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Elegant Outcomes

This note was originally published at 8am on September 24, 2012 for Hedgeye subscribers.

“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 $1731-1762, $107.60-111.44, $78.69-79.96, $1.28-1.30, 1.69-1.79%, and 1455-1474, 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



Broken America?

“America feels broken.”

-Chris Hayes

 

That about sums it up. That’s the opening line to what I’ve found to be a surprisingly thought provoking book just published by MSNBC’s Chris Hayes, Twilight of The Elites.  Hayes is not Chris Matthews. He’s half his age, and he has much better hair.

 

Hays also has a much more balanced approached in attempting to explain the sometimes un-explainable - the zeitgeist of the US Political Economy: “Over the course of the last decade, a nation accustomed to greatness and progress has had to reconcile itself to an economy that seems to be lurching backwards.” (page 1)

 

That’s why people got so fired up about the Jack Welch suggestion about the US jobs report on Friday. Conspiracy theories are no longer conspiracy theories when they are proven to be true. The truth is that we have both a failed Keynesian spending jobless recovery and money printing induced inflation. Any government “report” suggesting otherwise only perpetuates The People’s distrust.

 

The other thing I like about Hayes is that he actually thinks about what I attempt to explain every morning from a completely different perspective. He grew up in the Bronx and was a Philosophy major at Brown. In Chapter 1 of his book he introduces the framework of “Insurrectionists and Institutionalists.” I am one of the former, and appreciate his making up a word for those I criticize as the latter.

 

“Whatever my own insurrectionist sympathies – and they are considerable – I am also stalked by the fear that the status quo, in which discredited elites and institutions retain their power, can just as easily produce destructive and antisocial impulses as it can spur transformation and reform… when people come to view all formal authority as fraudulent, good governance becomes impossible.”

 

Again, that’s why what Welch said is still driving the “institutionalist” media batty again this morning – but they are missing the point. Hayes nails it, calling this a “Crisis of Authority”… and the longer it “persists, the more it runs the risk of metastasizing into something that could threaten what we cherish most about American life: our ability to self-correct.” (page 29)

 

Back to the Global Macro Grind

 

It’s not my job to be a Bull, Bear, Republican or a Democrat. My job is to empathize with both sides of the debate, and attempt to probability-weight which way the crowd will lean in and around those polarized perspectives. If you listen to both sides closely enough, you can actually hear that both make some great points.

 

Last week, the US Dollar was down for the 1st week in 3, so stocks and commodities were up. That’s not a political point. That’s just what’s happening today in markets. They are completely correlated to currency moves. Hugo Chavez has nailed this inasmuch as both Bush and Obama did – he devalued his currency, stocks ripped another +31% higher last week to +245% YTD, and boom – re-election!

 

Even if you don’t have an education, you probably get the math – if I devalue what’s in your pocket, you can buy less of what you need with what’s left in your pocket. From 1920’s Germany to Charles de Gaulle in France, Policies to Inflate have been around for a lot longer than polarized journalists attempting to spin easy money any other way.

 

But what do we do when all that asset price inflation deflates?

  1. We get Bernanke to call it what 21% of people in France suffer from (depression)
  2. We beg and plea for more bailout policies to re-flate
  3. We say “it’s different this time”, just so we can feel better about it

All the while, economic gravity has proven to bite both Democrat and Republican politicians in the behind. Politicians have never been able to “smooth” either the Global Growth or US #EarningsSlowing cycles – and this morning, we have to once again deal with both.

 

At 130PM EST, Daryl Jones and I will host our Q4 2012 Global Macro Themes Conference Call (email for access) where we’ll take a closer look at the following intermediate-term TREND to longer-term TAIL risks:

  1. Earnings Slowing – what does it mean when corporate margins are coming off all-time peaks?
  2. Bubble #3 – what do Bernanke Bubbles (Commodities) do now that he’s out of communication bullets?
  3. Keynesian Cliff – what happens if the USA bonks the Debt Ceiling before The Cliff?

Sadly, some of these themes are political. That’s a direct function of our governing elite fundamentally believing that they are the solution (rather than the cause) to our economic problems.

 

Both Neil Barofsky (Democrat author of Bailout) and Sheila Bair (Republican ex-Chairperson of the FDIC) have recently called the likes of Timmy Geithner out in their tell-all books about the reality of our situation. The problem with government is government itself.

 

America isn’t broken; your trust in your government is.

