The Filter: Hedgeye's Take On Today's Financial News

The Filter: Hedgeye's Take On Today's Financial News - lemmings cartoon 02.23.2016

Below is a collection of interesting links and insights from today's news with analysis filtered through our macro lens. This installment discusses St. Louis Fed head James Bullard's poor forecasting abilities, Bernanke's Brexit blog post, sorry hedge fund European equity bets and the bubble in mergers and acquisitions.

Enjoy! 

Poor Bullard

Interesting reads from the St. Louis Post-Dispatch and the Wall Street Journal on St. Louis Fed head James Bullard's forecasting abilities (or lack thereof). Here's the St. Louis Post-Dispatch, "For someone who has called himself “the North Pole of inflation hawks,” James Bullard sounds dovish these days." And here's WSJ:

"The president of the Federal Reserve Bank of St. Louis has developed an unrivaled reputation for changing his mind on the central question of whether the Fed should raise interest rates. He surprised markets again by declaring on June 17 that he now favors raising the Fed’s benchmark interest rate just once this year, by a quarter of a percentage point, then holding it steady through 2018."

Bottom Line: The biggest risk to investors is believing in the Fed's serially-overoptimistic and incorrect forecasts.

Bernanke's Brexit Blog Post

Former Fed head Ben Bernanke weighed in on Brexit today and the effects on the global economy via the Brookings blog:

"Among the hardest hit countries is Japan, whose battle against deflation could be set back by the strengthening of the yen and the decline in Japanese equity prices. In the United States, the economic recovery is unlikely to be derailed by the market turmoil, so long as conditions in financial markets don’t get significantly worse: The strengthening of the dollar and the declines in U.S. equities are relatively moderate so far."

 

Bottom Line: Bernanke's modus operandi has been to devalue the dollar (the US Dollar hit a 40-year low during his reign as Fed head). What makes him so sure the Fed has that power now? The central planning #BeliefSystem is breaking down.

The Filter: Hedgeye's Take On Today's Financial News - central bankers cartoon 09.08.2015

Hedge Fund Herding

"While some hedge funds have profited from the pain crippling global markets since Britons voted to exit the European Union, more funds may be facing potentially heavy losses," WSJ's Gregory Zuckerman writes. Apparently, a lot of hedge funds were buying European equities ahead of the vote.

Bottom Line: "2016 might go down as the worst year for hedge funds ever; so many of the 10,000 lack a repeatable macro process," Hedgeye Senior Macro analyst Darius Dale writes. That's a tough pill to swallow especially after last year's showing. In 2015, hedge funds lost more than 3%, on average, according to early estimates from hedge-fund-research firm HFR Inc., while the S&P 500 returned 1.4%, including dividends.

Shocking!

Here's the headline from Nikkei"Brexit survey: Japanese firms see weaker European economy." "Nearly 88% of respondents think the U.K.'s exit from the EU will harm their operations: 34.1% expect a negative impact while 53.7% predict the effect will be mildly negative. None of the 123 chiefs expects a positive outcome for their business."

Meanwhile, a survey of 1,000 U.K. business executives conducted by the Institute of Directors, found "about a quarter of respondents are planning to freeze recruitment, with 5% saying they would cut jobs. One in five executives said they were looking to move operations outside the U.K."

Bottom Line: The Brexit fallout continues.

The biggest M&A Bubble In History?

According to Bloomberg, "Companies paid a median of 11.07 times their target’s earnings before interest, taxes, depreciation and amortization through June 27 to make acquistions, the data show. That’s the most since at least 2007." The story also notes a drop in deal value. "About 18,000 deals with a total value of about $1.5 trillion dollars were announced so far in 2016, compared to $1.7 trillion in the same period last year."

The Filter: Hedgeye's Take On Today's Financial News - bloomberg M A

Bottom Line: "This is one of the top M&A Bubbles in world history," Hedgeye CEO Keith McCullough writes. The pricking of the bubble will be undoubtedly painful as the #LateCycle U.S. economy rolls over.