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REPLAY PODCAST & SLIDES: 4Q11 KEY MACRO THEMES

HEDGEYE 4Q11 KEY MACRO THEMES

REPLAY PODCAST & SLIDES

October 14, 2011

 

Valued Client,
 

Earlier today, Hedgeye's Macro Team, led by CEO Keith McCullough and DOR Daryl G. Jones, hosted their quarterly themes conference call. In addition to another lively and robust Q&A session, the core topics included: 

  • King Dollar - In the last three years, the U.S. dollar has been a key driver of asset prices globally. In the intermediate term, the dollar is set up to outperform other major currencies.
  • Correlation Crash - Correlations are heightening globally within asset classes, across asset classes, and among disparate economies. The derivative risk is that correlations also increase the possibility of an interconnected crash.
  • Eurocrat Bazooka - As the monetary union falters in Europe, the only way out appears to be a Keynesian solution. Global markets will be influenced heavily by talk and potential implementation of the Bazooka. 

To access the replay podcast, please copy/paste the link below into the URL of your browser:

https://app.hedgeye.com/feed_items/16227

 

To access the accompanying slide presentation, simply click on the following link:

"Q4 MACRO THEMES CALL, CORRELATION CRASH, KING DOLLAR & EUROCRAT BAZOOKA" 

 

Please contact if you have any questions.  

 

Best regards,

 

The Hedgeye Macro Team


DIAL IN & MATERIALS: HEDGEYE MACRO: Q4 THEMES AND PRESENTATION

Valued Client,
 
5-10 minutes prior to the 11 AM EDT start time please dial:

(Toll Free) or (Direct)
Conference Code: 456746#
  

Materials: "Q4 MACRO THEMES CALL, CORRELATION CRASH, KING DOLLAR & EUROCRAT BAZOOKA" 

                 
To submit questions for the Q&A, please email .

 

****************************************************************************** 
 
 

"Q4 MACRO THEMES CALL, CORRELATION CRASH, KING DOLLAR & EUROCRAT BAZOOKA"  

 

Topics will include:

   

  • Correlation Crash - Correlations are heightening globally within asset classes, across asset classes, and among disparate economies. The derivative risk is that correlations also increase the possibility of an interconnected crash.
  • King Dollar - In the last three years, the U.S. dollar has been a key driver of asset prices globally. In the intermediate term, the dollar is set up to outperform other major currencies.
  • Eurocrat Bazooka - As the monetary union falters in Europe, the only way out appears to be a Keynesian solution. Global markets will be influenced heavily by talk and potential implementation of the Bazooka.

 

Please contact if you have any questions.  

 

Regards,

 

The Hedgeye Sales Team


THE HBM: SAFM, GMCR, SBUX, SONC, DIN

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Consumer

 

Yesterday’s initial jobless claims number came in at 404k versus expectations of 405k and the prior week’s revised 405k. The jobs picture is far from improving and, while the numbers are not deteriorating, we believe that casual dining needs an improvement in the jobs picture to boost demand.  

 

THE HBM: SAFM, GMCR, SBUX, SONC, DIN - initial claims 1014

 

 

Gasoline prices have ticked up over the last week as the dollar has weakened and some optimism on the economy has surfaced. 

 

THE HBM: SAFM, GMCR, SBUX, SONC, DIN - gasoline prices 1014

 

Advance Retail Sales for September came in at +1.1% versus expectations of 0.7%.  Retail Sales Less Autos came in at 0.6% versus expectations of 0.3%.

 

China

 

China’s inflation came in at 6.1% in September, exceeding 6% for a fourth month in succession.

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: SAFM, GMCR, SBUX, SONC, DIN - subsectors fbr

 

 

FOOD PROCESSORS

 

SAFM: Sanderson Farms target increased to $52 from $48 at Stephens

 

 

QUICK SERVICE

 

GMCR: Green Mountain Coffee Roasters was upgraded by Longbow Research to Buy, with a price target of $112.

 

SBUX: Starbucks was reiterated “Overweight”at Piper Jaffray and its price target was raised to $55 from $50.

 

SONC: Sonic announced that its Board of Directors authorized a stock repurchase program for up to $30 million worth of common stock through August 31, 2012.

 

  

CASUAL DINING

 

DIN: DineEquity has announced that franchisee Neighborhood Restaurant Parnters purchased Apple Restaurants, which includes 40 Applebee’s in the Atlanta area. No terms of the agreement were disclosed.

 

THE HBM: SAFM, GMCR, SBUX, SONC, DIN - stocks 1014

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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(CORRECTED) THE M3: CHINESE LOANS SHRINK; S'PORE GDP; SWINE BACTERIA;TOURIST DATA

The Macau Metro Monitor, October 14, 2011

 

 

CHINA LENDING SHRINKS AS WEN WRESTLES INFLATION Bloomberg

According to the PBoC, September new loans were $470 BN yuan (US$73.7 BN), the least since 2009.  Consumer prices rose 6.1% compared with a 4% goal.  M2 money supply rose 13% YoY, the least in almost a decade, and data for foreign-exchange reserves pointed to capital outflows.

