“A little knowledge is dangerous. So is a lot.”
I have a tremendous amount of respect for what Einstein’s independent thinking did for this world, and I love that risk management quote. No matter what you do or do not know this morning, there’s this interconnected Global Macro market’s last price.
US Dollar driven correlation-risk to currency, commodity, and stocks market prices is running at its highest level since Q2 of 2008. While it’s Dangerous Knowledge to have marked-to-market models on your desktop to help you price this real-time risk, it’s doubly dangerous to summarize the uncertainty associated with this risk with partisan politics.
Since neither the Manic Media nor 90% of Washington/Wall Street got what a Crashing Currency meant in Q2 of 2008, we don’t expect consensus to provide any proactive thought leadership on the risk management topic this time. Whether it’s the US Dollar Index’s relationship to the price of Oil, Gold, or even Volatility, the similarities to the second quarter of 2008 are borderline glaring at this point.
The most market relevant mathematical learning since Einstein’s Relativity has been Chaos and Complexity Theory. It, unlike Efficient Market Theory, accepts uncertainty as a grounding principle. The Keynesian Kingdom’s top brass doesn’t do uncertainty. Allegedly, this time they know exactly what’s going on out there in this gargantuan ecosystem of colliding factors that we call the Global Economy.
What’s going on in Global Macro markets may very well be trivial. Market prices and the trailing correlations that impacted them are historical facts. What’s “not clear” (to quote The Bernank’s favorite career risk management qualifier from last week) is what can be quantified as causal over a long period of time. “Not clear” that is, to the professional politicians who are accountable to the US Dollar Debauchery math.
Here’s what the US Dollar did last week:
- Down another -1.4% week-over-week to a new YTD low
- Down -9.8% from its January, 2011 price and down for the 14th week out of the last 18
- Down -17.5% from June 2010
Wait. What does June 2010 have to do with anything other than making Groupthink Geithner’s record as a credible US Dollar stability guy anything short of a national embarrassment? June 2010 is when the US Dollar was high and prices at the US pumps were a lot lower.
38% lower, actually…
Looking ahead at our kids getting out of school and the summer driving season (hearing from my expert network that both still occurs this year), I think most Americans think a -17.5% meltdown in their Crashing Currency and a +38% tax at the gas pump is a bad trade – for them.
Have no fear however, the President is here in his weekly address (Saturday): “When oil companies are making huge profits and you’re struggling at the pump, and we’re scouring the federal budget for spending we can afford to do without, these tax giveaways aren’t right.”
Meanwhile, Brazil’s President had a different take than blaming Petrobras: “Guaranteeing purchasing power means playing tough on inflation. This is one of the fundamentals of our political economy, and one we’ll never let up on.”
At least there’s a healthy political bid/ask spread out there in terms of what left-leaning President knows the least about Complexity Theory. With American central planners leaning more left than even Europe and Brazil at this point – who would have thunk…
Back to the Global Scorecard – here were the big Global Macro currency and commodity moves associated with the US Currency Crashing week-over-week:
- The Euro = UP another +2.1% to $1.48
- The Chinese Yuan = UP another +0.3% to a new all-time high of $6.49
- CRB Commodities Index (19 commodities) = UP another +0.8% to a new 2-year weekly closing high of 370
- WTI Crude Oil = UP another +1.5% to a new 2-year weekly closing high of $113.93
- Gold = UP another +3.5% to a new all-time high of $1556 (all-time is a long time)
- Copper = DOWN -5.4% at $4.17/lb
Oops, one of these things is not like the other. That’s right, Dr. Copper is reminding those of us with some knowledge about real-time market signals that Global Growth Slows As Inflation Accelerates. Maybe that’s why Chinese and Brazilian stocks lost -3.3% and -1.4% last week, respectively. They no likey The Inflation from The Bernank.
US stocks had another great week, rallying like Japanese equities have for decades to lower-long-term-highs on decelerating volume and scary skew signals. But don’t worry – this Currency Crash thing is cool, like it was in Q2 of 2008, until it isn’t…
In the Hedgeye Asset Allocation Model I proved that I still know a little about learning from my many prior mistakes. I ended the week with my highest invested position of 2011, dropping my allocation to Cash to 34% (at the last immediate-term overbought peak in US Equities I had 62% in Cash, so at least this time is different in that I am riding out more of The Inflation trade’s gains).
