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Pain & Progress

“Pain plus reflection equals progress.”

-Ray Dalio

 

As a hedge fund analyst, turned Portfolio Manager, turned Canadian-American Entrepreneur, there are very few quotes that resonate with me more than that one. Ray Dalio remains, The Man.

 

In order to really learn how to win, I need to feel the pain of my mistakes. If I’m not making mistakes, that means I’m probably not pushing myself hard enough to try something new. John Cage frames that thought about risk taking another way: “I can’t understand why people are frightened of new ideas. I’m frightened of the old ones.”

 

As you watch the bull market crowd cheer on 10 million iPhone5 sales this weekend but, at the same time, beg for more of what has not worked (Spain Bailouts), remember that in order to foster Apple like innovation, we can’t incubate an American culture of socializing losses.

 

Back to the Global Macro Grind

 

For me at least, last week’s pain was this week’s gain. With the US Dollar Index having its 1st up week in the last 7, the CRB Commodities Index has had its long-term TAIL spanked for a -4.4% wk-to-date move.

 

Within the parameters of our Multi-factor, Multi-duration Risk Management Model, we focus on 3 key durations of risk (TRADE, TREND, and TAIL). We define TAIL risk on a bi-partisan basis; it works both ways (up and down).

 

Across the Global Macro waterfront, here are some key TAIL duration risks (3 years or less) for long-term risk managers to consider:

  1. US Dollar Index long-term TAIL support = $78.11
  2. CRB Commodities Index long-term TAIL resistance = 309
  3. Oil (Brent) long-term TAIL resistance = $111.44/barrel
  4. US 10yr Treasury Yield long-term TAIL resistance = 1.91%
  5. EUR/USD long-term TAIL resistance = $1.31

The first and last TAIL risks are the mirrors of one another. One up, one down. That’s why I’ve been saying for a while now that if you get the US Dollar right, you get a lot of other things right. That’s where most multi-duration Correlation Risks associated with Policies To Inflate live.

 

The other thing that you need to get right is economic growth. Put another way, if you’ve had US and Global Growth right in 2012, you’ve had Treasury Bonds right (long). Despite all of the broken promises from Bernanke on delivering you the elixir of a centrally planned life, the bond market continues to make a series of higher-lows, as the 10yr yield’s TAIL resistance remains intact.

 

When you get both A) the biggest Ball Under Water Macro trade of the last decade (US Dollar) and B) US Growth (demand) right, you have a tremendous opportunity to get the holy grail of investing right – timing. Personally, I’ll always have room to improve on that.

 

But does Ben Bernanke? Who holds this man accountable? With a lack of progress, is America’s economy about to experience the most amount of pain yet? If we go back into the soup, what will he do next? Is he out of bullets?

 

If you know the answer to these critical long-term questions, tweet me.

 

In the meantime, here’s what you get for your Burning Bernanke Bucks:

  1. Unemployment: US Jobless Claims Rising on a 4-wk rolling average basis to 378,000 (382,000 reported for this wk)
  2. Inflation Expectations: 10yr Breakevens testing all-time highs immediately following Bernanke’s decision last Thursday
  3. Fund Flows: ex-ETFs, US Equity Fund Flows were negative (again) at -$1.9B wk-over-wk (outflows)

In other words, at 4.5 year highs in the US stock market, this is what multiple “Quantitative Easings” and countless “communication tools” about the pending Qe-upon-prior-Qe got us:

  1. Higher US unemployment than we had in 2009 (unemployment rate in January 2009 was 7.8%)
  2. The 3rd of 3 Greenspan/Bernanke Asset Bubbles (Commodities) that every money manager is dared to chase
  3. No trust and/or volume in what used to be America’s beacon of free-market capitalism (the US stock market)

Great job, dude.

 

Both Bush and Obama signed off on this guy. See the Chart of The Day (10yr Breakeven Inflation Expectations 2007-2012) and you tell me how much longer he can keep America’s Purchasing Power (US Dollar) down, Savings Rates on hard earned moneys at 0%, and show zero reflection on his academic dogma’s mistakes, never mind progress.

 

My immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500, are now $1, $108.03-111.44, $78.61-80.43, $1.29-1.31, 1.72-1.87%, and 1, respectively.

