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Defining Asymmetry: Investor Complacency At Multi-Year Lows

Conclusion: Measures of investor complacency are signaling to us asymmetric risk from an intermediate-term perspective. As such, we’re either at/near a cyclical top in “risky assets” or we’ve achieved “escape velocity” and are entering a new era of investing. We believe this is the key market debate to focus on.

 

After recently shifting out of being long the Inflation Trade from an asset allocation perspective, we’ve been loud in recent weeks highlighting the risks to real GDP growth, both domestically and internationally. Further, we continue to anticipate those risks (namely higher input cost inflation in the absence of commensurate employment and wage growth) to roll through the global economic system and slow growth on a lag. At these market prices (SPX = ~1,400; MSCI All-World Country Index  = ~160) we find there is asymmetric risk to the downside.

 

Of course, that risk is mitigated if we have reached “escape velocity” (to borrow the Fed Chairman’s own academic theory within the soft science of macroeconomics). At Hedgeye, we are inclined to defer to the math backing hard sciences, like physics, for example. Central plan as they may, we remain of the view that economic gravity can’t be arrested in perpetuity. Furthermore, we continue to hold steadfast on our views that Big Government Intervention does two things:

  1. It shortens economic cycles; and
  2. It amplifies market volatility.

Speaking of market volatility, we’ve been in print lately flagging the risk to U.S. equities that is a CBOE SPX Volatility Index at/south of the 15 level (closed at 14.26 on Monday). Specifically, as we’ve seen over the last ~4yrs, VIX-15 has been key contrarian indicator to fade consensus bullishness at cyclical equity market highs:

 

Defining Asymmetry: Investor Complacency At Multi-Year Lows - 1

 

Broadening our read-through on volatility as a measure of investor complacency, we’ve created a proprietary cross-asset class volatility index that uses an unequally-weighted average of the following volatility indices:

  • CBOE SPX Volatility Index (VIX);
  • Merrill Lynch U.S. Treasury Option Volatility Estimate Index (MOVE);
  • CBOE Oil ETF Volatility Index (OVX);
  • JPMorgan G7 FX Volatility Index; and
  • JPMorgan EM FX Volatility Index. 

On this score, the Hedgeye Global Macro VIX is at levels last seen since early OCT ’07. Note: that date is coincident with the all-time peak in U.S. equities amid consensus faith that “shock and awe” interest rate cuts and other modes of central planning would ultimately prove effective in delivering a shallow, manageable domestic growth slowdown.

 

Defining Asymmetry: Investor Complacency At Multi-Year Lows - 2

 

At such levels of consensus complacency, we feel it is prudent for investors to pick sides and make a call on which is the more probable of the following two scenarios:

  • Scenario A: We’re at/near a cyclical top in assets perceived to be generally more risky (equities; HY credit; EM currencies and debt); or
  • Scenario B: Measures of volatility will trade sustainably around these depressed levels for the foreseeable future, as we’ve entered a new era of global growth and financial market returns (akin to the mid-90’s and early-00’s).

You know where we stand. At a bare minimum, we think you should be having this debate with your respective teams.

 

Lastly, and certainly not to mine for contrarian data points, but the following anecdote is worth flagging for those of you who aren’t yet familiar:

 

The latest II Bulls/Bears Survey Spread (% Bull less % Bears) came in at 2,900bps – good for the widest spread since APR ’11. Per Keith’s commentary on yesterday’s Morning Macro Call:

 

“This is the other problem with [no] volume. We all know there’s no inflows into U.S. equities… there also isn’t going to be any more short covering. If this is how low the bears can go, this is what perpetuates the crash. Ben Bernanke’s policies have [many] unintended consequences… one of the big ones is that it gets the short sellers out of the game. They can’t efficiently cover stocks and keep that bid alive, so you get these real big draw-downs. That’s what we’ve seen: 1Q08, 1Q10, 1Q11. Are we going to have one in 2012? We’ll see…”

 

Measures of investor complacency are signaling to us asymmetric risk from an intermediate-term perspective. As such, we’re either at/near a cyclical top in “risky assets” or we’ve achieved “escape velocity” and are entering a new era of investing. This is the key debate we feel investors must focus on at the current juncture.

