will expand further to more markets over the course of the year to test both consumer perception and their supply chains ability. This could be a big move for MCD that will undoubtedly improve food quality and consumer perception of the company.

 

Also in the news over the last couple of weeks is MCD’s plan to move its HQ from Oak Brook to downtown Chicago. Although not important from an operational perspective immediately, it will help the company attract and retain top talent which will be beneficial overtime. MCD remains one of our top ideas in the Restaurant space.

TLT

Friday’s jobs report represented a complete shift to any renewed expectations of a June/July hike. The yield spread ended the week pinned near the bottom of the cycle low at 92 basis points (10yr-2yr yield %). And, looking at real-time rate hike expectations, the bid-yield of December 2016 Federal Funds Futures Contracts dipped 8 basis points day-over-day, implying the market’s expectations for the first rate hike is now in 2017!

GLD

That was the commentary that closed out a deflationary month of May – USD +3.1% with Gold -6.3% and the long end of the Treasury curve and the S&P roughly flat. Fast forward a week. Gold, the Treasury market, and Federal Fund futures don’t buy the hawkish rhetoric for a second.

 

We’ve shown our chart of the Y/Y% change in Non-Farm Payrolls numerous times, so Friday’s Jobs report was no surprise to us. Consumption and labor market strength are classic late-cycle indicators, but eventually these indicators peak and roll-over in rate-of change terms. Here's the Jobs Report breakdown:

Non-Farm payroll additions totaled +38K in May vs. +160K est. and +160K prior. While the number was a bomb for those who follow the month-to-month sequential change (which is useless), we expected the weakness. To be clear, history paints a very clear picture. NFP additions peaked in Q1 of 2015 and have since rolled over. It’s part of #TheCycle.  

Three for the Road

TWEET OF THE DAY

*REPLAY Q&A w/ Neil Howe: Bullish Case For Life Insurance Stocks app.hedgeye.com/insights/51536… @HoweGeneration $MET $PRU

@Hedgeye

QUOTE OF THE DAY

"That's right...Iceman...I am dangerous!"

-Pete "Maverick" Mitchell, Top Gun

STAT OF THE DAY

Don Mattingly played 14 years in the MLB, he had a career batting average of .307


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.

Daily Market Data Dump: Friday

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: Friday - equity markets 6 10

 

Daily Market Data Dump: Friday - sector performance 6 10

 

Daily Market Data Dump: Friday - volume 6 10

 

Daily Market Data Dump: Friday - rates and spreads 6 10

 

Daily Market Data Dump: Friday - currencies 6 10


CHART OF THE DAY: Yellen's Favorite Indicator Prints Worst Reading Since 2009

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. 

 

"... Janet’s favored dashboard labor Indicator, The Labor Market Conditions Index (LMCI) dropped to an index reading of -4.8 in May, marking a 5th consecutive month of decline, a 7th straight months of deteriorating conditions and the worst reading since 2009."

 

CHART OF THE DAY: Yellen's Favorite Indicator Prints Worst Reading Since 2009 - 06.10.16 EL


Crazy Pills

Blue Steel? Ferrari? Le Tigra? They're the same face! Doesn't anybody notice this? I feel like I'm taking crazy pills!

-Mugatu, Zoolander (clip here: Crazy Pills)

 

QE? NIRP? rhetorical dovishness? $8T+ in negative yielding sovereign debt? serial negative estimate revisions? all-time lows in bond yields? decelerating domestic employment/income/consumption growth? sub-2% potential output? utilities/low growth/low beta outperformance?

 

They’re all outcroppings of the same slow-growth reality! Sure, there are recurrent bad = good, down-dollar counter-trend reflations but that’s why they’re called “counter-Trend” because they are not the overriding reality. Doesn’t anybody notice this? If feel like I’m taking… !

 

Crazy Pills - Crazy bull cartoon 08.19.2014

 

Back to the Global Macro Grind ….

 

If you are unaware, in addition to being a prolific “ambiturner” from a policy perspective (hawkish-dovish-hawkish-dovish pivots YTD), Janet is a noted labor economist. 

 

In other words, both her primary research and policy focus centers on labor market dynamics.  

 

It is also likely that she is aware that you are aware that the market is well aware of the current softness in the domestic labor market. 

