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2007 Redo

This note was originally published at 8am on August 14, 2012 for Hedgeye subscribers.

“This book isn’t based on academic theories. It’s based on our experience.”

-David Heinemeir Hansson

 

What a difference the last 5 years makes. Or did it? The aforementioned quote comes from the introduction of one of my favorite leadership and innovation books. Some of you already have it on your bookshelf. I’ve cited it often since founding the firm – REWORK, by Jason Fried and Victor Heinemeier Hansson.

 

If you are jammed for time into summer’s end, I read this book in 12 minutes to our team at a workshop meeting – lots of pictures. We like pictures. We’ll show you one of our risk management favorites in today’s Chart of The Day.

 

Re-work, Re-think, Re-do. Sadly, when it comes to Old Wall Street’s forecasting and risk management processes, there hasn’t been much of that going on in the last 5 years. Instead, broken sources keep re-cycling the same old stuff that sucked people in during Q3 of 2007.

 

Back to the Global Macro Grind

 

2007? Pardon? Weren’t we talking about Q308 similarities? Or was it the 1930s? 1987?

 

Here are 3 Big Macro things that are precisely like 2007:

  1. SALES: GDP Growth led Corporate Revenue Growth Slowing; by Q307, companies were right confused
  2. MARGINS/EARNINGS: stocks were “cheap” if you used peak margins and peak earnings assumptions for 2008
  3. VOLATILITY: US Equity market Volatility got slammed by “rumors” of Bernanke bailouts, rate cuts, etc.

Fast forward to Q3 of 2012:

  1. SALES: Same pattern – but Global GDP growth slowing faster now than it did then (China especially)
  2. MARGINS/EARNINGS: perma-bulls are still using peak margins and prior 2007 all-time high in EPS to justify “cheap”
  3. VOLATILITY: yesterday marked the 1st time since 2007 since the VIX dropped below 14

Since the VIX dropped below 14 eighty nine (89) times throughout 2007, the good news is that you probably have plenty of time to get out of stocks before everyone else has to. There are only 30,000 funds chasing beta at this point.

 

One question on that: after the shorts have all covered how, precisely, is that going to happen without volume? Probably just a silly risk management question; NYSE volume was only down -42% versus my intermediate-term TREND duration average yesterday. That’s gotta be bullish for someone. Just not Tommy Joyce.

 

Enough about price, volume, and volatility already – who cares about 3-factor risk when simple 1-factor Fisher Price point and click 50-day moving averages tell us all we need to know in the rear-view mirror?

 

Let’s deal with my personal baggage instead…

 

Not that I took it personally, but since I got fired for being “too bearish” in October 2007, I do remember the proceeding birth of my 1st son and the vision for Hedgeye quite vividly. So do the perma-bulls. The SP500 dropped -4.4% in November 2007.

 

And, that was it.

 

That was it for the storytelling. That was it for the “world is awash with liquidity” thing. That was it for the academic theory that “shock and awe” rate cuts to zero were going to free we centrally planned beasts from the shackles of our own thoughts.

 

Where to next?

 

The only thing I can predict, with 100% certainty, from here is that this is not 2007. This is 2012. And next year will be 2013.

 

What will get #GrowthSlowing to stop slowing? Will it be a bird or a plane? Or will Keynesian Economics finally provide the long lasting elixir of life that its group-thinkers have so often promised (growth) but never delivered?

 

I don’t know.

 

What I do know is that if you are buying US stocks at lower long-term highs (-10.3% versus October 2007 and -1.1% versus April 2012) at anything < 14 VIX, you either think 1990s growth is coming back and/or that this all ends well.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1601-1624, $110.36-115.42, $81.76-82.59, $1.23-1.24, 6943-7199, and 1393-1406, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

2007 Redo - Chart of the Day

 

2007 Redo - Virtual Portfolio



Correcting All Of This

“My government, will correct all of this.”

-Stephen W. Kearny

 

General Stephen Watts Kearny was one of the central figures in mid 19th century Western American history. Albeit for very brief periods of time, he was the Military Governor of both New Mexico (1846) and California (1847).

 

The aforementioned quote comes from Chapter 12 of the most recent book I’ve been reading on the conquest of the American West, Blood and Thunder, where “On August 14th, 1846, two days after the Navajo raid on Las Vegas, General Kearny marched with his Army of the West into the town’s central plaza…” and proclaimed his mystery of ill-fated central planning faith.

 

Within 6 months (January of 1847), Kearny’s “government” was nowhere to be found as the dead (scalped) body of the Governor he put in place in New Mexico (Charles Bent) “lay naked on the floor in a congealed pool of blood.” (page 221) The risk management lesson here is one that is never the same, but usually rhymes – beware of short-term government promises.