 

Best of luck out there today and enjoy your weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pain & Progress - Chart of the Day

 

Pain & Progress - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 21, 2012


As we look at today’s set up for the S&P 500, the range is 20 points or -0.63% downside to 1451 and 0.74% upside to 1471. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 9a

 

EQUITY SENTIMENT: 

  • ADVANCE/DECLINE LINE: on 09/20 NYSE -623
    • Decrease versus the prior day’s trading of 473
  • VOLUME: on 09/20 NYSE 678.75
    • Increase versus prior day’s trading of 5.44%
  • VIX:  as of 09/20 was at 14.07
    • Increase versus most recent day’s trading of 1.37%
    • Year-to-date decrease of -39.87%
  • SPX PUT/CALL RATIO: as of 09/20 closed at 1.07
    • Down from the day prior at 1.53 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 27.16
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.77%
    • Increase from prior day’s trading of 1.76%
  • YIELD CURVE: as of this morning 1.52
    • Up from prior day’s trading at 1.51 

MACRO DATA POINTS (Bloomberg Estimates)

  • U.S. Rates Daily Agenda
  • 11am: Fed to purchase $1.5b-$2b notes 11/15/2022-2/15/2031
  • 12:40pm: Fed’s Lockhart speaks in Atlanta
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • House, Senate in session
    • House Financial Services holds hearing on Fed interest rate policy, 9:30am
    • House Ways and Means holds hearing on Medicare Advantage health plans, 9:30am
    • CFTC holds closed meeting on enforcement matters, 10am
    • State Dept. advisory panel meets at Fed Bank of New York on enforceability of close-out netting, a contractual mechanism used by financial institutions to reduce risk exposure, 10am
    • FDA holds meeting of Orthopaedic and Rehabilitation Devices Panel, 8am
    • FDA holds meeting on generic drug user fees, 9am
    • Energy and Commerce panel holds hearing on FCC handling of LightSquared, 9:30am
    • FCC advisory panel meets on broadband adoption, 2pm
    • FTA Administrator Peter Rogoff addresses Transit Rail Advisory Committee for Safety meeting, 9am
    • Transportation Dept. advisory panel meets on vessel financing, ship capacity for marine highway services, 11am
    • Space Transportation Assoc. holds discussion on launch systems, with NASA program manager Todd May, 11:30am

WHAT TO WATCH:

  • Italy, Spain won’t seek aid unless yields surge, official says
  • China central bank adviser sees slowdown persisting into 2013
  • Apple poised to sell 10m iPhones in record debut
  • IPhone 5 restrictions to spark Samsung discounts in Europe
  • Knight names chief risk officer, seeks chief tech officer
  • SEC said to scrutinize private equity on share of fund profits
  • Oracle revenue misses ests. as hardware sales decline
  • UnitedHealth to join DJIA after close of market
  • U.K. posts record Aug. deficit as slump hits tax revenue
  • Fed’s Kocherlakota says battling unemployment may mean keeping interest rates close to zero for 4 years
  • Syngenta to buy biotech seed maker Devgen for $523m
  • Glencore, Xstrata said to meet seperately as deadline looms
  • Wells Fargo loan bias settlement with U.S. wins approval
  • News Corp said to consider giving James Murdoch U.S. TV ops
  • GM reaches 4-yr labor agreement with CAW
  • European Medicines Agency CHMP announcements expected
  • UN, Congress in Recess, Xstrata, Libor: Week Ahead

EARNINGS:

    • Darden Restaurants (DRI) 7am, $0.83
    • KB Home (KBH) 8am, $(0.15)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

COMMODITIES – evidently Bernanke’s Inflation Policy trade didn’t like a week of the Fed and Hilsenrath saying nothing thereafter; Qe rallies are getting shorter (and steeper); US Dollar having its 1st up wk in the last 7 gets you a CRB pancaked -4.4% for the wk to-date, snapping its TAIL risk line of 308.