 

SINGAPORE CUTS GROWTH FORECAST, CENTRAL BANK EASES POLICY Bloomberg, Channel News Asia

The Monetary Authority of Singapore (MAS) cut its 2012 GDP forecast from 5-6% to 5%.  It also said it will reduce the slope of the policy band of its currency and continue with a modest and gradual appreciation.  This is the 1st time of monetary policy easing since 2009.  An advance estimate for S'pore 3Q GDP showed 1.3% QoQ growth and 5.9% YoY growth.  MAS added that core inflation stood at 2.2% in the second quarter and the first two months of 3Q, compared to 1.9% in 1Q.

 

SWINE STREPTOCOCCUS CASE FOUND IN MACAU Macau Daily Times

A case of swine streptococcus was found in a 60-yr HK resident living in Macau.

 

MACAU PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR AUGUST 2011 DSEC

Visitor arrivals in package tours in August 2011 soared by 49.4% YoY to a record high of 713,383.  Visitors from Mainland China (513,094); Taiwan (53,358); Hong Kong (33,356) and the Republic of Korea (30,532) surged by 46.6%, 124.2%, 28.8% and 113.6% respectively.

 

At the end of August 2011, total number of available guest rooms of hotels and guest-houses increased by 2,384 (+12.1% YoY) to 22,151 rooms, with that of 5-star hotels accounting for 63.4% of the total.  Hotels and guest-houses received 809,120 guests in August 2011, up by 16.3% YoY, with the majority coming from Mainland China (53.9% of total) and Hong Kong (21.8%). The average length of stay of guests decreased by 0.05 night to 1.4 nights.

 

MACAU TOURIST PRICE INDEX FOR THE 3RD QUARTER 2011 DSEC

Macau Tourist Price Index for 3Q surged 16.7% YoY and 4.8% QoQ.  The rise was attributed to higher hotel room rates, restaurant service charges, food prices and jewelry prices. 

 


THE M3: CHINESE LOANS SHRINK; S'PORE GDP; SWINE FLU;TOURIST DATA

The Macau Metro Monitor, October 14, 2011

 

 

CHINA LENDING SHRINKS AS WEN WRESTLES INFLATION Bloomberg

According to the PBoC, September new loans were $470 BN yuan (US$73.7 BN), the least since 2009.  Consumer prices rose 6.1% compared with a 4% goal.  M2 money supply rose 13% YoY, the least in almost a decade, and data for foreign-exchange reserves pointed to capital outflows.

 

SINGAPORE CUTS GROWTH FORECAST, CENTRAL BANK EASES POLICY Bloomberg, Channel News Asia

The Monetary Authority of Singapore (MAS) cut its 2012 GDP forecast from 5-6% to 5%.  It also said it will reduce the slope of the policy band of its currency and continue with a modest and gradual appreciation.  This is the 1st time of monetary policy easing since 2009.  An advance estimate for S'pore 3Q GDP showed 1.3% QoQ growth and 5.9% YoY growth.  MAS added that core inflation stood at 2.2% in the second quarter and the first two months of 3Q, compared to 1.9% in 1Q.

 

SWINE STREPTOCOCCUS CASE FOUND IN MACAU Macau Daily Times

A case of swine flu was found in a 60-yr HK resident living in Macau.

 

MACAU PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR AUGUST 2011 DSEC

Visitor arrivals in package tours in August 2011 soared by 49.4% YoY to a record high of 713,383.  Visitors from Mainland China (513,094); Taiwan (53,358); Hong Kong (33,356) and the Republic of Korea (30,532) surged by 46.6%, 124.2%, 28.8% and 113.6% respectively.

 

At the end of August 2011, total number of available guest rooms of hotels and guest-houses increased by 2,384 (+12.1% YoY) to 22,151 rooms, with that of 5-star hotels accounting for 63.4% of the total.  Hotels and guest-houses received 809,120 guests in August 2011, up by 16.3% YoY, with the majority coming from Mainland China (53.9% of total) and Hong Kong (21.8%). The average length of stay of guests decreased by 0.05 night to 1.4 nights.

 

MACAU TOURIST PRICE INDEX FOR THE 3RD QUARTER 2011 DSEC

Macau Tourist Price Index for 3Q surged 16.7% YoY and 4.8% QoQ.  The rise was attributed to higher hotel room rates, restaurant service charges, food prices and jewelry prices. 

 


Groupthink's Behavior

This note was originally published at 8am on October 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Psychologist Irving Janis coined the term groupthink to describe ‘expert’ behavior.”

