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2 Charts: Reiterating Our US #GrowthAccelerating Call

Takeaway: The latest U.S. Retail Sales and CPI accelerating reports confirm our view of US #GrowthAccelerating.

From a trending perspective (3 months or more), both US Retail Sales (+5.7% y/y) and CPI (+2.7% y/y = 61 month high) are straight up and to the right vs. where they were at the cycle lows of Q2/Q3 of 2016.

 

Reiterating our US #GrowthAccelerating call ... because the data continues to.

 

2 Charts: Reiterating Our US #GrowthAccelerating Call  - z ree

 

2 Charts: Reiterating Our US #GrowthAccelerating Call  - z infla


PREMIUM INSIGHT

My ‘Big Short’ Call on Hanesbrands Could Become the Best of My Career

My ‘Big Short’ Call on Hanesbrands Could Become the Best of My Career - hanesbrands

"If I’m right, this may prove to be the best short call of my 23-year career," writes Hedgeye Retail analyst Brian McGough. "This could be a single digit stock by the end of the year."


Putin's Other Bromance

This guest commentary was written by Rich Blake of Wikistrat

 

Putin's Other Bromance - putin image

 

While Russia has carved itself a permanent spot in the American news cycle, the context is almost always with respect to United States election meddling, or, alternatively, the conflict in Syria. In recent weeks, Vladimir Putin’s alleged penchant for having dissidents poisoned has gotten a little attention too.

 

Still, it could be argued that myriad other more complicated but no less important storylines concerning Russia deserve more play. One example: renewed relations between Russia and Egypt.

 

What started a few years ago as a bolt-from-the-blue bear hug has quietly morphed into a tender slow dance – joint military exercises in the Med, arms deals, tourism partnerships – oh and did we mention Russia plans to build a nuclear plant in Egypt?

Something to Watch Very Closely

What this burgeoning alliance mean for the region, and for the rest of the world, remains to be seen. To assess the relationship's ramifications, Wikistrat, the world's first crowdsourced geopolitical intelligence consultancy, held a short online engagement exercise hotwiring the brains of a dozen experts on Egyptian and Russian politics/security/economies via a series of questions and cross-analysis.

 

One key question tackled by the working group: Can Russia replace Saudi Arabia as the main financial backer of Egypt? The answer seems more likely to be NO.

 

But it's still a situation on which to keep a close eye, especially with America's current foreign policy in a disrupted state not unlike a brand new chemistry set that's been opened on Christmas morning: jostled around and emptied out on to floor.

 

Putin's Other Bromance - us egypt russia callout

 

During the 1950s and '60s, the Soviet Union and Egypt were sort of kindred spirits with a shared disdain for dominant Western powers. But then came the early 1970s and the rise of Anwar Sadat who embraced the U.S. After a long sour patch, this pair of geopolitical misfits is giving it another go.

 

It's as if the drummer and bass player from a classic rock band decided to record some new material together following a long hiatus – even as their lead guitarist and singer soldier on together playing the old stuff – in other words, Russia and Egypt may find it complicated, if not impossible, to rekindle what may never have been there to begin with.

 

Or to take the analogy further, and in a more twisted direction – think two ex-lovers, one of whom is crafty and manipulative, the other, emotionally unstable, who move into a fixer-upper together, although the project is overwhelming and both of them are broke and off their meds. What could go wrong?

What's Behind the Russia-Egypt Bromance

Russia saw an opening to revive relations with Egypt after the latter country alienated Gulf state sponsors i.e. Saudi Arabia by supporting Assad's crackdown on Sunni Islamists. Saudi Arabia surely expected its ties with Egypt's president, Abdel Fattah al-Sisi, were bound in iron cement after the Kingdom supported the 2013 Egyptian military coup that put Sisi's government in power – and chilled relations between Egypt and the U.S.

 

That Sisi turned his back on the Kingdom's proxy wars (in Syria, Yemen and Iraq) with Iran, while expressing an all-options-open foreign policy not in lockstep with Riyadh's, was an even more monumental development than a U.S.-Egypt rift and cleared the stage for Russia to swoop in with candy and flowers in the form of an offer to help Egypt with its nuclear program. 

 

Just when you thought the region couldn't be any more fragile you find new tensions, and new rivals; a gas leak inside a gunpowder making facility housed in the windowless basement of a firetrap. Or put in even scarier terms – a Russian-built nuclear reactor in the heart of the Middle East.

 

Egypt and Russia began to strengthen their cooperation in the aftermath the 2013 coup (paid for by Saudi Arabia) but this saga, while not new, has been underfollowed.