  • Gold Bulls Extend Streak as Prices Jump on Stimulus: Commodities
  • Coal Era Beckons for EU as Carbon Giveaway Ends: Energy Markets
  • Crop Prices Probably Peaked After Drought Cuts U.S. Output
  • Bananas in Latin America Crunch as Fyffes Plans to Raise Prices
  • India Wins on Livestock-Feed Exports as Drought Cuts U.S. Crops
  • Gold Seen Gaining in London as Stimulus Spurs Investor Demand
  • U.K. Natural Gas Rises to Seven-Month High on Supply Shortfall
  • Crude Oil Rebounds to Trim Biggest Weekly Decline Since June
  • Copper Stockpiles at Four-Month High in Shanghai; Zinc Drops
  • Cooking-Oil Imports by India Seen at Record as Food Demand Grows
  • China’s Iran Oil Imports Drop to Five-Month Low Amid Sanctions
  • Duke Chief Answers Critics After Coup at Biggest Utility: Energy
  • Cocoa Supply, Demand to Even Out; Pricing Pressures Diminishing
  • Soybeans May Slump 14% After Momentum Stalls: Technical Analysis
  • Corn Heads for Biggest Weekly Loss Since June on Slowing Demand
  • Gold Seen Luring Wealthy as Central Bankers Expand Stimulus

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


EURO – EUR/USD bounces +0.5% on Spain bailout rumoring; that monster correlation risk FX pair is in a very important positions right now w/ TRADE support of $1.29 under attack at the same time as our long-term TAIL risk line of $1.31.54 remains a wall of resistance; a break and close below $1.29 gets me $1.26, fast – so watch that.

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


SPAIN – what would the week have been if we actually went 5 full days with no central planning rumors? Spain gets the bailout begging back into the headlines, and that’s good for a European/US futures bounce; IBEX continues to make lower-highs vs March; its risk range is now 8031-8214; doing nothing in European Equities right now, waiting/watching.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 


Corporate Earnings Slowdown

 

Hedgeye CEO Keith McCullough appeared on CNBC's Fast Money this evening to discuss the market and the pressure on corporate earnings.

Keith reiterated that the corporate earnings slowdown is a big issue; it's the one thing that Ben Bernanke can't take care of no matter what policies he implements. Norfolk Southern (NSC) was down 9% today, so you can clearly see that earnings are at risk. Growth is slowing on a global level and affecting corporations as factors like slowing exports and rising inflation take hold.

Also discussed was energy and oil. Demand is down and supply is up in the US. But the real question is: how will Bernanke's policy of further easing affect energy prices in the long run?

As QE3 continues, commodity prices will continue to drive higher. Eventually, the cycle will turn and prices will come down, especially when the US dollar stops heading lower (keep in mind the USD has been falling for 6 consecutive weeks now).


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WEEKLY COMMODITY CHARTBOOK

Takeaway: Coffee prices remain a tailwind for $SBUX, $PEET, $GMCR, $CBOU, $THI, and other coffee retailers.

Over the past week, cheese prices gained the most of the soft commodities that we track.  Coffee declined almost 6% after strong gains last week.  Currently, Arabica prices are down 35% versus last year and almost 30% YTD.  This year-over-year decline is a benefit to SBUX, PEET, GMCR, CBOU, THI and other coffee retailers.  Grain prices declined week-over-week as corn, wheat, and soybean saw declines of -3.5%, -2.4%, and -7.1%, respectively. 

 

 

General Overview

 

WEEKLY COMMODITY CHARTBOOK - commod

 

 

Macro Callout

 

Elevated gasoline prices are slowing growth in the U.S.  Commodity inflation during the last few years of quantitative easing has been staggering.  Copper, oil, gold are up in the region of 80% in the last three-and-a-half years while beef is up 50% over the same period.  Gasoline prices are a major factor for the consumer at the moment and we fully expect Darden management to mention gas prices tomorrow on their earnings call.

 

WEEKLY COMMODITY CHARTBOOK - gasoline

 

 

Correlation

 

WEEKLY COMMODITY CHARTBOOK - correl

 

 

Charts

 

WEEKLY COMMODITY CHARTBOOK - crb foodstuffs

 

WEEKLY COMMODITY CHARTBOOK - corn

 

WEEKLY COMMODITY CHARTBOOK - wheat

 

WEEKLY COMMODITY CHARTBOOK - soybeans

 

WEEKLY COMMODITY CHARTBOOK - rough rice

 

WEEKLY COMMODITY CHARTBOOK - live cattle

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

WEEKLY COMMODITY CHARTBOOK - chicken broilers

 

WEEKLY COMMODITY CHARTBOOK - chicken wings

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

WEEKLY COMMODITY CHARTBOOK - milk

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 

 


HSIC: Down With Dental

Takeaway: Decelerating growth in dental in 2H12 in the US and Europe will put continued pressure on $HSIC going forward.

