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CHART OF THE DAY: Checking-In On Equity Volatility

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.


"... Oh, and how about that thing called equity volatility?


Front month US Equity VIX just went from 13 to 21-22, in a week. Since both the April and June US stock market “rallies” to lower-all-time-bubble highs came on decelerating volume, should this move surprise anyone other than people who chase charts?


Or were people chasing moving monkey averages aware of the causal factor called #TheCycle all along?"


CHART OF THE DAY: Checking-In On Equity Volatility - 06.14.16 EL Chart

What's Yellen's Update?

“I update constantly.”

-Tim Minto


In Superforecasting by Phil Tetlock, they call him Captain Minto for good reason. In the 3rd season of the IARPA forecasting tournament, Tim Minto (a 45 year old Canadian Software Engineer) won with a ridiculous Brier Score of 0.15. How did he do it? Bayes Theorem.


Do you have a Bayesian forecasting process? Or do you go with the Old Wall “feel” thing? “In simple terms, the theorem says that your new belief should depend on two things – your prior belief (and all of the knowledge that has informed it) multiplied by the diagnostic value of the new information.” (Superforecasting, pg 170)


Before the US Treasury 10yr Yield hit 1.57% this morning, our belief was that classic #LateCycle economic factors (like #EmploymentSlowing) would drive the long end of the curve to all-time lows. The “new information” on labor slowing wasn’t new. It was in Janet Yellen’s favorite labor market indicator (Change in Labor Conditions Index). She should have listened to it.


What's Yellen's Update? - Jobs.rate hike cartoon 11.04.2015


Back to the Global Macro Grind


Q: What’s Yellen’s update going to be this week? A: Dovish.


Yep. After going from hawkish (DEC) to dovish (MAR) to hawkish (MAY)… she’s going back to dovish.


While I won’t give her credit for being correct in her prior beliefs on either GDP growth or the employment cycle, she gets a sticker from Hedgeye for updating on the latest NFP (non-farm payroll) and JOLTS labor information.


What if she stays hawkish?


Oh boy, if you think blaming Brexit this time (or China last time she had to pivot dovish) carries some volatility, wait until you see what she makes her reflation trade look like on a Dollar Up, Rates Up (into a slow-down) move.


But neither I, nor my colleague Don Kohn (former Vice Chair of the Federal Reserve under Bernanke), thinks she’ll do that.


Back to the latest “market conditions” and US economic updates:


  1. US Retail Sales for the month of May will be released today (we’ll update our predictive tracking algo for US GDP intraday)
  2. Major Global Equity markets continue to crash as growth expectations and long-term sovereign bond yields do


Yep. The Fed might care more about “levels” than they do rate of change, but that doesn’t mean that rate of change doesn’t matter more than their linear-optimal-utilization model “levels” do.


What happens when the “level” implies a rate of change crash in prices?


  1. Japanese Stocks (Nikkei) dropped another -1% overnight, taking its crash from the 2015 cycle peak to -24.3%
  2. Chinese Stocks (Shanghai Comp) remain in crash mode, down -45% year-over-year in rate of change terms
  3. German Stocks (DAX) are down -1.4% this morning, taking its crash to -23% from the 2015 cycle peak


“Reflation” country (equity) indices like Australia and Russia are down -2% and -3%, respectively, this morning as Dollar Up, Rates Down asks the risk management question of the month: #Reflation or #Deflation, from here?


And how, by the way, do you reflate asset prices when NIRP (negative rate policy) is being read as a banking #Recession?


Not that holding the equity bulls to consistent account matters anymore (the bull case changes every 6 weeks), but whoever is looking for “earnings to rebound in Q2” has to go both non-GAAP and “Ex-Financials” to get there with yields crashing and curves flattening.


Oh, and how about that thing called equity volatility?


Front month US Equity VIX just went from 13 to 21-22, in a week. Since both the April and June US stock market “rallies” to lower-all-time-bubble highs came on decelerating volume, should this move surprise anyone other than people who chase charts?


Or were people chasing moving monkey averages aware of the causal factor called #TheCycle all along?


So many questions. Such a messed up consensus. Don’t forget that up until late last week, in CFTC futures & options net positioning terms, Wall Street was net LONG SP500 and net SHORT the 10YR Treasury!


With our long-term cycle call firmly intact, our immediate-term TRADE signal actually says the 10yr is immediate-term oversold at 1.55% inasmuch as the beloved barometer (SP500) is at 2067.


