The Economic Data calendar for the week of the 28th of November through the 2nd of December is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Keith covered AN in the Hedgeye virtual portfolio at $33.98 (please note correction on price) for a nice gain managing risk and trading the range this morning.
We continue to be concerned near-term with CapEx having doubled back to levels more in-line with investment prior to AN shrinking to half its size from ’05-’10 and is on pace to increase even higher as a % of sales this year. Returning to prior levels to offset deferred investment will impact FCF and the company’s ability to buy back shares and manage earnings near-term.
TODAY’S S&P 500 SET-UP - November 25, 2011
As we look at today’s set up for the S&P 500, the range is 42 points or -0.67% downside to 1154 and 2.94% upside to 1196.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
KING DOLLAR – big long-term TAIL breakout in the US Dollar continues to hold its gains this morning as the Euro moves to immediate-term TRADE oversold at 1.32. If the Germans aren’t going to cooperate with the Bailout Beggars, Draghi is going to move towards more aggressive ECB rate cuts = bearish for the Euro, bullish for the USD (intermediate-term TREND)
ITALY – complete mess as the Italians sell €10B of 6mth fiat at 6.50% vs 3.53% last; that’s just a monster jump in funding costs and both the Italian bond and stock markets continue to have this right. Markets don’t lie; politicians do. MIB Index moves to immediate-term TRADE oversold at 13,711.
HUNGARY – small country but they all matter in this game of dominos; Hungary is begging for an IMF bailout and Moodys decided to cut their credit rating to junk this morning = -4.6% drop in Hungarian stocks and the story just moved to #1 on Bloomberg most read.
The Hedgeye Macro Team
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This note was originally published at 8am on November 22, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“In a time of turbulence and change, it is more true than ever that knowledge is power.”
-John F. Kennedy
Contextualizing market moves within the scope of Global Macro fundamentals is as critical right now as it’s ever been. That’s why we built a firm around our multi-factor, multi-duration, Global Macro risk management process.
Every morning we wake up at the same time and do the same thing. We Embrace Uncertainty. Functionally, what that means is that price, volatility, and volume factors strike our models on a real-time basis – and we accept them for what they are.
Much like the rain and tide pounding the contour of an ocean line, what you end up seeing is what you get – patterns. Time and patterns create a series of probabilities, scenarios, and ranges. This is how we apply Chaos Theory to markets.
Back to the Global Macro Grind…
This morning’s embrace of uncertainty issued me a not-so-friendly risk management kiss. I’m in a hotel room on the road – and that’s not cool coming from a laptop. But I guess that’s too bad for me – the market doesn’t care about how I am positioned.
I am long the US Dollar and short the Euro.
The Germans decided to support the Euro this morning by telling the rest of the world’s Bailout Beggars to go pound sand. This isn’t the kind of sand in Benoit Mandelbrot’s fractal model (falling one grain at time). This is the big beachhead of fluffy expectations stuff.
“We don’t have any new bazooka to pull out of the bag… we see no alternative to the policy we are following… we need to tell markets very clearly – and this must be done soon – that there is no other way forward than the one we’re pursuing.” –Michael Meister
Meister, one of Merkel’s senior guys, went on to add that if Italian and the French central planners don’t like that, they can go pound some more sand, and “sit tight through the turbulence.”
The Euro finally bounced on that (I know – how dare the Germans defend the common currency and purchasing power of their people!), rallying straight back up to an immediate-term TRADE zone of resistance ($1.35-1.36).
In turn, the US Dollar sold off, holding immediate-term TRADE support of $77.07 (US Dollar Index).
Thankfully, it will take more than one morning, week, or month of Powerful Turbulence to take me out of this globally interconnected game of risk. Pursuing its outcomes is what I love to do. And I love being long our King Dollar theme on red.
Dollar Down = reflation of some of yesterday’s deflation. Dollar up = Deflates The Inflation.
Since 71% of US GDP = Consumption, that’s what we need to see more of to bring growth back in the country – not another super-committee of central planners. Newt has that part of it right.
