“It is seldom that liberty of any kind is lost all at once.”
If alarm bells aren’t going off in your head this holiday season, they should be. Don’t confuse our 2012 Global Macro call for #GrowthSlowing as regressive. Being a realist is progressive. So is standing on the front lines of change.
While he had a tough time marketing his progressive free-market ideas in the 1930s and 1940s, Hayek’s lessons lived on. The aforementioned quote from Hume stands like a rock alongside one from de Tocqueville at the beginning of The Road To Serfdom. Hayek addressed his book “to socialists of all parties.”
I’m not suggesting you become a hard core Hayekian. Neither am I telling you what and/or how to think. I am just a man in a room. I’m fighting for free-market liberties like many men and women who have come before me. During this generational debate about debt, spending, and taxes, all that we ask is that you educate yourself. Liberty’s Bells are ringing.
Back to the Global Macro Grind…
After another Monday morning littered with Greek bailout headlines, Global Equities backed off their early morning highs and closed on their lows (SP500 -0.5%). Across durations in our risk management model, Risk Ranges are getting pretty tight.
Tight can be trade-able. That’s a good thing. In Hedgeye-speak we are always talking to clients about managing the Risk Range. Once you have a repeatable process to calculate it, it’s trivial. Risk Ranges are at the bottom of the Early Look note, every day.
Risk Ranges provide us with a quantitative, probability-weighted, framework to contextualize the storytelling in the marketplace. Most stories are qualitative in nature, so having some math wrapped around what’s happening out there is helpful.
We tell stories too. We call them our Hedgeye Global Macro Quarterly Themes. For Q4, they remain as follows:
2. Bubble#3 (Commodities)
For accountability purposes, I use the hash-tag to provide you an archive of high-frequency macro data on Twitter. Being early doesn’t always make us right – but it will make you think outside the government’s centrally planned box.
While the #KeynesianCliff is annoying you, here’s an update on what used to matter to markets (#EarningsSlowing):
- For Q4 2012 so far, 78 companies have issued negative EPS guidance (29 companies have issued positive EPS guidance)
- That means 73% (78 out of 107) of the companies that have said something, said something negative, on the margin
- 73% = 2nd highest percentage of companies issuing negative EPS guidance since FactSet began tracking the data in Q1 2006
Per the lynx-eyed (and some say exotic) Darius Dale, I guess the perma-bulls would say that only 73% of companies guiding down is bullish! Relative to the worst quarter on recent record, that is (i.e. the one just reported with Q3 of 2012 = 74%).
I know, I know – since very few bulls called for both global and earnings growth to slow in Q1, blame everyone and everything but the forecasters in 2012. It’s all the government’s fault. So what we really need to do now is beg for more government.
Or do we?
The best thing that can happen to both the US and Global Consumption economy is more of Theme #2. Popping Bernanke’s Bubbles in food and energy prices would be wildly stimulative to the 71% (that’s US Consumption as a % of total US GDP).
Get consumption right, you’ll get global growth right.
That’s why I got bullish in 2009. That’s why I was bullish until January 25th of 2012 (until Bernanke decided to move 0% rates out to 2014 with more Policy To Inflate asset prices). Inflation is not growth.
“We are now so conditioned by permanent price inflation that the idea of prices falling every year is difficult to grasp. And, yet, prices generally fell every year from the beginning of the Industrial Revolution in the latter part of the eighteenth century until 1940, with the exception of periods of major war when governments inflated the money supply radically and drove up prices.” -Rothbard
The only war I see now is between the #PoliticalClass and the rest of us.
At tomorrow’s NYC Analyst Day one of the greatest innovators in America will be talking up asset price deflation in commodities. The Brooklyn born grinder (Starbucks CEO, Howard Schultz) knows how to make a buck and then hire someone with it. Now he’s staring down a futures price in coffee that’s down 50% since topping in May (see Chart of The Day).
