“Plainly, MacArthur’s bleak assessment of the situation, his forecasts of doom, had been wrong.”
-David McCullough (“Truman”, page 834)
We’ve all experienced getting too bearish at bottoms. Historically, when this emotional capitulation comes from the political leaders of our country, we often look back at their Forecasts of Doom as the catalysts for change. Politics are a lagging indicator.
While I’m not sure I’d be accused of being bullish on Keynesian Economic policies or their impacts to the US Dollar since the 2008 US stock market crash, I’m certainly not the US Dollar bears’ huckleberry on this matter right here and now.
Not to name names, but PIMCO’s Mohammed El-Erian has been getting plenty of air-time in recent weeks (Barrons this weekend, Bloomberg article again this morning, etc.) talking up the credit risk in US Treasury Bonds.
Not to callout timing, but this has been El-Erian’s view since PIMCO effectively sold almost all of their US Treasury exposure in Q1 and Q2 of 2011. While I respect Bill Gross and all of his risk management accomplishments over the years, his partner’s Forecasts of Doom for the US Treasury Bond market have not only been wrong since March, but they are wrong, again, on this morning’s Debt Ceiling “news.”
The “news” on anything being commandeered by central planners of the 112thCongress is that the news is going to change. This weekend’s “news” of a Debt Ceiling debate failure may have been good for the Sunday talk show ratings, but it wasn’t bad for what matters to markets – the marked-to-market rating on US Treasury Yields.
If you didn’t know that market prices don’t lie (politicians do) – now you know. Or at least Mr. Macro Market in US Treasuries thinks he knows. Here’s this morning’s reaction to the “news” of doom:
- Short-term Treasuries (2-year yields) – didn’t move 1 basis point versus where they were priced into the end of last week (0.39%)
- Long-term Treasuries (10-year yields) – moved a whole 2 basis points versus Friday to 2.98%
But Mr. El-Erian has a Top 10 article on Bloomberg’s most read that delivers the headline “El-Erian Says US Vulnerable To Downgrade”… Qu’est ce qui se passe avec Le Analysis if the market isn’t reacting to PIMCO’s bleak assessment?
I’m long US Treasuries and have been writing about why since we launched our Q2 Macro Themes at Hedgeye in April. Sure, partly because I’m bearish on US Growth (Mr. El-Erian says he’s bearish on US Growth, but evidently not Bearish Enough or he’d be long the long-bond).
As most of the lagging of lagging indicators (Moody’s, S&P, etc) downgrade the likes of Greece (again!) this morning, I’m moving the Hedgeye Asset Allocation Model to its most invested position of 2011.
Yes, we still have 40% Cash – but that’s less than the 67% Cash we held at the end of February when Wall Street/Washington expectations for growth were will too high by about a double!
Ahead of this Friday’s preliminary US GDP Growth Report for Q2, Hedgeye’s estimate for US GDP Growth remains 1.7%-2.1%. Since the government, to a degree, makes up this number, we make up a range of expectations around current made-up numbers.
Here’s where the Hedgeye Asset Allocation Model stands as of this morning:
- Cash = 40% (down from 46% last Monday)
- Fixed Income = 24% (US Treasury Flattener and Long-term Treasuries – FLAT and TLT)
- International Equities = 12% (China and S&P International Dividend ETF – CAF and DWX)
- Commodities = 9% (Gold and Silver – GLD and SLV)
- International Currencies = 9% (US Dollar and Canadian Dollar – UUP and FXC)
- US Equities = 6% (Healthcare – XLV)
Obviously as Global Economic Growth Slows and Fiat Fool Policies whip around between Europe and the US like a ping pong ball (see our Q3 Macro Theme presentation, “Policy Pong”), we don’t want to be “fully invested” – not with our own money at least.
As for today, what we’d like to do on this “newsy” morning is sell some Gold high and buy some US Equity and Currency exposure low. We get the bleak assessment about Congress and a President who has a hard time making hard decisions. We also get that markets discount the obvious – and we could very well be looking at “news” of a Debt Ceiling resolution by the end of the week.
My immediate-term support and resistance ranges for Gold (long), Oil (no position), and the SP500 (no position) are now $1, $97.72-100.24, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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Conclusion: China broadly underperformed from both a financial markets and economic data perspective. We think that was due to a general lack of liquidity in China’s banking system, but one final PBOC rate-hike should not be completely ruled out.
This is the fourth installment of our now-weekly recap of prices, economic data, and key policy action throughout Asia. We’re aiming to keep our prose tight here, so if you’d like to dialogue more deeply regarding anything you see below, please reach out to us at .
The key callout from an equity market perspective is China’s negative divergence (-1.8% week-over-week vs. a group median gain of +1.3%). The Shanghai Composite Index did, however, hold a key level of quantitative support and we remain long the CAF in our Virtual Portfolio. In the FX market, the New Zealand dollar (NZD) had a monster week to the upside (+2.3%) on the heels of an elevated CPI reading (21-year high). In the fixed income market, Chinese 2yr sovereign bond yields increased 23bps week-over-week. This move is confirmed by money market rates and swaps spreads breaking out to new highs. It remains to be seen whether or not this is a leading indicator for a Chinese rate hike or merely indicative of a general lack of liquidity in the financing-based economy.