 

Increasingly aligned regional interests and a sense of mutual respect between Sisi and Putin has led to increased military cooperation, Egyptian purchases of Russian arms and an increase in economic cooperation, mainly in the energy sector. Last September, Egypt went as far as to back a Russian proposal on the Syrian crisis in the UNSC, full-well knowing it would lead to tensions with Saudi Arabia, its most crucial regional ally; or at least it was.

What's the smart money say...

The Wikistrat exercise – experts trading views, contributing answers and analysis to several key questions in a sort of pop-up think tank – had at least one key finding and it should come as (seemingly) good news for those followers of geopolitical tinder boxes and/or Lifetime network movies: Russia can never take the place of Egypt’s main strategic allies.

 

Wikistrat analysts believe that despite a genuine desire by both leaders to enhance bilateral relations, Russia will not be able, or willing, to replace Saudi Arabia and the Gulf States as Egypt’s main financial backer; nor will it be able to substitute the U.S as its main strategic partner. Said one contributor following the thought exercise: “Egypt's relationship with Russia is quite shallow and lacks serious depth."

 

The more recent upturn in relations with Russia is primarily a function of the deterioration of bilateral relations with the U.S. and the beginning of hedging behavior during a period of turbulence and isolation, the analyst added.

 

"Russia cannot and will not replace the financial support provided to Egypt by the United State and the Gulf.”

 

More reasons to not panic: Military cooperation seems likely to be limited to arms purchases of Egypt from Russia, military drills, and perhaps some (again, limited) cooperation in areas of common strategic interest. This could include Libya - where Egypt and Russia both support Khalifa Haftar’s Libyan National Army. The majority of Wikistrat's analysts believe that the plan to set up a Russian military base on Egyptian soil will not materialize, and that Russia will not directly intervene to help the Egyptian regime confront its own security threats.

 

However, and this could be categorized as worrisome, there is significant potential avenue for continued cooperation: Egypt badly needs foreign investment in its awakening energy sector.

 

Russia could benefit from Egypt’s energy resources and in the long term could finally lock-in Southern Europe to Russian suppliers of natural gas. In December 2016, the Russian energy firm Rosneft bought 30% of the stake in Egypt’s major gas field, Zohr, from Italy’s Eni. Additionally, Russia plans to build Egypt’s first nuclear plant in Dabaa.

 

How likely is that Dabaa plant (gulp), you might be asking? Of 12 Wikistrat analysts, 11 agreed; YES it is likely to materialize. 

EDITOR'S NOTE

This is a Hedgeye Guest Contributor piece written by Rich Blake a veteran financial journalist and the former head of content at the Investor Intelligence Network. Blake is now a contributing analyst at Wikistrat, the world's first crowdsourced geopolitical intelligence consultancy with over 3,000 subject-matter experts.


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There's No Other Way to Say This: Fed Forecasts Are Flat-Out Wrong

There's No Other Way to Say This: Fed Forecasts Are Flat-Out Wrong - yellen image1

 

The Federal Reserve raised rates yesterday. "The simple message is -- the economy is doing well," Federal Reserve Chair Janet Yellen said following yesterday's Federal Open Market Committee meeting, which makes U.S. monetary policy decisions.

 

That was a smart decision considering, the U.S. economy is, in fact, accelerating. We have a GDP tracker that tells us just that.

 

But the Fed is clueless about what's next for the U.S. economy. Yes, clueless...

 

Following yesterday's rate hike decision, the Fed cut the top-end of its 2017 GDP forecast and now has a range of +1.7-2.3% year-over-year growth. Meanwhile, the Atlanta Fed's GDPNow forecasting algorithm suggests the U.S. economy will grow just 0.9% in the first quarter of 2017. "That's really funny," says Hedgeye CEO Keith McCullough in today's Early Look:

 

"I have no idea how the Atlanta Fed  “tracker” is down at +0.9% GDP for Q1, but Darius and I quite like it when establishment economics departments have wildly varying forecasts vs. our own.

 

As you can see in today’s Chart of The Day, the Atlanta Fed’s GDP forecasts have 230 basis points of intra-quarter revisions (tracking error) since inception on a number that has a typical 0-300 basis point range. #lol"

 

There's No Other Way to Say This: Fed Forecasts Are Flat-Out Wrong - Chart of the Day 3 16 17


Cartoon of the Day: Et Tu, Janet?