 

For the unaware:

 

  1. NFP Growth: Employment growth decelerated markedly in the latest month on both an absolute and rate-of-change basis and has now been slowing for 15-months and ….  100% of the time, it converges to 0% growth everytime.
  2. LMCI: Janet’s favored dashboard labor Indicator, The Labor Market Conditions Index (LMCI) dropped to an index reading of -4.8 in May, marking a 5th consecutive month of decline, a 7th straight months of deteriorating conditions and the worst reading since 2009
  3. ISM Employment: While expansion in the 80%+ of the economy that is the Services Sector slowed to its weakest pace in 27-month in May, the employment component of the index fell into contraction in May, matching the lowest reading since 2011.
  4. JOLTS: The Job Opening and Labor Turnover Survey (JOLTS) provides the internals on the gross flow of both Hirings and Separations and is released on a month lag to the NFP report. The data for April, reported on Wednesday, showed Job Openings making a new all-time high (data goes back to 2001) while Hires fell to an 8-month low (& will again when the May data are reported) and the quits rate retreated -10bps to 2.0%. As we’ve highlighted previously, a hallmark of an efficient and well-functioning labor market is a fluid flow of workers – job openings and the creation of new positions is a direct measure of the economy’s health (or perceived health), and the more that companies are hiring and creating new positions, the easier it is for job-seekers to find work and for skill and need to find their most productive match. Or so conventional thinking goes. The issue has been the apparent, burgeoning skills gap reflected in the growing spread between Job Openings and Actual Hires and the continued rise of “Jobs Hard to Fill” component of the NFIB Small Business Survey. There are a number of compelling explanations for the skills gap which I’ll address in a future EL.     

 

So, from a labor-centric Fed, what can we expect from the FOMC meeting next week?

 

Our Hedgeye-Potomac colleague, former Fed Vice Chairman and Potomac Research Group Senior Economic Strategist Don Kohn, previewed next week’s meeting/decision on a call yesterday. Here is a selection of his salient takeaways (paraphrased):

 

  • No Change in June … or July: June is an obvious no go from a tightening perspective and July carries less than even odds. If employment growth, inflation and household spending all continue to improve then it becomes higher probability but everything needs to fall into place for July policy action to occur. From a messaging perspective, raising in July when there is no scheduled press conference, would be a strong indirect conveyance that we are transitioning to a more normalized environment where nominal policy changes needn’t be oversensationalized. 
  • Projections: 2.25% was the middle of the range on growth estimates in the last SEP. That will likely be revised lower given the reported growth thus far as it would imply overly optimistic assumptions around 2H growth. It would be unsurprising to see modest upward revisions to Inflation projections. [Note: the net of this is a stagflationary update with Growth ↓, Inflation ↑]
  • Distribution, Not Dots: The Median is a flawed indicator of where the committee sits collectively. For example, in the last SEP the median was for two rate increases in 2016 but there were more people above it than below it. One thing we might see next week is people fall back towards the median, shifting the distribution/skew but leaving the median reading itself unchanged. 
  • Modestly Accommodative: Janet’s recent (& altered) characterization of policy as “modestly accommodative” expresses lower confidence around the prospect for a rising equilibrium interest rate. In other words, we should expect to see the path/trajectory of policy revised to something flatter … if not for the balance of 2016, then for 2017 and beyond. 
  • Levels, not Changes (In response to a question asking if the Fed cares about 2nd derivative changes)It’s the level of the unemployment rate relative to its sustainable value that will ultimately determine inflation pressures. And Labor gains had, arguably, been running too hot and needed a slowing in so as not to overshoot the unemployment rate on the downside with negative flow through to prices. Janet indicated that, in taking a “balanced” approach to policy, they wouldn’t mind an overshoot as undershoot on the inflation target would be balance by an overshoot on the employment target. [Note: in this context, the FED is viewing negative 2nd derivative changes, not as an indicator of a late-cycle slowdown, but as a positive development supporting achievement of their mandate] 

 

In short, we’re likely to see a modest negative revision to growth projections, a flatter projected policy trajectory and a shift in focus from the prospects for reaching the inflation target to the prospects for further progress in the labor markets. 

 

Remember, however, that projecting an air of confidence and maintaining maximum policy optionality requires carefully treading the hawkishly dovish messaging line … or maybe it’s the dovishly hawkish line.

 

In either case, it’s clearly not nonsensical that we haven’t never seen a data dependent policymaker that did not mention neither labor growth nor price growth. Ignoring both certainly won’t get you nowhere!

 

That was the most confounding double negative filled sentence I could come up with at half past 5:15am in the morning after three days before Sunday morning. 

 

If that made sense to you then there is probably a “communication tool-ing” job waiting for you at the Marriner Eccles Building in D.C. 

 

If it was confusing & contradictory, no worries, you’re not alone. After all, domestic equities and global bonds are at all-time highs, at the same time.  

 

If everyone else is taking crazy pills, who’s really the crazy one?   

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.63-1.76%

SPX 2082-2119

VIX 13.02-16.73
USD 93.05-95.27
Oil (WTI) 47.77-51.47

Gold 1

 

Best of luck out there today,

 

Christian B. Drake

U.S. Macro Analyst

 

Crazy Pills - 06.10.16 EL


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