In this excerpt from The Macro Show this morning, Hedgeye Demography Sector Head Neil Howe answers a subscriber’s question on how whether income inequality in the U.S. is depressing aggregate demand.
Takeaway: Convention Coup; Speaker Engagement; Fiscal Year Funding Fiasco
Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email firstname.lastname@example.org.
"Tell the truth, work hard, and come to dinner on time."
-Gerald R. Ford
With less than a week to go until the convention, anti-Trump forces are scrambling faster than ever to dethrone the presumptive nominee. Removing Donald Trump may be their main objective, but another option is being weighed – attempting to select his veep akin to an arranged marriage. The nominee's running mate is still technically decided by an independent delegate vote and delegates have no obligation to support the nominee's choice.
The Rules Committee is set to meet later this week to decide convention rules and the party platform, and we doubt any coup will succeed, but this could get interesting depending on Trump’s highly anticipated pick reportedly coming at the end of this week.
Speaker Paul Ryan has finally agreed to speak at the convention, becoming the most notable stumper on a somewhat atypical lineup. Ryan’s speech is expected to be penned by Ryan himself and will focus on the House Republican agenda and the sharp contrast between Republican ideals and another term of progressive Democratic policies. Expect Ryan’s speech to be more of a pitch for the party than a pitch for the nominee.
FISCAL YEAR FUNDING FIASCO
If you believed there was any chance of Congress agreeing on its annual spending bills this year, forget it – it’s time to focus on avoiding a government shutdown. As we mentioned numerous times throughout the past few months, the process of moving individual appropriations bills was limping along with some progress in each chamber, but with Congress about to call it quits for the summer, almost all hope has been lost. Republicans have now shifted their attention to a timeline for a stopgap spending bill they would need to move before the end of the fiscal year on September 30.
Takeaway: Here's our take on some of today's top financial stories.
"Be wary of the arrogant intellectual who comments from the stands without having played on the field."
Helicopter Ben Visits Japan
"Bernanke met Haruhiko Kuroda, the central bank governor, for lunch Monday," Bloomberg reports. "The BOJ issued no statement on the substance of those talks, which come three weeks before its next policy meeting as it confronts a fresh strengthening in the yen this year that risks undermining inflation and weakening the appetite for investment and wage increases." Interestingly, Bernanke has been weighing in on the efficacy of helicopter money recently.
OUR TAKE: As the BOJ's negative interest rate policy (NIRP) fails and continues to draw the ire of the Japanese public, the likelihood that central planners turn to helicopter money is rising.
Earthquakes, Unforeseen Events & Brexit
The OECD will hold off on publishing its Composite Leading Indicators (CLIs) – "an effective tool during periods of extreme volatility" – until September in order to properly assess the Brexit shock. In a press release, the OECD compared Brexit to an unforeseen event like a natural disaster:
"The CLIs cannot, however, account for significant unforeseen or unexpected events, for example natural disasters, such as the earthquake, and subsequent events that affected Japan in March 2011, and that resulted in a suspension of CLI estimates for Japan in April and May 2011.
The outcome of the recent (23 June) Referendum in the United Kingdom is another such significant unexpected event, which is affecting the underlying expectation and outturn indicators used to construct the CLIs regularly published by the OECD, both for the UK and other OECD countries and emerging economies."
OUR TAKE: As Hedgeye Director of Research Daryl Jones wrote in today's Early Look "So the moral of the story is: if you don’t like the numbers, just suspend reporting them. That’s one way to deal with adversity anyway. Practically speaking, it is pretty difficult to call Brexit an unforeseen event. Perhaps it was viewed as improbable, but hardly unforeseen."
A pre-Brexit survey of 8,2000 firms in the U.K., conducted by the British Chambers of Commerce, found that "UK economic growth was uninspiring in the run-up to the EU Referendum." The BCC found that services sector sales continues to fall and manufacturing sales remained at historically "low ebb."
OUR TAKE: In our Q3 Macro Themes, the Hedgeye Macro team warned that "Europe's cyclical and structural growth and inflation headwinds" combined with political risk would cause ... #EuropeImploding. More to come.
Equity Market Bull & S&P all-time highs
"We don’t have the rising (bond) yields that would typically check the market rally, that’s one of the reasons we keep going higher," Jim Paulsen, chief investment strategist at Wells Capital Management told Reuters. Paulsen continues: "I certainly think (low bond yields) are creating problems in the bond-like stocks. I wouldn’t want to be sitting in utilities or REITs right now."
OUR TAKE: We've been The Bulls on Long Bonds (TLT) and Utilities (XLU) on U.S. #GrowthSlowing. That's been the right call and we're sticking with it (see chart below). As for Paulsen's call against bonds and utilities, it is what it is ... a whole lot of bull.
Taleb: The Importance Of Probability
"One thing it took me 30 years to realize is that the way people compute future performance of portfolios is wrong because they take alpha and simply apply it as if you were invested in that strategy. But if you have any uncle point, in other words if you hit ruin, then you never realize that return," author and distinguished professor Nassim Taleb tells Bloomberg.
The "uncle point" Taleb is talking about is the point at which you have to reduce your position or take a loss. Now, an investor might have realized their expected returns if they were able to wait for a downturn to mean revert but "uncle points," like a margin call, prevent such long-term patience. Taleb's conclusion? "People [therefore] underestimate how much protection they need."