 

Back to the Global Macro Grind

 

Stock and commodity markets appear to have been promised that European and American central planners are once again going to provide them the elixir of a no-volume but “up year-to-date” life in Jackson Hole, Wyoming this weekend.

 

That’s all good and fine, until it isn’t. Super Mario Draghi just cancelled his trip to the central planning summer play-land of the modern American West, and the Gold price doesn’t seem to be pleased by that turn of events this morning – not one bit.

 

As a refresher on how the market’s game of front-running both the Fed and ECB works, both political pandering entities are charged with keeping market prices up through money printing, bailout promises, and currency debasement.

 

Here’s the update on what US Dollar Debauchery has done for this 30-day bull run in stocks and commodities (inverse correlations between USD Dollar Index and the big stuff people are speculating on):

  1. Gold = -0.85
  2. Silver = -0.87
  3. Oil (WTIC) = -0.81
  4. CRB Index = -0.74
  5. CRB Raw Industrials Index = -0.79
  6. SP500 = -0.83

European and Global Equities alike get even more pop on the Fed’s Qe rumoring with 30-day USD inverse correlations for the EuroStoxx600 and MSC World Equity indices currently running at -0.88 and -0.86, respectively.

 

So, your “governments” are going to “correct all of this” by attempting to convince you that asset price inflation (commodities in particular, because that’s what’s driven the beta of the equity indices) is growth.

 

*note to real-world consumer self: inflation is not growth.

 

Maybe that’s why old Chavez is having such a tough time in the Venezuelan national polls, falling behind Radonski for the first time in a long time by a fairly wide margin (47.7% to 45.9%) despite the Venezuelan stock market being up +153% YTD!

 

Pardon? You mean people aren’t as stupid as politicians think they are? You mean the stock market being “up year-to-date” doesn’t reflect the fully bought and paid-for political messaging of the common man’s economic health?

 

Venezuela, by the way, devalued its currency in the last year. See Darius Dale’s Chart of the Day for what looks suspiciously Weimar Republic, 1920s style.

 

Maybe I have this wrong. Maybe Americans are truly as dumb as the politicians who are making these short-term broken promises of “price stability, full employment, and economic growth”…

 

Maybe I don’t.

 

Now that 2 of the world’s Top 4 economies (China and Japan) have guided down their GDP growth expectations this month (Japan did last night), maybe someone sane out there is starting to figure this out too. The US Treasury Bond market certainly just did.

 

Looking at what’s happened to market prices in the last week isn’t the end of this story, but it’s certainly instructive:

  1. US Treasury Yields have dropped -13% in basically a straight line (from 1.89% to 1.64% on the 10yr this morning)
  2. US Stocks (the SP500 and Russell2000) have fallen from their mid-August highs to make lower-highs versus March
  3. US Equity Volatility (VIX) = +22% “off the lows” (in a week), bouncing hard off our 14-15 TAIL risk zone
  4. Asian Equities: China made a fresh YTD low yesterday (-16.5% since May); Japan = -12% since the March top
  5. European Equities: DAX, CAC, IBEX – pick your index have all made lower-highs on lower and lower volumes
  6. US Dollar Index = down -3% in August, from its top to bottom

I know, I know. This whole Currency Correlation thing doesn’t fit the Bernanke/Geithner narrative because someone in their group-thinking Keynesian business schools told them “correlation is not causality.”

 

Someone better tell that to the entire market that’s keying off the causality that is the latest rumor about what Bernanke does next then, because US Dollar bets (CFTC contracts) just went from +311,000 on the bull side in June to -132,000 on the bear side pre Jackson Hole.

 

Correcting All of This will be abrupt. What started as a localized grievance against money printing (late 2007) and bank bailouts (2008-2009) now moves to a national debate about the stability of your hard earned currency and long-term (inflation adjusted) economic health.

 

Our immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr Treasury Yields, and the SP500 are now $1, $112.28-114.26, $81.11-82.01, $1.23-1.25, 1.63-1.76%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Correcting All Of This - Chart of the Day

 

Correcting All Of This - Virtual Portfolio


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 28, 2012


As we look at today’s set up for the S&P 500, the range is 18 points or -0.67% downside to 1401 and 0.61% upside to 1419. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT: 

  • ADVANCE/DECLINE LINE: on 08/27 NYSE -149
    • Decrease versus the prior day’s trading of 855
  • VOLUME: on 08/27 NYSE 504.30
    • Decrease versus prior day’s trading of -2.13%
  • VIX:  as of 08/27 was at 16.35
    • Increase versus most recent day’s trading of 7.71%
    • Year-to-date decrease of -30.13%
  • SPX PUT/CALL RATIO: as of 08/27 closed at 1.80
    • Down from the day prior at 2.23 

CREDIT/ECONOMIC MARKET LOOK:


BONDS – sell stocks and buy bonds? at 1.89% in the 10yr, we did – now we’re staring down the pipe of a 1.64% 10yr yield this morning and a Yield Spread that’s pancaked in the last week back down to 137bps wide. Commodity inflation is not growth. It slows real growth. 