The Hedgeye Asset Allocation Model’s week-end allocations are now as follows:
- Cash = 34% (down from 40% last week and 52% in the last week of March)
- International Currencies = 30% (Chinese Yuan, Canadian Dollar, British Pound - CYB, FCX, and FXB)
- Commodities = 12% (Gold, Oil, and Corn – GLD, OIL, and CORN)
- International Equities = 9% (China – CAF)
- Fixed Income = 9% (US Treasury Flattener – FLAT)
- US Equities = 6% (Technology – XLK)
A little knowledge of the Bin Laden takedown would have helped me be levered-long everything US Equities into this week’s start. Having Dangerous Knowledge like that though is a lot of knowledge I’ll pray to do without!
My immediate-term support and resistance lines for Gold are now $1515 and $1557, respectively. My immediate-term support and resistance lines for oil are now $111.47 and $115.61. And my immediate-term support and resistance lines for the SP500 are now 1338 and 1377, respectively.
I plan on taking down both my gross (Hedgeye Asset Allocation invested position) and net long positions (Hedgeye Portfolio: 17 LONGS, 11 SHORTS) into this morning’s newsy strength.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on April 27, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“The main question is where this movement will lead us.”
Today is his big day. Today is the 1st day in US economic history that the Almighty Central Planner of US Monetary Policy will hold a press conference with the media immediately following his decision to pander to the political wind. Currency Crashers and Yield Chasers, unite!
As Hayek predicted 70 years ago in “The Road To Serfdom” (which Keynes himself called “a grand book” that he agreed “morally” with), this is the long hard road towards socialism that traverses many political conflicts and compromises. Before you watch The Bernank today, take a step back and really think about how Big Government Intervention in our markets has become; you’ll see this certified gong show of Gaming Policy for what it is.
“Where these common beliefs of our generation will lead us is a problem not for one party, but for every one of us – a problem of the most momentous significance… Is there a greater tragedy imaginable than that? In our endeavor consciously to shape our future in accordance with high ideals, we should in fact unwittingly produce the very opposite of what we have been striving for?” (Hayek, “The Road to Serfdom”, page 60)
As the Monkey Movement hustles us toward prime time advertising dollars, please don’t listen to what storytellers of the Keynesian Kingdom say – watch how they get paid. If there’s any lesson we’ve learned from the Greeks by now it’s that markets don’t lie – politicians do (Greece’s stock market is down another -1.6% this morning, taking its straight down decline since February 18th to -18.3% as Greek bond yields hit record highs).
So what do you do with that today?
My risk management strategy into the Fed presser is very simple – don’t chase returns; take down your net long exposure; sell high.
I made this call in April of 2010 (SP500 dropped -15% to its August low). I made this call again in November of 2010 (November was down, and I got crushed in December). And again in February of 2011 (another -6.5% correction to mid-March where I covered at the YTD low)… again!
Two for three in calling for corrections from blow-off US Dollar Debauchery driven tops isn’t good enough. So I am looking at improving upon that … with my longest of long-term risk management calls not changing – BURNING YOUR CURRENCY AT THE STAKE will not end well.
If you want to get the US Dollar right, you need to get policy right – and The Bernank, sadly, will remain Indefinitely Dovish.
So what do you do with that? I usually start with the what not to do’s:
- Don’t go ideological in your portfolio (I’m leaning long ahead of the Fed today – 15 LONGS, 9 SHORTS in the Hedgeye Portfolio)
- Don’t sell The Inflation trade (it’s outperforming every global equity market other than maybe Russia for the YTD)
- Don’t be a monkey
What are the intermediate to long-term TREND and TAIL implications of the Monkey Movement perpetuating a US Currency Crash?
- It perpetuates The Inflation priced in US Dollars
- It structurally impairs the sustainability of long-term economic growth
- It dares institutional investors to chase “yield”
What am I seeing in the Global Macro Grind this morning that confirms any or all of these realities related to inflation and/or growth?