 

My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $108.44-112.45, $79.24-80.25, $1.29-1.31, 1.59-1.74%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Broken America? - Chart of the Day

 

Broken America? - Virtual Portfolio


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THE M3: TOURISM; SEPT CHINA HOME PRICES

The Macau Metro Monitor, October 8, 2012

 

 

LESS IS MORE Macau Business

SJM executive director Angela Leong On Kei said the recent drop in visitor arrivals to Macau gives the city more time to push ahead with new tourism offerings.  “With the negative growth now, it gives us time to diversify with more tourism products on offer, which is good for society,” said Leong.  Leong added that a high tourism arrivals growth rate “is not beneficial” for the city.

 

CHINA HOUSING PRICES RISE AGAIN BUT AT SLOWER PACE Fox Business

According to China Real Estate Index System, the average price of housing in September was 8,753 yuan ($1,384) a square meter, 0.17% more than the CNY8,738 of August, and moderating from August's 0.24% sequential rise.  On a YoY basis, the average price of housing fell for the fourth consecutive month, by 1.40% from CNY8,877 in September 2011, recovering somewhat from August's 1.60% decline.

 



THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 8, 2012


As we look at today’s set up for the S&P 500, the range is 17 points or -0.95% downside to 1447 and 0.21% upside to 1464. 

                                      

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 10/05 NYSE 408
    • Decrease versus the prior day’s trading of 1384
  • VOLUME: on 10/05 NYSE 606.70
    • Decrease versus prior day’s trading of -10.08%
  • VIX:  as of 10/05 was at 14.33
    • Decrease versus most recent day’s trading of -1.51%
    • Year-to-date decrease of -38.76%
  • SPX PUT/CALL RATIO: as of 10/05 closed at 1.93
    • Up from the day prior at 1.58

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 25.49
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.74%
    • Increase from prior day’s trading of 1.67%
  • YIELD CURVE: as of this morning 1.49
    • Up from prior day’s trading at 1.43

MACRO DATA POINTS (Bloomberg Estimates)

  • No major U.S. economic data releases scheduled
  • U.S. Economic Data Preview
  • U.S. Rates Weekly Agenda

WHAT TO WATCH:

  • Columbus Day holiday; equity markets open, bond markets closed
  • Canadian markets closed for Thanksgiving holiday
  • Allscripts said to get first-round bids from Blackstone, Carlyle
  • Foxconn labor disputes disrupt iPhone production again
  • Europe seeks to contain Spanish troubles as finance chiefs meet
  • Amazon.com to buy Seattle headquarters complex for $1.16b
  • Google to make first entry in credit-card business: FT
  • Neeson gets revenge again as Fox’s ‘Taken 2’ leads wkend
  • American Securities buys auto-parts co. HHI for $750m: WSJ
  • Yahoo buyback urged by holders seeing doubling of shares
  • Gannett, Dish talks extended by several hours
  • Company at center of meningitis outbreak recalls products
  • U.S. Weekly Agendas: Finance, Tech, Consumer, Real Estate, Transports, Media/Entertainment, Health, Industrials, Energy
  • Canada Weekly Agendas: Energy, Mining
  • G-7, IMF Meeting, Nobel Prizes, Sandusky: Week Ahead

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

OIL – get the EUR/USD right, you’ll get a lot of things Oil right; Brent remains under big league pressure post the Bernanke Bubble top (Sep 14 for Commodities, which we’ll host a call on at 130PM today – Q4 Macro Themes) and after breaking its long-term TAIL line of $112.45/barrel support. Copper -1.4% this morn also failed at $3.95 TAIL risk resistance as well.

  • Oil Declines a Second Day on Economic Outlook for Europe, Asia
  • Hedge Funds End Rout as Prices Reach Two-Month Low: Commodities
  • Traders Eye Grains Rebound as Supply Set to Tighten Post Harvest
  • German 2013 Power Declines as European Coal, Carbon Permits Fall
  • 5 Asia Fuel Oil Discount Shrinks; Vitol Buys Gasoil: Oil Products
  • U.K. Within-Day Natural Gas Trades Near Highest in Two Weeks
  • Brent-Nymex WTI Crude Oil Spread Widens to Near One-Year High
  • Coffee Falls on Dollar as Brazil’s Trees Flower; Sugar Drops
  • Iron-Ore Swaps Rise as Chinese Buyers Return After Holidays
  • Palm Oil Drops for First Time in Four Days as Stockpiles Advance
  • China Benchmark Coal Price Rises for First Time in Five Weeks
  • Bullish Gas Wagers Climb First Time Since July: Energy Markets
  • Ghana’s Gold Rush Sparks Conflict With Illegal Chinese Miners
  • Hedge Funds End Rout as Prices Decline
  • Palm Oil Exports From Indonesia Set to Sink Most in Four Months

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


ITALY – Greece is back, Spain to be saved, and Italy? Oh my goodness is the storytelling in Europe getting good – meanwhile Italy leads losers -1.7% this morning after snapping its immediate-term TRADE line of 15,866 3 wks ago – when will they ask?

