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Remember The Fed's December Rate Hike? What Happened Again?

Takeaway: Following the Fed's December rate hike, Long Bonds (our favorite macro call) rallied to up 12% year-to-date versus 2.6% for the S&P 500.

Remember The Fed's December Rate Hike? What Happened Again? - Hawk dove cartoon 06.06.2016

 

As the Fed flounders from rate hike rhetoric to cautious soothsaying, Treasuries have rallied. Take a look at the flattening of the yield curve since the Fed decided to "raise interest rates" in December 2015. The yellow line is the yield curve on 12/15/15 and today's is the green line.

 

Rate hike ... What rate hike?

 

Click image to enlarge.

Remember The Fed's December Rate Hike? What Happened Again? - rate hike yield spread

 

To be clear, long the Long Bond (TLT) has been our most vocal Macro call. 

 

Heading into this year, it was a massively contrarian and in direct opposition to Wall Street consensus, which remained convinced the 10yr Treasury yield would hit 2.5% to 3% on Fed rate hikes. 

 

Guess what? Our Long Bond call...

 

IT'S WORKING

 

The flattening of the yield curve has paid off massively for investors in TLT. Below are the year-to-date returns on Long Bonds versus the S&P 500.

 

Remember The Fed's December Rate Hike? What Happened Again? - long bonds vs s p


This Is One of the Top-3 Stock Market Bubbles in History

 

In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough and Demographics Sector Head Neil Howe discuss why “the stock market is one gigantic emotional rollercoaster” perched perilously at its peak.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

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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


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

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


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


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