• GB Davis

Recap / Scorecheck: Our Fed and Risk Calls

Fed Primer & FOMC Spoiler - 9/13/17 : " There will be some nuggets in next week's release, in the ECB Presser and in the Fed Press Conference - but there is no Fed hike." Result, No Fed Rate Hike.

Market Update - 9/21/17 : " There is now a Fed Hike fully priced for December 2017 "

Almost October - 9/26/17 : "Before the MLB season, we made our Six Division Selections - AND (drum roll please) - ALL Six are in FACT going to win their respective divisions."

Fed Hike - 10/13/17 : " Despite the Fed on the tape, wavering a little, the next Fed hike is still fully priced in for December 2017, at present." 

Fed Primer - 11/1/17 : "We did not think it worth mentioning, b/c it is a 0% Probability, but there is No Fed Rate Hike Today. The most interesting thing to come out of the meeting and release on the hour, esp. in light of the soft PCE (inflation) data released recently, is how the Dec Hike - FULLY Priced in changes or stays static. I'll give you an update if the UST Market moves and softens on its view of a 100% FULLY Priced in 25bps Fed Funds Hike in Dec 2017 at its last FOMC meeting; later today, next week and certainly prior to the Dec meeting."

Da Fed - 12/14/17 : "We've been telling you for quite sometime, that there would be a 25bps hike (12/13), and there was a 25bps hike.  That makes us correct on 100% of our Fed Calls (bar none)."

Fed Hike Outlook - 5/10/18 : "On the Fed - we are still fully priced +25bps for mid-June Fed meeting.  We are still fully priced for +25bps for Sep Fed meeting.  Some interesting changes are hapening with the Dec Fed meeting, within the last 24-hours, the market - despite increasing inflationary pressures - has moved to a ~10% chance of a Fed hike in Dec from ~10-20% before; this compares to 0% from one month ago."

Value and Cash - 5/12/18 : "3Q17 we told you that technology (US equities) would outperform late cycle - and it did (we may have even thrown some names out there; and if we did, I am sure almost all of them, did excellent relative to benchmarkets (and supposed expert picks).We've been watching the Yield Curve (YC) - it is the flattest, now, it has been since 2007 - time to panic?  Not quite yet.  USGDP remains healthy; with circa benchmark level inflation, nothing to be concerned about (as of yet; but it can be sneaky)BoE on hold (despite Carney hitting the tape this week to the contrary) - we're going w/ HSBC here (cut UK GDP 2x in the last few weeks and have, themselves, called the BoE on hold), even though Canadian Carney does head the BoE - we (mostly, not entirely) dismiss his comments as trying to keep some upward Gillt spread through academically empirically tested information guidance to the Street, and nothing more."

Italy (WSJ) Snapshot Must Read and Other Pertinent Actionable Info - 5/30/18 : "Observations from the Euro bond market sell-off: (i) the severity matters, with the spread of Italian 10-year over Bunds back to late-2012, i.e. just after "whatever it takes;" (ii) there is contagion to other systemic sovereigns; and (iii) fair value of EUR/$ is 1.05 or lower. " 5/30 EUR/$ at 1.17 as of 4/1/19 1.12

Europe - 6/14/18 : " September hike (+25bps) still fully priced in."

Two Turn Tables & a Microphone - 6/30/18 : "We had previously called for Yield Curve Inversion around September 2018 (we think this is the earliest that it could happen, as we subsequently cited to).  It will be interesting to see what happens post September 2018 Fed 25bps hike (happening), combined with slowing growth in EU (already happening); EM and EM FX weakness (strong USD everywhere; going to that 1.05/.06 to 1.10 v Euro level we cited not too long ago? still trending that direction)"

