“They would be our shepherds, and we are to be their flock.”
After watching Maria Bartiromo interview Chicago Federal Reserve Bank President Charles Evans yesterday into the market close and then watching The Bernank shepherd the financial media into taking his word for it on The Inflation last night, I thought about becoming a sheep.
Or should I rethink my being in this interconnected Global Macro game of risk as a lemming? Perhaps a monkey? Or a donkey? Ah, so many attractive career options are available if I were to accept the wishes of the overlords of the Keynesian Kingdom and become a member of The Fiat Flock…
Born in France in 1801, then orphaned at the age of 9, Bastiat penned the aforementioned quote when he wrote “The Law” in 1850. Not surprisingly, his work wasn’t well regarded by the French Socialists of his time. Neither was it promoted by Charles de Gaulle in the 1950s when his debt-financed-deficit-spending and devaluation programs destroyed both the franc and French credibility in global markets…
During days when the General-in-Chief of the US Federal Reserve (Bernanke) is more left leaning and socialist than the ex-Finance Minister of France turned head of the European Central Bank (Trichet), I think it’s worth taking a moment this morning to consider America’s constitutional definition of liberty as an alternative to this wanna be Centrally Planned world.
The Bastiat Questions (“The Law”, page 46):
“The pretensions of organizers suggest another question, which I have often asked them, and to which I am not aware that I have ever received an answer: Since the natural tendencies of mankind are so bad that it is not safe to allow liberty, how comes it to pass that the tendencies of the organizers are always good? Do they consider that they are composed of different materials from the rest of mankind?”
The Implied Answer (“The Law”, page 46):
“They have, therefore, received from heaven, intelligence and virtues that place them beyond and above mankind: let them show their title to this superiority. They would be our shepherds, and we are to be their flock.”
So how do you feel about that? How do you feel about American central planners debauching the longstanding entitlement we’ve had to the definition of a “free market” system? What’s so free about a market whose every breath of weaning volume depends on The Bernank’s heavy hand?
It’s sad to watch.
Back to this morning’s Global Macro Grind…
The Top 3 headlines this morning are:
- “UConn beats Butler for the National Championship”
- “Texas Instruments To Buy National Semiconductor”
- “Bernanke Says Fed Must Monitor Inflation Extremely Closely.”
Great news for UConn and National Semi – but what’s up with The Bernank? What exactly does monitoring inflation “extremely closely” mean? Were our shepherds monitoring The Inflation somewhat closely before food prices hit all-time highs?
I don’t know how else to say it, so I’ll say it like the Chinese just did this morning by addressing The Inflation head on and raising China’s benchmark interest rate. If we’re not going to address reality about oil at $108/barrel, a new leader in the global financial system will. Don’t think for a New York minute that China didn’t do this in Bernanke’s face this morning for a reason.
China waited on Ben Bernanke’s speech to The Fiat Flock in Georgia last night. This what he said:
“So long as inflation expectations remain stable and well anchored… the increase in inflation will be transitory”
No, dear hard working red-white-and-blue-collared Americans, I couldn’t make that quote up if I tried. Yes, Bernanke makes up his own “forecasts” about matters like growth and inflation all of the time – and, yes, his forecasting track record speaks for itself. It’s terrible.
- Bernanke is still forecasting 2011 US GDP growth of 4% to Infinity and Beyond…
- The Street, including both Goldman and Bank of America, is cutting GDP growth estimates closer to the Hedgeye estimate
- Bernanke calls inflation expectations well anchored and prices “stable”
- The Market, including Commodity and Volatility prices, is flashing the highest food prices and gyrations in price volatility, ever…
As we like to say at Hedgeye, Mr. Bernanke, ever is a long time…
There has never been a Federal Reserve Chairman who has overseen more Americans on food stamps (44 million people and counting). There has never been a Federal Reserve Chairman who has overseen 3-week explosions of price volatility (VIX) on the order of +40-60%, and then draw downs to higher-lows that are the most expedited in market history (7 days in March = VIX down -41.6%).
We are not your Fiat Flock. We do not trust your “forecasts.” And we want our markets back.
My immediate-term support and resistance lines for WTI Crude Oil are $105.91 and $108.92, respectively. My immediate-term support and resistance lines for the SP500 are now 1318 and 1341, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
THE HEDGEYE DAILY OUTLOOK
TODAY’S S&P 500 SET-UP - April 5, 2011
Dollar rises against euro and yen and the futures are looking lower as Bernanke says Fed will act if inflation more than “transitory.” As we look at today’s set up for the S&P 500, the range is 23 points or -1.12% downside to 1318 and 0.61% upside to 1341.
SECTOR AND GLOBAL PERFORMANCE
We are on day 2 of perfect with 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.
