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CHART OF THE DAY: The "Ber-nank" --- "...Just Stimulating the Economy..."

 

 

CHART OF THE DAY: The "Ber-nank" --- "...Just Stimulating the Economy..." -  chart 2

 


Bond Boys

“Big boys don’t cry unless their last name is Boehner, or they’re a banker in need of a bailout.”

-William H. Gross

 

Bill Gross is one of the buy-side’s best writers. And in his Investment Outlook note from PIMCO yesterday, that was one of his best one liners. There’s nothing quite like having the Big Boy discussion out there about what’s actually happening in the marketplace.

 

What’s happening out there is that The Ber-nank and the bullish Bond Boys are all of a sudden getting smoked out of their holes by inflation. And the manager of the world’s biggest bond fund isn’t happy about it.

 

Before I recap some of Gross’ snarly attacks on The Ber-nank (he one-upped me!), let’s preface this Big Boy argument not with what should be happening to bond yields (Bernanke’s QG2 promise is that they’d remain low), but what is happening to bond yields:

  1. 2-year US Treasury yields - continue to make higher-highs and higher lows since Bernanke made his Quantitative Guessing 2 promises. This morning 2’s are busting a move towards 0.67%, which is a +24% move for the week-to-date and +103% move since the 1st wk of November
  2. 10-year US Treasury yields - broke the sound barrier of their December highs yesterday and at 3.52% are +38% higher since the 1st wk of November.
  3. 30-year US Treasury yields – continue to make higher 9-month highs, pushing towards 4.64% yesterday which is up +17% since the 1st week of November, and up +31% since the 1st week of September.

So what gives here? Isn’t Big Government Intervention the elixir of American life?

 

Obviously a few things seem to be going the wrong way on Bernanke here - as they should when Global Inflation Accelerates. After all, there is always another side to any government supported trade. Debauching the US Dollar = inflation. And inflation kills bonds.

 

Now for a more sophisticated Big Boy dress-down on the matter, let’s turn back to what Bill Gross has to say about this:

  1. “A low or negative real interest rate for an “extended period of time” is the most devilish of all policy tools.”
  2. “This is the framework that has been created by modern-day policymakers who have innovated far beyond their biblical counterparts.”
  3. “Today’s rock bottom yields, however, have less to do with disinflation and more to do with providing fuel for an asset based economy that promotes unsustainable wealth creation and false confidence in perpetual capital gains.”

Well done Mr. Gross. Well done.

 

You see, the Thunder Bay Bear isn’t balled up in his ice fishing gear clawing at Bernanke’s beard all on his very own here. From Jim Grant in New York to Bill Gross in California, this is turning into a whale hunting expedition - with the hunted being the Chairman of the Fiat Fools.

 

Yes, I am pushing my own book here because I am long inflation (short bonds) and Gross is trying his best to protect his book (all bonds), but no matter where Bernanke may want this little inconvenient critter called real-time market prices to go, there it is…

 

Now, to be fair to the perma-stock market bulls who claim that they don’t see any inflation anywhere (despite being long commodity and energy stocks), there are 2 cornerstones to the argument that rising inflation and rising borrowing costs won’t hurt US stocks or corporate margins (even though borrowing costs are at all time lows and operating margins are at all time highs):

  1. This move higher in US interest rates is all about US growth accelerating
  2. And if US Growth doesn’t accelerate from here, we’ll blame the snow and/or dial up The Ber-nank for some QG3

There is also the infamous “flows” argument, but US stock market history fans should be reminded of what happens to legendary long only guys like Bill Miller when “the flows” stop…

 

Interestingly (and not ironically in terms of market timing), according to a Bloomberg headline this morning “Bill Miller Is Back On Top”…

 

Can someone get me a quote on what a dollar invested with ole Bill at the last US stock market top (2007) looks like today (give the poor guy some marking-to-model and don’t adjust that dollar for its debauchery).