  • TED SPREAD: as of this morning 33.35
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.64%
    • Decrease from prior day’s trading of 1.65%
  • YIELD CURVE: as of this morning 1.37
    • Down from prior day’s trading 1.39

MACRO DATA POINTS (Bloomberg Estimates)

  • 7:30am/8:45am: ICSC/Redbook weekly sales
  • 9am: S&P/CS 20 City Home Price Index M/m, June, est. 0.4% (prior 0.91%)
  • 9am: S&P/CS U.S. Home Price Index Y/y, 2Q (prior -1.92%)
  • 9am: S&P/CS Home Price Index, June (prior 138.96)
  • 10am: Conference Board Consumer Confidence, Aug., est. 66.0 (prior 65.9)
  • 10am: Richmond Fed Manuf. Index, Aug., est. -10 (prior -17)
  • 11am: Fed to purchase $4.5b-$5.5b notes 11/15/2020-8/15/2022
  • 11:30am: U.S. to sell $40b 4-wk. bills
  • 1pm: U.S. to sell $35b 2-yr. notes
  • 4:30pm: API inventories

GOVERNMENT:

    • Republican National Convention in Tampa, Day 2: Prime-time speakers include Ann Romney; Rick Santorum; Va. Gov. Bob McDonnell; N.J. Gov. Chris Christie
    • House, Senate not in session
    • Arizona primaries: Rep. Ron Barber vs State Rep. Matt Heinz in Democratic primary; in Senate race, Rep. Jeff Flake vs Wil Cardon in Republican primary, polls close 9pm
    • Biotechnology Industry Organization hosts conference call on “Renewable Fuel Standard and the Drought,” focusing on governors of several states petitioning EPA to waive requirements of federal renewable fuel standard, 2pm
    • Acting FDIC Chairman Martin Gruenberg discusses Quarterly Banking Profile, 10am
    • Center for Strategic and International Studies holds logistics conference on “Creating a 21st Century Supply Chain,” with HPQ’s Tony Prophet, World Bank’s Bernard Hoekman, 2pm

WHAT TO WATCH:

  • Tropical storm Isaac on verge of becoming hurricane today
  • Isaac seen making U.S. release from SPR more likely
  • GM said to plan halt of Chevrolet Volt production for 4 wks
  • Apple seeks ban on sales of 8 Samsung phones in U.S.
  • Forest Laboratories adopts shareholder-rights plan
  • U.S. farm income seen up as drought prices overtake lower yields
  • ECB to urge weaker Basel liquidity rule on crisis concern
  • Spain sells $4.5b of bills exceeding target
  • Standard Chartered faces U.S. fine over Iran: N.Y. Post
  • Japan cuts economic assessment as BNP says contraction looms
  • Canada’s Bank of Montreal, Bank of Novia Scotia report earns
  • Toyota offers $2b to buy 70% of CFAO to expand in Africa
  • Knight Capital to name 3 new directors today: WSJ

EARNINGS:

    • Sanderson Farms (SAFM) 6:30am, $1.07
    • Brown Shoe (BWS) 7am, $0.03
    • Cyberonics (CYBX) 7am, $0.36
    • Bank of Montreal (BMO CN) 7:26am, C$1.34
    • Bank of Nova Scotia (BNS CN) 7:30am, C$1.19
    • Movado (MOV) 7:30am, $0.26
    • Ship Finance (SFL) Pre-mkt, $0.42

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

GOLD – bailout bulls did not like the headline this morning that Draghi isn’t going to Jackson Hole. The Dallas Fed (Fisher) put the heat on Bernanke yesterday again too (don’t underestimate the GOP convention launching w/ a ticking debt clock in the background today either); Romney picking up some momentum this week could be Dollar bullish; gold bearish, on the margin, from lower-highs.

  • Robusta Coffee Beats Arabica as Folgers Cut Prices: Commodities
  • Barclays Gutted in Energy Trade as Bonus Limits Spark Exodus
  • Isaac Seen Making U.S. Release From Oil Stockpiles More Likely
  • China May Sell Cotton From Stockpile, Release Import Quota
  • Oil Advances on U.S. Supply Forecast, Venezuela Refinery Blaze
  • Corn Declines as Rains May Ease Dry Conditions in Southern U.S.
  • Copper Nears One-Week Low on Signs of Slowing Asian Economies
  • Gold Set to Gain in London on Demand for Protection of Wealth
  • ICCO Reduces Global Cocoa Shortage Forecast by 56% This Year
  • Iron Ore Poised to Drop as Slowing Growth in China Cuts Demand
  • Louisiana Preps for Oil Dredged From the Gulf by Isaac’s Power
  • Tanker Trackers Turn Bearish as IEA Trims Oil Forecast: Freight
  • Olam Fourth-Quarter Profit Falls 14% on Industrial Raw Materials
  • Crude Supplies Fall to Five-Month Low in Survey: Energy Markets
  • Storm Isaac May Reach Hurricane Strength
  • Sugar Nears Two Year-Low as Brazil Crop Speeds Up; Coffee Rises
  • U.S. Farm Income Seen Up as Drought’s Prices Trump Lower Yields