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


 ASIA – after such a “great” US jobs report, you’d think the world would go straight up – nope; bad jobs report underneath the hood has USA close on the lows and Asia open/close weak across the board: Singapore -1.1%, India -1%, Indonesia -1%, etc.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 

 

 

 

 


MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI

Takeaway: Bank swaps tightened across the board globally. Sovereign swaps followed suit. The 2-10 spread widened and rates on junk bonds fell.

Key Takeaways

 

* Last week American and European bank swaps tightened across the board fueled by ECB comments about assistance for Spain and an initially strong perception of the US labor situation. However, Friday's softening by the close coupled with this morning's performance around the world is suggesting the labor-based rally may be short-lived.

 

* Sovereign CDS - Sovereign swaps mostly moved in tandem with bank swaps around the world, tightening across the board. The one notable divergence was the United States, which saw its sovereign swaps rise by 26.4% (9 bps) to 42 bps from 33 bps in the prior week.

 

* The rate on high-yield corporate debt fell 14.5 bps last week, ending the week at 6.67% versus 6.81%

 

* The 2-10 spread widened by 8 bps last week, bringing the spread to 148 bps. As we've noted in the past we like to look at the 2-10 spread as a leading indicator for bank margin pressure. While we welcome the widening that we saw last week, we continue to expect tightening going forward.

 

* Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 2.0% downside to TRADE support.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 8 of 12 improved / 0 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Positive / 8 of 12 improved / 1 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Summary

 

1. American Financial CDS -  Swaps tightened significantly vs. last week with 25 out of 27 domestic financial institutions showing WoW improvement, for an average gain of 21 bps. Among the large caps, BAC and C showed the sharpest improvement at 22 and 21 bps, respectively.  

Tightened the most WoW: MTG, BAC, C

Widened the most/ tightened the least WoW: MBI, MMC, AGO

Tightened the most WoW: MTG, HIG, AIG

Widened the most/ tightened the least MoM: MBI, JPM, AGO

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - American

 

2. European Financial CDS - European bank swaps were tighter across the board with Italian, Spanish and French banks showing the sharpest week-over-week improvement. Overall, swaps were tighter for 35 out of 37 reference entities with an average tightening of 29 bps. 

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Europe

 

3. Asian Financial CDS - In Asia, Chinese and Indian bank swaps were tighter while Japanese banks were generally wider. Overall, 8 out of the 12 reference entities that we track tightened. 

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Asian

 

4. Sovereign CDS – European sovereign swaps were sharply tighter across the board last week. Italian sovereign swaps tightened by -12.5% (-45 bps to 312 bps) and U.S. sovereign swaps widened by 26.4% (9 bps to 42 bps).

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Sov Table

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Sov 1

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 14.5 bps last week, ending the week at 6.67% versus 6.81% the prior week.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.2 points last week, ending at 1732.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - LLI

 

7. TED Spread Monitor – The TED spread fell 1.2 bps last week, ending the week at 25.2 bps this week.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1.3 points, ending the week at 6.43 versus 5.2 the prior week.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by less than 1 bp to 13 bps. 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: MORE MANIPULATION BY DRAGHI - Euribor OIS

 

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: MORE MANIPULATION BY DRAGHI - ECB liquidity facility

 

11. Markit MCDX Index Monitor –  Last week spreads tightened , ending the week at 135 bps versus 136 bps the prior week. 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: MORE MANIPULATION BY DRAGHI - MCDX

 

12. Chinese Steel - Due to "Golden Week" ( also known as Mid-Autumn Festival), a 7-day Chinese national holiday, there are no quotes for Chinese steel this week.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - CHIS

 

13. 2-10 Spread –  Last week the 2-10 spread widened to 148 bps, 8 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure. 

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 2.0% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - XLF

 

Margin Debt - August: +0.73 standard deviations 

NYSE Margin debt rose to $287 billion in August from $278 billion in July. 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 August. 

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Margin Debt 

 

Joshua Steiner, CFA

 

Robert Belsky

 

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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 80.64%
  • SHORT SIGNALS 78.61%
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