 

I guess another angle you could take on why the Bond Boys are bitter is the upcoming calendar of events in US Congress:

  1. Midterm Message - the newly minted chairman of the US Financial Services Sub-Committee on Domestic Monetary Policy (Ron Paul) will be hosting his first dance with Ben Bernanke in Washington, DC next week (February the 9th)
  2. US Budget Deficit - at some point in the coming week, President Obama needs to unveil the alchemist draft of the US Federal Budget (don’t forget that the CBO just raised the Budget Deficit forecast by 46% for the next 3 years, so Barry has some pencil pushing to do).
  3. US Debt Ceiling – that needs to be addressed over the course of the coming month because, in theory, America needs to make a decision on this before March 4th, or our creditors might get a little peeved.

Or are they already right p.o.’d? If you were The Creditor of this nation (China) and watched Geithner mimic Larry Summers’ hand signals on C-SPAN as he threatens the white wall of Congressional stares with “the alternative”, wouldn’t you be?

 

This morning, Timmy’s assistant at the Treasury for financial markets, Mary Miller, said this about raising America’s $14.3 TRILLION debt ceiling: “We expect that Congress will do the right thing.”

 

With all due disrespect for what these government people have considered “the right thing” for the last 10 years, I’ll stay with the right risk management call that we’ve been making here in Q1 called “Trashing Treasuries.” (email if you’d like the 50 slide Q1 Macro Theme deck). Big Boys don’t cry wolf.

 

My immediate term support and resistance lines for the SP500 are now 1292 and 1311, respectively. We remain bullish on inflation and bearish on bonds. Our latest call to short Treasuries on the short end of the curve was made at 320PM EST on January 27th, 2010.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bond Boys - HeutLeut


Suffocating Stagflation

This note was originally published at 8am on January 31, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It’s nice and breezy here. In Cairo one suffocates.”

-Hosni Mubarak

 

Suffocating your citizenry with stagflation is apparently a problem; particularly when that citizenry is young, hungry, and unemployed. By definition this is the Egypt you are seeing on your flat panel TVs today.

 

Hosni Mubarak  became the 4th President of Egypt in 1981. While this may be a very old country (established in 3100 BC), this 21st Century Social Revolution is being driven by the very young. Almost two-thirds of Egyptians are under the age of 30 years old , and of the 79 million people who live in Egypt, approximately 40% of them live on less than $2 a day.

 

The Egyptian government has been telling its people that inflation is currently running around +12%. The people of Egypt obviously don’t believe that. They shouldn’t. However they do believe that the country is running double-digit unemployment. They don’t have jobs.

 

Captains of Keynesian Big Government Intervention don’t use the word ‘stagflation’ very much for a reason. The last time these bubble makers plugged the world with stagflation was in the mid-to-late 1970s. That’s when US Federal Reserve Chairman, Arthur Burns, was attempting to monetize America’s debt as President Jimmy Carter bet that it would not create any globally interconnected risk. Sound familiar?

 

At Hedgeye, we call it stagflation when real-world inflation readings are growing faster than economic growth. Even if we were lemmings enough to believe the Egyptian government on a +12% inflation number, that would be plenty enough to justify calling this situation for what it is. Egyptian GDP is only running +5% at this stage of what Groupthink Inc. in Davos, Switzerland would have you believe is an “emerging market boom.” It’s sad.

 

We’ve been berating this point for the last 6 weeks, because it’s time. It’s time to recognize what America’s debauchery of the US Dollar is doing to global inflation. If US monetary policy makers are still in the camp of the willfully blind and want to believe there’s no real-world inflation out there because The Ber-nank’s conflicted and compromised calculation of CPI says so, Godspeed having the world agree with them on that.

 

And for all of the Fiat Fool fans who are still out there cheering this on because it’s good for the inflation in our portfolios, here’s some global starvation math we can’t hide from – immediate-term inverse correlations between the US Dollar Index and 3 major global food prices:

  1. Corn = -0.91
  2. Rice = -0.90
  3. Wheat = -0.85

Those are extremely high (and alarming) correlations. So the next time someone tells you that the US Dollar and the policy that backs it doesn’t matter to the price of the #1 food staple for 3 BILLION of the world’s people (rice), forward them the math. Risk managers like me wouldn’t be perpetuating higher food prices by trading them with a bullish bias if we didn’t fully expect American policy makers to let its currency burn.

