Our unelected central planners don't appear to have the faintest clue what's really going on.
In this clip from The Macro Show, Hedgeye CEO Keith McCullough briefly explains how he’s positioning his portfolio during this period of central bank-fueled market confusion.
Editor's Note: Below is a complimentary Early Look written by Hedgeye CEO Keith McCullough on 8/8/16 discussing why U.S. growth will continue to slow. It's particularly prescient given the less-than-stellar August U.S. jobs report released a few weeks later. Click here to get the Early Look delivered in your inbox weekday mornings.
“If you want to be the best, you have to do things other people aren’t willing to do.”
I don’t know about you, but I absolutely love watching the Olympics. As a boy (pre internet), I used to write down every medal for every country, comparing my totals to what I could find on TV. I got used to penciling in American Gold. #MaryLouRetton!
Now my 8 year-old son Jack keeps score for me on Google. After Michael Phelps won a record setting 19th Gold last night (I was in bed), that took the American medal count to 12 vs. China and Australia at 8 and 6, respectively.
I am Canadian. We’re in 18th place with 1 Silver and 1 Bronze. But somehow we beat USA’s Men’s Volleyball Team in straight sets yesterday. That was a golden moment for Team Canada. Yes, since we don’t win many golds, we’re in it for the moments!
Back to the Global Macro Grind…
Gold itself got hammered on it, but in what seemed like a golden jobs report moment for American Goldilocks last week, both the SP500 and Nasdaq closed at all-time highs of 2182 and 5221, respectively.
I wrote those down too.
Since I’m short the Nasdaq in Real-Time Alerts right now, that sucked (for me). That said, memories can be short. If you were shorting the all-time highs in most things US Equities in July/August of last year, you were feeling golden come the February 2016 low.
What is American Goldilocks?
- Forget the 2-3-4%, we need GDP of 1% (but definitely not 0%)
- Earnings to “beat” beaten down expectations (and still be negative y/y)
- A Dovish Fed that pretends to be hawkish so they can go back to dovish
- The “but, but… the labor market is good” political narrative
- Stocks and Bonds near their highs for the YTD, at the same time
Yep. Don’t worry. We’re all in the 1% now.
And since our predictive tracking algo for US GDP is around 1% for Q3, why can’t this continue? Especially if the next jobs report goes from “good” to bad again, bonds (and stocks that look like bonds) are going straight back up.
From a US stock market perspective, here’s what I wrote down for last week:
- SP500 +0.4% last week to +6.8% YTD
- Nasdaq +1.1% last week to +4.3% YTD
- Financials (XLF) +1.6% last week to 0.8% YTD
- Tech (XLK) +1.3% last week to +9.9% YTD
- Consumer Discretionary (XLY) -0.1% last week to +4.4% YTD
- Utilities (XLU) -2.7% last week to +17.2% YTD
In other words, it was mostly a hopeful move higher in US interest rates that drove the Sector Style Factor performance last week. Since most macro tourists don’t do the rate of change thing, they saw a “good” jobs report as great. Bond Yields rose on that.
The US Treasury 10yr Yield was +14 basis points on the week to 1.59%. That drove the Financials out of the red, temporarily, for 2016. And it slapped a big correction on the biggest macro gold medal winners YTD (Utilities, Gold, etc.).
The other big thing that continues to manifest is a #StrongDollar move. That’s something we didn’t have wrong last week:
- US Dollar Index +0.7% last week and +2.6% in the last 3 months
- EUR/USD down -0.8% last week and -2.8% in the last 3 months
- British Pound -1.2% last week and -9.7% in the last 3 months
I’m using the last 3 months for our FX view as that’s when we started getting louder on both Gold and the US Dollar winning the Currency War. A big part of this view has been complimented by our Q3 Macro Theme of #EuropeImploding. While the goldilocks narrative is fun for all things American right now, both the UK and Europe are heading into a protracted recession.