 

This week we initiated a short position in Henry Schein (HSIC) based on two factors: decelerating growth in dental and issues regarding Europe. We’ve been negative on the stock for the past 5 months or so due to the pressures outlined below.

 

US dental consumption is slated to decelerate in the back half of 2012 due to a combination of lackluster employment gains and rising inflation. This doesn’t bode well for what is largely a discretionary healthcare service. The chart below says it all.

 

With regard to Europe, we know that most of the EU has some version of Universal Healthcare. The problem is that not all procedures are reimbursed equally. The more discretionary (i.e. higher-cost) procedures will likely slow overall growth.

 

 

HSIC: Down With Dental  - hedgeye dental


IS IT TIME TO GET OUT OF INDIAN EQUITIES?

Takeaway: To know where you’re headed, you’ve got to know where you’re coming from.

SUMMARY BULLETS:

 

  • We are now fundamentally bearish on Indian equities with respect to the intermediate-term TREND duration and view the current price setup in the SENSEX as asymmetrically stretched relative to India’s economic fundamentals.  
  • From a GROWTH and INFLATION perspective, India’s economic outlook looks quite poor when applying a forward-looking (3-6 months) analytical lens. Moreover, India’s POLICY outlook is rapidly deteriorating and we believe this risk is not being appropriately discounted by the market – no doubt a side-effect of the global yield chasing born out of QE3.
  • From a long-term perspective, we think the Indian economy represents a classic turnaround opportunity, as policymakers there have quite a few POLICY levers that they can pull that would be positive for sustainable organic economic GROWTH. In the interim, however, there will have to be some short-term economic pain as it relates to quashing structural INFLATIONary pressures and reigning in the fiscal deficit. Unfortunately for anyone currently buying what we view as a cyclical top in Indian equities, the India of today is not the “India of tomorrow” just yet.

 

It would be a remarkable understatement to say the YTD has been a volatile year for Indian equity investors. At the start of the year, the SENSEX ramped up +19.2% to a then-cycle peak on FEB 21. That was followed by a -13.5% drop to a then-cycle trough on MAY 23. Since MAY 23, the SENSEX has ramped +15%, making a new YTD high in the process. As a point of reference, we helped clients reorient their fundamental bias on Indian stocks in an appropriately-bearish manner ahead of the FEB highs and did the inverse of that right around the YTD lows:

 

  • TRIANGULATING ASIA – IS IT TIME FOR INDIA TO TAKE A BREATHER? (2/17): “While the fundamentals would suggest that India is not necessarily a top short idea, the risk of a short-to-intermediate-term correction in Indian assets is inflated, given that monetary easing might be farther out in duration than consensus hopes. We point to a developing trend of incrementally-less pricing in of monetary easing into Indian rate markets as supportive of this view.”
  • BACKING OFF OF INDIA – AT LEAST FOR NOW (6/4): “We are suspending our bearish bias on rupee-denominated assets – particularly Indian equities – on the event that INR-supportive inflows pick up in the immediate-term ahead of a potential rate cut. Further, higher lows in the rupee has the potential to develop into a sustainable TREND, making the risk/reward on shorting India from here a lot less asymmetric than it has been recently.”

 

To the latter point, INR-supportive capital inflows into India's debt and equity markets did in fact rebound from their mid-summer lows, with foreign PDI stock in Indian equities currently at an all-time high.

 

IS IT TIME TO GET OUT OF INDIAN EQUITIES? - 1

 

Our neutral, but directionally-bullish bias on Indian equities and the Indian rupee (relative to prior bearishness) was also supported by what we viewed as probable upside for the Indian sovereign to push through much-needed fiscal and economic reforms, as outlined in our AUG 6 note titled, “DO INDIAN EQUITIES HAVE ROOM TO RUN?”:

 

“Indian equities may be on the verge of a sustainable quantitative breakout driven largely by improving POLICY fundamentals (namely the passage of key economic reforms). Conversely, a failure at the SENSEX’s TREND line of resistance would likely be a leading indicator for Indian policymakers running into the proverbial wall – again. As such, we’ll be keeping a close eye on the Indian political landscape over the intermediate term.”

 

On the heels of a disastrous month-long parliamentary session that was India’s least productive in 17 months and saw opposition-led protests wipe out the last 13 days of the session, we subsequently reduced our expectations for an upside surprise(s) to Indian fiscal policy over the intermediate term. As such, we too were pleasantly surprised by the recent Congress Party-led push to approve the previously-stalled multi-brand retail and airline FDI initiatives, as well as the recent +14% diesel price hike.