OUR TAKE: Taleb's analysis is always thoughtful and this video is no exception.
Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.
Takeaway: Headline Q2 GGR disappointed but the mix likely more favorable than expected. HE Mass Tracker suggests mass revs up 2-4%. LVS is the play
CALL TO ACTION
The Hedgeye Macau Mass Tracker suggests mass gaming revenue increased in the range of 2-4% YoY in Q2. Given the headline GGR disappointment of -9%, positive mass growth may come as a surprise to most. If the Tracker is right – the high R Square suggests it probably is – this would imply better margins in general for the Macau operators’ Q2. With a growing mass segment, LVS is the obvious play and it is our favorite, particularly over the long-term. Our only reservations pertain to the very near term – for whatever reason, the sell side has not reduced Q2 expectations despite the softer monthly GGR figures.
Positive mass revenue growth in Q2 would represent the first growth quarter since Q3 2014. Extrapolating estimated Q2 mass revenues portends consistent YoY growth for at least the next 3 quarters, and likely more assuming just some market growth from new properties. This is a very important inflection point for the market and particularly LVS. Importantly, within the mass segment, higher margin bass mass is likely outperforming. Not only is LVS the largest mass player in Macau, it maintains the most exposure to base mass.
PLEASE SEE OUR DETAILED NOTE | HERE
Takeaway: Total market volume was down -24% versus the 1-month and 3-month average yesterday as the S&P 500 breached its all-time high.
All-time high in the S&P 500 yesterday?
Meanwhile, US Equity Volume crashed. Here's analysis from our Macro team in a note sent to subscribers earlier today:
"Take a look at volume the last two trading days. We’re comfortable calling the nearly 2% move in the SPY Friday-Monday a “melt-up”. Market and Total exchange volume on Friday was down -8% and -7% vs. 1-month averages on Friday and yesterday volume was much lighter still. Total market volume was down -24% vs. 1-month averages and total exchange volume was down -19% vs. 1-month Averages showing the lack of breadth at all-time highs and cycle high market multiples."
In other words, yesterday's no volume up day is an expression of investors' lack of conviction. Funny how market volume rips on down days and is nowhere to be found on bull-touted "rallies."
Client Talking Points
The GBP/USD rises +1.18% to $1.3152 intraday on news the UK is set to receive a new Prime Minister (Theresa May) in 2 days. However, we caution that relief rallies may be met by incrementally more dovish policy from governor Mark Carney and the BOE in the wake of Brexit. Carney has repeatedly said that the leave vote “materially changes the risk outlook” and the Bank is “ready to take more action if needed”. The BOE next meets this Thursday.
Take a look at volume the last two trading days and you’re comfortable calling the nearly 2% move in the SPY Friday-Monday a “melt-up”. Market and Total exchange volume on Friday was down -8% and -7% vs. 1-month averages on Friday and yesterday volume was much lighter still. Total market volume was down -24% vs. 1-month averages and total exchange volume was down -19% vs. 1-month Averages showing the lack of breadth at all-time highs and cycle high market multiples.
Small Business Confidence
Small business hiring growth has been slowing conspicuously over the last year and with small businesses representing over 99% of total U.S. employer firms and >60% of net private sector hiring on a monthly basis, the trend is not inconsequential. This morning’s NFIB small business confidence index for June increased +0.70 points sequentially, marking at 6-month high at 94.5. Under the hood, the Job Openings and Jobs Hard to Fill sub-indices both gained two points while the Compensation and Compensation Plans sub-indices fell -4 points and -1 point, respectively. Net-net, small businesses continue to have difficulty finding qualified applicants but aren’t expecting to pay up for current or prospective workers. Confidence was better sequentially but represents another lower high as both sentiment and hiring growth remain 6 quarters past peak.
|CASH||US EQUITIES||INTL EQUITIES||COMMODITIES||FIXED INCOME||INTL CURRENCIES|
Asset Allocation as a % of Max Preferred Exposure
|CASH||US EQUITIES||INTL EQUITIES||COMMODITIES||FIXED INCOME||INTL CURRENCIES|
Top Long Ideas
On Thursday, we introduced our Q3 Macro Themes: #ProfitCycle, #ConsumerCredit, #EuropeImploding. The gist of themes #1 and #2 emphasize that the economic cycle continues to roll over as evidenced by declining corporate profitability and the pending deceleration in consumer credit growth which is more of a “when” rather than an “if” scenario.
Consumer credit growth has a direct effect on consumption. Employment and consumption peaked on a Y/Y rate of change basis in Q1 2015 right after corporate profits peaked in the second half of 2014.
We want to be long of continued growth decelerating and inflation picking up from a GIP modeling perspective into the back half of 2016. TIPS are a great way to play both of these views along with our GLD (reflation) and TLT (growth slowing) positions.
See update on TLT/GLD.
Three for the Road
QUOTE OF THE DAY
"Brock Lesnar does what Brock Lesnar wants to do"
STAT OF THE DAY
Giancarlo Stanton won the MLB homerun derby last night, he hit a total of 61 homeruns...39 of which went over 440 ft.