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


JAPAN – could Japanese GDP growth go negative sequentially? They do have to adjust real growth for imported energy inflation (unless they make up the number like Spain does); and the Nikkei continues to make lower-highs (down -12% from its March top)

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

The Hedgeye Macro Team


THE M3: LABOR BOTTLE NECK; IMPORTED WORKERS

The Macau Metro Monitor, August 28, 2012

 

 

NOT ENOUGH MANPOWER IN GAMING INDUSTRY Macau Business

Macau’s casinos don’t have enough manpower and the situation will only get worse next year, as the government increases the cap on the number of live gaming tables, warns Macau Gaming Industry Employees Association, João Bosco Cheang Hong Lok.  “Next year, the number of gaming tables will increase by 3%. I believe many casinos will increase the number of their gaming tables and by then, staff shortages in the gaming industry will be even tighter,” Cheang said.  Cheang also noted that starting November 1, all those below 21 years of age would be banned from working inside the city’s casinos.

 

NEW ALL-TIME HIGH FOR IMPORTED WORKERS Macau Business

The number of imported workers in Macau reached a new all-time high in July.  According to official data from the police released yesterday, Macau had a total of 104,938 imported workers by July-end, 60% of whom came from the mainland.  That is above the previous peak, recorded in September 2008, when Macau’s imported labour workforce reached a total of 104,281 people.  Hotels and restaurants are the number one employer for imported workers, giving work to 30% of the total.

 

 



RL: The Flip Side of the CFO Announcement

Takeaway: There's a flip side to the chest-beating that the $RL bulls will all come out with regarding the CFO announcement.

This RL announcement of Chris Peterson as CFO is net positive. The guy is from P&G, and formerly the head of its largest division. He’s going from presiding over a $45bn business to a roughly $10bn biz (wholesale equivalent). You can bet that every sell side analyst out there will come out this morning beating their chest defending how great this is. The reality is that they're probably right... it is.

 

Roger Farrah runs an extraordinarily tight ship, and winning the top finance/ops job over a pool of thousands of prospects is a feat in itself. Moreover, the role of CFO has historically been somewhat weak at RL, but we can’t imagine that Mr. Peterson would leave his post at PG for a diminished role in a company 1/5 the size of his current business.

 

There is one negative consideration, however…Executives from Packaged Goods companies don’t exactly have the best track record in coming into fashion businesses and knocking the cover off the ball. It’s a fundamentally different business. When a CPG company beats/misses, it’s usually by 2-3% top line, and 6-8% EBIT. But in a discretionary fashion business with an outsourced production model, we’re talking 5-10% rev variations and 20-30% EBIT swings. Capital allocation is radically different, and takes place more heavily on the P&L (and off balance sheet) than it does in PP&E and in vertical sourcing ops.  Here’s a few examples of executives that were lauded as being exceptional ‘breaths of fresh air’ but turned out to be disasterous.

  1. Paul Charron: Everyone loved the guy (Campell Soup), but in reality he destroyed LIZ.
     
  2. Bill McComb: Cleaned up Charron’s mess, though admittedly got into a tougher bind than he expected coming from JNJ.
     
  3. Bill Perez: When he fell into the fountain at Nike’s campus on his first day, he should have known his days were numbered. Going from SC Johnson to Nike is not easy. Sometimes you need to go with a gut feel in pricing a pair of shoes at $300 regardless of what the data says. Bill could not understand this.
     
  4. Bob Eckert: From Kraft to Mattel. He’ll be the first to admit how fundamentally different the two businesses are and how much it hurts to not be on trend for an extended time period of time (Barbie v Bratz).
     
  5. Paul Pressler: From Disney and Avon to Gap…he couldn’t cut the mustard. Ousted after two bad holiday seasons.
     
  6. Glenn Murphy: From Shoppers Drug Mart to Gap. Lately credited with the stock’s rebound. But financial engineering has been the main driver, until JCP ceded share six months ago at a time when, by chance, GPS got colors right.
     
  7. Ron Johnson: JCP from Apple. ‘Nuff said.

 

Our point is, by no means, that Peterson will follow the footsteps of these gentlemen. Again, this is Roger’s show. But simply that the sell side will grant this guy a free pass. Let’s practice a little more risk management and be prepared for the challenges that lie ahead of him.


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