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CHART OF THE DAY: What's Winning (& Losing) As U.S. Growth Slows

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.

 

"... If you’re long things that are crushing it when growth slows (and bond yields fall), congrats:

 

  1. Utilities (XLU) added another +1.0% absolute return last week taking them to +16.8% YTD
  2. Gold rose another +2.8% last week to +20.2% YTD

 

On the other side of that, classic #LateCycle consumption Sector Styles in the USA lagged:

 

  1. Financials (XLF) lost another -1.5% on the week to -2.8% YTD
  2. Consumer Discretionary (XLY) fell back into the red last week, closing -0.8% to -0.8% YTD"

 

CHART OF THE DAY: What's Winning (& Losing) As U.S. Growth Slows - 06.13.16 Chart


Loving The Game

“You’ve got to love what you are doing.”

-Gordie Howe

 

On behalf of everyone @Hedgeye, I’d like to express our deepest sympathies to the families who have been affected by this horrible shooting in Orlando over the weekend. Sadly, terror is the dark side of how a small percentage of people think about life.

 

The good news is that there is much more light in the world than there is darkness. While the hockey world lost one of the greatest ambassadors of the game this weekend, the farm boy from Floral, Saskatchewan left us all feeling a lot of love.

 

Do you love what you are doing this morning? I do. And if you can find that passion on a frozen pond or at your desk, do more and more of that. As Gordie Howe went on to say, “if you love it, you can overcome any handicap… and continue to play for a long time.”

 

Loving The Game - gordie howe

 

Back to the Global Macro Grind

 

In addition to enjoying time with my family and friends, I spent this weekend doing the other thing I love – coaching kids hockey. We were up at the Coast To Coast tournament in Bloomington, Minnesota. Hockey is a hard game, but wow is it easy to love.

 

I don’t love that US growth is slowing. But I do love the game within the game of being the best independent research firm we can be in making a call that was both differentiated and right.

 

As everyone in this game knows, the direction of long-term bond yields reflect intermediate-to-long-term growth expectations, and they have been falling alongside those slower-for-longer expectations for … well, a long time.

 

Dollar Up, Rates Down? Yep. That Quad4 #DeflationRisk showed up again last week:

 

  1. USD Index +0.6% on the week > long-term Hedgeye TAIL support of 92.57
  2. UST 2yr Yield down another -4 basis points on the week to 0.73% (down -32 bps YTD)
  3. UST 10yr Yield down another 6 basis points on the week to 1.64% (down -63 bps YTD)

 

And so did cross asset class volatility:

 

  1. US Equity Volatility (front month VIX) ramped +26.4% on the week to 17.02
  2. Oil Volatility (front month OVX) popped +14.8% on the week to 39.95

 

Since it’s critical to contextualize short-term moves within long-term mean reversion risks, it’s critical to understand what’s been driving this on/off volatility switch all along: Fed growth, inflation, and policy forecasts vs. market expectations.

 

If stock, commodity, and bond markets weren’t expecting the Fed’s forecast to “probably” raise rates (i.e. another policy mistake, tightening into a slow-down) to be wrong, why would they be driving long-term US interest rates to all-time lows?

 

Don’t forget that long-term cross-asset class volatility put in an all-time low in the summer of 2014. Corporate profits peaked in the 2nd half of 2014. Some corporates then issued reams of debt expecting their profits to be perpetual. That’s a big problem now.

 

Especially if you issued debt in Dollars… and don’t get paid in Dollars…

 

The combination of a rising Dollar and falling interest rates is also very bearish for banks who issued those debts. All-time lows in bond yields are going to crush bank earnings. If you think “earnings have bottomed”, you better state them “Ex-Financials!”

 

If you’re long things that are crushing it when growth slows (and bond yields fall), congrats:

 

  1. Utilities (XLU) added another +1.0% absolute return last week taking them to +16.8% YTD
  2. Gold rose another +2.8% last week to +20.2% YTD

 

On the other side of that, classic #LateCycle consumption Sector Styles in the USA lagged:

 

  1. Financials (XLF) lost another -1.5% on the week to -2.8% YTD
  2. Consumer Discretionary (XLY) fell back into the red last week, closing -0.8% to -0.8% YTD

 

Those two sectors and the Nasdaq (also late cycle) are the last places I want people to have their hard earned money right now. If you get #GrowthSlowing, your main debate should be whether to be long REFLATION or DEFLATION. They are different things.