 

Burning Bone? Pull up the chart. The US Dollar Index is down for 4 out of the last 5 weeks and down almost 4% since the 1st week of January.  Chaos theorists don’t have to look very far to find that incremental grain of sand that tipped the Egyptian pyramid of risk into turmoil. This is what you get when you debauch the world’s reserve currency. Global Inflation is a policy – and it’s priced in US Dollars.

 

Inflation kills emerging markets. Inflation kills bond markets. These are historical facts and they are also reflected in last week’s bearish price action in emerging markets:

  1. Egypt = down -15.7%
  2. Chile = down -4.2%
  3. Turkey = down -4.1%
  4. Brazil = down -3.5%
  5. India = down -3.2%
  6. Thailand = down -2.5%

We’ve been writing about Chinese Growth Slowing As Inflation Accelerates for the last few months as well. Chinese Equities, at down -2% for the YTD, are now OUTPERFORMING 15 other country equity markets, including all of the ones on this list. Inflation’s contagion is broadening its base.

 

Stagflation doesn’t just stop when a politician tells it to. Stagflation is sticky. Since The Ber-nank opted for Quantitative Guessing (QG2) with his fear-mongering friends in Jackson Hole, WY, the 19 commodity component CRB Commodities Index has inflated by +27%.

 

While that may be up less than what US stock market volatility (VIX) is up in the last 2 weeks (+29%), that’s still up a lot – and we think that both globally interconnected markets and the people living in this world outside of Washington, DC have noticed.

 

Since the beginning of 2011, given our outlook of Global Growth Slowing as Global Inflation Accelerates, I have not been bullish on stocks or bonds in general. That’s why I have such a large asset allocation to Cash. Last week, I raised my Cash position to 67% versus 61% at the end of the week prior. I’ve sold all of our oil and German equity exposures (and there are no rules against buying them back).

 

The updated Hedgeye Asset Allocation Model is as follows:

  1. Cash 67%
  2. International Currencies 21%
  3. US Equities 6%
  4. Bonds 6%
  5. Commodities 0%
  6. International Equities 0%

Again, this isn’t an asset allocation model for a fund mandated to be fully invested. This is where I’d be positioned as an individual or family who has made positive absolute returns in all 3 of the last 3 years. We’ll have plenty of opportunities in the coming weeks and months to buy things on sale.

 

My immediate term support and resistance levels in the SP500 are now 1273 and 1288, respectively. On Friday, I covered my short position in the SPY and moved the Hedgeye Portfolio to 8 LONGS and 7 SHORTS. I’ll continue to trade US Equities with a bearish bias provided that we don’t see a close above 1288 in the immediate-term.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Suffocating Stagflation - EGY


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BYI: THANKFULLY NOT A FISCAL 2011 STORY

Fiscal 2011: the good - gaming ops, the bad - timing.

 

 

BYI posted a sloppy FQ2 which we think was expected by the investment community.  North American ship share remain around an estimated 14%, consistent with FQ1.  Gaming operations was pretty much in-line.  The unit growth in the installed base bodes well for future growth.  As we pointed out in our preview, we were worried about the timing of software sales.  Indeed, software sales came in $4m below our revenue projection.  This segment remains BYI’s lumpiest and most difficult for analysts to model.

 

BYI lowered guidance to a range of $2.00-$2.15 from $2.05-2.30.  We are not too concerned with the lower guidance as BYI was not a fiscal 2011 story.  The primary culprits for the lower guidance was Italy, which is looking more like a revenue sharing model rather than straight sale and regulatory delays of around 1 quarter, and Canada system sales which were pushed out until fiscal 2012.  Neither of these issues is too disconcerting.  Revenue sharing is usually preferred as it provides a higher margin and smoother and longer-term revenue stream.  Our fiscal 2011 estimate is now $2.11.

