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Quick Take: 2Q GDP ↑ = Fed Hawkish

Takeaway: We think Q2 economic growth will accelerate and the Fed will turn hawkish.

Quick Take: 2Q GDP ↑ = Fed Hawkish - Hawk dove cartoon 06.06.2016

 

Q2 GDP ↑ (vs. Q1) = U.S. Dollar ↑ = Rates ↑ = Reflation (i.e. commodities) ↓ = Fed hawkish

 

That's our latest thinking on the current macro setup. Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"The #StrongDollar move continues as consensus remains A) bearish on USD (see net positioning in CFTC futures & options data) and B) finally too dovish on what the Fed might do in SEP – what slows this down if we’re right on the Q2 sequential GDP acceleration as European and Japanese economic data continues to slow? Still bearish on Euros."

 

Quick Take: 2Q GDP ↑ = Fed Hawkish - dxy 7 20

 

Note Fed Funds futures' current rate Hike Probabilities:

 

  1. JUL meeting = 8%
  2. SEP meeting = 21%
  3. DEC meeting = 43% 

 

Quick Take: 2Q GDP ↑ = Fed Hawkish - 07.20.16 image

 

On #StrongDollar induced #Deflation...

 

McCullough writes:

 

"Oil continues to break-down as the USD continues to threaten a breakout – WTI down -1.4% yesterday takes it -7.1% in the last month as the inverse USD correlation there remains as real as it is for the CRB Index (down -1.1% yesterday to 186 and signaling bearish TREND @Hedgeye); WTI immediate-term risk range now = $43.91-46.65."

 

 

... Cue the Fed hawks:

 

  • Atlanta Fed President Dennis Lockhart: “I wouldn’t rule out as many as two” rate hikes.
  • “We should be looking toward removing accommodation,” said Robert Kaplan, president of the Federal Reserve Bank of Dallas. "We just should do it in a patient, gradual way.”

 

That's just in the past week.

 

Quick Take: 2Q GDP ↑ = Fed Hawkish - Fed grasping cartoon 01.14.2015

 

What does this mean for investors going forward?

 

In the past few days, Hedgye CEO Keith McCullough has been trimming exposure to our favorite Macro idea, Long Bonds (TLT). We'll be happy to buy them back on selloffs (especially given our bearish outlook for Q3 GDP).

More to come...


A Closer Look At How Big Banks Really "Beat" Earnings Estimates

Takeaway: Reality check. Over the past year, Wall Street earnings estimates for big banks typically fell over -20%.

A Closer Look At How Big Banks Really "Beat" Earnings Estimates - Earnings cartoon.spare

in a wall street (and america for that matter) of lowered expectations ... Everybody Beats.

 

That's the long and short of it. The news this morning is Morgan Stanley (MS) beat consensus earnings estimates, sending its shares higher. Setting aside for a second that MS revenue and earnings were down -9% and -12% respectively year-over-year, let's look at the parlor game being played by Old Wall analysts belying those "beats."

 

The first thing to note? In order to manufacture these earnings beats, Wall Street's downward revisions are sometimes massive. Over the past year, big bank consensus earnings estimates dropped anywhere between -9% and -29%. Check out the charts below showing consensus earnings estimates (the red line depicting the steady decline in those estimates.)

Morgan Stanley

  • EPS 2Q16: $0.75
  • Consensus EPS Estimate: $0.59
  • Consensus EPS Revision: -29% in past year

A Closer Look At How Big Banks Really "Beat" Earnings Estimates - ms ee

Citigroup

  • EPS 2Q16: $1.24
  • Consensus EPS Estimate: $1.10
  • Consensus EPS Revision: -25% in past year

A Closer Look At How Big Banks Really "Beat" Earnings Estimates - c ee

Bank of America

  • EPS 2Q16: $0.36
  • Consensus EPS Estimate: $0.33
  • Consensus EPS Revision: -23% in past year

