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Poll Of The Day: Which Choice Below Do You Trust The MOST?

Takeaway: What do you think? Cast your vote. Let us know.

Poll Of The Day: Which Choice Below Do You Trust The MOST? - z poll

 


Welcome to Fed Powerball Friday!

Client Talking Points

USD

Down Dollar, Down Yields on that ISM print of 49.4 AUG vs. 52.6 JUL (with New Orders tanking from 56.9 to 49.1); my thought was ISMs and PMIs would trace the rate of change in that Oil chart, and I guess I got lucky with that.

US 10YR

Globally, long-term yields are rightly concerned that Yellen tightens into a slow-down (in the last 5 yrs, she and Trichet are two of the few who have tried it – both moves damn near blew up capital markets); while the JGB 10yr is the most consistent long-term #GrowthSlowing chart in economic history, even its +2bps this am to -0.04%.

Commodities

Anything in-line to “missing” this anchoring-bias “expectation” for NFP should = Down Dollar, Down Rates, Up Oil and Commodities – no reason why CRB Index cant ramp back to 184 on that (or Oil back to $45-46 for that matter).

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
9/1/16 42% 8% 8% 16% 20% 6%
9/2/16 42% 8% 8% 15% 21% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
9/1/16 42% 24% 24% 48% 61% 18%
9/2/16 42% 24% 24% 45% 64% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
GLD

On the other side of the USD expectation, Gold (GLD) lost -1.5% w/w. Again we still like UUP and GLD as a basket against other centrally-planned currency regimes elsewhere.

TLT

Long Bonds (TLT), which has been on Investing Ideas since August 4th, 2014, finished the week -0.25%. We continue to believe that growth is the main catalyst for the curve amidst all the central planning noise. Slower growth gets discounted in a flatter curve so even if rates are hiked into a late cycle slow-down, the yield curve pancakes (the long-end of the yield curve fall and the short-end goes up). 

UUP

Strength in the U.S. dollar, with renewed rate hike expectations back in the mix over the last few weeks, gave a good boost to U.S. Dollar (UUP) which finished +1.1% on the week. The bid-yield of December Federal funds futures has ticked 10 bps higher in August to 0.55% to close out the week.

Three for the Road

TWEET OF THE DAY

Cartoon of the Day: Once Upon A Time... app.hedgeye.com/insights/53516… cc @KeithMcCullough #Fed #GDP #AutoSales pic.twitter.com/h0UpVP0sV4

@Hedgeye

QUOTE OF THE DAY

“To improve is to change; to be perfect is to change often.”

-Winston Churchill

STAT OF THE DAY

The Tennessee Volunteers only gained 319 yards of offense last night against Appalacian State.


September 2, 2016

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  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.62 1.50 1.57
SPX
S&P 500
2,162 2,188 2,170
RUT
Russell 2000
1,227 1,248 1,239
COMPQ
NASDAQ Composite
5,185 5,259 5,227
XOP
SPDR S&P Oil & Gas Explore
34.98 37.78 36.66
RMZ
MSCI US REIT
1,209 1,239 1,223
NIKK
Nikkei 225 Index
16,300 16,999 16,926
DAX
German DAX Composite
10,436 10,698 10,534
VIX
Volatility Index
12.07 14.41 13.48
USD
U.S. Dollar Index
94.01 96.51 95.66
EURUSD
Euro
1.11 1.13 1.11
USDJPY
Japanese Yen
99.00 103.80 103.23
WTIC
Light Crude Oil Spot Price
42.13 45.55 43.16
NATGAS
Natural Gas Spot Price
2.60 2.98 2.79
GOLD
Gold Spot Price
1,302 1,351 1,317
COPPER
Copper Spot Price
2.02 2.12 2.07
AAPL
Apple Inc.
105.30 109.50 106.73
AMZN
Amazon.com Inc.
752 781 770
JPM
J.P. Morgan Chase & Co.
64.50 67.90 67.21
INTC
Intel Corp.
34.91 36.25 36.02
COST
Costco Wholesale
154 161 156
LULU
Lululemon Athletica
72.95 78.01 76.66

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.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%

CHART OF THE DAY: Jobs Growth Migrating South for Winter

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro Analyst Christian Drake. Click here to learn more.

