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Re-Shape The Debate

“I am trying to re-shape and improve my central position.”

-John Maynard Keynes

 

After getting publically steam-rolled for his failed government “stimulus” experiments of the late 1920s, that’s what Keynes finally admitted to Hayek in 1932. Keynes went on to tell Hayek that changing his views is “probably a better way to spend one’s time than in controversy.”

 

Classic. Can you imagine if Ben Bernanke and Larry Summers had it in them to change their central planning strategies as the facts have? Sadly, you probably can’t. That’s the anchor of Academic Dogma in our Ivy League towers that will take time to creatively destruct.

 

Keynes, of course, used willful blindness to alternative economic strategies like Hayek’s just as well as Bernanke and Geithner do: “Keynes admitted in a Treatise on Money that ‘in German, I can only clearly understand what I already know – so that new ideas are apt to be veiled from me by the difficulties of the language.” (Keynes Hayek, page 139).

 

It’s a good thing Albert Einstein was able to Re-Shape The Debate of his time in English…

 

Back to the Global Macro Grind

 

Solution - the 3 core factors our team focuses on from a Fundamental Macro Modeling perspective when we look at countries are:

  1. GROWTH
  2. INFLATION
  3. POLICY

Since our models have actually worked in calling the big Growth and Inflation turns for the last 4 years, we think it’s high-time to Re-Shape The Debate on how leaders (running countries, companies, or trading P&Ls) consider these 3 factors.

 

Rather than compounding Keynesian mistakes in forecasting Growth and Inflation by slapping random multiples on the economic growth that countries do or do note generate (with a 30-80% tracking error in their forecasts), this is what we do:

  1. Measure the Slope (accelerating or decelerating) of Growth and Inflation
  2. Apply Predictive Tracking Algorithms to all Growth and Inflation data we can find to generate an estimated range of outcomes
  3. Hammer out the reps each and every morning across all of Global Macro to adjust our models for any new Growth/Inflation data

Then, on a risk adjusted basis, we decide if there is:

 

A)     An acceleration in the existing slope (going from good to great is the same thing as going from bad to toxic)

B)      A deceleration in the existing slope (going from great to good is the same thing as going from toxic to bad)

C)      A centrally planned policy to attempt to arrest the gravitational force of the slope

 

Hopefully I didn’t lose you yet (I didn’t write it in German, but it’s math – which, seemingly, Bernanke and Summers should understand even if I wrote this in Mandarin-Canadian).

 

If I did lose you, here’s what it means in term of what’s changed from a Fundamental Macro Modeling perspective since we’ve made an explicit change in our call on Global Macro markets in December (we’re long Growth (Equities) and out of Fixed Income):

  1. GROWTH: US, Chinese, and German Growth (our Big Mac-cro 3) have all decelerated at a slower rate = bullish
  2. INFLATION: Globally, we’ve seen a Deflation of the Inflation (US CPI dropped from 3.4% NOV to 3.0% in DEC) = bullish
  3. POLICY: Bernanke/Geithner haven’t been able to debauch the US Dollar and Germany is being fiscally/monetarily conservative

What would make our models change back to the bearish side (i.e. Growth Slowing re-accelerates on the downside and Inflation re-accelerates on the upside)?

  1. Ben Bernanke goes to Qe3
  2. Obama and Geithner go way left on fiscal spending
  3. Germany folds to French demands for Euro bonds (money printing) and bank bailouts

After 4 long years of Jobless Stagflation, look at what getting Bernanke, Geithner, and Sarkozy out of the way is doing – yesterday’s US jobless claims print of 352,000 was the best jobs number we’ve seen since March of 2008!

 

Strong Dollar = Stronger Consumption (inflation deflates), Stronger Confidence, and Stronger Employment. Period.

 

Whoever is begging Bernanke for policies to inflate (Qe3) is effectively begging for my model to break down (begging for Inflation to accelerate and slow real (inflation adjusted) US, Chinese, Brazilian, etc. Consumption Growth).

 

If you’re an exporter in Michigan, you don’t like this. If you’re making BMW’s in Germany, or putting gas in yours in New Jersey, you love it. The only people that want weak currencies are the people who need them to get paid.

 

Rather than having CNN focus a US Presidential Debate on “open marriages”, it’s time to get real in this country. It’s time to get serious about the evolution in our economic thinking. It’s time to Inspire, Re-work, and Re-Shape the Real-Time Economic Debate.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, German DAX, and the SP500 are now $1, $109.85-112.11, $1.26-1.30, $80.19-80.97, 2, 6, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Re-Shape The Debate - Chart of the Day

 

Re-Shape The Debate - Virtual Portfolio


Squeezy: SP500 Levels, Refreshed

POSITIONS: Long Consumer Discretionary (XLY), Consumer Staples (XLP) and Utilities. Short Russell 2000 (IWM).