Market Currents - 7/6/18 : "September +25bps hike still fully priced in (has never changed).  The December hike (+25bps); over the last month - despite and in contrast to the UST YC Flattener - is now HIGH.  In our estimation it sits, today, at 87.5% chance of a hike (from 25% at our last briefing on such; it moves around that much, yes).  Further, we, presently believe that the tariffs will stoke inflation (and that is their intent; by all global CBs, sounds very conspiracy doesn't it) - and - this will be the catalyst to hike through inversion until it breaks - that is the prescription people.  By break we mean defaults; followed by equity de-risking.On the last bullet, it appears 1yr UST yields are negative?  I heard that was the case perhaps in the last 24 hours?  True?  Irrespective, the thing to queue on - though being mindful of the tariffs (and looking to economic indicators that could shorten (but most likely not entirely remove) the typical equity runway post YC inversion (e.g. FOMC Minutes released show that some firms are dialing back capital investment out of a concern over a trade war; and we noted in the NY Fed the drag from PCEs this week; that's very near real-time info).  The 2-10 inverted in Dec '88, May '98, and Jan '06. S&P 500 peaked 19, 22, and 21 months later. It gained +33.2%, +39.6%, and +22.3% AFTER the inversion (h/t Ryan Detrick, Senior Market Strategist, LPL Financial Member FINRA/SIPC of Fort Mill, SC)Has the U.S. Credit Cycle Peaked? While rates are higher, IG was issued at lower coupons and Debt-to-GDP is relatively high viewed historically - however, EBIT-to-Int Exp Ratios need to be evaluated here too.  But, if they are going to globally stoke inflation and a recession via tariffs - then they want to collapse non-productive debt; and re-cap.  So these are interesting cross-currents.  We have not dealt w/ the global tariff issue before.  If there were no tariffs- we would easily still have 18-24 months of "risk-on" and equity upside.  There may likely still be upside; it may be in select names.  Queue Cramer's sensibility here - and, yes KASS with his SPY Short?  Early, he is early often (a lot).  Don't even bring up Shiller here....."

Da Fed - 7/14/18 : "Cleveland Fed was on the tape this week (sorry about not giving the heads up of weekly macro events) - and signaled Dec Hike (reading the tea leaves).  Right now we (as in the royal we, me) see an approximate 81% chance of a Dec Hike (+25bps) following on the heels of +25bps in Sept (that we have never changed our opinion on as we have w/ Dec). "

The Most Important Thing You'll Read Today (FACT) - 7/16/18 : "While President of the Minny Fed, Neel Kashkari (someone I do admire for his intellect and service), is on the tape today indicating that he sees no reason for further rate increases and that it could trigger a recession--that's straight up Krugman/Summers idiocy; where we should expect it; but not from Neel. So, what really happened?  The net effect of the economic reports today is that the market has now fully priced in a +25bps rate increase in December (in addition to the +25bps fully priced in for Sept).  Who is right more often me or the Fed heads?  Remember, can't fight Mr. Market.  We will let you know if this Dec hike changes; but for the time being (and sometimes this changes fast - this Thursday has a ton of economic releases) it is on.

Tomorrow, BoE Carney on the tape; and, Fed Powell (he'll warn about tariffs and the like) - and we'll see if he supports Fed Bro Neel and tries to talk the market down as Neel did (Neel's not stupid, so he thinks the YC forsages all? Today, I'm in the +25bps Dec Hike camp - I will let you know when that changes."

Market Update - 7/18/18 : "On the UST Front: 2yr-10yr Spread now at 26 bpsMacquaire out front stating that the Fed will end QT in 3-6 months - so after the next hike or two. this, having not view their comments in detail on same, was what we allowed to in noting that the Fed view QT in a rate hike cycle, now as the equivalent of a PDK Double Clutch for the first time - than can end QT; but still tighten - note that Powell on the tape indicated "years" of strong employment  - and - both he and Congress concerned about the lack of wage growth flowing through (esp. from stronger S&P earnings - eventually people will get tired of share buybacks)A new metric is drawing closer attention: 1yr Fwd Eurodollar - 2yr Fwd Eurodollar (or '19 to '20, generally) - and this curve just invertedThe Dec +25bps hike is still, currently, fully priced in (there has been no doubt about the +25bps in Sept) - however, it has slightly pulled back over the past few days - but still fully priced"

What's Happening - 7/20/18 : "Sept +25bps Fed Hike fully priced; Dec +25bps Fed still fully priced in after this mornings economic releases - we will revisit the Dec Hike after PMIs of Tue next week (it is tenuous at the moment despite our resolve) "

First Hot Contrarian Take on TSLA? Good Takes - 7/23/18 : "Our track record and insightful quips on TSLA have been SPOT On - the only thing that can pretty much save TSLA in the long-run is a Gov Hyperloop deal - in the interim; why is this company a public company??