Cartoon of the Day: Et Tu, Janet? - 03.15.2017 Fed Day cartoon

 

The much-anticipated Fed rate hike happened without a hitch today. "The simple message is -- the economy is doing well," Federal Reserve Chair Janet Yellen said at the news conference following the FOMC meeting.

 

 

Click here to receive our daily cartoon for free.


Investors Have Begun to Smell a Rat In the Bond Market

This guest commentary was written by "Fed Up" author Danielle DiMartino Booth. Make sure to watch her recent conversation with Hedgeye CEO Keith McCullough.

 

Of all virtues to which we must ultimately aspire, forgiveness demands the most of our souls. In our naivety, we may fancy ourselves man or woman enough to absolve those who have wronged us. But far too often, we find our pool of grace has run dry. So deeply burdened are we by our emotions that grace to us is lost.

 

How many of us have the strength of resolve to let bygones be gone for good? Those of the cloth recognize the damage self-inflicted scars sear into our souls as they seek to guide us through life’s most difficult journeys. They pray for our deliverance from a painful inner turmoil and with it the peace only forgiveness can convey.

 

None who have ever heard Don Henley’s "The Heart of the Matter" could be blamed for thinking divine inspiration itself came down from the heavens to spawn those longing lyrics. But it isn’t just the words that scorch their way into your memory, it’s Henley’s tone, the raw pain that pierces every time you’re caught off guard by the mournful ballad released in 1989.

 

 

Henley sings of our feeble struggle as no other, grasping for our collective release in humility. “The more I know, the less I understand. All the things I thought I’d figured out, I have to learn again.” In the end, Henley hands down the cruelest of convictions: If you truly want to vanquish your demons, you must find the strength within to forgive.

 

Astute policymakers might be saying a few prayers of their own on fixed income investors’ behalves. The explosion in corporate bond issuance since credit markets unfroze in the aftermath of the financial crisis is nothing short of epic. Some issuers have been emboldened by the cheap cost of credit associated with their sturdy credit ratings.

 

Those with less than stellar credit have been prodded by equally emboldened investors gasping for yield as they would an oasis in a desert. Forgiveness, it would seem, will be required of bond holders, possibly sooner than most of us imagine.

 

Investors Have Begun to Smell a Rat In the Bond Market - dimartino banks

 

For whatever reason, we remain in a world acutely focused on credit ratings. It’s as if the mortgage market never ballooned to massive proportions and imploded under its own weight. In eerie echoes of the subprime mania, investors indulge on the comfort food of pristine credit ratings despite what’s staring them in the face – a credit market that’s become so obese as to threaten its own cardiac moment.

 

It may take you by surprise, but the U.S. corporate bond market has more than doubled in the space of eight years. Consider that at year end 2008, high yield and investment grade bonds plus leveraged loans equaled $3.5 trillion. Today we’re staring down the barrel of an $8.1 trillion market.

The age-old question is, and remains:  Does size matter?

 

Ask yourself, did size matter as it pertained to the mortgage market way back in 2006, when it peaked in size at $13 trillion? (That was rhetorical in the event you weren’t on Planet Earth at the advent of all modern times’ meltdowns.) Still, it’s the why behind the growth of any given market that matters most. In the case of both markets, the credit rating agencies have helped investors sleep at night, a fact that might now keep you up at night.

 

First, a disclaimer. Of course, speculative grade debt is riskier than its investment grade brethren. The vast majority of investors in the go-go junk market know this and are hopefully buckled up as such, especially if a true rate-hiking cycle is about to test their mettle – more on this later.

 

Still, it’s the blind abandon with which issuance has risen among investment grade (IG) issuers that should, but has yet to, give supposedly conservative investors pause. Consider that in 2011, a (then) record $741 billion was sold into the IG market. As an endless encore, in every single year that followed, issuance has shattered the prior 12-month record. 

 

Last year alone witnessed $1.28 trillion in issuance. As for all the rate hike anxiety permeating the airwaves, 2017 also appears to be in it to win it — $254 billion was sold in the first two months of the year, $20 billion more than the same period in 2016. Investors might soon have to call upon Archimedes’ concept of exponentiation to sufficiently capture how very large the numbers have become.

 

You might wonder how the health of the corporate bond market is faring as it bulks up. As Bloomberg reported last week, you’d have to time travel back to 2002 to get back to the last time IG issuers were carrying more debt vis-à-vis their profits. The sticking point is leverage ratios tend to peak as an economy is just emerging from recession, as companies’ revenue streams hit their nadir.

