“Two things are infinite: the universe and human stupidity. And I’m not sure about the universe.”
As much as we and other market prognosticators (and even trained economists) have criticized Chairman Bernanke’s monetary policies, he went ahead yesterday and put on the big boy gloves of monetary policy. In the Fed’s statement yesterday, quantitative easing was, as Buzz Light Year would say, extended to infinity and beyond.
In using the Einstein quote above I’m not suggesting anyone on the Federal Reserve board is stupid. In fact, they are obviously all very intelligent. While I would give myself the odds in a game of hockey, I’m pretty sure anyone on the Fed could beat me in a game of one-on-one Sudoku (if that even exists). Of course, what they may be missing is the impact of their policies on the real economy.
After Keith got off CNBC’s Fast Money last night, he and I had a long discussion about the quarter. Let’s be honest, we’ve been leaning too bearishly this quarter. Coming into the quarter, we actually believed that the Fed would be in a box because the data didn’t currently support incremental easing and that the Fed wouldn’t ease ahead of the election. Obviously, we were wrong on both those points.
Conversely, we’ve been spot on in terms of our view on general economic growth this quarter and this year. Ultimately, economic activity will drive both company fundamentals and the broader stock market. In the shorter term, of course, other factors can override these fundamentals.
So while we weren’t levered long in to this new market high (in fact, we are actually short the SP500), our risk management process has also enabled us to not have major blow ups. Step #1 for us is always to minimize our losses. Start by not losing money, and you will get your shot to generate returns.
A popular refrain yesterday in the media and around some areas of Wall Street was that Bernanke and the Fed are the only ones focused on doing anything about the abysmal jobs market. I have to admit, I find this view a little nonsensical. From a practical sense, printing money does very little to encourage companies to hire. Further, it has actually done very little to encourage banks to lend more broadly.
On the last point, and I will admit this is anecdotal, I ran into a friend who is one of the larger real estate developers and condo owners in a small New England city. I assumed that extending the duration that rates will be held at 0% and further monetizing of MBS would be beneficial for those in real estate. His response was that I was right, for those that can get a loan this is a very good thing. But, according to him, for the large percentage of the population who doesn’t have a 20% down payment or stellar credit rating, it is far less relevant. On some level, this likely explains why mortgage applications have not accelerated with rates at all-time lows.
The most critical economic issue with printing dollars to infinity and beyond is the inflationary impact. Ironically, shortly before the Fed released its statement yesterday, PPI hit a three year high in terms of month-over-month growth. But forget that spurious government data, what about the real economy you say? Well, in the Chart of the Day today we actually looked more closely at the impact of commodity inflation on the real economy.
As the chart shows, going back to 2008 gasoline has exceeded $4 in mid-2008, in mid-2011, in early 2012, and now. The corresponding result, as the chart shows very vividly, is that economic growth slowed and we then saw a corresponding correction in equities, despite infinitely loose monetary policy.
Not to scare you this morning, but inflation from these levels shifts our growth slowing scenario squarely into potential recession territory. We don’t use the R word frivolously. In fact, the last time we emphasized recession as a probable scenario was back in March of this year.
Whether we get aggressive on the recession call will be data dependent, but we are comfortable continuing with the idea that global growth is slowing. In this vein, later this morning we will be doing a 15-minute call on Caterpillar Inc. (CAT) outlining our long-term bearish thesis. Our Industrials Sector Head Jay Van Sciver is relatively new to Hedgeye, but hasn’t been afraid to make a bold call. This one will be no different. The key tenets of his thesis on CAT are as follows:
- Resource company investment is near cyclical highs and set to decline. Other end markets do not appear poised to replace this tailwind;
- CAT has been adding capacity and building inventory into what we believe will be a peak in demand; and
- Our cyclically adjusted valuation for CAT implies a stock price range of $50 – 70.