 

Darius Dale

Senior Analyst


INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING

This note covers both this morning's initial unemployment claims and MBA mortgage application weekly data released yesterday. 

 

Revisions, Revisions, Revisions

The media is running with the headline that jobless claims fell 5k week over week to 359k. That's fine, but it's definitely misconstruing what really happened. Last week's jobless claims number was 348k. This week? 359k. So how does an eleven thousand increase become a five thousand decline? Revisions! Last week's number was upwardly revised by 16k. There is a serial upward revision bias to this data driven by its calculation methodology, but that upward revision normally averages 2-3k per week. This week it was 16k. We suspect this is a byproduct of this being the week in which the government incorporates the annual revision to its seasonal adjustment factors. The bottom line is that claims are now rising, which is a marked reversal from their steady trend of improvement over the past several months. This is consistent with our call for the tailwind of Lehman's Ghost to become a headwind from March through August.

 

The rolling claims number was similarly affected. The government is reporting a decline in rolling claims of 3.5k to 365k even though last week the rolling number was 355k. On a non-seasonally adjusted basis, claims were essentially flat vs. the previous week. Non-seasonally adjusted rolling claims fell 3.7k to 336k from 339k. 

 

On a separate note, it's interesting to observe that the mean reversion between the S&P and jobless claims has finally played out. The two series are currently mean reverted. Given our expectation for claims to rise steadily over the next five months that should put a headwind on the market and XLF.

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Rolling

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Raw

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - NSA

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - NSA rolling

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - S P

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Fed


2-10 Spread

The 2-10 spread tightened 6 bps versus last week to 186 bps as of yesterday.  The ten-year bond yield fell 9 bps to 220 bps.

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - 2 10

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - 2 10 QoQ

 

Financial Subsector Performance

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

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Subsector performance

 

Mortgage Purchase Applications Were Stronger Last Week 

MBA Mortgage Purchase Applications rose 3.3% last week, ending at an index level of 180.5. Purchase activity has been showing resilience after a dismal display in February. For reference, today's print is 11% higher than the February average of 162.1. Purchase Applications are currently 4.2% lower than a year ago. On a longer-term basis, demand for housing remains weak. Note in our long-term chart that the current 2012 average is now hovering around 1 levels. 

 

Refinance Applications fell 4.6% last week. Mortgage rates fell 7bps to 3.98% yesterday from 4.05% last Wednesday.

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - shark

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Refi

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Mortgage Rates

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - shark LT

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - Refi LT

 

INITIAL JOBLESS CLAIMS ARE RISING, NOT FALLING - YoY

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link below. 


THE HBM: YUM, GMCR, RRGB, CBRL

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Gas Prices

 

According to the most recent American Pulse survey, even though gas prices have been rising for some time, the recent increase is not welcome and consumers are having to adjust their spending habits.  The survey suggests that 73.7% of Adults 18+ somewhat or strongly disagree with the statement, “I have become used to high gas prices and paying more than $4/gallon would not impact by spending in other areas.”


THE HBM: YUM, GMCR, RRGB, CBRL - gas prices chart

 

Commentary from CEO Keith McCullough

 

"While VIX 14 has been drawing people into buying high since the first week of March, this is not new – VIX 14, going back to 2008, is one of the most relevant sell signals (gross long equity exposure to beta) we can keep highlighting.

 

From a Sector perspective, Energy was the first Sector to snap its intermediate-term TREND line (today). Energy looks nothing like Apple - the Sector peaked on Feb 24thand has since had a -6.6% draw-down. Basic Materials (XLB) and Industrials (XLI) are broken from an immediate-term TRADE perspective, but those signals are less worrisome than broken TRADE and TREND (Energy).

 

This is a very pro-cyclical group of sectors Breaking down in unison, and it makes sense to us given that Global Growth has been slowing for at least a month."   

