Spain's IBEX is down 32% from its 2015 peak.
Takeaway: "The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions." -Seth Klarman
Below is a collection of interesting links and insights from today's news with analysis filtered through our macro lens. This installment discusses why investors are wrong to be against long bonds, stalling M&A, UK 2-year bond goes negative, President Obama's obvious statement about global growth, big bank euphoria and despair, and why a few statement from European Commission President Jean-Claude Juncker is emblematic of everything that's wrong with the E.U.
"Treasuries are heading for their biggest back-to-back quarterly advance in more than four years," Bloomberg reported. Good so far. The story cites the Bloomberg U.S. Treasury Bond Index which has returned 5.5% since the end of 2015. But here's where Bloomberg journalists Wes Goodman and Anchalee Worrachate go off the rails: "Economists say the gains won’t continue into 2017." These so-called "economists" say simply "Treasury prices are too high."
Our Take: Watch Hedgeye Senior Macro analyst Darius Dale explain why we're sticking with our Long Bond call even while "Treasury prices are too high."
According to Reuters, "The value of announced mergers and acquisitions (M&A) worldwide dropped by a third in the second quarter of 2016, as a wave of transactions were abandoned in the wake of concerns over regulatory and tax risks or national security."
Our Take: M&A activity always peaks at the end of the cycle as companies try to buy growth. Take a look at the chart below.
Wall Street Journal: "A two-year British government bond yield fell into negative territory for the first time ever in late European trading, after Bank of England governor Mark Carney’s announced that the central bank would likely have to stimulate the British economy in the aftermath of the country’s vote to exit the European Union. A bond maturing in March 2018 registered a yield of minus 0.04% shortly after European markets closed, according to Tradeweb."
Our Take: As global growth slows, bond yields around the world are coming down. That's why we're long the Long Bond (TLT).
"President Obama said he expects the global economy 'in the short run, will hold steady.' But it won't necessarily stay that way," CNN Money reports. "'I think there are some general longer-term concerns about global growth if in fact Brexit goes through and that freezes the possibilities of investment in Great Britain, or in Europe as a whole,' Obama said Wednesday at a summit in Canada."
Our Take: Brexit is merely a symptom of global #GrowthSlowing which we've been warning about for well over a year now.
Phew. All 33 banks passed the Fed's stress test and, according to regulators, would not need more capital in the event of a severely adverse scenario. As such a slew of big banks announced buybacks and dividends after passing the test, sending Financials stocks higher.
Our Take: Buybacks are a nice mirage for banking executives, who get paid on this artificial growth in earnings per share, but, with interest rates so persistently low, bank stocks should get continually pummeled as net interest margin is squeezed. We're sticking with our short Financials (XLF) call.
Deutsche Bank was labelled the "most important net contributor to systemic risks in global banking system," by the IMF. Shares are getting punished today. Italian banks took a dip too as German Chancellor Angela Merkel shut down bailout hopes.
European Commission President Jean-Claude Juncker made headlines this week when he taunted British MEP Nigel Farage in the European Parliament saying, "Why are you here?" This is the same guy who once said that E.U. compromises and deals needed to be hidden from public scrutiny. "When it becomes serious, you have to lie," he said.
Other detestable statements from Juncker, via a 2014 The Telegraph article, include:
Our Take: Just ... "Ick"
In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough exposes the ridiculousness of big bank stock buybacks and enablers at the Fed.
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Takeaway: This bizarro global central banking experiment will not end well.
Earlier this year, our Macro research team highlighted that shaky investor faith in the global central banking #BeliefSystem was breaking down. That call has been working out well. On a related note, take a couple of seconds to absorb the chart below. It highlights the astronomical, multi-trillion dollar, yen, euro rise in central bank balance sheets.
Pretty unbelievable right? Question. With trillions already on central bank balance sheets around the world... what more can they possibly do?
