CLIENT TALKING POINTS

#PRODUCTIONFREEZE

New stories of a crude production freeze are again surfacing ahead of the International Energy Forum in Algeria September 26-28 where OPEC meets informally. The major OPEC influences (Saudi Arabia, Iran, Iraq) show no signs of pushing for a production cut. The trend in official selling prices from the big three middle eastern producers has been to cut further and further below benchmark prices to consumers all over the world. Saudi Arabian, Iranian, and Iraqi production is flat, +29%, and +3% respectively while production comes offline elsewhere. Petro states concede their influence on the global marketplace by throwing in the towel at this stage of the game. 

EUROZONE

Political risk remains front and center:  the latest poll indicates that a third Spanish election would do nothing to resolve the political impasse. Separately, Italy’s high court has approved a constitutional referendum, setting in motion a vote from Italians on whether to strip the Senate of most of its powers in order to streamline legislation; if defeated, PM Renzi has vowed to resign. Uncertainty breeds contempt and contempt breeds investors heading for the exits. We remain bearish on the EUR/USD and reiterate our Q3 Macro theme of #EuropeImploding. 

COSTS

This morning’s Productivity and Unit Labor Cost data for 2Q will confirm that labor growth continues to grow at a premium to output growth and that input costs continue to rise faster than output prices.  So long as the price to produce something is growing faster than the selling price, corporate margin pressure will persist.   

TOP LONG IDEAS

GLD

GLD

See update on TLT/UUP.

TLT

TLT

Back to growth ... we’ll refrain from commenting on Friday’s headline non-farm payrolls number in isolation, and rather offer some perspective on the cyclical nature of the non-farm payroll data series (you’ve heard it before):

  • On a Y/Y rate of change basis, Non-Farm Payrolls peaked in February of 2015;
  • Once growth in this series peaks and rolls over, it doesn’t return and we move toward economic contraction on the margin. Read: Bullish for Long Bonds (TLT);

A print of +282K jobs was needed for July to avoid another Y/Y sequential deceleration in the series. NFP additions were +255K. While this beat expectations of +180K (which was cheered by just about every mainstream media outlet), the TREND in this series remains slow-moving, predictable, and most importantly past peak.

UUP

UUP

Our team’s macro process is both fundamental and top-down, and we get the top-down signals in real-time. The bottom-line is that both the CRB Commodities Index and crude oil have recently broken down from a quantitative risk management perspective. While this is a key factor contributing to our recent addition of the PowerShares DB US Dollar Index Bullish Fund (UUP), it also signals that TIP does not have as much upside as we thought. As Keith McCullough wrote to subscribers this week:

“Changing my mind on longer-term longs has happened infrequently this year, but it should happen. That’s how the game goes.”

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/8/16 66% 3% 3% 8% 12% 8%
8/9/16 64% 3% 3% 9% 13% 8%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/8/16 66% 9% 9% 24% 36% 24%
8/9/16 64% 9% 9% 27% 39% 24%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

THREE FOR THE ROAD

TWEET OF THE DAY

What Wall Street Missed About Friday’s #JobsReport https://app.hedgeye.com/insights/52953-what-wall-street-missed-about-friday-s-jobs-report … via @KeithMcCullough @HedgeyeDDale

QUOTE OF THE DAY

"My competition isn't resting!'" 

-Kim Rhode

STAT OF THE DAY

There was a 32% drop in Olympics viewership from the 2012 to 2016 Summer Games, it is estimated that 19.5 million people watched prime time Saturday, compared with 28.7 million in 2012.