- ADVANCE/DECLINE LINE: 225 (-908)
- VOLUME: NYSE 770.67 (-14.57%)
- VIX: 17.50 +0.57% YTD PERFORMANCE: -1.41%
- SPX PUT/CALL RATIO: 2.15 from 2.22 (-3.40%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 24.60
- 3-MONTH T-BILL YIELD: 0.06% -0.01%
- 10-Year: 3.45 from 3.46
- YIELD CURVE: 2.68 from 2.66
MACRO DATA POINTS:
- 7:45 a.m.: ICSC Weekly retail sales
- 10 a.m.: Treasury Secretary Timothy Geithner testifies to Senate panel
- 10 a.m.: ISM Non-manufacturing, est. 59.5, prior 59.7
- 11:30 a.m.: U.S. to sell $24b 52-week bills, $40b 4-week bills
- 12:45 p.m.: Fed’s Kocherlakota gives remarks in Minneapolis
- 12:45 p.m.: Fed’s Lockhart speaks in Stone Mountain, Ga.
- 2 p.m.: FOMC minutes released
- 4:30 p.m.: API inventories
WHAT TO WATCH:
- French government revises 2012 growth down to +2% from 2.5%
- Moody's downgrades Portugal's bond ratings to Baa1 from A3, still under review down
- Poland’s central bank may raise its benchmark rate by 25bp to 4%
- Australia’s central bank left its benchmark interest rate at the highest level in the developed world.
- Nasdaq to reduce weighting of Apple in Nasdaq-100
COMMODITY HEADLINES FROM BLOOMBERG:
- Silver Advances to Most Expensive Versus Gold Since 1983 on Inflation Risk
- Copper Rises in London Trading Before U.S. Services Report: LME Preview
- Oil Drops First Day in Four on Signs U.S. Demand Easing as Supplies Gain
- China's 8% Growth to Bolster Consumption of Copper, Aluminum, Chalco Says
- Gold May Advance on Libya, Inflation Concern; Silver Reaches 31-Year High
- Rubber Futures in Tokyo Reach One-Month High on Yen, Thai Supply Concerns
- Corn Near 33-Month Peak on Shrinking Supplies as Wheat at Four-Week High
- Cocoa Falls as Ivory Coast Conflict May Be Ending; Coffee Prices Decline
- Beef, Pork-Price Gains Boosting U.S. Craving for Chicken: Chart of the Day
- Australia Posts First Trade Deficit in Year as Disasters Disrupt Exports
- Kazakh Uranium Miner Seeks to Raise India, U.S. Sales Before Possible IPO
- Extract Expects to Fund $1.7 Billion Uranium Project Amid Reactor Crisis
European markets trade lower with the periphery again in focus and particularly Ireland, Spain and Portugal; Turkey and Switzerland are bucking the negative trend.
EuroZone Feb retail sales +0.1% y/y vs consensus +0.6% and prior revised +0.4% from +0.7%
Mar final Services PMI:
- France 60.4 vs preliminary 60.7
- Germany 60.1 vs preliminary 60.1
- EuroZone 57.2 vs preliminary 56.9
- UK Mar Services PMI 57.1 vs consensus 52.5 and prior 52.6
ASIA PACIFIC MARKTES:
The Asian markets turned in a mixed performance; China, Hong Kong, and Taiwan were closed for Ching Ming Festival. Australia February trade balance (A$205M) vs consensus A$1.2B and the central bank keeps interest rates unchanged, as expected.
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“It was a matter in which we have heard some other persons blamed for what I did myself.”
-Abraham Lincoln, 1862
That’s one of the many outstanding leadership quotes in the book I highlighted yesterday, “Team of Rivals – The Political Genius of Abraham Lincoln.” If he wants to get re-elected, President Obama should think long and hard about Lincoln’s example of transparency, accountability, and trust. Rather than giving lip-service to being like the great American leaders who came before him, Lincoln was his own man - and he lived these principles out loud.
Whether you like following politics or not, you need to get the direction of their leanings right if you want to get your Global Macro positioning right. Currency markets move on policy – policy is set by politicians. And while that’s a pathetic and sad statement about our said “free market” system altogether, you can’t get bogged down by it – you need to play the game that’s in front of you.
Currently, the most important game in Global Macro Risk Management is the cross-asset-class correlation-risk associated with what the US Dollar does. If you get policy right, you’re likely to get the US Dollar right. If you get the US Dollar right, you’ll get fewer things wrong.
This is where my only political advice to the President of the United States (or whoever realizes that they could win his office) comes into play – get the US Dollar right (strengthen it) and you’ll Deflate The Inflation. If you Deflate The Inflation, The People will believe in you.
Strong US Dollar Policy isn’t a partisan thing. It’s an American thing. Reagan had it. Clinton had it. Nixon and Carter devalued it. Nixon and Carter also had a Dollar Debauchery man at the Fed named Arthur Burns.
Reagan had Volcker. President Obama has The Bernank.
