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Political Policy

RETHINKING POLICY

 

 

CLIENT TALKING POINTS

 

THE GOLDEN AGE

When Ben Bernanke came out to extend QE3, those invested heavily in precious metals, namely gold and silver, rejoiced knowing that burning the buck would inflate prices for the aforementioned metals quite a bit. $2000/oz for gold did not seem like a pipe dream. So when gold and silver make big moves to the downside these days, that’s something that really matters and this morning, there’s a -1-2% drop in both.

 

Should gold continue to fail at its February 2012 all-time highs (read: lower-highs), things will change for the gold bugs very quickly. As Keith mentioned this morning, “...it’s a very lonely camp being short GLD here.”

 

 

POLITICAL POLICY

We really think that Romney would be doing better in the polls these days if he had really pounded the table on getting rid of Ben Bernanke and putting strength back in the US dollar. Our proprietary Hedgeye Election Indicator put Obama at an all time high last week (63%) for his chances of being reelected. Bernanke and Obama are managing to keep the market afloat (just barely) until November. Meanwhile, the US dollar had an up week last week, breaking a 5 week consecutive drop. Should we continue to burn the buck, keep in mind a little thing called correlation risk; you get the dollar right, you get a lot of other things right.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                Flat

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: Flat  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“My $ gets 0 in the bank and inflation is a killer. buying a multi-family in this market w a 2.875% mortgage seems like a good option.” -@HedgeyeEnergy

 

 

QUOTE OF THE DAY

“Man has to suffer. When he has no real afflictions, he invents some.” -Jose Marti

                       

 

STAT OF THE DAY

Dow Jones Chicago Fed: Aug National Activity Index -0.87 Vs Jul -0.12

 

 

 


MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT

Takeaway: Economic deterioration seems to have trumped monetary stimulus as swaps mostly widened across the globe.

Key Takeaways

* Bank swaps domestically and in Europe saw significant widening WoW as economic uncertainty trumped monetary stimulus relief once again. Sovereign swaps followed suit mostly rising WoW. French, Italian, Spanish, and Portuguese sovereign swaps were all wider while Germany and Ireland saw their sovereign swaps tighten. 

 

* In Asia, bank swaps were mixed. Chinese bank swaps tightened while Indian bank swaps widened. 

 

* High yield rates increased 8.8 bps last week, ending at 6.59 versus 6.51. 

 

The Euribor-OIS spread tightened by 1 bps to 15 bps, and is now back at its tightest levels in the last five years.

 

* The MCDX, our preferred measure of municipal default risk fell by 3.3% last week. 

 

*Chinese steel prices rose a second consecutive week in a row, increasing by 5.4% WoW.

 

* The 2-10 spread tightened WoW, falling 12 bps. The brief reprieve following the Qe3 seems to be over. 

 

* More risk than reward - Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 2.7% downside to TREND support.

 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 6 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged  

• Intermediate-term(WoW): Positive / 11 of 12 improved / 1 out of 12 worsened / 1 of 12 unchanged  

• Long-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - Summary2

 

1. American Financial CDS – The money center banks and large domestic brokers all saw swaps widen materially last week with the average reference entity seeing  a +14.6% increase in swap prices WoW. 

 

Widened the most WoW: WFC, JPM, BAC

Tightened the most WoW: MBI, UNM, AGO

Widened the most/ tightened the least MoM: JPM, WFC, AXP

Tightened the most WoW: GS, AIG, MS

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - America

 

2. European Financial CDS – French, German, Italian, Spanish  and UK bank swaps all widened last week. 

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - Europe

 

3.Asian Financial CDS – Asian bank swaps were a mixed bag with Chinese banks tightening and Indian banks widening. Japanese banks were mixed. 

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - Asia

 

4. Sovereign CDS – European sovereign swaps were mostly wider last week with the exception of Germany and Ireland. Spanish, Italian and Portuguese swaps all widened between 20-30 bps last week.  

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - Sov Table

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - Sov 1

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates rose 9 bps last week, ending the week at 6.59% versus 6.50% the prior week.

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.6 points last week, ending at 1732.61.

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - LLI

 

7. TED Spread Monitor – The TED spread fell 2 bps points last week, ending the week at 26.5 bps.

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - TED Spread

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 0.2 points, ending the week at 5.51 versus 5.3 the prior week.