 

It’s no secret we like the long term outlook for the slot suppliers:  huge growth off of trough replacement and significant number of new markets.  What is particularly appealing about BYI’s position is:

  • Ship share gainer – given the new technology platform and introduction of new games on that platform, we think BYI gains sequential share each quarter from its current and artificially low share of 14%.  In the absence of a pick-up in replacement demand which would lift all suppliers, ship share may be a focus in stagnant domestic environment.
  • Participation – BYI doesn’t seem to have the IGT or WMS issues in this segment.  BYI should be a market share gainer here as well.
  • Lower valuation/expectations – BYI appears to trade at a 15-20% discount to the peer group. 

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - February 3, 2011


Equity futures are trading slightly below fair value following yesterday's weak internals which saw major indices close all but flat.  As we look at today’s set up for the S&P 500, the range is 19 points or -0.92% downside to 1292 and +0.53% upside to 1311.

 

 MACRO DATA POINTS:

  • 8:30 a.m.: Net export sales, commodities
  • 8:30 a.m.: Non-farm productivity, est. 2.0%
  • 8:30 a.m.: Jobless claims, est. 420k, prior 454k
  • 10 a.m.: ISM Non-Manufacturing, est. 57.1, prior 57.1
  • 10 a.m.: Factory orders, est. (-0.5%), prior 0.7%
  • 10:30 a.m.: EIA Natural Gas, est. (-187), prior (-174)
  • 8 p.m. Fed’s Kocherlakota speaks in Minn. (Topic similar to Jan. 11 speech)

EARNINGS/WHAT TO WATCH:

  • Dunkin’ Donuts CEO Nigel Travis told CNBC co. may “do something like an IPO” in the future. Sees “no pressure” to do it immediately.  In statement, Dunkin’ reports prelim. fiscal 2010 rev. up 7% to $575m to $580m, global system-wide 2010 sales up 7% to $7.7b, same store sales up 2.3%
  • Gunfire erupted in Cairo’s Tahrir Square early today as supporters of President Mubarak battled with demonstrators. Europe’s Cameron, Merkel and Sarkozy demand immediate regime change in Egypt.
  • Nippon Steel and Sumitomo Metal Industries plant to merge to form world’s second-largest steelmaker behind ArcelorMittal.
  • Bank of America is said to be near an agreement to sell its Balboa insurance unit to Australia’s QBE Insurance. 
  • SharesPost to publish first report on value of Groupon, 10 a.m.
  • Ameriprise (AMP): 4Q op EPS miss
  • BMC Software (BMC): 3Q adj. EPS miss
  • Cadence Design  (CDNS): Sees 1Q EPS 8c vs est. 6c
  • Green Mountain Coffee (GMCR):  Sees 2Q adj. EPS 38c-42c, est. 34c
  • GT Solar International  (SOLR): Raised 2011 EPS view
  • Hartford Financial  (HIG):  4Q EPS beats est.
  • News Corp. (NWSA): 2Q EPS, Rev. beat; evaluating alternatives for MySpace
  • Shutterfly (SFLY):  Sees yr EPS $1.16, est. 98c.
  • Southern Copper (SCCO): 4Q EPS beat
  • Visa  (V):  Reaffirmed view for 2011 rev. 
  • Yum! Brands  (YUM): 4Q adj. EPS, rev. beat

PERFORMANCE:


The XLP and XLY remain broken on TRADE - 7 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.02%, S&P (0.27%), Nasdaq (0.04%), Russell 2000 (0.34%)
  • Month-to-date: Dow +1.26%, S&P +1.39%, Nasdaq +1.85%, Russell +1.91%;
  • Quarter/Year-to-date: Dow +4.01%, S&P +3.69%, Nasdaq +3.67%, Russell +1.60%
  • Sector Performance - (8 sectors down and 1 up): - Financials (0.78%), Utilities (0.55%), Healthcare (0.34%), Consumer Spls (0.38%), Materials (0.16%), Industrials (0.31%), Consumer Disc (0.29%), Energy (0.08%), Tech +0.18%

  EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -197 (-2159)  
  • VOLUME: NYSE 933.47 (-14.72%)
  • VIX:  17.30 -1.87% YTD PERFORMANCE: -2.54%
  • SPX PUT/CALL RATIO: 2.35 from 1.21 (+94.52%)

CREDIT/ECONOMIC MARKET LOOK:

Treasuries were weaker for a third straight session.

