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Follow The Lightning

This note was originally published at 8am on August 16, 2012 for Hedgeye subscribers.

“I follow the lightning, And draw near to the place that it strikes.”

-Navajo Chant

 

Now I know that a lot of our clients want to talk about what consensus versus contrarian thinking is, in this no-volume marketplace, but I’m thinking they’d have a tough time advising their kids to go hard core contrarian like the early 19th century Navajos did.

 

Admittedly, I am developing a Darwinian confirmation bias in my reading list this summer as I delve into more Native American history with a book I started reading this week titled Blood and Thunder – “The epic story of Kit Carson and the Conquest of the American West.”

 

Whether it was the ability of the Navajo and Comanche tribes to adapt and survive the late 18th and early 19th centuries, or it’s what you are staring at on your screen this performance chasing morning, our goals remain common in human nature; evolve or die.

 

Back to the Global Macro Grind

 

Buy stocks or bonds?

 

Rarely can I time that question as critically as I’ll timestamp it this morning. Yes, these are the thralls of August. But Mr Macro Market couldn’t care less about our summer vacations. Timing matters right here and now, big time.

 

Timing was especially important in answering this same basic asset allocation question in the middle of March 2012 (see Darius Dale’s Chart of the Day): 

  1. Stocks wouldn’t go down
  2. Bonds wouldn’t go up
  3. Volatility went away 

In fact, by the time the VIX hit 14.26 on March 26th (the Russell2000 topped for 2012 on the same day at 846, +5.2% higher than where it is today), there was a massive consensus (both buy and sell side)  that “growth was back” and “earnings are great.”

 

Fast forward to June… and US stocks were gasping for air in the middle of a double-digit drawdown (Russell2000 and SP500 down -13% and -10% from their late March highs) as US Treasuries put on a massive move to the upside (10yr yield dropped -42%, from 2.4% to 1.4%).

 

What drove the correct answer to the stocks vs bonds question?

 

Global #GrowthSlowing. Period.

 

What will get you to the correct answer for the next 1-3 months, from here?

 

Follow The Lightning.

 

The most abysmal volume and volatility readings I have ever recorded in my US Equity model aside, there are 2 basic realities that both bulls and bears have to deal with this morning: 

  1. US stocks are making both intermediate and long-term lower-highs
  2. US bonds are making both intermediate and long-term higher-lows 

In other words, if you believe Growth is going to improve from here, you buy stocks. If you’re more confident (like we and the data are) on #GrowthSlowing, you buy bonds.

 

Our predictive tracking algorithm (the one that called for #GrowthSlowing when few did in March), which is a multi-factor, multi-duration model, is telling us that this is a fairly straightforward call to make because:

 

A)     Oil prices are up +32% (Brent) from the June low (that slows growth)

B)      Corporate Revenue growth’s slope is as weak as it has been, globally, since Q308

C)      Chinese Growth continues to surprise on the downside

 

Chinese what? Yes, while I suppose you could say that China’s Foreign Direct Investment (FDI) print this morning of -9% year-over-year was better than India’s Export growth tanking to -15% year-over-year earlier this week, we highly suggest you take China’s word for it:

 

“In the second half, China’s foreign trade and export situation will be more grim, there will be more difficulties, harder tasks, and the pressure of achieving the full-year target will be bigger…” –China Ministry of Commerce (this morning)

 

Now, before you zap me with the bull counterpoint (for stocks) to this (rate cuts, stimuli, bailouts, etc.), just remember that doing more of the same will only keep food/energy prices higher (and growth slower) for longer. That’s bullish for bonds, longer term. And our long-term TAIL risk line for growth (bond yields) remains intact at 1.94% on the US Treasury 10yr.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1601-1612, $111.69-116.21, $82.34-82.97, $1.22-1.24, 1.56-1.82%, and 1391-1410, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Follow The Lightning - Chart of the Day

 

Follow The Lightning - Virtual Portfolio


THE M3: PONTE 16

The Macau Metro Monitor, August 30, 2012

 

 

PONTE 16 TARGETS PHASE 3 OPENING BY 2014 Macau News

Hong Kong-listed Success Universe Group Ltd. said the target completion date for Phase 3 of Ponte 16 is 2014.  Phase 3 will comprise of an entertainment and recreation complex including a shopping arcade, restaurants and “space for gaming expansion.”  Ponte 16 is 49% owned by an indirect subsidiary of the company, while 51% is owned by SJM.




Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Walking Away

“In many cases, they simply walked away.”

-Hampton Sides

 

That’s a quote about the Anasazi people of Chaco Canyon in Chapter 31 of Blood and Thunder. By 1150 AD, “just as quickly as they had burst upon the scene, the Chacoan culture ebbed… the Anasazi had overfarmed, overhunted, and overlogged.

 

After a 200 year ( AD) “cultural boom that has no parallel in North American pre-history… archeologists have come to call this the Chaco Phenomenon… this environmental upheaval led, predictably enough, to a social upheaval.” (pages 266-267)

 

Whether some study history doesn’t matter. Markets do. They rise and fall. For centuries,  ideologies, regimes, and civilizations have lived and died by the sword of evolution. Just when you don’t think it could never happen to yours, it starts happening.

 

Back to the Global Macro Grind

 

How long can Keynesian governments over-spend, over-consume, and over-promise on bailout resources that they do not have?

 

I don’t know. And neither did Jim Rickards on our Currency Wars conference call yesterday. What we both agreed on, however, is that within the framework of considering global markets as a complex system, we’re getting real close to the tipping point.

 

Rickards explained it using “critical threshold” math. I always discuss it internally within the Chaos Theory of emergent properties triggering phase transitions. For those of you who are Keynesians or Monetarists, we’re talking a different risk management language here. Alongside physics, applied math, etc., we’ve chosen to think outside the Western academic box. We’ve evolved.

 

To simplify the complex, a “phase transition” is the transformation of a dynamic system (global markets, across asset classes) from one state to another. Pundits don’t get why they call it this, but they call it something like “risk on, risk off.”

 

Unfortunately, phase transitions don’t happen like the Karate Kid learning how to wax. There is no centrally timed “on, off.” There is no “smoothing mechanism” or certainty in analyzing when emergent properties (risk spreads) move into a phase transition.

 

In thermodynamics, you can understand what a phase transition is by reading an 8th grade Chinese textbook (they have them in English too). “For example, a liquid may become gas upon heating to the boiling point.” (Wikipedia)

 

What’s the market’s boiling point?

 

To answer that question, many people who have not evolved their process in this business would answer using the US stock market and maybe a 50-day moving average sprinkled with some storytelling dust.

 

*Risk Manager Note: the US stock market is not the dynamic and globally interconnected currency, commodity, bond, etc. market that our 27 multi-factor, multi-duration model is writing about every day.

 

Jim Rickards is very good because markets have humbled him enough over the years to answer the aforementioned question with “I don’t know.” That’s also a cornerstone of what we (Chaos and Complexity Theorists) do vs. what they (Keynesian Policy Makers) do.

 

We Embrace Uncertainty.

 

One suggestion I had to answering the most frequent question I get from clients (again, what’s the boiling point, or point when this entire centrally planned gong show of broken policy promises implodes) was measuring Spread Risk in key Global Macro relationships:

  1. The long-term spread between Money Supply (rising as they print money) and Velocity of Money (falling, fast)
  2. The long-term spread between the US Dollar and the CRB Commodities Index
  3. The long-term spread between the SP500 priced nominally versus priced in Gold (see Rickards’ Chart of The Day)

I’ve probably geeked out enough on the math this morning, but since Paul Ryan is going all-math on CNN’ers, I’m cool with it.  I’ll also leave you this morning with more questions than any of us have answers.

 

But that’s cool too - if that’s the story of your professional life, you really are constantly learning and evolving.