 

"...From a rate of change perspective, payroll growth will continue to slow from here. 

 

The why is relatively straightforward:

 

  1. Employment growth is hostage to the law of large numbers and as the base gets bigger, an accelerating growth rate implies an ever increasing number of jobs.  On an NFP base of 145M, the numbers get unreasonable quickly (i.e. you start needing to add 700K … 900K … >1M workers net on monthly basis to maintain the growth curve).
  2. Diminished slack and a tighter labor market.  As the expansion matures and labor supply tightens, there are simply less people to hire and more competition."

CHART OF THE DAY: Jobs Growth Migrating South for Winter - CoD NFP YoY


North vs South

“I am the object of criticism around the world. But I think that since I am being discussed, then I am on the right track.”

-Kim Jong-il

 

 

The “official” story is that North Korean Vice Premier Kim Yong Jin was executed for “not keeping his posture upright at a public event”.

 

Whatever the real reason is, it probably doesn’t matter – I’m sure it falls within the same broader bucket of absurdity.   

 

As I was reading that Reuters report yesterday, I was reminded of the famous-in-econ-circles chart below.

 

It shows a night image of North & South Korea.  The contrast in light output is meant to convey the relative income differences between the two countries.

 

Because they were once a single country, share a similar geography and have historically similar cultures and comparable resources, the two countries serve as a natural case study in growth policy.  

 

Institutions and ideologies matter to real growth, real standards of living, and real lives, a lot. 

 

North vs South - CoD N vs S Korea

 

Back to the Global Macro Grind ….

 

So, North vs South. 

 

That’s pretty much what macro investing distills down to.  Is the 2nd derivative of growth and inflation positive and headed north or negative and heading south.  

 

Let’s review the recent fundamental data before drilling into some Jobs Day, labor market specifics:

 

  • ISM: In confirmation of what may be the most passive aggressive top ever, the August ISM reading printed 49.4, down -3.2 pts sequentially and down for a 2nd month off the June “top” as current production, new orders, employment and backlogs all slide into contraction.  Our view has been that while stabilization in manufacturing activity after a year+ of negative growth wouldn’t be particularly surprising, we didn’t have a fundamental catalyst for a sustainable inflection.  In other words, while going from bad to less bad is good, it doesn’t really represent an investible Trend without a catalyst or expectation for a 48 --> 52 --> 58 --> 62 type progression.

 

  • Auto Sales:  Auto Sales fell -4.8% MoM in August, offering further confirmation that 2015 was the probable peak in demand.  The companies themselves are publically acknowledging that 2015 was the top and we’re not going back to 18M in annualized sales.  Take their word for it.

 

  • Retail Sales:  Auto sales represent ~20% of Headline Retail Sales so a -5% decline will sit as a -1% drag to reported growth when the data are reported on 9/15.  Recall, Retail Sales were up just 0.0% last month despite auto sales being up +6.5% sequentially.  The Retail Sales Control Group (GDP Input) and all the Ex-Auto subaggregates were negative month-over-month and decelerating on a year-over-year basis.  Some industry other than “e-commerce” will have to step up in August.

 

If we’re scoring yesterday, that =  3 Souths, 0 Norths

 

Moving on to employment.  Here’s a look at the North-to-South annual progression in the monthly NFP average:

 

  • 2014: 250K/mo
  • 2015: 228K/mo
  • 2016: 186K/mo

 

From a rate of change perspective, payroll growth will continue to slow from here. 

 

The why is relatively straightforward:

 

  1. Employment growth is hostage to the law of large numbers and as the base gets bigger, an accelerating growth rate implies an ever increasing number of jobs.  On an NFP base of 145M, the numbers get unreasonable quickly (i.e. you start needing to add 700K … 900K … >1M workers net on monthly basis to maintain the growth curve).
  2. Diminished slack and a tighter labor market.  As the expansion matures and labor supply tightens, there are simply less people to hire and more competition.