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: YUM, GMCR, RRGB, CBRL - subsector

 

 

QUICK SERVICE

 

YUM: Yum filed an 8-K with the SEC detailing a new $1.3 billion credit deal.  The new facility carries interest rates of LIBOR plus 1-1.75%.

 

GMCR: New allegations of fraud are emerging against Green Mountain in the form of an amended class action lawsuit alleging violations of various federal securities laws.

 

KKD: Krispy Kreme announced a buyback equal in magnitude to roughly 4% of the market cap.

 

 

CASUAL DINING

 

CBRL: Cracker Barrel shareholder Sardar Biglari increased his stake in the company by ~27k shares on 3/23, according to SEC filings.

 

RRGB: Red Robin Gourmet Burger was rated New Buy at DA Davidson.  The PT is $46.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

RRGB: Red Robin gained on accelerating volume on the DA Davidson upgrade.

 

THE HBM: YUM, GMCR, RRGB, CBRL - stocks1

THE HBM: YUM, GMCR, RRGB, CBRL - stocks2

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


The Sum of Experiences

“Be who you are and say what you feel because those who mind don’t matter and those who matter don’t mind.”

-Dr. Seuss

 

I’m sure after reading the quote above, especially after reading yesterday’s declaration of the Bernanke War, you are wondering if Keith has gone soft.  Well, since I’ve known Keith for upwards of 15 years, I can say categorically he hasn’t gone soft, but he has handed the proverbial hockey stick on today’s Early Look to me as he is flying up to Thunder Bay, Ontario.

 

Yesterday, we had a long internal debate about branding and marketing.  The key questions, which of course are similar for your organizations, related to who we are, who we want to be, and what people actually think we are.  These are challenging questions for any organization, especially one that perceives itself to be the standard bearer for Wall Street 2.0.

 

Naturally, being the social media addict that I am, after our meeting I posed the question to the Twitter Sphere.  Specifically, I tweeted:

 

@HedgeyeDJ Question for the day: What is a brand?

 

The best answer actually came from a good friend and former colleague who tweeted back that “a brand is specifically the *perceived* sum of all the experiences, actual and emotional, associated with your brand.”  If you think about it, that’s not totally dissimilar to a stock price or stock index price.  It is actually the sum of all fundamental inputs, plus the behavioral or emotional input of market participants.

 

In the Chart of the Day, we actually emphasize that last point in looking at Chinese equities.  The Shanghai Composite, which is a capitalization weighted index which tracks all A-shares and B-shares listed on the Shanghai Stock Exchange, is at a 10-week low.  Further, the index is only up +3.9% in the year-to-date and is down -22.5% in the last year.  In as much as China is a proxy for global growth, as one of the world’s fastest growing and largest economies, the performance of Chinese equities is a little disconcerting. 

 

The next key catalyst for the Chinese economy is Chinese PMI, which is out this Saturday.  Ahead of that, as is typical before disappointing Chinese data, rumors are circulating that China will implement another reserve requirement ratio cut.  In theory, this action will free up money supply within the Chinese banking system.  My belief is if the Chinese indeed have to ease again, then it is probably ominous for the Chinese growth outlook.   Incidentally, the last time the Chinese cut the “RRR” was on the weekend of February 19thand the Shanghai Composite is literally in a straight line down since then.

 

For those that are looking for bullish global growth catalysts, you need to look no further than Morgan Stanley and HSBC.  This morning Morgan Stanley upped its China GDP growth forecast to 9.0% from 8.4%, while HSBC raised its price targets for all major Chinese indices.   HSBC may be on to something as slowing growth is starting to, obviously, be priced into Chinese equities.  As for Morgan Stanley, I’m not sure what they are feeling (or smoking for that matter).

 

The other key data points from global macro land this morning come from Europe.  As usually occurs when austerity is implemented aggressively, a general strike is underway in Spain this morning.  Interestingly, neither strikes, especially those that result in clashes with the policy, nor austerity are all that positive for economic growth.  I dare say that Spain is starting to look a little like Greece, but don’t take my word for it.  According to the head of the Spanish Banking Federation, “the strike takes us a lot closer to Greece and farther from Germany.”

