TODAY’S S&P 500 SET-UP – January 13, 2012
As we look at today’s set up for the S&P 500, the range is 21 points or -1.12% downside to 1281 and 0.50% upside to 1302.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: 699 (+410)
- VOLUME: NYSE 770.06 (1.44%)
- VIX: 20.47 -2.76% YTD PERFORMANCE: -12.52%
- SPX PUT/CALL RATIO: 1.55 from 2.18 (-28.90%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 55.12
- 3-MONTH T-BILL YIELD: 0.02%
- 10-Year: 1.90 from 1.92
- YIELD CURVE: 1.68 from 1.69
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Import Price Index, M/m, Dec., est. -0.1% (prior 0.7%)
- 8:30am: Trade Balance, Nov., est. -$45.0b (prior -$43.5b)
- 9:55am: UMich Confidence, Jan. P, est. 71.5 (prior 69.9)
- 11:10am: Fed’s Duke speaks on regulation in Santa Barbara, Calif.
- 12:45pm: Fed’s Lacker speaks on economy in Richmond
- 1pm: Fed’s Evans speaks in Indianapolis
- 1pm: Baker Hughes Rig Count
- 1:15pm: Fed’s Bullard Speaks on Monetary Policy in St. Louis
WHAT TO WATCH:
- Trade deficit may have widened in Nov. to $45b as oil imports rose, economists est.
- J.P. Morgan is first of the large banks to release earnings; watch commentary on capital/regulatory outlook
- Google, LG said to be in talks to collaborate on new TV service
- Nestle, Danone said to make first-round bids for Pfizer’s baby-formula unit
- Eastman Kodak said to be in advanced discussions with Citigroup to provide bankruptcy financing
- Dow Chemical CEO Andrew Liveris, Alcoa CEO Klaus Kleinfeld speak on job creation, innovation at Brookings, 8:30am
- Lufthansa, Boeing officials to speak at National Press Club on how use of biofuels will impact transportation industry, 9am
- No IPOs scheduled: Bloomberg data
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- China Gold Hoarding Turns More Traders Into Bulls: Commodities
- Oil Heads for Weekly Decline on Plans to Delay Iranian Embargo
- Cocoa Falls After European Bean Processing Report; Coffee Climbs
- Gold Drops as Some Investors Sell After Rally to One-Month High
- Copper Advances on Optimism Euro-Area Economy Is Stabilizing
- Copper, Oil, Gold May Drive Commodities Rally, Goldman Says
- Gold May Gain to $1,670 as Average Breached: Technical Analysis
- Soybeans Gain First Time in Four Days as USDA Trims Forecast
- China’s Wen to Juggle Iran Oil Need With Saudi Ties on Gulf Trip
- Evraz Debt Costs Diverge on Lowest U.S. Loan Rate: Russia Credit
- Copper Tax Pushing KGHM to Debt to Keep Growing: Poland Credit
- Rubber Drops, Paring Weekly Gain, as Oil Under $100 Cuts Appeal
- Palm Oil Drops as USDA Forecasts Bigger U.S. Soybean Supplies
- COMMODITIES DAYBOOK: Oil Trims Weekly Drop on Europe Optimism
- Corn Drops After USDA Unexpectedly Lifts Global Supply Outlook
- Uranium Returning From Brink on China Demand: Energy Markets
- EU’s Iran Oil Embargo Said Likely to Be Delayed for Six Months
The Hedgeye Macro Team
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This note was originally published at 8am on January 10, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Perpetual optimism is a force multiplier.”
Politicians have been trying to spin multiplication theories for generations. From time to time, within their own groupthink tanks, these theories have become particularly influential – especially with the large percentage of the political-class that doesn’t do math.
In 1936, when he wrote the General Theory, John Maynard Keynes focused on what he infamously coined “The Multiplier Effect.” The theory was that every dollar spent by government would have a multiplier effect (greater than 1) rippling throughout the economy. Unfortunately, when Keynesian governments tried that in the late 1920s it didn’t work – and it hasn’t worked since.
Despite being proved wrong throughout the 1929-1933 period, Keynes, ever the master Storyteller, found a way to re-frame his vision of the elixir of a government-stimulated life. Keynes preached “that it is a complete mistake to believe that there is a dilemma between schemes for increasing employment and schemes for balancing the budget.” (Keynes Hayek, page 135)
What does 1 scheme multiplied by 2 more failed schemes equal? But these guys have to do something!
Fortunately, President Bill Clinton figured this out and wanted nothing to do with being labeled a Keynesian. President Clinton, like President Reagan, oversaw one of the 2 largest decades of employment growth in US history (by decade, the 1980s and 1990s saw between 18-22 million jobs added (net), respectively – Obama/Bush decade = net zero).
And Clinton did it with a balanced budget mandate…
Fact Check: Clinton’s Balanced Budget Act of 1997 led to the following Federal Budget results:
- 1998 = +$69B surplus
- 1999 = +$124B surplus
- 2000 = +$230B surplus
“… the first surplus in three consecutive years since 1947-1949, when Harry Truman was President. The debt had been reduced by $360B in three years with $223B paid in 2000, the largest one-year debt reduction in American history.” (Keynes Hayek, page 274-275)
I’m not a Republican or a Democrat. I’m just a man who wants to get this right. And, setting aside all of the other angles on this Presidential Election, I think that if Obama or Romney get the economic policy messaging right, they’ll win the election.
So far, President Obama has a lot of Reagan in his economic policy legacy (ballooning national debt balance and Keynesian spending). Romney’s got plenty of baggage too, but maybe he has a bigger opportunity to be the change Americans want to see in our economics.