 

And as we reach full employment, jobs gains need only be large enough for the labor force to absorb net new entrants.  In forecasting that figure and translating it into a monthly NFP estimate, there are four primary inputs:

 

  1. Population Growth
  2. Labor Force participation by age
  3. Natural Unemployment Rate
  4. A conversion factor

 

In other words, the estimate must account for the number of working age people (the net flow of new, young entrants and older retirees), the percentage of that working age population that will generally have or be seeking employment (the Labor Force Participation Rate) and the number of labor force participants that will be unemployed in some average sense over time (Unemployment Rate).  Lastly, because the labor force participation and unemployment figures are estimated from the BLS Household Survey of employment and the NFP figures are derived from the Establishment Survey, the estimate requires an adjustment to account for systematic differences between the two surveys.  

 

The output is moderately sensitive to the assumptions embedded in those inputs but, across a liberal range of assumptions, the estimates of trend employment generally fall between 60-120K per month (Janet thinks it’s <100K).  

 

In other words, employment growth will continue migrating South for the Winter. 

 

Which brings us to the simple macro reality we harp on every month:

 

If employment growth is slowing, there are only a couple ways in which (aggregate) income growth can remain flat or accelerate:

 

  1. An increase in the number of hours worked per week.  It has been largely flat the last couple years.  And/or …
  2. An acceleration in wage growth.  Wage inflation has shown some fledgling mojo in recent months but wage growth needs to accelerate faster than employment growth slows, on an ongoing basis, to support any improvement in income growth.

 

And if income growth is slowing there are only a couple primary ways to maintain or accelerate consumption growth:

 

  1. Declining savings rate:  A declining savings rate, while arguably a negative fundamental development,  is supportive of consumption growth from an accounting perspective and the savings rate was down -20 bps year-over-year to 5.7% in July, providing a modest tailwind to spending growth.  With the savings rate at or above 6.0% in 2H15, if we hold the current level it will be supportive of reported consumption growth over the coming months.
  2. Accelerate credit growth:  With aggregate income growth slowing since its peak in early 2015, accelerating credit growth has helped buttress the deceleration in consumption growth.  That support may be fading.  Total Consumer Credit growth peaked in October of last year and has slowed in each of the last three months and revolving credit growth (i.e. credit cards) peaked in March and has also slowed in the subsequent 3 months.   

 

I have more to say around the outlook for consumption but this morning’s verbosity is marching Northward and I want to leave you with a couple parting thoughts:   

 

The trend in employment remains in somewhat of a Catch-22:

  • If employment growth continues to slow and wage growth can’t manage a sustainable acceleration then income and consumption growth will continue to slow.
  • If employment maintains its current pace and labor growth continues to run at a positive spread to output growth then Productivity, Corporate Margins and Profitability will all continue to head South. 

 

Tactically, as Keith has highlighted, bad probably = good and good probably = bad in terms of this morning’s jobs number as the implication for equities and asset prices broadly follows some version of the following.  

 

Strong employment report(s) = ↑ tightening expectations = Dollar ↑ = stuff priced in dollars ↓ = Deflation Risk ↑ = Yield Spread↓,Trade deficit ↑, etc

 

Does industrial/energy sector activity, investment or earnings inflect and inflate in that scenario?  Did it in December’s iteration of that macro factor flow?

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.50-1.62%

SPX 2162-2188

VIX 12.07-14.41
USD 94.01-96.51
Oil (WTI) 42.13-45.55

Gold 1

 

Happy Labor Day.

 

Christian B. Drake

U.S. Macro Analyst

 

North vs South - CoD NFP YoY


The Macro Show with Keith McCullough Replay | September 2, 2016

CLICK HERE to access the associated slides. 

 An audio-only replay of today's show is available here.

 


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