August 12, 2017 - H-Fin "High yield has started softening, albeit slightly this month.  Do note, the equity markets are shut to Tesla, it had to access the Junk Bond market this week - think about that.  Their cap structure can't support senior debt.  I did not like at the offering, but if it has any form of PIK toggle - run for the hills (not investment advice).  Hope that Reno Battery Plant is worth it.  Risky Business."  TSLA Equity Price $342.94August 13, 2017 - H-Fin "the equity market is shut to Telsa and they are issuing Junk Bonds, then that is just another data point to be mindful of. " TSLA Equity Price $342.94October 14, 2017 - H-Fin: "I am not there (credit cycle rolling over) just yet, as inflation is low, rates are still relatively low, these signs (above) are mostly normal cyclical signs, true poor credit u/w losses are no where to be found (as of yet), and also growth (relatively speaking) is okay.  I think Tesla is a fake company (though hyperloop could be interesting).  I think, like Downtown Josh Brown, and something we mentioned previously, when the real autos perfect electric cars, Telsa, America's Most Valuable Car Company valuation will come crashing back down to earth.  Daimler AG has the capability to do everything Tesla could ever hope or dream to, only 10x better - and they will - where sensible.  Daimler will not be taking you to the moon anytime soon, they will not care about any first mover advantage there.  Daimler used to be a partner with Telsa, they learned what they needed to - and then sold.  They could care less.  Remember when we told you that Tesla couldn't raise equity and had to tap the High Yield bond market, and then those immediately traded below par?  When a hard Tesla sell-off happens, IF it drags other QQQ equities with it; keep a shopping list for strong tech that sells-off (e.g. Apple, Google, etc. etc.) "  TSLA Equity Price $315 TSLA Equity Price today ~$303/$304.

There are clearly Accounting games going on here.  But, the flip side is they can beat NEGATIVE earnings (that's a thing, it's usually called VC though).  Further, there are some serious top heavy institutional accounts in this that like and have bought the story and will Bill Miller it into the Ground (say how's Bill Miller's big bet on BitCoin doing? which we laughed at) - TSLA gets capped when it's next funding gap comes up (but they're asking their suppliers for discounts) - or - if able to finance; then, when Tech sells-off in a downtown - this will be a Beta-Breaker to the downside.  At present, from a distant view, the former looks like it could happen sooner than the latter.  the HY issuance, 90/100s? where's it at - not par stuff.

So once again, we were right; and we were right at the right time."

US GDP - 7/27/18 : "December +25bps still fully priced in (September 25bps still fully priced in)"

Week Ahead, BoE Hike, Fed No Hike - 7/27/18

Market Update - 8/20/18 : "Sept +25bps still fully priced in.  We also, still, see a 25bps Dec hike - we will let you know IF, and WHEN, that changes"

Market Update - 9/10/18 : "we're still fully priced +25bps in Sep, and another +25bps in Dec on Fed Funds.  We are seeing a little bit less than 50-50 on March right now. "

Da Fed - 9/24/18 : "As we have relayed for quite some time, the Fed is set to hike +25bps on Sept. 26.  An add'l +25bps, we feel, is priced in for Dec-19.  Since last week, March odds of a hike have declined.  Last week's economic data for 3Q18 were basically flat - housing starts picked up (which seems odd given interest rate levels this late cycle absent meaningful pick up (across the board) in wage growth (which never materially materialized (pardon the alliteration) - also Lumber prices nose dived after May of this year (maybe those Refi Rate Levels in RMBS, follow-on?)."

March 2019 Hike? - 10/3/18 : "If you asked me yesterday about a March Fed hike, I would have said, No.  Today, I view with 90% likelihood that there is another 25bps in March - but recall, 90% is not good enough for me - so I don't see this priced in yet until our view is 100% - but it's close enough to bring to your attention as well as provide some backdrop on the movement: ISM non-mfg hit an all-time high and had a 5 standard deviation upside move in September (growth). Oil prices spiking (inflation). So with jobs stable, defaults low, this was a big move in UST markets today. Despite RUS2000 weakness.  I'm currently pondering Hedgeye's Quad 4 4Q18 call in the context od this new info."