I guess that signals that Yellen’s update would be another buy/cover signal (for stocks) on the “news.” It’s perverse, but it’s reality. The new bull case needs the Fed, not real economic and/or earnings growth.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.55-1.70%

SPX 2067-2104
RUT 1140-1170

Nikkei 155


VIX 15.88-22.77

USD 93.11-96.01
Oil (WTI) 47.62-51.39

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


What's Yellen's Update? - 06.14.16 EL Chart

The Macro Show with Christian Drake Replay | June 14, 2016

CLICK HERE to access the associated slides.


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

The Clock Is Ticking: Will Trump Bring The GOP Together?


Much is being made of Donald Trump’s inability to unite Republicans at this stage of the campaign. Hedgeye Potomac Chief Political Strategist JT Taylor takes a look and offers some key thoughts on the subject, as well how Hillary Clinton stacks up on the Democratic side.

Lazard (LAZ) | Trending Not Mending

Takeaway: 2Q advisory activity has fallen off of a cliff and with BREXIT looming we think the quarter is lost with 3Q/Summer at risk next.

  • We are lowering our full year LAZ earnings estimate to $2.49 for '16 and remain at $2.57 for '17, -17% and -27% below Consensus
  • We continue to outline that Lazard has the most exposure to the upcoming BREXIT vote with over 25% of global advisory revenues in Europe. A withdrawal by Britain would be the worst case scenario
  • The M&A cycle peaked last year in our view and historically new restructuring revenue takes 2 years to offset M&A losses (but overall Advisory revenues never comp up overall -- see our BlackBook below)
  • The asset management business is working on a slightly better quarter solely on market appreciation as our data outlines no organic growth in 2Q16 thus far
  • LAZ shares remain a value trap in our view with Consensus estimates that need a substantial haircut and financials that won't comp up for at least the balance of 2016

While the technology sector yesterday created exciting headlines with Microsoft's all cash bid for LinkedIn ($26 BB) and Symantec's acquisition of Blue Coat Systems ($4.7 BB), none of the boutique M&A firms caught part of the deals. Despite the flurry of activity, M&A announcements industry wide are down -14% globally year-to-date which we think is just an opening foray considering less active strategic buyers and a rising cost of capital. For Lazard specifically, activity levels in 2Q have all but dried up, with transactions listed on their website down -37% year-over-year on an absolute deal count and a -74% drop in deal value. While the firm doesn't disclose all activity online (restructuring deals are listed when completed with M&A transactions listed on an announced basis), the dearth in activity is sharper than we expected. We are lowering our annual estimates for 2016 to $2.49, -17% below consensus and have an upcoming 2Q16 estimate of $0.57 (with Consensus at $0.61). Rebounding global equity markets with average balances up +6% thus far in the second quarter should salvage a really low 2Q result within the asset management division. However this slight improvement is solely due to markets as a rolling 3 month average of Lazard Asset Management flows from Morningstar has flat organic growth brewing for 2Q16.


We continue to ascribe a fair value range of $22-$26 for LAZ shares based on 8-10x our out year estimates and the stock remains on our Best Ideas Short list. We do not think shares are attractive on valuation until fundamentals comp higher year-over-year which we don't see until 2017.    


Lazard (LAZ) | Trending Not Mending - chart 1 deal volume


Lazard (LAZ) | Trending Not Mending - chart 2 deal count


Lazard (LAZ) | Trending Not Mending - chart 3 deal table


Lazard (LAZ) | Trending Not Mending - chart 4 AUM flow


Lazard (LAZ) | Trending Not Mending - chart 5 markets



LAZ - Incremental Color in 10Q is Dark

LAZ - Don't Get Caught Watching the Paint Dry

LAZ - Hiring in Restructuring, Chairman Bullish From Davos

LAZ - Value Trap - Best Ideas BlackBook

LAZ - As Good As It Gets - Adding to Best Ideas


Please let us know of questions,


Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA

Checking in w/ Asia, LatAm and EEMEA

Below are a few country-level summaries you may find helpful to expanding upon your global investment motif. As always, feel free to email us to the extent you’d like to dig deeper into a specific country or topic.