That may not be the kind of change you are hearing from Marxist price controllers and debt/deficit spending Keynesians. That’s simply called the Fed getting out of the way for a few months. Cheers to that. Liberty’s Bells are ringing.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.42-111.76, $3.54-3.66, $79.59-80.27, $1.29-1.31, 1.58-1.67%, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – December 4, 2012
As we look at today's setup for the S&P 500, the range is 15 points or 0.39% downside to 1404 and 0.68% upside to 1419.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.39 from 1.37
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am/8:55am: ICSC/Redbook weekly retail sales
- 9:45am: ISM New York, Nov. (prior 45.9)
- 10:45am: Fed’s Tarullo speaks at Brookings Institution in Washington
- 11:30am: U.S. Treasury to sell 4-wk bills
- 4:30pm: API inventories
- House, Senate in session
- FDIC issues report on state of U.S. banking industry, 9:30am
- Obama meets with state governors to discuss fiscal cliff, 10am
- Energy Dept. releases supply, demand forecast through 2040, 1pm
WHAT TO WATCH
- Qualcomm makes almost 5b investment in Sharp
- GrainCorp to review increased offer from ADM
- Sprint unlikely to make counteroffer for MetroPCS: Reuters
- Student loan debt collection targeted for overhaul in bill
- Patents in Apple, HTC settlement deal can’t be sealed: CNET
- Cerberus in talks to join Virtu’s bid for Knight Capital:WSJ
- Oracle plans to accelerate payment of 3 quarterly dividends
- Kinder Morgan’s $110m settlement in El Paso case approved
- Fiscal cliff talks at stalemate over dueling plans on taxes
- Toll Brothers (TOL), Pre-Mkt, $0.24
- Big Lots (BIG) 6am, $(0.26)
- Bank of Montreal (BMO CN) 6:45am, C$1.43
- AutoZone (AZO) 7am, $5.39
- Vail Resorts (MTN) 7:15am, $(1.58)
- Canadian Western Bank (CWB CN) 8:30am, C$0.59
- Evertz Technologies (ET CN) 4pm, C$0.26
- Oxford Industries (OXM) 4pm, $0.21
- Mattress Firm (MFRM) 4:01pm, $0.46
- Pandora Media (P) 4:02pm, $0.01
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG
GOLD – maybe not everyone is long Gold, but there’s a fairly broad and buoyant population of bulls. This morning Gold and Silver are down -0.6% and -1.3%, respectively, after last week’s futures/options (net long contracts) ripped a +12-13% wk-over-wk move (Gold was -2.2% last wk). The go-to move of being long Gold/Silver on Dollar Down days not working like it has – that’s new and notable.
- European Corn Imports Seen Expanding to Second-Highest on Record
- Record Brazil Coffee Crop Cuts Costs for Starbucks: Commodities
- Soybeans Advance as Weather Threatens South American Crops
- Oil Halts Three-Day Advance on Fuel Inventories, Budget Talks
- Copper Advances for a Fourth Day on Fed Stimulus Speculation
- Gold Drops to Four-Week Low as Commodities Fall on Budget Talks
- Robusta Coffee Pares Gains on Vietnam’s Exports; Sugar Climbs
- Rebar Gains as Recovery in Chinese Stocks Boosts Economy Outlook
- Delayed Start to India Sugar Cane Crushing Not to Impact Output
- Chalco to Build Indonesian Alumina Plant to Secure Supplies
- Gasoline Supplies Rise to August Level in Survey: Energy Markets
- Olam’s Biggest Bond Sale Only Delays Collapse, Muddy Waters Says
- Tanker Rates Rising as Ethanol Imports Triple Into U.S.: Freight
- Iron Ore Outperforms Producers Including BHP, Rio After Rally
GERMANY - DAX making its second run for its SEP closing high (7451 on 9/21) this morning. Up small, but higher-highs would be bullish if the DAX can achieve them. Economies haven’t been stock markets in 2012, but given all the cheerleading on what US stocks are “up YTD”, German and Danish stocks are smoking them on both absolute and relative (to the SEP highs).
INDONESIA – We know, who cares about Indonesia? It only has the 4th largest population in the world. Indonesian stocks lead decliners in Asia overnight, down another -0.8% to a new 1 month low. Something to think about as you think this morning. RBA cuts rates on #GrowthSlowing and the Mining Capex Bubble.