China: China printed a nasty preliminary July manufacturing PMI number (48.9); we think the Chinese growth continues to slow, but at slower rates. The recently announced tax reform initiative (scheduled to commence in September) should incrementally boost consumer spending in an environment of slowing inflation. We look for that to offset weakness in the manufacturing sector as external demand (US and Japan, in particular) slows.
Hong Kong: CPI accelerated to a 3-year high in June we remain bearish on Hong Kong equities for the intermediate-term TREND and long-term TAIL as growth continues to slow while inflation continues to accelerate. A peaking property bubble that the government is under increasing pressure to address from a policy perspective is decidedly bearish for the index’s financial and real estate developer stocks (over half the market cap of the Hang Seng Index).
Japan: Japan’s June trade data came in sequentially better in another sign that of the economy continuing its rebound off the March/April lows. We think it is short-lived, as Japan’s YoY economic growth data looks to materially slow in 2H. We remain bearish on Japanese equities (we’re short the EWJ in our Virtual Portfolio) for the intermediate-term TREND and long-term TAIL and are now bearish on the yen for the intermediate-term TREND ahead of a pending government shut down in Sept/October. We’ll be out with a detailed note on this topic early next week.
India: A weekly gauge of commodity inflation slowed and the recent move in India’s interest rate swaps market is supportive of our belief that the RBI is very close to the end of its tightening cycle. We remain cautious on Indian equities as our models have growth slowing in 3Q and inflation accelerating through August. Looking ahead to 4Q, we are quite bullish and if the Global Macro environment is favorable, the market may choose to look through the next 2-3 months of marginally negative economic data.
South Korea: The Bank of Korea made an important policy decision in support of long-term economic prosperity by prohibiting financial companies from buying bonds denominated in foreign currencies that have the intended use of financing domestic projects. This will limit the country’s aggregate external debt burden and may also supply upward pressure on domestic interest rates. Both are positive for the Korean won (KRW) from a long-term TAIL perspective. Our models continue to signal downside risk to Korean economic growth over the intermediate-term TREND – particularly in 4Q.
Australia: Per the monthly NAB survey and a quarterly Deloitte survey, business confidence continues to trend negatively amid a slowing domestic economy. Further, the RBA’s recent commentary is finally acknowledging of the domestic slowdown. Interest rate swaps, interbank rate futures, and corporate issuance of floating-rate debt (relative to fixed-rate issuance) are all signaling an RBA rate cut over the intermediate term. The 2Q CPI report (due July 27) will be critical to watch as it will likely shape the market’s perception around future RBA policy. We expect it show a sequential acceleration on a YoY basis, but it will likely slow on a QoQ basis (perhaps more important for policy). As such, we remain bearish on the Aussie dollar (AUD) for the intermediate-term TREND.
New Zealand: CPI accelerated to a 21-year high in 2Q alongside a sequential uptick in services PMI. The data supported a regional-best +2.3% appreciation in the New Zealand dollar (NZD/USD) on a week-over-week basis and it remains at record-highs. In spite of Prime Minister Key’s expressed concern regarding the strength of the kiwi dollar, our models would suggest further upside as inflation is set to make another high in 3Q.
Thailand: Trade data came in mixed in June (slower export growth; faster trade balance growth) and Bank of Thailand governor Prasarn Trairatvorakul implicitly suggested that he expects Thailand’s growth to accelerate in 2H by updating his 2011 GDP forecast (“a little more than 4%”). We are in wait-and-watch mode on Thai equities and would like to see more color on: 1) the new regime’s fiscal initiatives; and 2) the Bank of Thailand’s official response to such policies. Their bullish view of the Thai economy may lead them to continue hiking interest rates, which is bullish for the Thai baht (THB).
Singapore: Non-oil domestic export growth slowed materially in June and we continue to flag negative Asian trade data as a clean-cut signal that global demand is lower than where consensus believes it is – particularly in the US and Japan. Accelerating economic growth in 3Q could prove bullish for Singaporean equities for the intermediate-term TREND, while inflation continues to decelerate due to the Monetary Authority of Singapore’s proactive tightening. Further upside in the Singapore dollar (SGD) might be limited, as many of the supportive factors which kept us bullish are now in the rear-view.
Big switch in FW vs. Apparel this week. The key is that apparel had tough numbers to comp, FW didn’t. This is in contrast with the strong monthly data we have for June, but that’s backward looking vs. the weekly numbers. The spread between the athletic specialty and other channels is getting wider suggesting that the FLs and FINLs of the world are not getting hit nearly as hard as the weekly numbers suggest, but still down sequentially nonetheless.
If you would like a copy of our forthcoming DNKN Black Book, please contact firstname.lastname@example.org.
It’s a great time for the Private Equity sponsors to be bringing DNKN public. Restaurant industry performance, particularly the coffee category, has been leading the consumer space and valuations are extremely rich.
We will be publishing a DNKN Black Book on Monday. Needless to say, we think there is a bubble in the coffee market which PE sponsors are taking advantage of.
If you would like a copy of the Black Book, please contact email@example.com
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