In China, the bulk of key high-frequency growth data surprised to the downside in MAY, headlined by the sharp slowdown in Fixed Assets Investment and FDI. At +9.6% YoY the former was the slowest rate of change since MAY ’00, while the latter saw the first negative print since DEC at down -1% YoY. We’ve reiterated time and time again that China has not bottomed and will not bottom anytime soon, which is precisely why industrial metals (copper, iron ore, nickel, palladium, aluminum, rebar, etc.) are demonstrably lagging the reflation rally in the commodity space from a multi-duration, multi-factor perspective. As highlighted our 6/9 note titled, “Got Demand?”, the global demand curve continues to trend lower, which creates an air pocket across risk assets globally to the extent the Fed cannot devalue the U.S. dollar any further from here.


Checking in w/ Asia, LatAm and EEMEA - 1


Checking in w/ Asia, LatAm and EEMEA - 3


Checking in w/ Asia, LatAm and EEMEA - China


In Japan, the 2Q MoF Business Survey was the latest piece of data highlighting Japan’s ongoing bout with #Quad4; the headline All-Industry reading of -7.9 was the lowest print since 2Q14. Elsewhere in Japan, cash on corporate balance sheets hit a record high of $1.01T in FY15 amid ongoing structural deterioration in Japan’s growth outlook. A U.S. equity bull would say that’s bullish (buybacks, dividends, etc.), but the Nikkei 225 Index’s -24% peak-to-present return would seem to suggest otherwise. Consistent with our 2Q Macro Theme, the breakdown of the #BeliefSystem remains ongoing throughout both the Eurozone and Japan.


Checking in w/ Asia, LatAm and EEMEA - Japan


In India, the economy’s ongoing shift into #Quad3 is incrementally confirmed with the advent of the APR Industrial Production and MAY CPI data. At +5.8% YoY, the latter is the fastest rate of headline inflation since AUG ’14 and calls into question the RBI’s easing bias. Indian financial markets have figured this out on a very immediate-term basis (e.g. SENSEX down -1.4% WoW; 1Y OIS Spread +3bps wider WoW; 10Y Yields backed up +5bpsWoW; and INR down -0.5% WoW vs. the USD), bucking what had been a trend of persistent resilience. We anticipate this inflection will be sustained with respect to the intermediate-term TREND.


Checking in w/ Asia, LatAm and EEMEA - India


In Turkey, slowing growth (Real GDP slowed -90bps in 1Q to +4.8% YoY) and ongoing plans to make the country’s leadership more authoritarian in nature have weighed heavily upon Turkish financial markets of late (e.g. BI 100 Index down -2.6% WoW; 10Y Yields backed up +28bps WoW; and TRY down -0.5% vs. the USD WoW). Regarding the latter, leaders of the ruling AKP have confirmed plans to transition more power to President Recep Tayyip Erdogan, but only after the summer recess. In the interim, the party will focus on prioritizing a new package of laws that includes measures on the economy and taxes. Normally, that would be a bullish catalyst, but the aforementioned move to authoritarianism, at the margins, remains a meaningful bearish overhang. On the flip side, at least 330 votes are needed in 550-seat parliament to trigger a referendum to amend the constitution and the AKP currently only has 317 seats. This implies Erdogan might fall short of his desire to transition Turkey to an executive-branch leadership model, but we’ll cross that [potentially bullish] bridge when we get there.


Checking in w/ Asia, LatAm and EEMEA - Turkey


In Russia, Putin cut the benchmark One-Week Auction Rate -50bps to 10.5% on Friday. OK, we made that statement largely in jest, but it’s not at all farfetched to suggest supporting Russia’s economic recovery ahead of critical parliamentary elections in SEP has likely become one of CBoR’s primary objectives (Yellen/Obama/Clinton anyone?). That said, however, their shift in APR to an easing bias and now the aforementioned follow-though here in early-JUN is quite warranted given trends across Russia’s key high-frequency inflation indicators, which are all slowing on a trending basis as of the APR/MAY timeframe. Moreover, steepening base effects for headline CPI through year-end should perpetuate additional rate cuts as reported inflation continues its trend lower. Additionally, fiscal policy looks to get incrementally supportive, at the margins, to the extent Putin ramps up spending ahead of the aforementioned elections. This combination of supportive monetary and fiscal policy in an economy that’s already trending in #Quad1 is as potent a bull case in EM that I’ve seen in recent memory. I’m inclined to be bullish on Russia, but refuse to chase that exposure here amid our bearish expectations for financial markets globally (i.e. we’ll probably get to buy RSX much cheaper than ~$17).


Checking in w/ Asia, LatAm and EEMEA - Russia


Enjoy the rest of your evening,




Darius Dale


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