CHART OF THE DAY: Worst ISM Services Since 2010

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. 


CHART OF THE DAY: Worst ISM Services Since 2010 - el 09.07.16 chart


"...Seriously. That was the worst ISM Services report since 2010 and the largest sequential decline in New Orders (leading indicator) in 104 months and this character at the San Francisco Fed, John Williams, came out intraday saying “the economy is strong” and needs rate hikes.


What, precisely, does “the economy is strong” mean? At Hedgeye we deal in real-time and space terms using this thing called the 2nd derivative as a leading indicator for future “levels.” In other words:


A)     The economy is either accelerating or

B)      The economy is decelerating


It’s not that complicated."

Is The Fed Your God?

“If only we had the vast knowledge of God, everything could be understood and predicted.”

-Benoit Mandelbrot


If you’re not religious but looking for new options, I do not recommend bowing at the altar of Federal Reserve forecast conformity. Thank goodness (and my God) that the USA’s economic data continued to slow yesterday. Stocks, commodities, and bonds loved it!


That’s right, #GrowthSlowing remains the bull case for “stocks” inasmuch as it’s always been the secular/demographic one for long-term US Treasuries. So I’m thinking I’m going to pick up some mind share from those marketing long-only-equity strategies until this stops.


If bad is good, when will bad become bad? No worries. Mr. Macro Market will let us know. That’s why what my man Mandelbrot called a “contrary approach, macroscopic instead of microscopic, stochastic instead of deterministic, more fruitful” to proactively predicting market scenarios than making a demi-Goddess out of Janet Yellen’s forecasts. (The Misbehavior of Markets, pg 29)


Back to the Global Macro Grind

Is The Fed Your God? - Yellen data dependent cartoon 11.18.2015 

‘Dammit Keith, stop blaming Janet. She’s a nice lady and she works hard.’ Oh, I totally agree with that. If she’s “data dependent” she’s going to have to pivot back to dovish from hawkish – that’ll be her 6th hawkish/dovish pivot in 8 months. That’s really hard work!


What up with yesterday’s data, bros?


  1. ISM Services (proxy for 70% of the economy) slowed to 51.4 in AUG vs. 55.5 in JUL
  2. Business Activity and New Orders dropped a remarkable -7.5 pts and -8.9 points, sequentially
  3. Employment declined -0.7 pts, barely holding above a contraction at 50.7


Seriously. That was the worst ISM Services report since 2010 and the largest sequential decline in New Orders (leading indicator) in 104 months and this character at the San Francisco Fed, John Williams, came out intraday saying “the economy is strong” and needs rate hikes.


What, precisely, does “the economy is strong” mean? At Hedgeye we deal in real-time and space terms using this thing called the 2nd derivative as a leading indicator for future “levels.” In other words:


A)     The economy is either accelerating or

B)      The economy is decelerating


It’s not that complicated. Neither is measuring and mapping the rate of change in “inflation.” It’s easy to track how macro markets are pricing in deflation vs. reflation. The 5-year US Treasury Break-Even Rate has deflated back down to where it started 2016 = 1.30%.


Back to the whole concept we’re willing to give Williams a teach-in on @HedgeyeHQ – is the “data” getting better or worse (accelerating or decelerating)? If you’re into data point breadth, here’s a list that “data dependent” hawks should obfuscate or ignore:


  1. Chicago PMI = Worse
  2. ISM Services = Worse
  3. ISM manufacturing = Worse
  4. Markit Manufacturing PMI = Worse
  5. NFP = Worse
  6. Auto Sales = Worse
  7. Existing Home Sales = Worse
  8. Labor Market Conditions = Worse


In other words, like corporate profits, the manufacturing and industrial side of the US economy remains in a #Recession. Whereas the bigger and broader #LateCycle swath of the US economy (labor and consumption) continues to slow from its 2015 economic cycle peak.


I’d be more than happy to invite any establishment economist to our Macrocosm 2016 Conference (November 16th at The Yale Club in NYC) to debate me on why what I just wrote isn’t 100% accurate. Again, both stock and bond market bulls should be thankful it is.


While they aren’t accelerating on a trending basis, I purposefully left a few “bullish” economic data points off the aforementioned list. Can you tell me what they are? Do they, pardon the pun, trump the other eight? What is going to make those 8 data points great again?


Those are actually tougher questions than answering the why on how many economists/strategists missed the 2016 US economic slow-down. Two centuries ago, before astronomers had good telescopes, establishment scientists were able to obfuscate reality too.