 

While the short squeeze (see chart) from my long-term TAIL breakout line (1267) has been proactively predictable, the short squeeze you’re seeing at the top of this immediate-term TRADE move in certain high-short interest stocks/ETFs/etc has been epic.

 

In the very immediate-term (I mean 3 trading hours to 3 days) this is where the Pain Trade tends to capitulate – more so in certain stocks than the stock index. Ultimately, provided that the US Dollar strength and US employment improvement continues, I think we’re headed toward a 1363 test. That will take more time.

 

For now, here are the lines I want to be managing gross and net exposure risk around: 

  1. Immediate-term TRADE overbought = 1314
  2. Immediate-term TRADE support = 1293
  3. Long-term TAIL support = 1267 

Another way to think about this is in terms of your beta-adjusted gross and net exposure. On the way towards 1314, you want to beta-shift to lower beta long positions, and take a few shots at higher-beta shorts that have been squeezed.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Squeezy: SP500 Levels, Refreshed - SPX


HBI: Shorting

Keith re-shorted Hanesbrands this morning – again -- on strength. It remains one of our top intermediate-term shorts.

 

HBI: Shorting - HBI TTT


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Trade Update: Shorting EUR/USD (FXE)

Positions in Europe: Short FXE


Keith shorted the EUR/USD via the eft FXE today in the Hedgeye Virtual Portfolio with the price bumping up against our immediate term TRADE resistance level of $1.29. Our bearish view on the EUR and bullish view on the USD haven’t changed, but the price did. Keith took the opportunity to short FXE at $128.28. Our intermediate term TREND resistance level remains broken at $1.33 (see chart below).

 

Matthew Hedrick

Senior Analyst

 

Trade Update: Shorting EUR/USD (FXE) - 1. EUR heut


BBBY Trade Update

Keith just added to our BBBY short position. Lower long-term highs in one of our favorite names on the short side, Bed Bath & Beyond. After being big bulls, we’re starting to question the sustainability of longer-term market share opportunity.

 

BBBY Trade Update - bbby TTT


CLAIMS NOW A REAL TAILWIND FOR 1H12 CREDIT OUTLOOK

Claims Have Become an Significant 1H12 Tailwind to Bank Credit Quality and Loan Growth

The headline initial claims number fell 47k WoW to 352k (down 50k after a 3k upward revision to last week’s data).  Rolling claims fell 3.5k to 379k. On a non-seasonally-adjusted basis, reported claims fell 125k WoW to 522k. For those unfamiliar with why we publish on claims every week, it's because they're the best indicator for how credit quality and loan growth trends are likely to fare over the next six months.

 

This morning's claims print is obviously strong. It also flies in the face of what we've seen in the last few years: claims tend to be weak in the start of the year. After the prior week's disappointing print, this week's print seems to lay to rest concern about an imminent back up in claims. We've pointed out that claims that are sustainably below the 385-400k range foster unemployment declines. While the unemployment rate is as much about the participation rate as the number of folks with jobs, the reason we think it matters is as a signal to broader confidence. As the unemployment rate falls it signals to the average American that things are improving, and that they should feel more confident about spending. In other words, it becomes an autocorrelated virtuous cycle.

 

We've also pointed out that an cointegrated relationship exists between claims and the S&P500. They don't stay diverged for long. It would seem that, just like last Fall, this time around the mean-reverting instrument is again the market. Full mean reversion from the market side would imply an index level around ~1360. Alternatively, claims would need to rise to ~410k to meet the market where the market is. 

 

CLAIMS NOW A REAL TAILWIND FOR 1H12 CREDIT OUTLOOK - Rolling

 

CLAIMS NOW A REAL TAILWIND FOR 1H12 CREDIT OUTLOOK - Raw

 

CLAIMS NOW A REAL TAILWIND FOR 1H12 CREDIT OUTLOOK - NSA chart

 

CLAIMS NOW A REAL TAILWIND FOR 1H12 CREDIT OUTLOOK - S P and Claims  2

 

CLAIMS NOW A REAL TAILWIND FOR 1H12 CREDIT OUTLOOK - Claims and Fed

 

2-10 Spread

The 2-10 spread tightened less than 1 bp versus last week to 167 bps as of yesterday.  The ten-year bond yield also fell less than 1 bp to 190 bps.

 

CLAIMS NOW A REAL TAILWIND FOR 1H12 CREDIT OUTLOOK - 2 10 spread

 

CLAIMS NOW A REAL TAILWIND FOR 1H12 CREDIT OUTLOOK - 2 10 spread QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

CLAIMS NOW A REAL TAILWIND FOR 1H12 CREDIT OUTLOOK - Subsector performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

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