Notable news items and price action over the past twenty-four hours.
This note was originally published at 8am on February 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“An empty stomach is not a good political adviser.”
Economic groupthink is dangerous - particularly when its policies perpetuate social stratification. With Global Food Inflation hitting its highest price ever this past week, The People are paying attention. Real-time prices are hard to hide.
The stark contrast between Washington Groupthink and what the rest of the world thinks about the highest food prices ever (yes, ever is a long time) is easily captured by comparing what the United Nations and the Fed had to say about it last week:
Nope – no mention of “the weakening dollar” or the fiscal and monetary policies in America that affect it - not from The Ber-nank at least...
To the high-society intellectual or ordinary person gifted with common sense, this probably stands out as somewhat odd. To the person with an Empty Stomach, this has to be downright depressing.
So how can the Chairman of the US Federal Reserve say this with a straight face?
The Fed has obviously been completely politicized. Fully loaded with that politicization comes the consummate lack of accountability that’s unique to a professional politician in the modern American Empire. But, this is the kind of thing that makes people really lose whatever trust they had left in government.
Before I go through what happened to the rest of the world’s market prices last week, let’s take a step back and think about the simplicity of a market’s pricing structure:
Sure, we agree with Bernanke on supply and demand, but what about price? Without a market price (and the currency that it’s denominated in), you obviously don’t have a market. As Barry Eichengreen writes in the introduction to his outstanding new book on the US Dollar, Exorbitant Privilege: ”The principal commodities exchanges quote prices in dollars. Oil is priced in dollars. The dollar is used in 85% of all foreign exchange transactions worldwide.”
Therefore, when you debauch the value of the world’s reserve currency, you are going to perpetuate world inflation.
If you want to take The Ber-nank’s side on this, you’ll have to ignore the math. As of this morning’s prices, here are the immediate-term TRADE correlations between the US Dollar Index and food prices:
*Note: these are extremely high correlations.
There are a lot of ways to prove out how US Dollar sponsored inflation is hurting bond and emerging markets worldwide too. At week’s end, here were the world’s worst performing stock markets for 2011 to-date:
Sure, a Bernanke Bull might quickly point out that 2 of the worst 3 markets have had revolutionary social unrest – that’s the point. Is that what we need to see for governments to pay attention to people who are unemployed with an Empty Stomach?
Some people in the US are trying to say that the US Bond market is getting hammered to new intermediate-term lows because US growth “is back.” Both the Q4 US GDP and January US Employment reports missing consensus estimates notwithstanding, some of it is growth – but some of it is inflation too.
On Friday, we took fresh new lows in US Treasuries as an opportunity to cover short positions in short-term bonds (SHY) and get invested where investors fear having to compete with rising bond yields – we bought a US Treasury Curve Flattener (FLAT) and Utility stocks (XLU). Both were down on the day.
On a week-over-week basis I drew down our Cash position from 67% to 52%. Here’s the updated Hedgeye Asset Allocation Model:
I’m still trying my best to buy things when they are on sale. Having covered my short position in the SP500 on Friday, January 28th at 1276, I’ve moved the Hedgeye Portfolio to 12 LONGS and 10 SHORTS (see all positions below). For the last week, I’ve definitely been getting longer – but that doesn’t mean I think this will end well - nor do I think it will make the 44 MILLION Americans on food stamps have less to worry about in terms of their Empty Stomachs.
My immediate term support and resistance levels for the SP500 are now 1297 and 1319, respectively.
Best of luck out there today
Keith R. McCullough
Chief Executive Officer
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.
TODAY’S S&P 500 SET-UP - February 10, 2011
Equity futures are trading below fair value, following equities' lower close on Wednesday, though stocks did finish off session lows. That said, the Dow closed in positive territory, which was its 8th straight gain. After the close, Cisco traded lower, following results for its January quarter, with investors expecting a bit more from results and guidance.
As we look at today’s set up for the S&P 500, the range is 30 points or -1.13% downside to 1306 and +01.14% upside to 1336.
MACRO DATA POINTS:
EARNINGS/WHAT TO WATCH:
Fairly sluggish price action throughout much of the day seemed to fit with the lack of meaningful directional drivers. Nevertheless, we have day 3 of perfect = 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.
CREDIT/ECONOMIC MARKET LOOK:
Treasuries 10-year yields are within 3bps of four-day low before U.S. sells 30-yr bonds and after yesterday’s sale of 10- yr debt drew most demand on record from foreign central banks.
Dollar gains vs most peers while euro falls on speculation Bundesbank President Axel Weber’s exit from race to succeed Jean-Claude Trichet as head of ECB will delay rate increase.
Levi’s is one of the largest (privately held) apparel companies that at the same time evades many radar screens of those who solely trade equities. Nevertheless, the company often provides interesting and honest insights into its business trends. Last night was no exception, with Levi’s reporting it’s 4Q results. We believe the company’s candid commentary on the cost environment provides valuable insight into the challenges facing an iconic, cotton-dependent brand such as Levi’s.
"We actually don’t hedge cotton where we buy finished product from our third-party manufacturers. Those manufacturers are buying denim from denim manufacturers, who are essentially buying raw cotton. So, we’re three steps or two steps removed from the actual purchasing cotton or the ability to hedge that. And so our real controls are essentially through pricing, as well as cost controls that run through our supply chain that we manage, which is primarily the third-party manufacturers."
In preparation for WYNN’s Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from WYNN’s Q3 earnings release/call.
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