We're already beginning to see the cracks in the #BeliefSystem edifice. Nowhere is this more apparent right now than in Japan. Despite the BOJ's best efforts to devalue the currency and prop up equity markets, the USDJPY is down -14.5% and Nikkei has tumbled -18% year-to-date. Meanwhile in Europe, the EuroStoxx 500 is down -12.4% and EURUSD is up +2.2%.
For starters, global #GrowthSlowing continues to confound the plans of the world's omnipotent central bankers. These un-elected bureaucrats have failed to arrest economic gravity since the data started rolling over.
Slow growth evidence is everywhere. Setting aside the obvious slowdown in economic data (click here and here for more), check out sovereign bond yields for select countries. The charts below show yield curves for these sovereign bonds today (green line) versus where they were last year (yellow line). (The red line shows 0%. Notice how much closer all of these yields are to the zero bound.)
To be clear, central bankers have manipulated these yield curves using unconventional methods like negative interest rate policies and QE. But that's just the proposed inoculation for the broader disease which is global #GrowthSlowing.
(And #TheCycle is just getting started)
Takeaway: We added LMT to Investing Ideas on the long side on 6/17.
Earlier this month, we added large-cap, low beta defense contractor Lockheed Martin (LMT) to the long side of Investing Ideas.
Here's what our seasoned Hedgeye/Potomac Research colleague and Senior Defense Advisor LtGen Emerson "Emo" Gardner USMC Ret. recently wrote in an institutional research policy note:
"With a bipartisan vote of 30-1, the Senate Appropriations Committee has released its FY17 defense spending bill report for action on the floor and it is very good news for defense prime contractors.
Like the already-passed House version appropriations bill, the Senate bill "finds" $15B to fund most of the services' unfunded priority lists for more fighters, more ships and higher readiness levels that were not requested by the President. Unlike the House, the Senate "finds" the money from within the President's request itself rather than by underfunding the OCO budget."
Coupled with the House bill, we can use the Senate Appropriations Committee changes to derive the minimum amount of increase that the major defense primes should see in the FY 2017 Pentagon budget.
Although we are three to six months from a final bill, we can anticipate the following changes to programs of interest to Lockheed. These are essentially a worst case as compromises between the House and the Senate when the bill goes to conference are likely to result in further increases to the Senate bill.
Lockheed Martin (LMT) major defense programs will see at least a net 3.6% increase of +$800M to the PresBud request of $21.8B. The Senate adds +$355M for UH-60 for the National Guard to the PresBud request of $755M. The President's request for $7.7B for F-35s will include four additional jets for the Marines (House added a total of 11 acft) but the program will see a net reduction of -$148M after all haircuts have taken place. There are +$263M in additions to the $146M requested for C130J and Compass Call. LMT's will share a $495M hit to the EELV program with its ULA partner, BA. Missile defense continues to shine with $50M added to the $370M Aegis Ballistic Missile Defense budget and +$50M to the $464M THAAD program. By adding +$475M to build an unrequested third ship in FY17, the Senate joins the House in resisting the Navy's plan to early downselect and truncate the Littoral Combat Ship."
"Whatever you do, don't talk about the UK economic growth data slowing this morning," Hedgeye CEO Keith McCullough wrote earlier today.
None of this Europe #GrowthSlowing data has anything to do with Brexit (we'll get a better understanding of the Brexit impact in coming data releases) and has everything to do with #TheCycle.
(No acceleration to speak of)
What do you do with ugly #EuropeSlowing data? We're watching the Euro. Hedgeye CEO Keith McCullough calls the euro "the main event." In a note sent to subscribers, McCullough writes:
"EURO – with the entire edifice of consensus staring at the Pound (which has a crazy wide risk range of $1.30-1.39), the EUR/USD is looking more and more vulnerable by the day; if they can’t break it out > $1.13, $1.05 is in play on the downside – something to seriously consider within the context of more exits and #GrowthSlowing."
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.