In this brief HedgeyeTV video, Hedgeye Potomac Senior Energy Policy analyst Joe McMonigle explains why Saudi Arabia and Iran will once again dash OPEC oil production “freeze” discussions.
Takeaway: Saudis ramp oil production. That's right. No production freeze. Just as we've been saying.
"Saudi Arabia told OPEC that it pumped a record 10.67 million barrels of oil a day in July to meet a summer surge in domestic demand, an increase that will do nothing to endear the group’s leading exporter to other members seeking output limits to shore up prices," Bloomberg writes.
That's right. No production freeze. Just as we've been saying. Check out Hedgeye Potomac Senior Energy analyst Joe McMonigle's piece "OPEC Oil Production "Freeze" Talk Will Have Similar Ending ... No Agreement." McMonigle has been making the case that Saudi Arabia and Iran have no incentive to agree to an oil production freeze anytime soon.
Here's a key chart from Bloomberg (with our commentary in red). As you can see, so far this year, Joe has been right. Saudia Arabia has, in fact, ramped production.
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Takeaway: The $9.4 trillion in negative-yielding sovereign bonds now make up 37% of the Bloomberg Global Developed Sovereign Bond index.
As yields on bonds from the U.K., Spain, and Ireland make news lows this week, sovereign bond yields are digging ever deeper into the red. According to the Bloomberg Global Developed Sovereign Bond index, which tracks nearly $25 trillion worth of sovereign bonds globally, there are $9.4 trillion in negative-yielding sovereign bonds, making up 37% of the index. That's up from just 13% at the start of 2016.
Meanwhile, the value of global negative-yielding investment grade corporate debt is up 1,254% this year at $368 billion. That's according to data in the Bloomberg Global Investment Grade Corporate Bond index, which tracks 10,050 investment grade bonds globally. (These figures have backed up a bit in the past month with rising yields in Japan and the U.S. Click here for our previous update.)
The index now includes 445 negative yielding bonds, versus just 59 at the start of the year, issued by companies such as General Electric, Siemens, Total, Unilever, Daimler, and Roche.
Back to Sovereign Bonds...
A few notable developments... new lows for 10-year yields in Spain, Ireland and the U.K. Below are their respective yield curves versus this time last year. Note how they've fallen (yellow line last year versus green line today).
Takeaway: We added UUP to Investing Ideas on the long side on 7/28.
THE HEDGEYE EDGE
Leading indicators of inflation such as the CRB Commodities Index and crude oil have recently broken down in the context of our quantitative risk management process (so have currencies that trade against the USD like the Chinese Yuan). This is a key factor contributing to our recent addition of the U.S. dollar on the long-side of Investing Ideas.
A currency position is always relative, and when looking at the U.S. economy relative to other major economies of the world, the outlook for growth is much worse elsewhere. #EuropeImploding is one of our big 3 Macro Themes for Q3 2016. For the next 3 quarters, our proprietary Growth, Inflation, Policy model has Europe tracking squarely in a growth-slowing environment which should be supportive of accommodative policy from Draghi.
INTERMEDIATE TERM (TREND)
Looking at the set-up domestically against, say, Europe, the futures market for federal funds is not pricing in a rate hike until at least the end of 2017 (probability of 63% in November of 2017). So for policymakers to talk down the dollar, it’s likely they’ll have to elect for easing policy (QE), forget shifting their tone toward policy normalization.
LONG TERM (TAIL)
We’ve been bullish on the U.S. dollar since 2013 from a long-term TAIL perspective, partially driven by a relatively favorable demographic picture.
For example, from 2016 through 2023, the cumulative spread in basis points between the U.S. growth rate for the 35-54 year old population bracket and the growth rate of the Eurozone’s 35-54 year old bracket is nearly 200 basis points (2%).
Now, 2% may seem like a small number, but that age bracket (peak earners and spenders) supports a growing elderly population. In other words, in Europe you’ll have a relative shrinking of the productive age demographic supporting a growing retirement-age population.
One way to pay off growing future obligations (nominal remember), when you have a shrinking producing population, is currency devaluation (less debt to pay in real terms).
ONE-YEAR TRAILING CHART
Takeaway: W continues to invest in an addressable market much larger than we believe it will ever recognize. Starting to see cracks in the foundation.
Editor’s Note: Below is an institutional research note on Wayfair written yesterday by Hedgeye Retail analysts Brian McGough and Alexander Richards. To access our institutional research email email@example.com.
The -20% move today is a nice near-term win, but let’s be perfectly clear about one thing…this short call is far from over. We saw a few cracks in the foundation within the numbers printed this morning and we think there’s considerably more downside risk embedded in this story as the company continues to invest in an addressable market that is much larger than our research has us convinced it will ever recognize. And ever is a long time.
- This is no longer a US story as the company has clearly pushed international expansion up higher in the queue. To date, Wayfair is present in four countries and the management team has now talked to roughly a $180bn market opportunity between the US and Western Europe. What that tells us is the company isn’t done funneling dollars across borders in order to diversify its revenue base. Meaning a bigger drag on earnings for longer.
- Over the past 12 months, Wayfair has rung the register on $2.7bn in the US. The current market share on Wayfair’s math is 13%, or looked at another way, 4% of its long term TAM. That still leaves a considerable amount of share to be captured in the US if you believe Wayfair’s math. We don’t think the outlook is as opportunistic for W, which based on our work suggests that the company has a $27bn TAM with upside to $45bn vs. the company at $90bn. That tells us that Wayfair is spending up now to supplement an unrecognizable US end market.
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