Before I let you head into this weekend, the other point related to extending QE to flag is that if equity markets continue to inflate, it will likely be positive for President Obama’s re-election chances. To wit, our Hedgeye Election Indicator has his chances of re-election at an all-time high at 61.9% and this corresponds closely with InTrade at 64.5% odds.
Incidentally, if you are confused by the global economy, you are in good company. In his most recent letter to investors, legendary investor Howard Mark writes that the “world seems more uncertain than any other time in my life.”
Our immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $114.49-118.01, $79.04-80.67, $1.27-1.30, 1.70-1.80%, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
The Macau Metro Monitor, September 14, 2012
HOTEL PRICE WAR MIGHT OCCUR AT LOW SEASON THIS MONTH Macau Daily Times
Chan Chi Kit, President of the Macau Hoteliers & Innkeepers Association, said the traditional low season of September this year coincides with the launch of over 1,800 rooms and suites by Sheraton in Sands Cotai Central with promotional prices very close to those of the 3 or 4 star hotels. According to some operators, this could trigger a price war between hotels as visitor numbers fall and no major new attractions are launched during this low ebb to draw extra tourists. Chan pointed out that in the first ten days of September, some hotels recorded occupancy rates as low as 50 –70%, and individual establishments even saw record 20 – 50% lows. While a price war is possible in September, the hotel industry leader hoped the Golden Week holiday starting October 1 would bring some relief to the hospitality industry by bringing more mainland visitors, as it always has done in past years.
PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR JULY 2012 DSEC
Visitor arrivals in package tours increased by 19.5% YoY to 825,464 in July 2012. Visitors from Mainland China (606,120) went up by 20.4%, with 256,537 coming from Guangdong Province; besides, those from Taiwan (75,261); Hong Kong (35,395) and Japan (24,717) increased by 54.2%, 14.4% and 66.1% respectively. On the contrary, visitors from the Republic of Korea (25,491) decreased by 17.9%. In the first seven months of 2012, visitors in package tours totaled 4,908,359, up by 24.8% YoY to account for 30.6% of the total visitor arrivals. The average length of stay decreased by 0.18 night to 1.2 nights.
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.
TODAY’S S&P 500 SET-UP – September 14, 2012
As we look at today’s set up for the S&P 500, the range is 36 points or -2.26% downside to 1427 and 0.21% upside to 1463.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: on 09/13 NYSE 1701
- Increase versus the prior day’s trading of 778
- VOLUME: on 09/13 NYSE 802.31
- Increase versus prior day’s trading of 20.86%
- VIX: as of 09/13 was at 14.05
- Decrease versus most recent day’s trading of -11.08%
- Year-to-date decrease of -39.96%
- SPX PUT/CALL RATIO: as of 09/13 closed at 1.11
- Down from the day prior at 1.12
CREDIT/ECONOMIC MARKET LOOK:
Qe USA – never, in US economic history, has a > $4 national avg at the pump NOT slowed US economic growth; never is a long time; see our Qe note from yesterday showing you the 3 most powerful ramps in gas prices and what the US economy immediately did next (mid-2008, mid-2011, and Q1 of 2012). Its only not obvious to the willfully blind.