 

Today, though, as we’ve been told in tsk-tsk fashion, the economy is at the precipice of an accelerating trend. That’s a good thing as companies have sold a heck of a lot more debt than their profit growth justifies, leaving their rainy-day cash to cover their massive, mounting obligations at the lowest levels since 2009.

Debt: The Good, the Bad and the Ugly

The good news is that on the surface, the chances of a hiccup appear to have diminished. According to credit rating agency Standard & Poor’s (S&P), 2016 ended on a relatively better low note: Some 68 global IG issuers were at risk of being downgraded speculative grade, five fewer than the last time the data were compiled at the end of the third quarter.

 

S&P refers to these envelope-pushing issuers as ‘potential fallen angels,’ with ratings at the cusp of crossing over into junk-land. Though you might be thinking one notch on a ratings scale is just that – one measly notch – crossing that line in the sand makes a huge difference for borrowing costs. The yield ‘spread’ above Treasuries paid by junk issuers is typically about double that of what IG issuers pay.

 

The not so good news is that the universe of potential fallen angels remains at historically high levels. The latest read of 68 potential fallen angels is identical to what it was last summer and appreciably higher than as recently as 2015’s first quarter when 42 issuers were at risk of downgrade to spec grade. Moreover, the divide that began to open between potential rising stars – those with the potential to be upgraded into the IG sphere – and potential fallen angels remains at the current cycle’s wides.

 

Perhaps most worrisome is the sector at the greatest risk of downgrades — that is, financials. Years ago, a high yield strategist remarked that declining commodities prices would take their toll in two waves – first, the actual commodities producers, and second, the financials who banked them as the initial commodities cycle became super-sized in magnitude. Bank balance sheets are highly susceptible to a nasty contagion effect.

 

And yet, here we sit watching those oil prices Janet Yellen lectured us would be at ‘transitory’ lows (several years ago) decline anew. God help us if crude’s latest swoon presages a broader downturn. Precisely because leverage is rising among IG borrowers, economic growth literally has to hang in there.

 

If growth even slows, or worse, contracts, all this ballyhooed record issuance among IG issuers will devolve into unprecedented levels of potential-to-actual fallen angels. It will be as if the heavens have opened up as their wings burn and they tumble back to earth.

 

Of course, downgrades don’t necessarily denote defaults. The Start of the Matter may nevertheless require forgiveness in some form as refinancing needs are also now at record levels and must be met. If the Federal Reserve does not intervene, markets are likely to revert back to pure price discovery mechanisms; they will be brutally agnostic to the rate environment to say nothing of the economic backdrop.

Investors have begun to smell a rat

IG exchange-traded funds (ETFs) have slid more in price compared to their high yield ETF peers since the surprise U.S. election that set rates rising. But unlike junk’s magnificent rebound since then, IG has yet to stage a return rebound.

 

It all comes down to refinancing risk. According to S&P’s competition down the block, Moody’s, the refinancing needs of both IG and spec grade issuers will hit record levels over the next five years.

 

Spec grade issuers’ five-years-out refinancing needs have officially crossed the trillion-dollar threshold. Some $1.06 trillion will come due between now and 2021, up from $947 billion in last year’s refinancing risk study and double what they were ten years ago. In the event you’re concerned spec risk has been overly downplayed in this missive, rest assured, the same dynamics that propel record fallen angel levels will be the mother of all default-rate cycle accelerants. File that one away in the ‘actual forgiveness’ to come file.

 

As for the IG space, $944 billion comes due in the five years through 2021. But here’s the kicker – the need to roll over debt is going to come on much more quickly for IG. Maturities are roughly evenly distributed over the next five years as opposed to the needs in spec grade, whose rollover risk gains speed and crescendos in 2021 with a record $402 billion in refinancing coming due.

 

Is that why junk is trading more richly than IG? The yield at which spec trades vs. its Treasury equivalent has only been wider 13 percent of the time over the past 17 years (2007 should provide you comfort because…?). IG on the other hand has traded this ‘tightly’ in only 25 percent of the times records have been kept.

 

Would the start of the matter – the prospects for debt forgiveness and debilitating defaults – be threatening so were it not for central bankers’ meddling ways in markets designed to determine their own damn prices? The ashes will indeed scatter. They will let us know.

EDITOR'S NOTE

This is a Hedgeye Guest Contributor piece written by Danielle DiMartino Booth. DiMartino Booth spent nine years as a Senior Financial Analyst with the Federal Reserve of Dallas under Dallas Federal Reserve President Richard W. Fisher. Her brand new book “Fed Up” explains why the current Federal Reserve system is due for a serious revamp. DiMartino Booth currently runs Money Strong, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.


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