 

For starters, I’m not sure Spain was ever all that close to Germany, except perhaps by plane or high speed train.  Germany’s unemployment rate fell -18,000 in March versus an estimate of -10,000 and the unemployment rate is now at 6.7%, which is a 20-year low.  Conversely, the Spanish unemployment rate is just shy of 23%. 

 

Also, unlike Germany, Spanish credit default swaps have accelerated dramatically recently.  In fact, Spanish 5-year CDS are now trading at 423 basis points, which is up more than 14% since the start of the month.  While still below the all-time high, this measure of risk certainly agrees with the idea that Spain is moving closer to Greece than Germany.  Incidentally, Spain Housing permits were down -25% year-over-year this morning, as well.

 

I’ll leave you with one last thought this morning from an email my colleague Darius Dale just sent to our team:

 

“Global cross-asset volatility hasn’t been this low since OCT ’07. Terrifying. Unless, of course, this time is different and we’ve reached “escape velocity”. Bernanke’s war has begun; we’re either off to the races from a growth perspective or things are about to get weird. You have to pick sides at these levels of investor complacency.”

 

Weird? Indeed.  Almost as weird as starting a Wall Street morning strategy note with a quote from Dr. Seuss.  Or, perhaps, that is all part of the brand . . .

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1, $122.12-124.96, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Sum of Experiences - Chart of the Day

 

The Sum of Experiences - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 29, 2012


 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - a2

THE HEDGEYE DAILY OUTLOOK - b

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

EQUITY SENTIMENT: 

  • ADVANCE/DECLINE LINE: -900 (-393) 
  • VOLUME: NYSE 817.02 (11.88%)
  • VIX:  15.47 -0.77% YTD PERFORMANCE: -33.89%
  • SPX PUT/CALL RATIO: 3.16 from 2.25 (40.44%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 39.33
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.18 from 2.20
  • YIELD CURVE: 1.84 from 1.86 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP, 4Q T, est. 3.0% (prior 3.0%)
  • 8:30am: Personal consumption, 4Q T, est. 2.1% (prior 2.1%)
  • 8:30am: Jobless claims, March 24, est. 350k, prior 348k
  • 9:45am: Bloomberg Consumer Comfort, March 25(prior -34.9)
  • 10am: Freddie Mac 30-yr mortgage
  • 10am: Fed’s Braunstein testifies on mobile payments
  • 10:30am: Fed’s Lacker to speak on credit markets in N.C.
  • 10:30am: EIA natural gas
  • 11am: Kansas City Fed Manufacturing, March, est. 13, (prior 13)
  • 12:15pm: Fed’s Lockhart speaks on global economy in Atlanta
  • 12:45pm: Fed’s Bernanke gives lecture at George Washington U. (4 of 4)
  • 1pm: U.S. to sell $29b 7-yr notes
  • 1pm: Fed’s Plosser speaks on economic outlook in Wilmington, DE
  • 6:45: Fed’s Lacker speaks to bankers in Charlotte, N.C. 

GOVERNMENT:

  • Senate plans to debate bill that would repeal tax breaks for big oil companies
  • Lawmakers will seek an extension to a highway funding measure that expires Saturday
  • CFTC holds a meeting of its advisory panel on automated and high-frequency trading. 10 am
  • House, Senate in session:
    • House Energy and Commerce Committee hears from FTC Chairman Jon Leibowitz on balancing privacy and innovation. 9am
    • Senate Energy Committee holds hearing on gasoline prices. 9:30am
    • House Financial Services Committee hears from CFPB Director Richard Cordray on the bureau’s semi-annual report. 9:30am
    • Senate Government Affairs subcommittee holds hearing on how cost information is used to make decisions. 10am
    • Senate Banking Committee votes on Fed Board of Governors nominees Jerome Powell and Jeremy Stein. 10am
    • Senate Appropriations Committee hears from Agriculture Secretary Tom Vilsack on the agency’s budget. 2pm  