- TED SPREAD: as of this morning 29.21
- 3-MONTH T-BILL YIELD: as of this morning 0.09%
- 10-Year: as of this morning 1.81%
- Increase from prior day’s trading of 1.72%
- YIELD CURVE: as of this morning 1.58
- Up from prior day’s trading at 1.49
MACRO DATA POINTS (Bloomberg Estimates)
- 8:30am: Consumer Price Index M/m, Aug., est. 0.6% (prior 0.0%)
- 8:30am: Advance Retail Sales, Aug. est. 0.8% (prior 0.8%)
- 9:15am: Industrial Production, Aug., est. -0.1% (prior 0.6%)
- 9:15am: Capacity Utilization, Aug., est. 79.2% (prior 79.3%)
- 9:55am: University of Michigan Consumer Sentiment, Sept. preliminary, est. 74.0 (prior 74.3)
- 10am: Business Inventories, July, est. -0.3% (prior 0.1%)
- 11am: Fed to buy $1.5b-$2b notes due 2/15/2036-8/15/2042
- 1pm: Baker Hughes rig count
- 1pm: Fed’s Lockhart at employment conference in Atlanta
- 1:45pm Fed’s Raskin speaks in Michigan on economy
- Washington Day Ahead agenda
- SEC holds a public hearing on ways to promote stability in markets reliant on highly automated trading systems; will focus on how market participants design, implement and manage trading technology after glitches disrupted Facebook’s initial public offering and pushed Knight Capital to brink of bankruptcy, 10am
- ITC Judge releases findings in patent-infringement case that Samsung filed against Apple over smartphone features and ways to transmit data, after 9am
- Treasury Undersecretary for Domestic Finance Mary Miller speaks at American Banker conference. Arlington, Va. 2:15pm
- Transportation Secretary Ray Lahood, FTA Administrator Peter Rogoff make transit funding announcement, 12:30pm
- Congressional Robotics Caucus holds briefing on National Robotics Initiative, 12:30pm
- House, Senate in session
WHAT TO WATCH:
- Germany’s Schaeuble cautions Spain against a full bailout
- U.S. retail sales probably improved in Aug. on auto demand
- Western Digital cuts rev. view, begins div. and $1.5b buyback
- Peregrine’s Wasendorf released on bails after guilty plea
- Visteon said to consider Leuliette as CEO while eyeing electronics unit
- Time CEO Lang seeks to unify web and print advertising
- Japan tells China to withdraw ships near disputed islands
- Italian 10y yields fall below 5% for first time since March
- California Attorney General investigates doctor-hospital deals: WSJ
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Corn Bulls Retreat as Near-Record Costs Curb Demand: Commodities
- Beef Premium Spurring Demand for Cheaper Pork: Chart of the Day
- Oil Rises to $100 for First Time Since May After Fed Stimulus
- Commodities Post Longest Rally Since 2010 as Fed Boosts Outlook
- Platinum Heads for Longest Winning Run in 25 Years; Gold Rallies
- Aluminum Heads for the Longest Rally in at Least 25 Years
- Wheat Rises on Egyptian Purchase of French Grain, U.S. Drought
- Coffee Headed for Longest Rally in Four Months; Cocoa Advances
- Japan Draws Curtain on Nuclear Energy Following Germany: Energy
- Rebar in Shanghai Gains to Three-Week High on Fed Stimulus Plan
- Aluminum Backwardation Looms as Warehouse Backlog Limits Supply
- Pemex’s Missing Oil Surges to All-Time High: Chart of the Day
- Oil May Fall on Projected Supply Gain After Isaac, Survey Shows
- Sugar Bulls Ascend as Rain Returning to Top Producer Brazil
- Copper Jumps, Heads for Highest Close Since May on Fed Stimulus
- Storm Effect on Oil Prices Waning as Shale Booms: Energy Markets
Qe EUROPE – ok, when you have economic stagflation (zero to negative growth + inflation), what you really need (if you have a growth problem) is another rip in food/energy prices; that’ll get things fixed! $117.35 Brent Oil last, +33% since June.
Qe ASIA – straight up moves in the KOSPI +3.2%, Hang Seng +2.9%, and Nikkei +1.8%, but all to lower-highs vs Feb-March; no idea how the math works on commodity demand slowing as prices are rising for Asian export producers; Bernanke doesn’t care.
The Hedgeye Macro Team
This note was originally published at 8am on August 31, 2012 for Hedgeye subscribers.
“Duration neglect is normal in a story, and the ending often defines its character.”