 

To the casual investor or asset allocator, Indian policymakers pushing through these crucial reforms at such a critical juncture is quite positive and evokes memories of a young Monmohan Singh (current prime minister) who was very active in implementing reforms early in his career as finance minster in the early 90s. Additionally, the confluence of these latest measures is likely to contribute to India maintaining its sovereign rating (as opposed to being downgraded to junk status, which Standard & Poor’s and Fitch have both threatened to do via “negative outlooks”) – at least for now.

 

Looking past these positive headlines, which should also include a -25bps cut to Indian banks’ cash reserve ratios on Monday, all is not well beneath the surface of Indian POLICY. In fact, we’d argue that conditions are rapidly deteriorating and are not being appropriately discounted by the market – no doubt a side-effect of the global yield chasing born out of QE3. On Tuesday, the largest ally of Singh’s Congress Party’s ruling coalition defected, leaving them 24 seats shy of a majority in the lower house of parliament (assuming the move is not reversed). Trinamool, the defecting party, followed its president’s lead in protesting the aforementioned reforms – which, of course, were pushed through amid heightened resistance. That resistance led to a very loose version of the policy being announced, as Singh conceded sovereignty to India’s State governments with regards to deciding if and when they implement the FDI initiatives.

 

Trinamool’s defection from the ruling coalition does come at a political cost for its leader Mamata Banerjee, who is seeking a federal bailout of her State (West Bengal). On the flip side, she may be choosing to preemptively realign her party with a perceived new ruling coalition if the opposition parties are able to force Singh and his Congress Party to a vote of no confidence. To that tune, a recent Pew Research Center study found that only 38% of Indians felt satisfied with the country’s direction, down from 51% in the year prior and good for the sharpest YoY decline in their 17-country sample. Sluggish growth and persistently high inflation have weighed on the Congress Party’s ability to govern and connect with Indian voters – 75% of them living on less than $2 per day.

 

All that being said, no election has to be called until early 2014, so all this political wrangling is likely to merely perpetuate political stagnation in India with respect to implementing much-needed economic and fiscal reforms. It’s worth noting that the Indian government passed the 2nd fewest bills since 1952 last year amid elevated political infighting. Moreover, that infighting appears poised to actually accelerate over the intermediate term as parties increasingly jockey for political position.

 

From a GROWTH and INFLATION perspective, India’s economic outlook looks quite poor when applying a forward-looking (3-6 months) analytical lens. The recent diesel price hike and QE3-inspired run-up in world food price inflation is in support of our view that India’s reported WPI and CPI measures are poised to continue accelerating over the intermediate term. That will likely contribute to tighter credit conditions domestically – which had improved in recent months – that ultimately weigh on Indian economic growth – especially in an environment of prudence out of an RBI that officially wants to see YoY WPI readings ~250bps lower. Layer on the potential for a reversal of capital flows – which India needs to grow via supplementing its elevated current account deficit – and it’s not difficult to get to a scenario whereby Indian real GDP growth resumes its downward trend in 4Q12E and heading into next year.

 

IS IT TIME TO GET OUT OF INDIAN EQUITIES? - 2

 

IS IT TIME TO GET OUT OF INDIAN EQUITIES? - 3

 

IS IT TIME TO GET OUT OF INDIAN EQUITIES? - 4

 

IS IT TIME TO GET OUT OF INDIAN EQUITIES? - 5

 

From a long-term perspective, we think the Indian economy represents a classic turnaround opportunity, as policymakers there have quite a few POLICY levers that they can pull that would be positive for sustainable organic economic GROWTH. In the interim, however, there will have to be some short-term economic pain as it relates to quashing structural INFLATIONary pressures and reigning in the fiscal deficit. As it stands currently, Indian equities are in a Bullish Formation, which we’d argue is discounting India’s potential rather than its likely path - though, to be fair, QE3 has had large role in perpetuating SENSEX and INR strength. Unfortunately for anyone currently buying what we view as a cyclical top in Indian equities, the India of today is not the “India of tomorrow” just yet.

 

Stay tuned.

 

Darius Dale

Senior Analyst

 

IS IT TIME TO GET OUT OF INDIAN EQUITIES? - 6


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