A Closer Look At How Big Banks Really "Beat" Earnings Estimates - bac ee

JPMorgan

  • EPS 2Q16: $1.55
  • Consensus EPS Estimate: $1.43
  • Consensus EPS Revision: -13% in past year

A Closer Look At How Big Banks Really "Beat" Earnings Estimates - jpm ee

Wells Fargo

  • EPS 2Q16: $1.01
  • Consensus EPS Estimate: $1.01
  • Consensus EPS Revision: -9.9% in past year

A Closer Look At How Big Banks Really "Beat" Earnings Estimates - wfc ee

 

None of this suggests big bank impropriety. However, these five stocks are up between +2% and +9% in the past month on significantly downgraded earnings beats.

 

Sad...

 

Stock performance of the banks above over past month

A Closer Look At How Big Banks Really "Beat" Earnings Estimates - bank stock

The game goes on and on. 

 

Don't expect it to stop. Another way to beat on earnings is to reduce the share count via stock buybacks. (Note: Executive bonuses are often tied to EPS growth, so therein lies another motivation to reduce the share count and goose earnings.)

 

  • JPM said it was increasing its planned buyback to $10.6 billion from $6.4B announced last year
  • Citigroup plans a huge $8.6 billion buyback
  • BofA lifted its expected payout in the next year to about $8.1 billion, including a $5B buyback
  • Morgan Stanley's buyback is now $3.5 billion, up from $2.5B previously announced

 


Daily Market Data Dump: Wednesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, key currency crosses, and commodities. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Wednesday - equity markets 7 20

 

Daily Market Data Dump: Wednesday - sector performance 7 20

 

Daily Market Data Dump: Wednesday - volume 7 20

 

Daily Market Data Dump: Wednesday - rates and spreads 7 20

 

Daily Market Data Dump: Wednesday - currencies 7 20

 

Daily Market Data Dump: Wednesday - commodities 7 20


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July 20, 2016

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  • Bullish Trend
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  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.65 1.35 1.56
SPX
S&P 500
2,115 2,188 2,163
RUT
Russell 2000
1,157 1,230 1,200
COMPQ
NASDAQ Composite
4,877 5,099 5,036
NIKK
Nikkei 225 Index
14,931 17,039 16,723
DAX
German DAX Composite
9,501 10,316 9,981
VIX
Volatility Index
11.50 17.04 11.97
USD
U.S. Dollar Index
96.11 97.51 97.11
EURUSD
Euro
1.09 1.12 1.10
USDJPY
Japanese Yen
100.01 107.98 106.08
WTIC
Light Crude Oil Spot Price
43.91 46.65 45.45
NATGAS
Natural Gas Spot Price
2.60 2.92 2.73
GOLD
Gold Spot Price
1,315 1,369 1,332
COPPER
Copper Spot Price
2.10 2.28 2.26
AAPL
Apple Inc.
94.61 100.93 99.87
AMZN
Amazon.com Inc.
721 758 739
NFLX
Netflix Inc.
84.55 94.59 85.84
GOOGL
Alphabet Inc.
701 765 753
JPM
J.P. Morgan Chase & Co.
59.75 65.33 63.86
MSFT
Microsoft Corporation
51.22 55.99 53.09



Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


CHART OF THE DAY: Fed September Rate Hike Expectations Too Low

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.

 

"... Looking at the implied market probability of another hike, across durations:

  1. JUL meeting = 8%
  2. SEP meeting = 21%
  3. DEC meeting = 43%

For now, I think those SEP expectations are too low. If I’m right on that, rates will keep making a series of higher-lows and Fed funds futures will continue higher until we get another jobs report bomb (PS. don’t rule that out)."

 

CHART OF THE DAY: Fed September Rate Hike Expectations Too Low - 07.20.16 image


Long Bond Bug

“We must consider how some bugs are not detrimental but fundamental to life.”

-Dr. David Perlmutter

 

I’ve learned more in the last week than I’ve learned all year and it had nothing to do with markets. It had everything to do with my growing gut.

