“There thus appears to be an inverse correlation between recovery and psychotherapy.”
With The Correlation Risk whipping around faster than a Keynesian can drum up the next big central plan, I’ve decided to source my morning quote from a psychologist. If I have to deal with managing risk today like I did yesterday, I think I might need one.
The late Eysenck was a “German-British psychologist … best remembered for his work on intelligence and personality… at the time of his death, Eysenck was the living psychologist most frequently cited in science journals” (Wikipedia).
The Big Government Intervention experiments of Japanese, American, and now European social scientists may not be cited in the scientific journals of our children as successes. I’m thinking maybe more like pre-Einstein “scientists” are remembered from Berlin.
After Ben Bernanke’s FOMC proclamations of faith yesterday, I was reminded of what the President of the United States should be holding him accountable to (his job):
- Achieve full employment
- Establish price stability
In the Transparency, Accountability, and Trust school of questioning perceived academic wisdoms, I give the Chairman of the Federal Reserve and the policies he has perpetuated globally to inflate very low grades.
Sure, somewhere in between what he thought was going to be an employment recovery and psychotherapy, I can be convinced that the man got lucky with some inverse correlations (driving commodities and stocks up with the Dollar Down). But for now, it’s the Correlation Risk (i.e. the other side of the trade), that’s ungluing just about everything that he believed would stick.
Back to the Global Macro Grind…
As the SP500 bumped up against (and failed at) my immediate-term TRADE line of resistance (1249) yesterday, I sold my long position in the SPY (957AM EST, #TimeStamped).
While that’s a 180 versus what I was outlining yesterday, there’s also a 180 degree difference between the SP500 at 1229 and 1249. There’s an even bigger difference on a TRADE line breakdown through 1232. Risk works both ways.
Contextualizing why you make immediate-term TRADE decisions requires an intermediate to long-term risk management process. That’s why we call our model Duration Agnostic.
If you take a step back and consider our most fundamental intermediate-term TREND view in Global Macro right now, it’s a lot easier to see why we’d have a 0% asset allocation to something like Commodities.
Hedgeye Global Macro Themes for Q411 (introduced in mid October):
- King Dollar – an explicitly bullish view of the US Dollar across durations
- Correlation Crash – an explicitly bearish view of Global Equities, Commodities and Foreign Currencies
- Eurocrat Bazooka – a view that the Europeans would ultimately fail in keeping rumors in line with reality
So far, so good.
Our competition (shh, even in a fair share world, it really still is a competition) has had plenty of opportunity to follow the leader on these Global Macro Themes. But, sadly, they have chosen the path most travelled by Old Wall Street sell-side firms and stayed the course with what didn’t work for them in 2008 and certainly is not working now. Same broken models.
Not to name names, but whether it was Goldman saying buy Commodities in October (then buy the Euro in November!), or Tom Lee at JP Morgan just saying buy buy buy, it’s all one and the same old thing. I’m not the only one who should be considering psychotherapy.
Back to The Correlation Risk…
Yesterday I heard a few pundits talk about how interesting it was that the “correlations are starting to come undone.” Not sure what that means (they were saying it when US stocks were up on the day actually), but here’s the latest math:
Immediate-term inverse correlations between the US Dollar Index and the big Macro that matters:
- CRB Commodities Index = -0.87
- SP500 = -0.59
- EuroStoxx = -0.73
- Gold = -0.82
- Silver = -0.89
- Corn = -0.84
Now maybe if you are US stock centric and not paying attention to Global Macro Correlations other than the SP500, this data could be spun as half-true (SP500 was a -0.8). But C’mon Man – interconnectedness is what’s been driving the Alpha bus for all of 2011. Period.
Since we authored this very basic thought, we do agree that the best path to long-term prosperity in America is through a Strong Dollar. Correlation Risk is not perpetual. With time, Strong Dollar = Strong US Consumption. Strong Consumption (71% of US GDP) will ultimately save this country from the Keynesians themselves - like it did in 2009.
Unfortunately, this is not yet 2009. Bottoms are processes, not points. And this Correlation Crash still needs to run its course.
My immediate-term support and resistance ranges for Gold, Brent Oil, German DAX, French CAC, and the SP500 are now $1, $107.12-109.56, 5, 3026-3133, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
We’re seeing some very notable sentiment changes. Great setup for WMT on the margin. Also looking good – LIZ, GES, COLM, URBN. Negative callouts include M, DECK, TJX. Keep an eye on NKE and JCP. They can go either way.
Here are some interesting callouts in our Hedgeye Retail Sentiment Scoreboard. As a reminder, our Scoreboard combines buy-side and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. We won’t belittle the art of stock picking by implying that simply going counter to what a chart says will make money. But this analysis is heavily quantified, back-tested, and most of all…accurate. We use it as a part of our process to flag the outliers. (Think of it like the manager of a baseball team sending a batter to the plate and starting off with a 2-0 count).