 

Yes, it’s been hard to maintain a bearish view on both Global and US growth and not chase the bear market bounce in something that’s killed people (in real return terms) like Energy Stocks.

 

Yes, it’ll also be hard not to buy Energy Stocks (XLE +11.7% YTD) on the next pullback to immediate-term TRADE oversold as my expectation is that the Fed does everything it can do to devalue the Dollar to another higher-low.

 

Both this game and life are hard – that’s why they’re easy to love too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.60-1.75%

SPX 2085-2106

NASDAQ 4

VIX 14.03-17.37
USD 93.01-96.08

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Loving The Game - 06.13.16 Chart


The Macro Show with Keith McCullough Replay | June 13, 2106

CLICK HERE to access the associated slides.

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


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.

Investing Ideas - Levels

Takeaway: Current Investing Ideas: DNKN, HOLX, DE, HBI, LAZ, MDRX, FL, NUS, JNK, TIF, WAB, ZBH, GLD, MCD, TLT

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.

 

Enjoy the rest of the weekend.

LEVELS

Investing Ideas - Levels - levels 6 10

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy!   

 

1. Airbnb Is an Existential Threat to the Hotel Industry (6/11/2016)

 

 

In this brief excerpt from The Macro Show, our Gaming, Lodging & Leisure Sector Head Todd Jordan explains why Airbnb is a significant threat to the hotel industry.

 

2. This Is One of the Top-3 Stock Market Bubbles in History (6/10/2016)

 

 

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. 

 

3. The Bullish Case for Life Insurance | Q&A with Neil Howe (6/9/2016)

 

 

Hedgeye Managing Director Neil Howe held a live Q&A on Thursday June 9 in which he discussed why life insurance company shares have been beaten down since the Great Recession, and makes the case for their comeback.

 

Click here to read Howe’s associated About Everything piece.

 

Click here to access the associated slides.

 

4. Benn Steil: Donald Trump Is a Clear and Present Market Danger (6/8/2016)

 

 

Would a Trump presidency be bad news for the global economy and markets? Benn Steil, director of international economics at the Council on Foreign Relations and author of "The Battle of Bretton Woods" thinks so. He discusses the disconcerting and adverse consequences a Trump presidency may have with Hedgeye CEO Keith McCullough.

 

5. Drake: Contextualizing the Biggest Deceleration in Credit Growth Since 2010 (6/7/2016)

 

 

In this brief discussion, Hedgeye U.S. Macro analyst Christian Drake analyzes the trend in consumer credit growth, which has been supporting consumption in the face of slowing income growth.

 

6. Yikes: Yellen’s Favorite Market Indicator Hits 7-Year Low (6/6/2016)

 

 

Hedgeye U.S. macro analyst Christian Drake takes a look at the “Labor Market Conditions Index” which just posted its 5th consecutive month of negative reading (worse since 2009) and what it portends for Fed policy.

 

7. McCullough: The Most Asymmetric US Corporate Profit Risk (Ever) (6/6/2016)

 

 

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough reviews the “Fantasy Island” earnings risk blinding many investors and why second and third quarter earnings for most sectors will be “awful.”


HUNTED: THE F-35 PROGRAM AT FARNBOROUGH (LMT, UTX, NOC, BAE, BA)

Takeaway: Within 18 months the Pentagon will reduce its planned F-35 acquisition objective by a third and its long term annual buy rate by 15%.

Like a mighty elk pursued by wolves, the world’s largest defense program, the Joint Strike Fighter, is being stalked by a series of programs that individually are not threatening but as a pack can mortally wound the program.  

On Friday, 17 June at 11:00 EDT, Hedgeye’s LtGen “Emo” Gardner will provide investors the context for the first ever appearance of the F-35 at the world’s most important aerospace show, the Farnborough International Airshow, July 11-17. He will cover current US TacAir plans in general,  the $1T JSF program specifically and where the surging US TacAir market is likely to be five years from now.  

Call in details will be provided.

 

 


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