- Chinese stocks closed down for their 4th consecutive day (we’re long them) as the USD hits new lows, inspiring global inflation risk
- Brazilian stocks remain down -3.1% for the YTD and bearish from an intermediate-term TREND perspective = inflation risk
- Copper continues to breakdown (bearish TRADE and TREND) as global growth slows in the face of USD perpetuated inflation
- US Equities are rallying to lower-long-term highs (like Japan’s have for 20 years) on anemic volume and very concerning skew signals
- US Financials (XLF) are bearish TRADE and TREND (worst S&P Sector YTD) as a Currency Crash will enforce counterparty and haircut risks
- US Treasury Yield Spread continues to narrow (we are long a UST Flattener – FLAT) as US Growth Slows and long-term yields decline
All the while, US Housing is turning into the train wreck (double dip) that we have been calling for in the last year (Case Shiller Home Price Index saw prices drop on a year-over-year basis in 19 of the top 20 US markets yesterday - Washington, DC was the only bull market in housing – long live Julius Caesar’s Roman Empire that plunders its citizenry by clipping their coins).
US Housing Demand? The MBA mortgage applications index (our best high-frequency data gauge for demand) plummeted by -13.7% week-over-week this week. Apparently Americans aren’t dumb enough to take on The Bernank’s dare to lever themselves up with a “cheap” long-term liability. Short-term Central Planning, press conferences, and marketing events be damned!
My immediate-term support and resistance levels for Oil are now $109.98 and $114.11, respectively (we are long). My immediate-term support and resistance levels for Gold are now 1491 and 1524, respectively (we are long). My immediate-term support and resistance levels for the SP500 are now 1324 and 1350, respectively (we are short).
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP - April 29, 2011
As we look at today’s set up for the S&P 500, the range is 39 points or -1.88% downside to 1333 and 0.98% upside to 1377.
SECTOR AND GLOBAL PERFORMANCE
The Financials remain the only sector broken on both TRADE and TREND.
- ADVANCE/DECLINE LINE: 917 (+226)
- VOLUME: NYSE 975.24 (+1.43%)
- VIX: 14.75 0.89% YTD PERFORMANCE: -16.90%
- SPX PUT/CALL RATIO: 1.21 from 1.15 (+5.28%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 22.25
- 3-MONTH T-BILL YIELD: 0.06% -0.01%
- 10-Year: 3.39 from 3.34
- YIELD CURVE: 1.75 from 1.96
MACRO DATA POINTS:
- 10 a.m.: Construction spending, est. 0.4%, prior 1.4%
- 10 a.m.: ISM Manufacturing, est. 59.5, prior 61.2
- 11 a.m.: Export inspections: Corn, soybeans, wheat
- 11:30 a.m.: U.S. to sell $29b 3-mo. bills, $27b 6-mo. bills
- 4 p.m.: Crop progress: Winter wheat, cotton, corn
WHAT TO WATCH:
- India’s manufacturing grew at the fastest pace in five months and exports climbed to a record, increasing pressure on the central bank to raise interest rates
- Silver futures plunged as much as 13% after CME boosted margins
- Ralcorp said it received unsolicited takeover proposal in March, board determined wasn’t in best interest; CNBC reported Friday that ConAgra had expressed interest
COMMODITY HEADLINES FROM BLOOMBERG:
- Oil Drops Most in Two Weeks After U.S. Says Bin Laden Killed in Pakistan
- Copper Declines to 7-Week Low as Chinese Manufacturing Declined in April
- Corn Slips as Dollar’s Gain Cuts Demand for Commodities as Store of Value
- India Said to Consider Ending Four-Year Ban on Wheat Exports on Stockpiles
- Rubber Falls as China’s Manufacturing Index Declines More Than Forecast
- South Korea Seeking to Boost Wheat, Soybean Production to Reduce Imports
- Commodities Beat Financial Assets for Fifth Month in Best Streak Since ’97
- Cocoa Bean Exports From Indonesia’s Sulawesi Slump as Sales Suffer Delays
- Korea Investment Corp. Buys Noble Group Stake to Partner in Infrastructure
- Funds Slash Bullish Sugar Bets to Two-Year Low as Thailand Supplies Climb
- Codelco Waning Copper Pressures $17.5 Billion Bet to Catch Boom for Metals
- Bolivia President Morales to Overturn Laws on Mining, Banking, Investments
- European indices are trading higher a few hours after the announcement of Osama bin Laden's death.