 

“Meet Your Microbiome” is how neurologist (and gut doctor), David Perlmutter introduced me to reality in what has been nothing short of a fantastic book everyone should read called Brain Maker.

 

“The Greek physician and father of modern medicine, Hippocrates, first said in the 3rd century BC that all disease begins in the gut.” Same thing goes for Long Bond Bulls. All corrections begin with this thing called #GrowthAccelerating.

 

Back to the Global Macro Grind

 

Talk about Recency Bias… I’m in my hotel in Chicago this morning… and for breakfast, instead of my usual, I ordered “The Fitness Trainer!” Berry parfait yogurt, eggs, mixed bell peppers, baby spinach, scallions…

 

But my gut isn’t deflating. Weird.

 

With a sequential (i.e. quarter-over-quarter) surprise to the upside in Q2 GDP, the former Perma Bull narrative (“Reflation”) is. With the US Dollar at a 4-month high, Commodities (and Oil) don’t like that inasmuch as Long Bond Bulls shouldn’t.

 

Long Bond Bug - currency wars

 

The way this macro pivot works is pretty straightforward:

 

  1. Q2 US GDP accelerates vs. Q1 as both European and Japanese growth continues to slow
  2. US Dollar becomes the relative winner in the Currency War
  3. Rates rise off their all-time lows
  4. Reflation (Oil down -7% in the last month) deflates
  5. The Fed corroborates USD strength with hawkish commentary that they nailed it all along

 

Again, and I want to be crystal clear on this… so let me write again, again…

 

A sequential acceleration is what we call a TRADE. And TRADES are not TRENDS (3 months or more, multiple quarters). All a Q2 GDP acceleration ensures is a Q3 sequential deceleration back to bearish TREND.

 

If that’s too “short-term” for you, stop reading and start pounding some empty carbs. As the authors of #GrowthSlowing, “all-time-lows in bond yields”, etc., I think my research team and I should have a pretty good handle on how to trade this.

 

Bought a bond, sold a bond…

 

That’s right. If you don’t like “short-term trading”, tell your boss you are risk managing. That’s what I signaled when I told subscribers to “sell-some” Zeroes (ZROZ) in Real-Time Alerts yesterday. We call it risk managing the range.

 

For something like the 10yr US Treasury Yield, here’s what I mean by that:

 

  1. The low-end of the immediate-term TRADE risk range = 1.35%
  2. The top-end of the immediate-term TRADE risk range = 1.65%
  3. Intermediate-term TREND resistance for the 10yr yield = 2.03%

 

In other words, if you want to actively risk manage the range of consensus finally being LONG what’s been our Best Idea on the long side of macro for a year now, you sell bonds on rallies and patiently buy them back on selloffs.

 

Patience has been (and will continue to be) the key to profiting from both cyclical and secular #GrowthSlowing.

 

Another way to “play” the short-term higher-low that my model is signaling in the 10yr Yield is via Fed Fund Futures. Those are the macro market’s expectations of when (and if) the Fed actually has the spine to “raise rates.”

 

Looking at the implied market probability of another hike, across durations:

 

  1. JUL meeting = 8%
  2. SEP meeting = 21%
  3. DEC meeting = 43%

 

For now, I think those SEP expectations are too low. If I’m right on that, rates will keep making a series of higher-lows and Fed funds futures will continue higher until we get another jobs report bomb (PS. don’t rule that out).

 

The other thing that should keep happening on that is a continuation of what I absolutely love in life – the value of my hard earned currency appreciating = #StrongDollar.

 

And all of that “reflation” hope, fully loaded with consensus being long things that have been tethered to a rising Oil price (think ISMs, PMIs, Industrial Stocks) should deflate at a faster pace than my gut seems to be, despite feeling smarter about it.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.35-1.65%

SPX 2115-2188

NASDAQ 4

VIX 11.50-17.04
USD 96.11-97.51
EUR/USD 1.09-1.11
Oil (WTI) 43.91-46.65

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Long Bond Bug - 07.20.16 image


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