The Hedgeye Macro Team
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This note was originally published at 8am on November 20, 2012 for Hedgeye subscribers.
“Time in truth, discovers everything.”
Bertrand Russell once claimed that, “Western philosophy begins with Thales.” And while I am not so sure about that being the truth, Thales was closer to getting to my definition of the truth than most Greek philosophers – he used math.
“Thales used geometry to solve problems such as calculating the height of pyramids and the distance of ships from the shore. He is credited with the first use of deductive reasoning applied to geometry… he has been hailed as the first true mathematician.” (Wikipedia)
The aforementioned quote comes from a book I started reading this past weekend titled Pythagoras The Mathemagician (pg 87). Since we’re in the midst of a bull market in Old Media storytelling, I needed to suspend disbelief and consider magic too.
Back to the Global Macro Grind…
Yesterday was a hoot. On no-volume (21% below the average US stock market down day volume in November), the SP500 melted up +1.99% to 1386. That was the biggest up day since September 6th (+2.04%). Back above my TAIL risk line of 1364. Hoowah!
Let’s not talk about September though. That was a time when The Bernank’s stock market magic stopped. As a friendly reminder, inclusive of yesterday’s squeezage, the SP500 is still down -6% from the September 14th YTD high.
But why? What is the truth? Have stock and commodity markets been going down for 2 months only because of the #KeynesianCliff? Or did a few things related to economic gravity (growth and earnings) have something to do with it?
To review, our Top 3 Global Macro Themes for Q4 are as follows:
- Earnings Slowing
- Bubble #3 (Commodities)
- Keynesian Cliff
So, I’m not saying that Theme #3 doesn’t matter. I’m not saying that Bubble #3 doesn’t either (we re-shorted Oil on yesterday’s ramp, and bought Natural Gas). I’m simply saying what I always say – embrace uncertainty, because the global marketplace’s interconnected risks are much more encompassing than a manic media sound-bite about timing the cliff.
Back to reality. Now that Q312 Earning’s Season is winding down, per Darius Dale’s scorecard, what has Time & Truth told us about #EarningsSlowing?
1. Roughly 96% of the way through the Q3 earnings season, 58.7% of SP500 companies have missed on the top line and 30.7% have missed on the bottom line (478 total). That compares with 57.8% and 26.8%, respectively, in 2Q12. If the season wraps up as things currently stand, 3Q12 will have reported the lowest percentage of companies beating on the top line since 1Q09.
2. 72% of companies that have issued 4Q12 EPS guidance have issued projections below the mean EPS estimate. That compares with a ratio of 80% on the negative side at this time during the previous earnings season. Despite this improvement, we continue to warn that consensus estimates for 4Q12 and 2013 remain dramatically inflated relative to any reasonable economic GROWTH scenario.
3. Bloomberg consensus still has SP500 constituent EPS growing an average of +7.1% YoY per quarter over the NTM vs. +0.9% YoY in 3Q12 and a trailing four quarter average of +3.1% YoY. While down from a projected quarterly average NTM EPS growth rate of +9.9% YoY when we first called out consensus’ poor modeling technique back on OCT 8, we still contend these estimates remain out to lunch.
Out to lunch? Yes. As in no soup fo you Mr. Sell-Side consensus. It’s been a long year for you on GDP growth and earnings forecasts. Maybe we should just pretend those 2012 predictions didn’t happen. Long live Hyman’s 569 “global easings” instead.
Money printing, of course, is not magic. The slope of growth in money supply is just math. If Bernanke doesn’t double or triple his monthly debt monetization soon, the slope of the Fed’s balance sheet will continue to slow. That’s bullish, on the margin, for the Dollar.
Perversely, in the immediate-term what’s good for the Dollar is bad for stocks. Part of yesterday’s fun times at no-volume high was that the US Dollar was having its biggest down day in 3 weeks. A -0.45% down day on the USD Index = a +2.8% up day for Basic Materials (XLB) stocks. Hooray.