Strong Dollar = Strong America. Period.
While that may create some Powerful Turbulence in the stock market in the short-run, in the long-run most of our children and grandchildren won’t be dead.
The short-run performance of the stock market doesn’t reflect the long-term health of the country – full employment and price stability do.
US stocks are down -12.5%, -7.6%, and -5.6% from their April, October, and November highs, respectively. Volatility (VIX) is up +120% since April’s SP500 price of 1363. Unemployment in America hasn’t moved off of 9%.
Having learned the 1920s lessons of structural unemployment and price volatility the hard way, maybe there’s a part of this that the Germans have right for the long-run too.
My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1684-1722, $95.35-98.42, 5567-5769, and 1186-1203, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
“Capitalism isn’t scarce; vision is.”
Get GDP Growth and the US Dollar right and you’ll get mostly everything else right. Happy Thanksgiving.
The US Dollar is up another +0.5% this morning to $79.52 on the US Dollar Index, taking its week-to-date gain to +1.7%, and its cumulative gain since Bernanke signaled the end of Quantitative Guessing II to +8.9% (since April).
Given the generationally high inverse-correlations between the US Dollar Index and everything else, we continue to see what we’ve coined as a Correlation Crash across asset classes as a direct result of this bullish Buck Breakout.
This morning’s Global Macro Grind amplifies the deep simplicity of this risk management point:
Correlation does not always imply causality. We get that.
But A) sometimes it does and B) it can be very reflexive in the immediate to intermediate-term.
Keynesian economists/strategists try to avoid Soros’ concept of “Reflexivity” in markets and economies as much as Global Macro investors are avoiding the Hungarian-American’s birthplace this morning (Hungary’s stock market trading down -4.6% after Moody’s cut Hungary’s credit rating to junk).
Academic types have a hard time using markets as leading indicators because they have no experience managing real-time market risk. That’s a problem - a really big problem with US economic policy.
Policy = Causality.
That’s why you’ve never heard Ben Bernanke or Tim Geithner use these 2 words - Correlation Risk – to attempt to explain anything about nothing that’s happening in either Global Macro markets or the economies that underpin them.
Accepting responsibility for causality, after all, would be an admission of failed policy. At least Greenspan admitted this in 2008. Maybe Bernanke will by the time he is retired from the Fed too…
The Germans kind of get this. That’s primarily because they have to. The German People will not give the fiscally conservative leadership of the Bundesbank a hall pass on forgetting the history of hyper-inflation. At least not yet.
German stocks are down another -0.54% this morning, taking the DAX down to 5398 (down -28.2% since the US and German stock markets put in their 2011 YTD highs). If the SP500 was down that much from its April 2011 closing high (1363), it would be trading at 979 this morning. The German People aren’t as hyper about their stock market as our manic media culture is.
If I’ve said this 100 times in the last 4 years, I’ve written and/or said it 1000 times – the immediate to intermediate-term moves in a country’s stock market does not exclusively reflect a country’s long-term health. Currency stability, inflations/deflations, and employment levels are, collectively, much better long-term barometers for purchasing power and prosperity.
I could write a book about that – and maybe I will – but that’s not going to happen in the remaining 10 minutes I have to finish this note this morning. So hopefully it continues to provide a basis for long-term economic debate.
The Scarce Vision that policy makers in this country have displayed over the course of the last decade is not what we should be thankful for this Thanksgiving. What we should all be thankful for is a generational opportunity in America to change that.
My immediate-term support and resistance ranges for Gold (bearish TRADE and TREND), Brent Oil (bearish TRADE and TREND), German DAX (Bearish Formation) and the SP500 (Bearish Formation) are now $1, $105.13-109.98, 5, and 1154-1196, respectively. With the US Dollar immediate-term TRADE overbought today, plenty of market prices will be oversold.
Happy Thanksgiving to you and your loved ones,
Keith R. McCullough
Chief Executive Officer
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.