-Dan Gardner (“Future Babble”, page 109)

 

When our head of Healthcare Research, Tom Tobin, and I were working at what used to be called Dawson-Samberg (long-time hedge fund that split up) over a decade ago, we were learning what Wall Street “consensus” was by doing. Today, we continue to develop processes to quantify it. This, like any good process, takes flexibility, testing, and time.

 

Within the context of a long time, “groupthink” is a relatively new phenomena. Irving Janis’ original groupthink research at Yale University didn’t occur until the early 1970s. Since then, it’s been very helpful in analyzing both the military and economic policy mistakes of central planners.

 

Groupthink can also be applied to analyzing the behavior of short sellers – as in hedge funds – and how and when they make decisions. To be, or not to be hedged – remains the question. With the most obvious of groupthink occurring at the most painful ends of what we call the immediate-term TRADE range.

 

While it’s hard to believe that Old Wall Street missed making the 2011 Growth Slowing call (after having had the opportunity to review their 2008 forecasting mistakes), it’s even harder to believe that the SP500 can put on a 116 point (+10.7%) move in less than a week and still have so many hedge fund guys trafficking in the same high-short interest hedges.

 

Believe both.

 

I remember listening to a friend explain to me that John Paulson was “reducing his exposure to 62% net long” (with leverage) sometime back in early Q3 of 2011 and thinking to myself, that’s not a hedge fund – hedge funds hedge.

 

But that was just silly young me saying what any prudent Risk Manager should have said about Paulson’s positioning, given my bearish intermediate-term Global Macro view.

 

After I said it publically on CNBC again in July, I had people do the proactively predictable and tell me I was being whatever they call someone when they are confident in their view. After all, John Paulson is smart. But, then again, so is my team. Market opinions aren’t personal. Neither are the tail risks associated with redemptions and liquidations. It’s all part of the game.

 

Back to the Global Macro Grind

 

With the Short Covering Opportunity and the Eurocrat Bazooka Squeezes out of the way, now we can get back to managing risk around newly developed ranges. In the last week, a very important signal has developed on my immediate-term TRADE duration that supports that claim – the SP500 and Volatility have recovered their respective TRADE lines of support and resistance.

 

What does that mean? First, let’s look at the levels.

  1. SP500 TRADE line support = 1167 and TREND line resistance = 1228
  2. Volatility (VIX) TRADE line resistance = 36.91 and TREND line support = 29.02

Did I just confuse the matter by throwing in another duration (the intermediate-term TREND)? Yes, I did. And that’s the risk management point that we continue to beat the drums on within our process – you have to be able to be Duration Agnostic.

 

What that means is that bullish is as bullish does for US Equities provided that the TRADE line of 1167 holds. But only to a point (the TREND line of 1228). And with a deep respect for that point, we also have to wake up every morning Embracing Uncertainty – because the minute that 1167 breaks again, we’ll need to be focused on putting our crash helmets back on.

 

This Globally Interconnected Game of Risk can get even more confusing if you don’t blow out your model to absorbing the uncertainty associated with correlation risks across global markets. Whether they be countries, currencies, or commodities, they’re all there – and they affect Groupthink’s Behavior, big time.

 

We call that being Multi-Factor in our risk management approach.

 

So, with a multi-factor (countries, currencies, commodities, etc.), multi-duration (TRADE, TREND, and TAIL) Global Macro model in hand, what do I see going on out there this morning?

 

Here’s my Top 6:

  1. SP500 bullish TRADE; bearish TREND
  2. VIX bearish TRADE; bullish TREND
  3. Hang Seng in a Bearish Formation (bearish across all 3 durations, TRADE/TREND/TAIL)
  4. Copper and Oil in Bearish Formations
  5. Euro/USD cross in a Bearish Formation with TRADE and TAIL lines of resistance at $1.36 and $1.39, respectively
  6. German DAX bullish TRADE; bearish TREND

I have a lot more than 6 factors in my model – but these are the ones ringing with the most Correlation Risk right here and now. These are my front-runners for managing Global Macro risk.

 

I have a tremendous amount of confidence in both my risk management model and the 41 people on my team that support its inputs. This confidence is a culture – we are not too proud to change the model’s parameters or throw away the wrong assumptions when they are not working. As prices, volatilities, and volumes change, we do.

 

Embracing Uncertainty is the furthest thing from what Old Wall Street wants right now. The only certainty I have about that is that Groupthink’s Behavior is going to continue to have performance problems as these markets churn.

 

My immediate-term support and resistance ranges for Gold, Oil, the German DAX, and the SP500 are now $1640-1679, $80.90-86.41, 5571-5921, and 1167-1198, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Groupthink's Behavior - Chart of the Day

 

Groupthink's Behavior - Virtual Portfolio


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