WHAT TO WATCH:

  • Best Buy releases 4Q results, probably will give yr forecast; watch 4Q gross margin
  • Research in Motion releases first earnings under CEO Thorston Heins, having missed sales est. for four consecutive qtrs
  • Roche raises hostile takeover offer for Illumina to ~$6.7b, or $51/share
  • Express Scripts said to get FTC ruling as early as tomorrow on proposed Medco Health takeover
  • Fed nominees Jerome Powell and Jeremy Stein face Senate Banking Committee vote
  • Tata, Vodafone get extension to April 19 to decide on Cable & Wireless offer
  • FDA advisers to recommend whether makers of new obesity drugs should be required to complete studies on heart risks
  • Oil trading near lowest close in a week as Western countries discuss tapping emergency reserves
  • Canadian finance minister releases his annual budget, 4pm
  • Pearson CFO says FT newspaper is not for sale, co. seeking targets in India, Brazil and China
  • SEC investigators said to review short-term VIX ETN from Credit Suisse that became unhinged from its benchmark
  • Economic confidence in the euro region unexpectedly declined in March
  • Greece may have to restructure debt again, S&P’s Kraemer says 

 EARNINGS:

    • Sprott (SII CN) 7:00am, C$0.06
    • Movado (MOV) 7:30am, $0.10 (1 est.)
    • Shaw Group (SHAW) 8am, $0.45
    • Best Buy (BBY) 8am, $2.15
    • Worthington Industries (WOR) 8:15am, $0.35
    • Cascade (CASC) 4pm, $1.09
    • Forest City Enterprises (FCE/A) 4:02pm, $0.32
    • Tibco Software (TIBX) 4:04pm, $0.19
    • Research In Motion (RIM CN) 4:15pm, $0.81
    • Finish Line (FINL) 4:40pm, $0.81

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Palladium Seen Beating Gold With Record Car Sales: Commodities
  • Oil Falls Near One-Week Low on Stockpile Gain, Talk of Release
  • Sugar Falls for Fifth Session on Surplus Prospects; Cocoa Drops
  • Soybeans Rise as Demand for U.S. Crops May Strengthen on Drought
  • Former UBS Executives Will Start London Commodities Hedge Fund
  • China Buys Five Cargos U.S. of Corn, State Researcher Says
  • Copper May Fall on Speculation of More Supplies; Nickel Declines
  • Gold May Drop in London on U.S. Outlook, Weak Physical Demand
  • Japanese Crude-Oil Imports From Iran Dropped 43% in February
  • Commodity Holdings Expand as Volatility Drops: Chart of the Day
  • Palm Oil Declines for Second Day as High Prices May Erode Demand
  • Gold May Gain 8.5% on Moving Average, Hammer: Technical Analysis
  • Runaway Gas Well Threatens Total Revival as Shares Slump: Energy
  • Palladium May Beat Gold on Rising Demand
  • China Cotton Demand to Recover, Lifting Prices, Weiqiao Says
  • Vitol’s Taylor Says Atlantic Oil Refinery Closings Spur Shipping
  • World-Leading Platinum, Rubber Stall on China: Chart of the Day 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


 US DOLLAR – the USD went from up +0.25% at this hour yesterday (commodity inflation was deflating = good) to down -0.62% on the close. What changed intraday? Bernanke reminded the world of his conflicted and compromised policy to inflate. Fun while it lasts (if you’re long), but our strong sense is that the next stock/commodity market crash will be perpetuated by the bubble in Easy Money. There’s no one left to blame. 

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

SPAIN – rising bond yields and a down -3.4% stock market YTD finally manifesting into higher yields (sequentially) on the 6mth side of the Spanish bond auction. Major stagflation issues in the Spanish south perpetuating political issues for Rajoy as he attempts to implement an austerity budget.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – someone forgot to tell the Chinese to stop slowing; stocks in China closed down -0.15% overnight and India rallied +0.8% on no volume to another lower-high. Down Dollar/Up Oil (particularly Brent oil) is what keeps China and India from cutting rates here.


THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 


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