That’s one of my favorite risk management quotes from Kahneman’s Thinking, Fast and Slow. It comes from Chapter 36 titled “Life As a Story.” After this morning’s central planning event, take some time to think this weekend. Re-read the last 30 pages of one of the most important books of the year. If there ever was a time to embrace the uncertainty of Behavioral Economics, it’s now.
Storytelling is at the core of everything we do. Storytelling can be personal and political. Storytelling can be short or long-term. But no matter what your confirmation bias or duration, storytelling, at some point, meets a fork in the road between fact and fiction. Whether or not you are proactively prepared for that moment is purely up to you.
Two weeks ago, the Bailout Bull Storytelling was that “Bernanke and Draghi are going to provide a one-two punch in Jackson Hole.” Stock were higher and bonds were lower. Since then: 1. Draghi bagged the meeting, 2. Bernanke’s boys are waffling with “it’s too close to call”, and 3. US Equity Volatility (VIX) is up +34%.
As Ray Dalio likes to say, look in the mirror and ask yourself, “what is true?”
Back to the Global Macro Grind…
The other thing Ray Dalio reminds us (from the Introduction of Ray Dalio’s Principles) is to “above all else, think for yourself.” That’s pretty important when considering what sources are credible in this profession. Many of them have not evolved since 2007.
Duration Neglect is one thing, but being unable to tell the difference between fact and fiction can bankrupt you at the poker table as fast as it can in your personal and professional life. From a Global Macro perspective, no matter what these broken sources tell you this weekend as they live large on your dime in Jackson Hole, Growth Is Slowing.
When I say Growth, I mean Global Growth Data – here it is in the last 48 hours:
- US Jobless Claims rose wk-over-wk to 374,000 vs 366,000 two weeks ago
- US Consumer Confidence fell -8% month-over-month in AUG to 60.6 vs 65.9 in JUL
- Japanese Retail Sales fell -0.8% year-over-year
- Hong Kong Retail Sales volumes dropped from +8.3% year-over-year to +1.3%
- Brazil cut interest rates as inflation ramped +100bps month-over-month to +7.7%
- Spain’s Retail Sales fell -7.3% in JULY (year-over-year) vs -5.2% JUN
- Italy’s unemployment rate ramped to 10.6% in Q2 vs 9.8% in Q1
- Italy’s inflation rate remains at +3.5% in AUG vs +3.6% in JULY (stagflation)
- US GDP Growth for Q212 slowed to 1.73% vs +1.97% in Q112
So, even if you’re still in the “growth is back and earnings are great camp” (Tom Lee, Ed Hyman, Laszlo Birinyi, etc.) from March of 2012 – at this point, if your storytelling is based on the USA alone – you’ve just gotta change your story to begging for bailouts.
To review, the call we made in March of 2012 was that Global Growth Slows As Inflation Accelerates. That, on the margin, is precisely what’s happened here in August versus July – primarily because of the inflation part of that statement. Food and Oil prices matter.
Now if you turn around and tell me that inflation fell in May versus where it was in March, I’ll agree with you. It did. That’s why we bought the SP500 at its long-term TAIL support line of 1283. But, to be consistent, don’t forget what central planning does: A) It Shortens Economic Cycles and B) Amplifies Market Volatility. So you have to keep moving.
Back to that US GDP Growth print this week of 1.73%:
- It implied a “Deflator” of 1.59% in Q2 versus +2.16% in Q1; therefore GDP, inflation adjusted, was overstated in Q2
- Assuming inflation is the same as the government says it was in Q1 here in Q3 (it’s higher), #GrowthSlowing continues
- Irrespective of the storytelling on what inflation rate you use, US GDP is down -57.8% from Q411 to Q2 of 2012
In this No Trust; No Volume market, one of the most neglected long-term issues remains confidence. Small business owners in America like me aren’t morons. We aren’t going to ramp Fixed Investment growth, Inventories, and Hiring into a central planning event.