I believe there is a God. I sort of believe there’s hell too (working for Obama’s Fed would certainly be some version of it). While I can prove those things to myself qualitatively, I can’t prove them to you, quantitatively, like I can the rates of change in economic data.


Our immediate-term Global Macro Risk Ranges with intermediate-term TREND Research Views in brackets are currently:


UST 10yr Yield 1.51-1.61% (bearish)

SPX 2166-2189 (bullish)
RUT 1 (neutral)

NASDAQ 5196-5284 (bullish)

XOP 35.21-37.98 (neutral)

RMZ 1 (bullish)

Nikkei 168 (bearish)

DAX 104 (bearish)

VIX 11.65-14.40 (bullish)
USD 94.23-96.49 (bullish)
EUR/USD 1.11--1.13 (bearish)
YEN 99.80-104.38 (bullish)
Oil (WTI) 42.77-45.90 (bearish)

Nat Gas 2.61-2.89 (bullish)

Gold 1311-1360 (bullish)
Copper 2.02-2.12 (bearish)


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Is The Fed Your God? - el 09.07.16 chart

Thank goodness for more USA #GrowthSlowing data...

Client Talking Points


On the heels of the worst US ISM Services report in 104 months (since 2010), rates got spanked and anything that looked like a bond and/or inverse USD correlation ramped; 2yr Yield down -13% (from 0.84% to 0.73%) in less than a week as markets tell Yellen she has to pivot back to dovish on the data (her 6th hawkish/dovish pivot in 8-9 months).


US #GrowthSlowing data = Down Dollar, Up Yen – wow was that a fun trade; we're long Yen (for a trade) as everything dovish/hawkish happens on the margin and it looks like the Japanese have some dissent at the BOJ in going for a big devaluation here in SEP (they also need to wait to see what the Fed does); risk range JPY/USD = 99.80-104.38.


Squeeze me please me, and find me any reason why – but w/ an immediate-term inverse correlation of -0.7 on Oil/USD, all we just did here was bounce within the $42.77-45.90 risk range; our Energy Policy analyst and I have 3 mins (video) on why we don’t buy into the alleged “freeze” here:

Asset Allocation

9/6/16 44% 7% 8% 14% 21% 6%
9/7/16 58% 4% 4% 7% 23% 4%

Asset Allocation as a % of Max Preferred Exposure

9/6/16 44% 21% 24% 42% 64% 18%
9/7/16 58% 12% 12% 21% 70% 12%
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

See updates below.


Income & Consumption

Slowing employment growth + a decline hours worked + deceleration in earnings growth will = a deceleration in aggregate income growth when the official data are reported at the end of the month.  Absent a significant decline in the savings rate and/or significant re-acceleration in credit growth, consumption growth can be expected to track income growth lower. 


Industrial Activity 

The -14K decline in manufacturing employment in August accords with the retreat in the employment subcomponent in the ISM manufacturing report.  Lower manufacturing employment and a slowdown in manufacturing hours worked also points to a sequential decline in Industrial Production when that data is reported later in the month.  In short (and in the short-term), bad economic data is good as falling rate hike expectations support asset price inflation.  Over the intermediate-term, "slower-and-lower-for-longer" continues to characterize the growth, inflation and interest rate outlook and support #GrowthSlowing allocations in bonds, gold, and dollars.   While incremental dovishness from the Fed may serve as a short-term headwind to the dollar, the structural case for the $USD amidst ongoing policy divergence between the U.S. and the balance of global DM markets remains intact.   

Three for the Road


S&P tags 251 "troubled" companies, 25% in energy sector



“I think a hero is an ordinary individual who finds strength to persevere and endure in spite of overwhelming obstacles.”

–Christopher Reeve


Aaron Jones of UTEP leads the NCAA in rushing with 249 yards.  Nick Chubb of Georgia is second with 222 yards.

The Macro Show with Keith McCullough Replay | September 7, 2016

CLICK HERE to access the associated slides.

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

JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2


“Liberty cannot be preserved without general knowledge among the people.”

                                         -  John Adams


FINAL STRETCH: It’s just one national poll - but Donald Trump is leading Hillary Clinton in a nationwide poll for the first time since the Republican convention. Even after multiple meltdowns in August, he’s come out ahead – but why and how? He’s capitalized on Clinton’s lack of campaigning, as she’s focused many of her resources on fundraising and hanging onto the lead, and was also hit with damaging revelations regarding her email account and State Department relationships. Trump is within striking distance, and Clinton and the Democrats can feel the hair rising on the back of their necks. She’ll need to up her game with 62 days left until Election Day, and now has $143 million more to help her focus heavily on the ground game in battleground states like FL, OH, and PA. He’ll need to broaden his appeal to non-white voters and continue to win over Independents. What once looked like a walk in the park for Clinton, could turn out to be a barn-burner.