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 1 bps to 15 bps, and is now back at its tightest levels in the last five years. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - Euribor

 

10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - ECB

 

11. Markit MCDX Index Monitor – Last week spreads tightened 5 bps, ending the week at 132 bps. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - MCDX

 

12. Chinese Steel - Steel prices in China rose 5.4% last week, or 188 yuan/ton, to 3665 yuan/ton. This brings the two-week rally to ~8%. However, taking a step back, in the last three months, Chinese construction steel prices have fallen ~10% inclusive of this recent rally. This index is reflecting significant weakness in China's construction market. Chinese steel rebar prices have been generally moving lower since August of last year. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - CHIS

 

13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened by 12 bps to 149 bps.

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 2.7% downside to TREND support.

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - XLF

 

Margin Debt - July: +0.61 standard deviations 

NYSE Margin debt fell  to $278 billion in July from $285 billion in June. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. Overall this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  The chart shows data through July. 

 

MONDAY MORNING RISK MONITOR - WELL THAT WAS SHORT LIVED: SWAPS BLOW OUT  - NYSE margin debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

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Surviving Tops

This note was originally published at 8am on September 10, 2012 for Hedgeye subscribers.

“The first definition of victory is survival.”

-Hampton Sides

 

Tops are processes, not points. From both an intermediate and long-term perspective, at least that’s what we have learned in the last 5 years. Big Central Planning in what used to be “free-markets” continues to A) shorten economic cycles and B) amplify price volatility.

 

But, Keith, the market is up year-to-date.” Yep. And the SP500 was up double-digits for the year-to-date on October 9th, 2007 too (1565 for those of you who still remember that cost basis and the people who told you to buy there). Just think, only 18 months later you could have bought Starbucks $SBUX at $11 (i.e. 78% lower). That’s when stocks were “cheap.”

 

Cheap is as cheap does. People get that. How else can you explain money flowing out of Equity funds in the latest Lipper data (-$6.8B in outflows last week)? People also remember late 2007 and all the storytelling about growth recovering via centrally planned “shock and awe” rate cuts back then too. I never thought we’d get back to that same sell-side narrative. Never say never, I guess.

 

Back to the Global Macro Grind

 

The aforementioned quote is the last one I wanted to highlight from this summer’s reading about the founding of the 19th century American West (page 469 in Blood and Thunder). It was a creed Kit Carson lived by. And it’s one I’ve embraced as a Risk Manager of my own capital too. Spending 5 years of your life trying to get your investors’ capital back to break-even is no life to live.

 

Getting back to break-even is another way to think about why I am constantly measuring LOWER-HIGHS across intermediate to long-term investing cycles. Those define memory, losses, and pain. If you have a friend who bought the 2007 top in the SP500, he only has another +10% higher to go (from here) to get back to his high-water mark. I hope he didn’t use leverage.

 

Across intermediate-term durations (since February-March 2012), here are some LOWER-HIGHS to think about (across asset classes):

  1. US Treasury Bond Yields (10yr) = 1.66% (down from 2.4% in March 2012)
  2. EUR/USD = $1.27 (down -5.2% from March 2012)
  3. CRB Commodities Index = 311 (down -4.4% from March 2012)
  4. Gold = $1736 (down -3.2% from February 2012)
  5. Oil (Brent) = $115 (down -9.2% from March 2012)
  6. Copper = $3.69 (down -7.1% from February 2012)
  7. Russell2000 = 842 (down from 846 on March 26th,2012)
  8. Chinese Stocks (Shanghai Composite) = 2134 (down -13.2% from March 2012)
  9. Japanese Stocks (Nikkei225) = 8869 (down -13.5% from March 2012)
  10. European Stocks (Eurostoxx50) = 2533 (down -2.9% from March 2012)
  11. Spanish Stocks (IBEX) = 7861 (down -11.9% from March 2012)
  12. Italian Stocks (MIB) = 16,050 (down -6.3% from March 2012)
  13. Russian Stocks (RTSI) = 1468 (down -16.2% from March 2012)
  14. Brazilian Stocks (Bovespa) = 58,321 (down -14.7% from March 2012)

In other words, if you bought any of these asset classes and went short and/or “underweight” Treasury Bonds, you are underwater since Growth Slowing began to be obvious, globally in March of 2012. That side of the research call has been dead on.

 

Are there any outliers?