That’s not me telling my own story – the only inventory I have in oversupply are tweets. That’s the story within the latest US GDP report:
- US Fixed Investment Growth was basically cut in half, sequentially, from Q1 to Q2 (+0.63% vs +1.18%)
- US Inventory Growth went from +2.53% in Q411 (when Growth was solid) to -0.23% in Q212
- US Export-Import Growth (+0.3% in Q212) remains nowhere to be found as an offset to 1 and 2
Keynesian Quacks will tell you that if you debauch the currency of a nation, “exports will ramp” and a bunch of other stuff will multiply upon that as Ben Bernanke and Larry Summers raise the oceans to escape velocity.
Not this time. No dear Sirs; this time is not different. This story will have an ending - and your Duration Neglect will be the cross of the families bearing your name for many years to come.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1627-1679, $111.12-113.74, $81.11-82.18, $1.23-1.26, 1.56-1.65%, and 1397-1409, respectively.
Enjoy your long weekend,
Keith R. McCullough
Chief Executive Officer
Takeaway: Coffee prices have taken a turn higher this week but favorable outlook remains for $SBUX, $GMCR, $DNKN, $THI, $CBOU
Corn dropped over the last week but beef retained the limelight as prices gained another 1.2%. Coffee prices snapped higher as speculation grew that Columbia’s Arabica harvest is likely to come up short versus growers’ expectations. We do not view this as overly material for the coffee retailer stocks given that prices are still down 33% versus last year. Chicken wings moved slightly lower to +103% year-over-year.
The last week has been mixed for commodity prices but today’s Fed announcement is likely to sustain the volatility in commodity markets that have made life difficult for investors, analysts, and company executives alike. As the chart below indicates, the CRB Foodstuffs Index turned sharply higher during the implementation of both prior rounds of quantitative easing. While there are different schools of thought on the relationship, or lack thereof, between monetary policy and commodity prices, and other factors such as drought clearly have an impact. As long as interest rates are artificially pushed lower, and QE3 seems likely to have that effect, investors will speculatively seek yield in alternative asset classes such as commodities. Joe Sanderson, CEO of SAFM, and others have noted Federal Reserve intervention have had an impact on commodity markets.
The USDA World Agricultural Supply & Demand (WASDE) report was released yesterday and there were some surprises.
- Corn declined yesterday as the USDA unexpectedly raised its corn ending stock forecast to 733 million bushels from 650 million prior. Lower production and yield were offset by higher beginning stocks. We believe that a slowing in consumption, as well as the market anticipating more drought damage to the crop than seems to have materialized, was behind the move lower
- Wheat supply and consumption estimates were unchanged for the current U.S. marketing year.
- The 2011/2012 marketing year estimate of U.S. exports of soybeans was increased by 10 million bushels
Coffee prices gained 13.1% week-over-week as speculation grew that Columbia’s Arabica harvest is likely to come up short versus growers’ expectations. Coffee prices are still down 33% from year-ago levels and the outlook remains favorable for PEET, SBUX, GMCR and other coffee retailers from a cost of sales perspective.
Beef prices gained over the last week and U.S. Meat Export Federation President and CEO Philip Seng had the following to say: “With higher operating costs, the beef sector is facing serious economic challenges. Tight beef supplies have pushed prices higher and strong demand from our international customers is helping support higher beef cutout values. With these factors in mind, it is absolutely critical that we remain aggressive with our international promotions and continue to capture the highest return possible on the products we export.” Beef price gaining is a negative for WEN (20% of spend), BLMN (30%), and JACK (20%).
Drought is undoubtedly still an issue in several areas of the world, including the U.S., but the USDA’s -1% corn output revision was much less dramatic than feared. That said, the drought is nearing its fourth month
Gasoline prices continue to head higher. As Hedgeye CEO Keith McCullough has been pointing out – particularly in light of QE3 today – gas prices north of $4 have had a destructive impact on consumption (71% of U.S. GDP) in 2008, 2011, and in 1Q12.
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