- UK markets are closed for a bank holiday.
- Eurozone April final manufacturing PMI 58.0 vs consensus 57.7
- Germany April final manufacturing PMI 62.00 vs consensus 61.7
- France April Final Manufacturing PMI 57.5 vs consensus 56.9
ASIA PACIFIC MARKETS:
- Most Asian markets that were open rose today.
- China, Hong Kong, Taiwan, and Thailand were closed for Labour Day.
Don’t look to the data points on the consumer to support the S&P 500 being at a three year high. At best the numbers on the consumer this week point to sluggish underlying trends, but the reality is that government continues to prop up the overall consumer picture. This has been the case for some time, and may continue, but a potent cocktail of slowing growth and accelerating inflation – we call it Jobless Stagflation – is starting to muddle the thoughts of the Central Planners in Washington, D.C.
THE JOBS PICTURE IS PUNK - Yesterday, Initial claims rose by 25,000 to 429,000 for the week ending April 23. The increase was noticeably above consensus expectations and follows the previous week’s 12,000 decline. As our Financials team noted yesterday, reported claims are now at the same level they were in January 2010. The consensus that “the jobs picture is getting better” may need to be revised back to “the jobs picture is not getting any worse”. On the margin, this is a potentially bearish change in general expectations. That being said, a number of temporary factors may have contributed to the rise in initial claims, including auto plant shutdowns because of Japanese supply-chain disruptions and the shift in Easter. Initial claims have been above 400,000 for three consecutive weeks; the latest gain raised the four-week moving average from 399,250 to 408,500 (the highest since mid-February). In terms of employment, the recovery story is on ice for now.
INCOME FOM UNCLE SAM - Income growth accelerated to 0.5% before adjustment for inflation from 0.4% in February. The source of the improvement was the government as transfer payments grew far more rapidly than in recent months, led by increased unemployment compensation. This situation is temporary and without an improvement in core fundamentals, like employment, there will be an increasing case for a pullback in spending – particularly as the buck continues to burn.
SPENDING WHAT WE DON’T HAVE - Consumers clearly have the income to spend and as I said the questions of where the income is coming from and how long it can be sustained are front and centre for investors today. The High-Low society dominated 2010; consumer confidence by income is one chart that illustrates that idea vividly. A chart of the total enrollment in the Foodstamps program is another image that hits home when one considers the broader economic picture in America today. Overall, consumer spending moderated in March, despite a slight acceleration in income. Nominal spending rose 0.6%, down from 0.9% in February, while real spending growth slowed from 0.5% to 0.2%.
WITH LITTLE CONFIDENCE - While the headlines are showing an uptick in April consumer confidence the index gained back only 2.3 of the 10 points it dropped in March. The index is up 25 points from the November ‘08 bottom and 29 points below its January ’07 high. By contrast, the S&P 500 is a mere 4.6% off its close on 1/31/07. The economic drivers of consumer sentiment (housing, jobs, inflation and income) remain very mixed, which are consistent with the low level of confidence. The inflation of stock prices, a direct result of Ben Bernanke’s easy-money policy, remains the only significant positive influence on confidence at this juncture. Below, I have a chart indexing consumer confidence by income bracket from January 2010. I’m sure every investor could weave their own story into this chart but what I see is a sharp relative gain on the part of confidence among the $50k and above bracket following the announcement of QE2 and the stock market rip that followed. Positive jobs data, it could be argued, bolstered other cohorts at the end of 2010/early 2011. Even going back to our April Flowers/May Showers call, it is clear to see that the stock market was a huge driver of confidence at that point. I believe it remains so today and, with earnings strong, many are assuming that it’s different this time. The terrible trio of Accelerating Inflation, Slowing Growth, and Joblessness has not mattered to equity investors of late. In our view, it is reckless to “keep dancing while the music is playing” while earnings are peaking and, like in 2Q08, the macro is not being respected.
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