  1. SP500 = 1437 (up +1.3% from March 2012)
  2. German Stocks (DAX) = 7217 (up +0.8% from March 2012)
  3. US Equity Volatility (VIX) = 14.38 (up +0.8% from March 2012) 

Hoowah, what a return versus the risk you had to take! (*note: SPX and RUT had 10 and 13% draw-downs from March to June)

 

To be fair to the “growth is back, earnings are great, and stocks are cheap” bull crowd of economists (rewind the tapes and/or read their Feb/Mar 2012 research), Venezuelan, Egyptian, and Pakistani stocks are right ripping since March 2012. So bullish.

 

But let’s not fuss about the details on why “the market is up-year-to-date” (Bernanke doing Qe3 on January 25th, pushing 0% rates to 2014; and the market baking in a Qe4 or push for 0% rates to 2015 now)…  

 

Let’s not talk about the real-time P&L impact of this little detail called timing in anything pro-cyclical since March. The very same economists and Old Wall Street strategists weren’t fussing about it in September-October of 2007 either.

 

This isn’t my 1st rodeo with perma-bulls. They are loud and they change their thesis to suit last market price. That’s why Surviving Tops isn’t easy. Particularly when the storytelling, groupthink, and performance chasing is coming on thick.

 

My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, 10yr US Treasury Yield, and SP500 are now $1689-1739, $113.39-115.02, $80.11-81.29, $1.24-1.28, 1.56-1.70%, and 1419-1438, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Surviving Tops - Chart of the Day

 

Surviving Tops - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.30%
  • SHORT SIGNALS 78.51%

THE M3: STUDIO CITY; AUGUST ARRIVALS; S'PORE INFLATION

The Macau Metro Monitor, September 24, 2012

 

 

STUDIO CITY CAN APPLY FOR CASINO: GOV'T Macau Business, Macau Daily Times

According to Secretary Tam, Studio City can apply for a casino.  This was the first time a government official had said so, after a string of statements to the contrary.  Tam said the government had already agreed that Studio City could apply for a casino in 2006, when the original investors in the project requested it.  Tam also admitted that some of the new 2,000 live gaming tables to become available until 2023 under the 3% average yearly growth rate cap to be introduced next year, could go to Studio City.

 

Mr Tam added the information that “they were given the land already in 2003.  The question is whether or not this land can have casinos or not”, he stated. “At the time of the first request they did not include any projects for casinos. It must be evaluated.” According to the Secretary, “this can’t be done fast.” 

 

Also, the requested 400 gaming tables for the recently opened Sheraton Hotel in Sands Cotai Central will probably be approved “only next year”.  The government had originally agreed to this number of tables and 200 were approved already.  The Secretary also referred to Sands’ “little Paris” project saying, “This is no new project, as it had already been integrated into the Venetian and Four Seasons projects. It’s only the construction works that are divided into different phases.”

 

AUGUST VISITOR ARRIVALS DSEC

Visitor arrivals totaled 2,681,141 in August 2012, down slightly by 0.6% YoY.  In August 2012, the average length of stay of visitors stood at 1.0 day, down by 0.1 day YoY.  Visitors from Mainland China increased by 4.1% YoY to 1,635,080, with those travelling to Macao under the Individual Visit Scheme rising by 10.6% to 772,534.

 

THE M3: STUDIO CITY; AUGUST ARRIVALS; S'PORE INFLATION - fda

 

SINGAPORE INFLATION UP AT SLOWER PACE IN AUGUST Channel News Asia

Singapore's consumer prices rose at a slower pace in August, as costs of accommodation and services moderated.  The consumer price index (CPI) rose 3.9% from a year earlier, after rising 4.0% in July.  The CPI rose 0.6% in August from July, after a MoM rise of 0.2% in July.  The Monetary Authority of Singapore said core inflation, which excludes accommodation and private road transport costs, fell to 2.2% in August from 2.4% the previous month.



Elegant Outcomes

“Not everything I say is elegant.”

-Mitt Romney

 

For 5 straight weeks both Romney and the US Dollar took a public brow-beating from both Obama and Bernanke. We’ll see where the Hedgeye Election Indicator scores Romney tomorrow. For now, all I can tell you is that last week the US Dollar just had its 1st up week in six.