Here are some important notables:
WMT: The fact that WMT went down to 74 from 92 over the past year is stunning – though it appears that this negative trend has stabilized. WMT remains one of our top picks.
NKE: While Nike’s Sentiment has come down meaningfully to 84 from 94 in July, it still has the highest sentiment score on our radar.
URBN: The contrarian bull case has been building for URBN for over a year now. Sentiment has steadily eroded from a high score of 70 down to 30. Now that all the bears are out of hibernation, we think that the incremental shifts will be on the positive side.
LIZ: LIZ was one of our favorites when its score was a 5. A few asset sales later as well as a more clearly defined brand strategy moving forward have gotten more people involved; the score is pushing double digits – but still among the lowest in all of retail (ie people are still not bullish enough).
CRI/GIL/HBI: Scores for the perceived commodity-heavy names improved throughout September and October. More recently however, GIL and HBI have declined sharply while CRI accelerated 8 points last week. Sell-side upgrades and expectations of a minimally promotional holiday shopping season have had no impact on our thesis. We’re still bearish on all three.
LULU: This week’s score jolted up 13 points to 41. The quarter definitely raised flags, but the stock saw immediate upgrades and short covering, which took sentiment higher.
GES: The long term merchandising and geographic opportunities for GES remain positive but short term headwinds in Europe and rising concerns around North America have driven the sentiment score down 10+ points over the past month. As it heads lower, we like it more.
COLM: Over the past 6 weeks, Columbia’s score has deteriorated by 20 points to 36. Someone is making a big negative bet here – likely on its tremendous International exposure (45% of EBIT).
DECK: The perennially bearish sentiment on DECK is now sitting at its most bullish position in years. Are people finally giving in to the idea that UGG is not a fad?
M: Macy’s is hitting peak sentiment. Yes, the name is cheap if you believe numbers. But we don’t believe numbers.
UA: Retraced 10 points over the past two months. Still bearish overall with a score of 40, but not bearish enough.
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Conclusion: Both leading market price indicators and lagging economic fundamentals lend us further conviction in our expectation of a monetary easing cycle across Latin America over the intermediate term.
- Equities: Latin American equity markets are trading down -2.1% wk/wk as of now. Argentina, a country we remain fundamentally bearish of, led decliners (-5.4% wk/wk).
- FX: Latin American currencies closed down -0.6% w/wk vs. the USD, led to the downside by Brazil’s real and Mexico’s peso (down -3.8% and -2.9%, respectively).
- Fixed Income: Latin American sovereign debt yields generally increased wk/wk, highlighted by the backup across Mexico’s maturity curve: 2yr up +8bps; 10yr up +15bps; and 30yr up +20bps. Yield curves mostly compressed across the region as slowing growth remains an issue.
- Credit: 5yr sovereign CDS broadly widened wk/wk, trading up +1.5% wk/wk on a median percentage basis. Venezuela held out, tightening -32bps or -3.4%.
- Rates (1yr O/S Swaps): Bullish wk/wk action across Latin American interest rate swaps markets; Mexico widened +24bps wk/wk and Brazil continues to trade a full -112bps below the central bank’s policy rate.
- Rates (O/N): Interbank rates signaled a broader easing of liquidity across Latin America, with Brazil seeing a -5bps wk/wk decline. Conversely, Mexico saw a +5bps wk/wk tightening.
CHARTS OF THE WEEK
Brazil’s growth/inflation outlook augers well for continued monetary easing:
That view is being priced into various fixed income and interest rate markets throughout Brazil:
The Currency Crash in the Mexican peso suggests Agustin Carstens and Co. might be next to join Brazil in lowering interest rates:
THE LEAST YOU NEED TO KNOW
- Brazil’s real GDP growth slowed in 3Q to +2.1% YoY vs. +3.1% prior; flat sequentially (QoQ) vs. +0.7% prior. Brazilian retail sales growth slowed in Oct; inflation-adjusted sales grew +4.3% YoY vs. +5.2% prior; unit volume growth came in at +1.6% YoY vs. +4.7% prior.
- Mexican consumer confidence ticked down in Nov to 89.5 vs. 90.6 prior. Industrial production growth slowed in Oct to +3.3% YoY vs. +3.6%.
- Chilean economic activity growth slowed in Oct to +3.4% YoY vs. +5.7% prior. Export growth slowed in Nov to +0.3% YoY vs. +18.2% prior.
Deflating the Inflation:
- Brazilian CPI slowed in Nov to +6.6% YoY vs. +7% prior; the continued slowing remains in-line with our models and the central bank’s expectations, which point to CPI falling to the mid-point of the target range (+4.5%) by year-end 2012 – a forecast that is inclusive of the recent rate cuts. Antonio Fraga, a former Brazilian central bank head now on the buyside, expects Brazilian interest rates to fall to a record low under President Rousseff, whose administration has been applying well-documented pressure to the central bank to continue lowering interest rates.