Last night on The Kudlow Report, Larry asked me what I’d suggest Romney be (economically). My answer: ½ Clinton ½ Reagan.
Back to the Global Macro Grind…
I’m coming into this morning’s US market open hot. I don’t mean Alabama Crimson Tide hot – I mean locked and loaded with the most Global Equity exposure I’ve had in well over a year:
- Long US Consumer Discretionary(XLY)
- Long US Consumer Staples (XLP)
- Long US Utilities (XLU)
- Long Chinese Equities (CAF)
- Long Hong Kong Equities (EWH)
But how hot is hot? Well, get out the calculators and tell me what your money is up or down if you sold all of your Asian and US Equity exposure between February and April of last year, and you tell me.
We all invest from the vantage point of what’s in our own accounts. This cochamamy storytelling of the Old Wall that there is an optimal “asset allocation” is as broken as Keynes personal accounts were when they crashed in 1929.
Money compounds. Anyone who does math with their own money gets that. Money also gets evaporated during big draw-downs (i.e. if you’re still long SP500 1565 from October 2007, you’re still down -18.2% from there and need to be up over +22% to get back to breakeven). That’s math too – it’s called geometric.
For my money, moving to a 24% total Global Equity asset allocation in an environment like this actually makes me really nervous. Maybe that’s why it’s working for 2012 YTD (Chinese Equities are already up +3.9% for the year). Maybe it’s not. All I know is that what I don’t know is what makes me nervous about being long anything tied to government decision making.
Maybe Powell was right about the force-multiplier of optimism. Maybe I’ve been right on the trust-divider of fear-mongering. All I know is that, combined with a Strong Dollar, the best of ½ Clinton ½ Reagan is a winner for me.
My immediate-term support and resistance levels for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1592-1645, $111.89-115.61, $1.26-1.29, $80.41-81.61, 2178-2295, and 1269-1291, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
“If we had 8% unemployment, Keynes would be back. We must remember that economists are not necessarily the creatures of great thought but of circumstance. Keynes would not have written ‘The General Theory’ except in the Great Depression.”
-John Kenneth Galbraith, 1999
Today’s quote of the day is typical of Galbraith; he expressed his views with a masterful economy of language. Ten years after Galbraith made his prediction that Keynes would be back in vogue if unemployment reached 8%, his prophecy came true. Robert Skidelsky began writing “Keynes: Return of the Master” – on January 1st, 1999 – as unemployment was just under 8% and trending higher. The Wall Street Journal also devoted a full-page spread to Keynes a week after Skidelsky put pen to paper.
It’s difficult to understand the motivations of academic economists. The measure of success for an economist, some might argue, is whether or not one’s theory stands the test of time and remains part of future policy debates. The difficulty with this, as Skidelsky highlights, is that circumstances may permit your ideas to be heard outside of academia but they will almost certainly demand that theories will, as policies, be applied in a vulgarized form. The discrediting of economists in recent times has prompted many public figures to disavow all ties with the profession; Tim Geithner is just one example.
Despite the provocative title of his aforementioned book, Skidelsky is realistic and honest about the role of circumstance in the ascension of Keynes and others to the throne of economics that some would place them on, stating that “just as Keynes succeeded politically because unemployment was the problem of the 1930s, Friedman succeeded politically because inflation was the problem of the 1970s.” The rise of Barrack Obama and, perhaps, the ever-perseverant Mitt Romney are also permitted more by the fickle preferences of their time than the genius of their ideas. Thankfully, politicians and the policies they implement are answerable to voters. One long term positive emerging in the United States is what could be called the bottoming process of political participation in this country. Obama’s engagement of the youth vote through social media was a political revelation of a scale not seen since Reagan went public with his appeal for voters to contact their state representatives to support Federal Tax Reduction Legislation in July 1981. The Great Communicator understood the value of engendering a feeling of inclusivity among the electorate and he warned Congress of the importance of public opinion, also in 1981, by quoting Teddy Roosevelt’s message to Congress 80 years prior, “The American people are slow to wrath but when their wrath is once kindled, it burns like a consuming flame.” The aftermath of the Great Recession has bred a new strain of voter: young, confused and dissatisfied with their vision of the future. The internet is greasing the wheel of mobilization as circumstance drives voters to wonder what factors are behind the country’s predicaments and how they can be changed.
A Gallup poll conducted in July 2011 posed the following question to Americans: What do you think is the most important problem facing this country today? The top three responses were “economy in general”, “jobs”, and “federal debt/deficit”, making up 31%, 27%, and 16% of the responses, respectively. While Obama has recorded some significant coups in terms of the War on Terror and has taken pride in health care legislation passed on his watch, what the vast majority of Americans want is the economy to be back on track. The longer the “Jobless Recovery” continues, the less relevant other topics become.
We believe that a strong dollar is the first step to rejuvenating American confidence. 71% of GDP is consumption and a stronger dollar increases purchasing power. GDP growth has strengthened sequentially as the greenback appreciated and we expect that to continue. Politicians in Washington need to recognize the strong dollar and the impact it has had on the economy recently. The short term impact for jobs has been unmistakably positive.
Our Chart of the Day highlights this point clearly. The two meaningful positive moves in the US Dollar Index since 2009 have coincided with improvements in employment growth. One of the many positives of democracy is that, in the end, the mandate is made clear. The People’s directive to Washington, D.C. is to create jobs. Economists that debate the optimal method by which to achieve this end are not incentivized to compromise. There are neither direct consequences of their words nor any clock hurrying them through their thought processes. Politicians are not being afforded such shelter from scrutiny. To compromise is the most human of actions and, whether they like it or not, many political figures in Washington are going to be forced to do just that from now on. The circumstances – and the People – demand it.
Have a great weekend,