 

The Hedgeye Portfolio is beta adjusted net short for this morning’s US market open. We continue to think you sell stocks and commodities at VIX 14-15 and buy bonds there too.

 

Timing matters; especially when entire populations of investors are Walking Away from something that’s been abused and broken – the market’s trust.

 

My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr Treasury Yield, and the SP500 are now $1, $111.79-113.76, $81.11-81.97, $1.23-1.26, 1.58-1.71%, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Walking Away - Chart of the Day

 

Walking Away - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 30, 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 0.60% 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 08/29 NYSE 526
    • Increase versus the prior day’s trading of 386
  • VOLUME: on 08/29 NYSE 509.30
    • Decrease versus prior day’s trading of -1.39%
  • VIX:  as of 08/29 was at 17.06
    • Increase versus most recent day’s trading of 3.46%
    • Year-to-date decrease of -27.09%
  • SPX PUT/CALL RATIO: as of 08/29 closed at 1.69
    • Up from the day prior at 1.49

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 32.55
  • 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 1.38
    • Unchanged from prior day’s trading

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Personal Income, July, est. 0.3% (prior 0.5%)
  • 8:30am: Personal Spending, July, est. 0.5% (prior 0.0%)
  • 8:30am: PCE Deflator M/m, July, est. 0.1% (prior 0.1%)
  • 8:30am: PCE Core M/m, July, est. 0.1% (prior 0.2%)
  • 8:30am: Initial Jobless Claims, Aug. 24, est. 370k (prior 372k)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 26 (prior -47.4)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas change
  • 11am: Kansas City Fed Manufacturing Activity, Aug. est. 3 (prior 5)
  • 11am: Fed to purchase $1.5b-$2b notes 2/15/2036-8/15/2042
  • 1pm: U.S. to sell $29b 7-yr. notes
  • TBA: ICSC Chain Store Sales Y/y, Aug. (prior 1.9%)

GOVERNMENT:

    • Romney accepts Republican nomination as candidate for presidency
    • House, Senate not in session
    • FERC meets on coordination between natural gas, electricity markets in Mid-Atlantic Region, 9am
    • SEC holds closed meeting on enforcement matters, 2pm
    • California holds trial auction of carbon allowances, 1pm

WHAT TO WATCH:

  • Isaac’s threat to offshore energy production eases
  • China’s Wen says Spain, Italy and Greece must step up overhaul
  • Barclays names Antony Jenkins as CEO to replace Diamond
  • Euro-area economic confidence falls more than forecast
  • CIBC 3Q earnings beat est.; boosts dividend to C$0.94
  • Caterpillar says China growth may recover on stimulus
  • Japan Air seeks $8.4b in biggest IPO since Facebook
  • WPP cuts sales growth forecast as clients reduce spending
  • German unemployment rises for 5th month in August
  • Nokia Siemens said to be close to selling business-support unit
  • Mando may buy former affiliate Halla Climate from Visteon
  • Pandora jumps in extending trading after break-even 2Q earns
  • Samsung unveils pen-equipped Galaxy phone to keep lead on Apple
  • Comcast said near U.S. approval to encrypt cable signals
  • Hewlett-Packard plans first Windows 8 touch-screen laptops
  • August same-store sales may gain 1.8% on back-to-school

EARNINGS:

    • Royal Bank of Canada (RY CN) 6am, C$1.18
    • China Sunergy (CSUN) 6am, $(1.41)
    • Toronto-Dominion (TD CN) 6:30am, C$1.83
    • Ciena (CIEN US) 7am, $(0.02)
    • Esterline Technologies (ESL) 4pm, $1.11
    • Cascade (CASC) 4pm, $1.29
    • Zumiez (ZUMZ) 4pm, $0.13
    • SAIC (SAI) 4:02pm, $0.33
    • National Bank of Canada (NA CN) 4:15pm, C$1.90
    • Omnivision (OVTI) 4:18pm, $0.24
    • Splunk (SPLK) 4:35pm, $(0.03)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Dust Bowl Kansas Farmers Set to Plant Winter Wheat: Commodities
  • Africa Gas Rush Imperils $100 Billion in Australian LNG: Energy
  • U.S. Gasoline a Bargain as Motorists Pay 63% Less Than Norway
  • Oil Declines for a Second Day as Stockpiles Rise, Storm Weakens
  • Copper Rises on Reduced Concern About Euro-Region Debt Crisis
  • Wheat Drops as Rally May Prompt Farmer Sales; Soybeans Decline
  • Gold Set to Advance on Speculation Bernanke to Hint at Stimulus
  • Cocoa Rises as West Africa May Have Little to Sell; Coffee Falls
  • Weakening Tropical Storm Isaac Eases U.S. Gulf Energy Risk
  • France’s Wine Production Will Be ‘Extraordinarily Low’ in 2012
  • China’s Iron Ore Output Dropped 10% in August as Prices Slid
  • India Set to Get Above-Average Monsoon Rains in Next Two Weeks
  • Record Gas Trade Shows Italy Craves Hub by 2015: Energy Markets
  • China Copper Demand Seen Growing at Slowest Pace in 15 Years
  • Grain-Barge Logjam From Isaac Rains Compounding Drought Slowdown
  • Wheat Imports by Thailand May Double as Local Rice Prices Surge
  • Copper Set to Decline on Ichimoku Cloud Top: Technical Analysis

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


USD – manic media back-pedaling, hard, on the Bernanke bailout drugs tomorrow; Washington Post article may have stole little Hilsenrath’s thunder, suggesting what Gold prices have all wk, no drugs for u. With the USD/Gold immediate-term TRADE inverse correlation -0.91 right now, this matters, big time. Paul Ryan is USD bullish, on the margin.

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


RUSSIA – big economy, big beta – watching this one closely as the USD makes higher-lows and Oil/Gold lower-highs; Russian Stocks (RTSI) have led European losers this wk and now the RTSI just moved back into crash mode (-20% from YTD top); beta is not alpha.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


JAPAN – another lower-high for Japanese stocks on another fundamental growth miss (Japanese Retail Sales -0.8% y/y now that subsidies burned off); Nikkei is down -12.4% since #GrowthSlowing began, globally, in March; ugly session in Asian Equities taking them to flat for AUG.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


Our Expert Call With Jim Rickards

Today we held an expert call for our Hedgeye Risk Manager and Macro vertical subscribers with CEO Keith McCullough and currency expert, lawyer and investment banker Jim Rickards. We live tweeted the call so that everyone could get insight into what Rickards’ thoughts are on the global currency wars, the US dollar, reverting back to the gold standard and monetary policy in the US and Europe.

 

Below are some of the highlights we think best represent the call and the ideas behind it. You can check the @Hedgeye Twitter account for a full play by play.

 

-John Taylor, Bob Barbera would make excellent replacements for Federal Reserve Board of Governors.

 

-In a crisis, there's not a central bank that wants gold. If you get CHAOS, countries may have to go to gold standard.

 

-Regarding the Eurozone crisis: you don't need to diffuse debt of Italy, etc. you just need to take care of enough to reinstate confidence in the markets.

 

-China is dying to diversify away from dollars and is looking at Euros. Once Europe has act together, China will invest heavily.

 

-50-year-old Greeks will throw Molotov cocktails rather than take pay cuts. 25-year-old Greeks will take entry level jobs with pleasure as they just want to work and have a different set of future incentives laid out for them.

 

-The Euro is getting stronger and stronger. Those thinking of par? No country is leaving the Eurozone; new members will be added.

 

-If GDP growth expectations are at 2% but we really want 4%, delivering something like 3% looks really good psychologically. So when the Fed says it expects 2% GDP growth, it really wants something more like 4% in order to manage expectations.

 

-Net exports are the key to getting out of this mess. Double exports in 5 years, we have a 1-1.5% increase in GDP which is decent.


the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

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