Just a quick update on the Correlation Risk math (using 30-day correlations versus the US Dollar Index):
- SP500 = -0.90
- EuroStoxx600 = -0.85
- MSCI World Index = -0.89
- CRB Commodities Index = -0.84
- CRB Food Index = -0.79
- VIX = +0.44
In other words, yesterday’s rally to lower-highs (SP500 still down -1.8% for November after the +1.99% move) has nothing to do with what I called bullish in Monday’s Early Look (Food Deflation and Commodity Speculation Imploding). It had everything to do with the same old playbook the bulls who have confused stocks with the real-economic growth have been using all year.
Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Natural Gas, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1710-1737, $109.96-111.35, $3.56-3.88, $80.69-81.39, $1.26-1.28, 1.49-1.64%, and 1364-1401, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Pawn shops are affected by fluctuating gold prices due to the fact that many buy gold outright and have jewelry as stock. Gold prices aveeraged $1722/oz in November, bringing the fourth quarter-to-date average price to $1735, which is up 2.9% vs 4Q11 average price of $1,686. Gold prices are acting as a tailwind for pawns right now, but volumes are also important to pay attention to. Same store gold volumes have been falling in the high teens at the year-over-year rate over the last few quarters. Rising prices do help a little but not enough to outweigh declining volumes.
Who’s affected by the decline in volume the most? EZ CORP (EZPW) and Cash America (CSH) have been the hardest hit while First Cash Financial Services (FCFS) and DFC Global (DLLR) are faring well on their own. We are bearish on EZPW and CSH and bullish on FCFS and DLLR.
Ultimately, one would think that the Federal Reserve’s policy of quantitative easing would be a boon to pawns as it drives up the price of gold. Hedgeye Financials Sector Head Josh Steiner explains the effects QE has had on pawn shops over the last few years:
“In the chart below we show how payday lenders have performed over the last three quantitative easing programs. Interestingly, QE3 has not had the same positive effect on the pawn/payday space that QE1 and QE2 had. In fact, pawn/payday is the second worst performing subsector since QE3 started. We attribute this almost entirely to the gold dynamic.”
Restaurant Tickers Affected:
DRI, BLMN, TXRH, WEN, JACK, MCD, PNRA, PZZA, DPZ, YUM, CAKE, EAT and CMG
Food Processing Tickers Affected:
TSN, SAFM, SFD, HRL, PPC, CAG, DF and MON
On Tuesday, December 4th, at 11:00am EST the Hedgeye Macro Team and Restaurants Team will be hosting an Agricultural and Consumer Economics Expert Call with Professor Darrel Good of the University of Illinois. Good has been part of the faculty since 1976 and took part in developing a comprehensive farm risk management website (www.farmdoc.uiuc.edu). His efforts are now focused on the performance of grain futures contracts as well as corn and soybean yield trends.
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 611762#
Topics will include:
- Supply side - planting intentions and farmer's economics
- Demand side - key drivers of demand - ethanol, protein, consumption (domestic and abroad)
- General long-term trends to think about for farming - utilization, fertilizers, seed evolution
- Thoughts on USDA projections, and their historical accuracy and what the implications are now
- View on supply, demand, key drivers and prices for:
Darrel Good has a comprehensive understanding of the agricultural markets and economic implications. "There was a time period in the early seventies when grain markets changed dramatically," said Good. "Russia started importing grain, prices just exploded to the upside and there was renewed interest in markets and prices. I was hired to help develop a very extensive educational program in marketing and risk management."
- Professor in the department of Agricultural and Consumer Economics, is marking his 33rd year with the University of Illinois
- Good and two other faculty members developed a seminar called "Price Forecasting and Sales Management"
- One of the founding members of the farmdoc team
- He writes one of the featured newsletters on the farmdoc site, Weekly OUTLOOK , and he is a primary contributor to the AgMAS section
- Current research includes:
- Evaluation of the pricing performance of agricultural market advisory services
- Evaluation of USDA production and price forecasts
- Evaluation of pricing performance of Illinois corn and soybean producers
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