I know, I know. #StrongDollar, Strong Gold (+5.2% in the last 3 months) isn’t exactly a panacea for all things “earnings”… Then again, we need to get to Q3 #EarningsSlowing before we see how sweet American Goldilocks is looking come The Fall.
With the pace of non-farm payroll growth slowing to a new cycle low of 1.72% year-over-year in JUL (vs. +2.1% JUL 2015), the probability continues to rise that jobs growth slows to 0%. And 0% isn’t 1%. That won’t even be in contention for bronze.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.45-1.60%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
Daily Trading Ranges
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Takeaway: Lower oil prices means less babies being born in Texas.
Birth rates at the national level declined to -6.2% Y/Y...
...while those in Texas and Houston decelerated even more.
Texas saw birth rates fall in August to -8% Y/Y while Houston declined to -13.6% Y/Y. Those are the fastest rates of decline at the national, Texas and Houston levels since the Great Recession.
Takeaway: A freeze now would just throw a lifeline to US shale.
Editor's Note: OPEC will meet informally on September 26-28 on the sidelines of the International Energy Forum in Algeria spurring speculation that a production freeze may be under consideration to stabilize prices. The following is an excerpt from an in-depth client note sent this morning. To see the full note and all five reasons not to expect an OPEC production freeze later this month, please contact firstname.lastname@example.org.
1. For Saudi Arabia, it’s too soon for a production freeze. The market is still oversupplied with record crude inventories. Therefore, in the Saudi’s view, more cap-ex cuts and production declines are needed to bring the market into balance, otherwise the last two years of pain - costing the Saudi’s about $100 billion a year - were for naught.
In 2014 when the Saudi’s declined to intervene with production cuts to limit the price slide, the market share strategy was launched. Saudi Arabia realizes they are no longer the only actors affecting oil markets, especially in light of surging US shale production. If the Saudi’s cut production to stabilize prices, they lose market share.
The strategy called for a period of low prices that would force production declines in high cost production (shale & off-shore mega projects). After one year, the Saudi’s, and most everyone else for that matter, were surprised at the resiliency of US shale. So the Saudi’s were determined to ride out another year of low prices to starve non-OPEC production. What followed were cap-ex cuts two years in a row and a steady decline in US production. According to the IEA, global cap-ex cuts since 2015 are now at $330 billion, and Wood Mackenzie further estimates cap-ex cuts in global upstream of nearly $1 trillion out to 2020. Meanwhile, US production has steadily declined about one million b/d from a high of 9.5 million b/d n April 2015.
But crude stocks are still at record levels – a stark reality that is putting a damper on the market-is-balancing party. The most recent EIA data for the week ending September 9 reported crude stocks were at 510.8 million barrels - up 55 million barrels this year and 100 million barrels above the five-year average.
The Saudi market share strategy has worked. The IEA said this week that Saudi Arabia has ousted the US as the world’s top producer. So the last thing the Saudi’s want to do now is to put the brakes on a strategy that is working for them. A production freeze that boost prices will only encourage more US production.
As we have seen this summer, price signals near $50 have slowed declining production. Just this week, the IEA changed its previous forecast that the market was balancing at year-end and now says non-OPEC production will rise in the first half of 2017. Rising non-OPEC production is anti-freeze to the Saudi’s. Another nail in the coffin of a production freeze later this month.
So a freeze now would just throw a lifeline to US shale. In our view it is still too soon for any change in OPEC production policy. Saudi Arabia is more nervous about oil at $50 than $40 because they know it keeps US shale alive. The barometer for any new change in OPEC production policy is declining US production, and Saudi Arabia wants to see more of it.
Editor's Note: This is an excerpt and chart from today's Early Look written by Hedgeye Retail analyst Brian McGough. Click here to learn more.
Here’s the kicker – of the 263 basis points in share gain for e-commerce, 177bps of it came over the past 12 months. That sentence might be worth rereading. It’s huge, and I can assure you that no self-respecting brick & mortar CEO is taking about that. Those that are probably are on their way our [case in point – HBI’s CEO has 16 days left on the job. Macy’s has 108]. Those guys know the drill.
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