IMMIGRATION DISORIENTATION: Trump’s immigration views have been up in the air for some time now, and his latest positioning hasn’t made it any clearer for us. He’s now refused to rule out granting legal status to undocumented immigrants who remain in the U.S., breaking with an immigration proposal he laid out just last week. It’s obvious Trump uses immigration to ignite and appeal to his animated followers, but without something more concrete that people can get behind and support, why continue the shuffling - it’s just confusing.


END OF SUMMER SPRINT: Congress has returned to Washington with just 16 working days left to push through a stopgap for keeping the government open and provide funding for Zika response and research, before lawmakers leave town again to campaign through the election. Republicans are eager to pass a bill to avoid being blamed for a government shutdown like the one in 2013 - and damaging their already delicate chances to remain in control of Congress. However, the disagreement between the parties, and within the Republican party will likely result in political wrangling until the deadline. Zika funding is another bug Congress can’t seem to squash, as the Senate rejected the $1.1 billion funding bill to fight the virus in a 52-46 procedural vote.


A CONTROVERSY OF HIS OWN?: Controversies for both candidates just keep piling up. This time, Trump and his foundation have been linked to allegations that a $25,000 donation to the FL Attorney General was used as compensation to forestall an investigation into Trump University. The Trump camp has dismissed all allegations, and has even paid an IRS levied fine over the donation, but the Clinton camp won’t let it end there. New and recycled controversies continue to keep both candidates unfavorables high and cement the untrustworthiness factor, and with the final push underway we expect at least some of the dust to settle, allowing the candidates to focus on policy...yeah, hurry up and wait.


PENTAGON PLAYS “HARDBALL”: An internal memo written by the DoD comptroller four months ago, was leaked yesterday and now Speaker Paul Ryan and other House leaders are apparently “shocked” at the Pentagon’s “shameless” proposed coordinated strategy to stop the House's plan for FY17 defense spending. The House versions of the annual authorization and appropriations bills only fund the costs of 2017 overseas operations through April, using the “savings” to increase the Pentagon’s baseline budget by $18B above the president’s proposal. The memo reflects the Administration’s view that the House plan is a gimmick to increase defense spending without an equivalent raise in non-defense spending as required by last year’s budget deal since it would force the next president to approve a supplemental budget to support troops already in the field.  The seven page memo advocates playing "hardball” and provides unusually clear views into the coordinated tactics DoD has been using over the past few months. The shock is not that the Pentagon has such a strategy, but that it was written down.


COMMANDER-IN-CHIEF PREVIEW: The Commander-in-Chief Forum, a town hall starring our two favorite candidates, will be held later today, giving us a preview of how the two candidates would perform if they were to take office. The main focus of the forum will be to discuss national security and military affairs issues - topics both candidates have struggled with in the past. We expect Trump to build on his recent endorsements from 88 retired Generals and Admirals, while Clinton boasts her experiences as a U.S. Senator and Secretary of State.


340B DRUG PURCHASING PROGRAM “MEGA-GUIDANCE” GOES TO WHITE HOUSE FOR APPROVAL: Our Healthcare Policy Analyst Emily Evans shared her insight on how the Administration is taking baby steps to rein in the obscure, but important discount drug program at U.S. nonprofit hospitals. You can read her piece here.


FALL REGULATORY CATALYSTS IN TELECOM AND MEDIA: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on the intensifying regulatory focus on a few big agenda priorities. You can read his piece here.


CALL INVITE: TOP THREE DEFENSE POLICY ISSUES FOR NEXT PRESIDENT:  Our Senior Defense Policy Advisor LtGen Emo Gardner is holding a call with the Honorable Dr. James Miller, former Undersecretary of Defense for Policy and leading expert on defense policy. You can find details on the call here.


BOGOTA? BRAVURA!: Our Geopolitical Analyst Dan Christman shared his insight on the landmark peace agreement between the Colombian government and the FARC, a Marxist-inspired anti-government guerrilla group that has dominated the lucrative drug trade throughout the country. You can read his piece here.



3 Reasons: Why Las Vegas Sands Is A Buy | $LVS

3 Reasons: Why Las Vegas Sands Is A Buy | $LVS - HE GLL Macau Vegas

This is an excerpt from a recent “Black Book” presentation for institutional investors on Las Vegas Sands (LVS). In this clip, Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan presents three reasons why he added LVS to his Best Ideas Long list.

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