 

Can Policies To Inflate, deflate? Oil just did, fast. Gold, Silver, and US Stocks are on their way lower this morning too. Did last night’s 60 Minutes moment for Romney mark a short-term top for Obama? Intrade had him at a fresh new high of 70% last week. At a bare minimum, that has some short-term mean reversion risk heading into the 1st debate (October 3rd).

 

From Greenspan/Bernanke asset price bubbles (Internet stocks in 2000, Housing in 2007, and Commodities in 2012) to mean reversion and correlation risks, Macro hasn’t been elegant over the course of the last 15 years. Neither is writing about the truth.

 

Back to the Global Macro Grind

 

With 43 days to the #Election and 99 days to the #FiscalCliff, both the US Dollar’s direction and the Obama vs. Romney Spread matter to markets – big time. Causality (policy) is driving correlation in market pricing right now. When that changes, we’ll let you know.

 

Correlation Risk Update (30-day immediate-term USD correlations, across asset classes):

  1. Gold = -0.98
  2. Copper = -0.97
  3. Silver = -0.96
  4. Coffee = -0.84
  5. CRB Commodities Index = -0.82
  6. SP500 = -0.89

In other words, if Obama gets the Dollar right (down), he should be fine for the next 30 days. If he doesn’t, Dollar up may very well be read as Romney building momentum off his mid-September lows.

 

Partisan people may not like this analysis, but the math is quite elegant when you show it in bullet point form. With the US Dollar Index up +0.6% last week, here’s what Big Macro data did:

  1. CRB Commodities Index = down -3.8%
  2. Oil = down -6.2%
  3. Copper = down -1.6%
  4. Coffee = down -4.1%
  5. SP500 = down -0.34%
  6. Russell2000 = down -1.0%
  7. Chinese stocks = down -4.6%
  8. Italian stocks = -3.8%
  9. Russian stocks = -3.8%
  10. Gold = +0.2%

Yes, Gold prices diverged from the rest of reality last week – but they aren’t this morning. That’s an interesting callout, if only because Gold was the last holdout in Bernanke’s Bubble (Commodities) to not make higher all-time highs.

 

The all-time high (not pricing it in rice beans or Thai Baht) in nominal Gold was established in February of 2012. And if you really want to think bubbly, it makes sense for it to potentially have topped before Bernanke printed to “Infinity & Beyond.” After all, Gold has been up for 12 consecutive years, discounting something, no?

 

What’s next?

 

If the US Dollar falls again from here and Gold recovers this morning’s losses to make higher-all-time-highs, I’ll likely cover my short position in GLD. If it doesn’t, well, I guess that’s not going to be my problem.

 

Within the weekly CFTC futures/options contract data, Gold is as frothy right now as Corn was in mid-August (Corn, by the way, is down -11% since then, in a straight line):

 

Here’s the update on Commodity speculation within that CFTC data:

  1. Total contracts finally fell wk-over-wk (-1.7%) after hitting their February 2012 highs of 1.33M contracts last week
  2. Gold contracts ripped another +8% wk-over-wk (up 5 weeks in a row with USD down) to a February high of 178,426 contracts
  3. Oil contracts made higher YTD highs into and out of Bernanke = +6% wk-over-wk to 214,647 contracts

All the while, Commodity speculation on Farm Goods (corn, wheat, soy, etc.) dropped -7% wk-over-wk, AFTER corn prices fell, not before. Super secret: hedge funds chase commodity beta high and sell it low (they’ll sell oil today, watch) – that’s why these prices whip around so much within the construct of Bernanke’s broken promise of “price stability.”

 

In other Contrarian Signal news, Fund Flows may be negative in Equities (ex-ETFs, Equity Fund outflows were another -$1.9B last wk), but they dog-piled into Raw Material/Commodity funds last week at +$2.36B (per EPFR data), and Goldman just upped their “Commodities” forecast to another +18% from here!

 

If Goldman and Obama are right, I’ll be wrong on Gold and Oil highs for 2012 being in the rear-view mirror. And the USA will probably be in a recession within 6-12 months. Don’t take my word for it on that - ask the bond market. Policies To Inflate slow growth. To Keynesians advising Bush and Obama, that hasn’t been an elegant economic outcome either.

 

My immediate-term risk ranges in Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $107.60-111.44, $78.69-79.96, $1.28-1.30, 1.69-1.79%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Elegant Outcomes - Chart of the Day

 

Elegant Outcomes - Virtual Portfolio


Early Look

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