Obama will be the first to tell you he took on a lot of Bush’s baggage. He’ll be the last to tell you he made a mistake in taking on Bush’s Bernanke. So, Mr. President, let’s strap on the accountability pants, Blame Yourself, and take a walk down that path – because your General-in-Chief on all things US economic policy definitely won’t be doing it for you anytime soon. Some of his Generals in the Fed’s ranks will.
In one of the great 2011 accountability headlines coming out of the US Federal Reserve last night, Kansas City Fed President, Thomas Hoenig, explained the following by effectively blaming himself:
- “Once again, there are signs that the world is building new economic imbalances and inflationary impulses…”
- “The longer policy remains as it is, the greater likelihood these pressures will build and ultimately undermine world growth…”
- “…remember, I’m not advocating tight monetary policy… I’m advocating a non-crisis policy. Zero is a crisis policy that by itself should be temporary.”
Now this isn’t Hoenig’s first rodeo. He joined the Federal Reserve Bank of Kansas City in 1973. He is the longest serving member at the Fed and his 8 consecutive “dissents” (English for publically disagreeing with The Bernank) recently tied Henry Wallich’s 1980 record for most disagreements with Fed policy (Wallich has been validated as being very right). Hoenig is a known inflation hawk – most likely because he faced it in the 1970s and joined Wallich and Volcker in fighting it.
Does the President of the United States really want to test the waters on $120/oil and 1970s style Jobless Stagflation? Does he want to roll the bones on The Quantitative Guessing experiments in Japan gone bad? Does he want to run against someone in 2012 who will crush him like a bug with the simple conclusion that Growth Slows As Inflation Accelerates?
I don’t think so. Remember, he’s a professional politician – after all…
As opposed to someone holed up in a room of academia’s Keynesian Kingdom, I’m in the soup. I’m managing risk in this cross-asset-class correlation-risk game each and every day. I have been writing these morning strategy notes since I started this firm without bailout moneys 3 years ago – and I’ve made 19 calls on the US Dollar since (long and short side) – and I’ve been right 19 times. If you want a USD opinion – at least ours has some credibility.
Call me politically irrelevant. Call me Canadian. Call me names from the heavens, Mr. Big Government Intervention man. But don’t call me a McClellan (1862) in this currency war, because it’s The US Monetary Policy that’s managed by you, the unaccountable generals, at the front of The Inflation lines who are perpetuating the problem.
Back to the Global Macro Grind…
Now that the IMF is cutting their US GDP Growth estimate for 2011 this morning (to 2.8%), I’ll assume that our call for Growth Slowing As Inflation Accelerates is being absorbed into the craws of consensus. The leading indicator that is the price of Dr. Copper remains bearish and broken with intermediate term TREND resistance (which was longstanding support) at $4.38/lb.
Consensus doesn’t mean that Growth Slowing signals don’t continue to flash amber lights – it simply means the 6.5% intra-quarter SP500 correction had more to do with a longer-term global reality (piling sovereign debt-upon-debt-upon debt structurally amplifies inflation and impairs growth) than a tsunami of complacency.
Japanese and Chilean Industrial Production Growth reports for February (pre quake) came out yesterday and both slowed again sequentially. Eurozone inflation (CPI) for March accelerated again, sequentially. And while the US Dollar trading up for 2 of the last 3 weeks has helped Deflate The Inflation this week (bullish for Equities), it looks like that reverts back to the mean of Burning Buck and up oil again this morning. I’m staying long oil and long gold.
My immediate-term TRADE lines of support and resistance for oil are now $102.13 and $107.95, respectively. My immediate-term TRADE lines of support and resistance for the SP500 are now 1305 and 1333, respectively.
Looking forward to seeing everyone at Hedgeye Soho’s launch party in NYC this evening – no government bailout moneys required for us to buy you drinks.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Notable news items and price action from the last twenty-four hours
- SBUX CEO Howard Schultz spoke at an event in San Francisco last night and spoke on the need for companies to do more for staff benefits, the importance of local relevancy in China, and the mistakes SBUX has made in China.
- PFCB was upgraded yesterday to “Buy” from “Neutral” at Janney Montgomery. The stock gained on accelerating volume yesterday.
- RUTH gained 2% on accelerating volume yesterday.
- CMG has chosen Rokkan, a New York-based digital agency, for several digital marketing and brand awareness initiatives for 2011. Rokkan will be working with CMG to develop its digital marketing and execution including online sales, customer service infrastructure, local store marketing strategy, and out-of-store ordering through mobile and web on Chipotle.com.
- Pret A Manger continues to grow in the U.K. despite the shrinking services industry in that country.
- As a result of the Latin America beverage agreement, PepsiCo will now become the largest soft drink provider for BKC restaurants in LatAm markets.
- BNHNA results released yesterday revealed that, for the third four-week period, both total restaurant sales and Company-wide comparable restaurant sales increased 7.0% to $27.9 million from $26.1 million, representing the fourteenth consecutive period of comparable restaurant sales growth.
- DENN said that its board has approved a 6m share repurchase program.
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