  • TED SPREAD: 16.44 +0.406 (2.531%)
  • 3-MONTH T-BILL YIELD: 0.16% +0.01%      
  • YIELD CURVE: 2.85 from 2.87

COMMODITY/GROWTH EXPECTATION:

  • CRB: 343.80 +0.48%  
  • Oil: 90.86 +0.10% - trading +1.12% in the AM
  • COPPER: 454.40 -0.07% - trading +0.29% in the AM  
  • GOLD: 1,329.97 -0.90% - trading +0.26% in the AM  

COMMODITY HEADLINES:

  • Blaming it on the traders....Commodity traders in the European Union may face restrictions including position limits under proposals from the European Commission aimed at curbing excessive price volatility. 
  • Inventories at Cushing, Oklahoma, the delivery point for New York-traded West Texas Intermediate oil, increased 667,000 barrels to 38.3 million, the highest level since the department started keeping records at the storage hub in 2004.
  • Natural gas futures climbed for the third day in four in New York on forecasts of below-normal temperatures in the Midwest that would boost demand for the heating fuel. 
  • Cash premiums for corn and soybeans shipped this month to terminals near New Orleans rose relative to Chicago futures after a Midwest blizzard threatened to hinder grain sales and transportation. 
  • As Australia’s worst floods caused as much as $20 billion of damage to eastern states, 3,000 kilometers (1,900 miles) to the west farmer Pete Mills is battling a Chinese mining company for water after a decades-long drought.  At stake is the output of the country’s biggest wheat- growing state at a time when global food shortages have pushed prices to records. The drought has already prompted the government of Western Australian state Premier Colin Barnett to cut its economic growth forecast for the year to June 30 to 4%, from 4.5%

CURRENCIES:


Dollar gains vs majority of counterparts while euro holds gains vs yen on speculation ECB will signal willingness to tackle inflation at meeting today.

  • EURO: 1.3788 -0.25% - trading -0.19% in the AM
  • DOLLAR: 77.158 +0.12% - trading +0.04% in the AM 

EUROPEAN MARKETS:

  • FTSE 100: (0.41%); DAX: (-0.12%); CAC 40: (1.14%); IBEX: (-1.18%)
  • European stocks slide as gunfire erupts in Cairo and political turmoil in Middle East spreads to Yemena and ahead of the ECB's monetary policy meeting.
  • Europe economic news was constructive.
  • Declining sectors lead advancers 15-3 with construction (1.4%) and healthcare (1%) leading fallers and technology +0.3% and telecom +0.2% heading gainers.
  • Jan Final Services PMI
  • France 57.8 vs prelim 57.1
  • Germany 60.3 vs prelim 60.0
  • EuroZone 55.9 vs prelim 55.2
  • UK Jan services PMI 54.5 vs consensus 51.4

ASIAN MARKTES:

  • Nikkei (0.25%); Hang Seng, Shanghai Composite closed for Lunar NY
  • Markets finished mixed, in a tight band, following a tepid performance by Wall Street.
  • Egyptian turmoil dents confidence...
  • Gains for basic materials producers boost Australia’s S&P/ASX 200.  Insurers rose after Cyclone Yasi caused less damage than feared.
  • Japanese stocks fall for first time in three days. Panasonic drops 3.2%, leading consumer stocks lower after 3Q net income misses estimates. Exporters were sold on a strong yen.
  • Markets in China, Hong Kong, South Korea, Singapore, Taiwan and Vietnam are closed for the Lunar New Year.


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 80.28%
  • SHORT SIGNALS 78.51%
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