- Chilean CPI accelerated slightly to +3.8% YoY vs. +3.7% prior.
- Venezuelan CPI accelerated in Nov to +27.6% YoY vs. +26.9% prior.
- Per Brazil’s Deputy Finance Minister Nelson Barbosa, the country plans to rely further upon monetary easing (both trailing and future) and less upon fiscal easing to stimulate the economy in 2012. Moreover, he confirmed that the country would not rely upon a widespread expansion of state-directed lending as seen in the 2008-09 downturn. As highlighted in our Black Book on Brazil, this is positive for the long-term health of the Brazilian economy, as backdoor capital injections into these banks will be limited to R$25B vs. R$100B-plus in previous years. Net-net, we expect further rate cuts and a potential for fiscal metrics to “miss” expectations to weigh on the BRL going forward. To the former point, the 1y O/S swaps market is trading 112bps below the current Selic target rate and Brazil’s interbank futures market is pricing in three additional -50bps cuts by next August. To the latter point, the central bank is forecasting +3.5% GDP in 2012 – a full 150bps below the government’s +5% target, which suggests to us that revenues may come in light next year and widen the deficit relative to the official target.
- After a -15.6% peak-to-trough decline in the Mexican peso through the end of Nov (a call we had clients well in front of), we saw Mexican CPI accelerate to +3.5% YoY in Nov vs. +3.2% prior. The +1.1% MoM gain was the largest sequential acceleration since Jan ’10. The weakened currency poses intermediate-term upside risks to Mexican inflation, so much so that the central bank has taken to auctioning $400M of its FX reserves daily to lend a bid to the ailing peso.
- Colombia CPI came in unchanged in Nov at +4% YoY while PPI slowed to +6.8% YoY vs. +7.9% prior. Our models point to this being right around the intermediate-term peak in Colombian CPI – a view supported by the aforementioned easing of Colombia’s supply-side inflationary pressure. As such, we do not expect further interest rate hikes out of Colombia over the intermediate term as growth slows and inflation peaks.
- Mexico’s IMEF manufacturing and services PMI readings both ticked up in Nov to 53.3 (vs. 51.4 prior) and 54.1 (vs. 53 prior), respectively.
POSITION: Long US Dollar (UUP)
After hearing today’s US Federal reserve proclamations of forecasting faith, we have no change to our view that Ben Bernanke will remain in a box for the foreseeable future.
Being in a box (for those of you central planning fans who have never tried it at home) means that you can’t cut or raise interest rates. In The Bernank’s case, we continue to believe that he cannot yet fear-monger for a QE3.
Ironically, but not surprisingly, the reason for this is King Dollar itself. As you can see in the charts below, as is the case with making most Big Macro calls, it’s the slope of the lines that matters. Less Big Government Intervention (money printing) = Stronger US Dollar.
Stronger Dollar = Stronger US Consumption.
Stronger Consumption in Q3/Q4 means Bernanke can’t cut (US Consumption = 71% of US GDP).
Pictures tell a 1,000 words. Keynesian Politicians, take notes.
Keith R. McCullough
Chief Executive Officer
So much for record Thanksgiving sales reports. U.S. Retail sales came in up only +0.2% vs. 0.6%E and ex-Auto +0.2% vs. +0.5%E on a sequential basis in November and up +6.8% yy. The continued sequential deceleration since July is consistent with what we heard out of retailers regarding November sales and the takeaway is the same as well – the U.S. consumer is weaker than many headlines suggest.
Among the key callouts from today’s retail sales report is the sharp deceleration in apparel to +3.7% down from +5.3% for the second consecutive month. Yes, that category alone it accounts for only 7% of PCE, but general merchandise stores (e.g. department and warehouse stores) had a similar deceleration. Combined the two represent over 25% of total PCE – that’s noteworthy.
Below is a table of the key categories that constitute ~70% of the retail sales number. Here are a few additional callouts:
- Top-line yy trajectory is decelerating sequentially in all core categories with the exception of auto and electronic/appliance stores.
- Food and Gas stores (~1/3 of total sales) were down -0.2% and -0.1% each sequentially underperforming all other categories
- Electronics/appliance stores were the best performing for the second consecutive month.
- Department stores declined -3% from -0.5% sequentially reflecting an even sharper deceleration than SSS trends suggest (+0.5% in November from +2%). At roughly 10x the size of the SSS sample set, this too is worth noting.
So what does it mean for Q4? The reality is that consumers are now lapping tougher retail sales compares through the 1H of ’12 with fewer levers to pull in order to sustain 7%+ growth rates. We continue to expect the greatest pressure on the consumer will be realized in the mid-tier department stores into the 1H of F12.
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