Market Sell Off - 10/10/18 : "The futures market is showing more US domestic equity Carnage tomorrow.  This appears to be a combination of liquidity (QT) and rates.  Yesterday, key LT US bond trends were breached for the 10 and 30yr UST.  Certainly tariffs will not help such, but they have other purpose.  Unfortunately, at the same time as this trade war, the US deficit is continuing to increase - which is / remains one of my biggest criticism s of this administration, which prides itself on being the fiscally prudent party.

It will be interesting to see if and where the equity correction stops. The Dec +25bps is still fully priced in. Since yesterday, the prospect of a March hike is now less than 50% in our view."

Year End Prep - 10/13/18 : "We may see more equity weakness related to the forthcoming Dec +25bps Fed Hike (just as we did this week following the Sep Hike; and a similar pattern following the Mar hike (but absent the June hike). As such, we're culling short-side tax loss selling targets for closer review - for the last two weeks of '18. Right now we are focused on Large and Mega Cap US Domestics and ADRs.  We are reviewing: GEBanks, including Regionals - cross-checking against Bauer RatingsAutos (GM, Daimler, Hyundai)Chinese ADRs of size near 52-week lows (same for all these here) Italian ADRs We feel some of these in mid-Dec could be compelling January 2019 Put plays. We'll update this thesis in December." $GE 10/15 Open, $11.78 12/31/18, $7.28.

Fed (eek, brakes) - 10/26/18 : "Well, in a rare reversal, though we did state what would give us pause for caution on a March 2019 hike: we no longer see a March hike:

(1) oil has sold off

(2) inflation looks headed lower

(3) today's latest ECRI FWD US GDP negative

(4) Philly Fed this week, disappointing

(5) Equity weakness

(6) YC flattening

(7) Commodities prices (eg construction materials down)

(8) CAT earnings? Channel stuffing?

(9) ECB, paused, as expected

(10) Italian Yields?

(11) German Bunds v USTs? Against prior recessions?

(12) technology sell off

At present we still +25bps for Dec.  November corporate buybacks may provide some equity basing."

November 9, 2019 : "JPM lower their price Target on GE to $6.  To put that in context, it opened the year at $18.15 (whoosh)"

Da Macro - 11/9/18 : "We have not changed our opinion on the +25bps Dec Fed hike.  We have changed it once or twice, data dependent on Mar, and currently we see no hike there."

Rate Hike Cycle End Near Absent Artificial Inflation - 11/17/18 : "Cramer is on the tape blasting the Fed. We still see the +25bps in Dec (having never wavered there).  Last time we checked in, we pulled back on a March hike.   Our current view (ceteris paribus) is that the Dec hike is the last one of the hike cycle.  We believe that the Fed will go on pause in Mar.  We believe between Mar and June it will evaluate QT and may put that on hold (while POTUS slams the Fed).

The only outlier we see is inflation from Tariffs, which has been announced but not felt on main Street, yet.  For example, on 1/1/19 price increases previously announced go into effect.  It's possible with a strong USD, and relatively strong US GDP, and a healthy employment market, new evidence of wage pressures could deepen.  At the same time the US economy is able to wait out deep structural issues in EU (eg Italy), and other global weakness.  They will not be forced to cut for some time.  If they time a 12-24 month recession, floating on a relatively strong USD, then some future  cuts can coincide with Corporate maturities and Refis easily absorbed, at most weighing on valuation.

We pointed you to the announced UsT issuance of Tips of the 5yr duration.  2020-2024 could look relatively good for valuation levels (so keep a buy list for such time) (we will update this broad time range in due  course, in the interim read up on "scaling""

No Pollack Jokes, compelling Macro - 11/24/18

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Fed Update - 11/26/18 : "December +25 bps - we have never wavered here. March +0 bps - PAUSE (per our last update, no chg). Anyone who doubts a December hike that works in the Finance Industry is dumb.  FACT"

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