If we analyze the energy sector to see what investors are piling into, we find that the top performing stock factors in energy over the last three months are: low margin, low short interest and large cap. The safety trade remains popular.
The political class of America loves to take, take take. Between widespread commodity inflation, a devalued currency and unsustainable debt limits, we really have it made here, don’t we? The Republicans and the Democrats are fighting each other over every little detail of a resolution to the fiscal cliff, so the odds of a deal actually happening are very slim. Think about it: how many politicians do you really trust? Do you think they’re looking out for you in the long run or themselves?
Mining stocks took a hit yesterday with Freeport-Macmoran (FCX) getting a baseball bat to the head like no other. And this morning, gold is down significantly in addition to gold mining stocks. Our intermediate-term TREND line of $1711 is broken for gold. Hedge funds are shedding their holdings related to gold miners and the commodity. Ignore brash comments from people saying that the “super cycle isn’t ending” in commodities. It has already ended and we can go a lot lower here on out.
|FIXED INCOME||18%||INTL CURRENCIES||12%|
New unit openings in China and strength in YRI and US should offset China weakness in 1H13. China SRS growth is sensitive to the economy but new unit growth and ROIIC are likely to be supported by continuing growth of the consuming class in China. Looking at operating income by geography for YUM/MCD/SBUX, we can see that YUM is the most geographically diverse. This is manifest in YUM’s more stable EPS growth and price performance over the last 10 years.
Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.
We believe ASCA is greatly undervalued due to its potential to follow a OPCO/PROPCO model like PENN in two years or so. A high FCF yield and a healthy balance sheet make this gamer an attractive investment.
“Diamondback liquidation confirmed. Investors pull $520MM. Fund to close down” -@Zerohedge
“It is a waste of energy to be angry with a man who behaves badly, just as it is to be angry with a car that won't go.” -Bertrand Russell
Standard Chartered to pay $330 million in fines to US regulators for dealings with Iran.
TODAY’S S&P 500 SET-UP – December 6, 2012
As we look at today's setup for the S&P 500, the range is 15 points or 0.37% downside to 1404 and 0.69% upside to 1419.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
OIL – both Brent and WTIC continue to make lower-highs on low volume rallies – and both remain in Bearish Formations in my model. We expanded our Commodities Bubble short positioning yesterday to US Energy stocks (XLE) and Russia (RSX); the sell side’s top rated Sector is still Energy “because it’s cheap”, using the wrong commodity prices of course.
GOLD – not good. My intermediate-term TREND line of $1711 is now broken and being confirmed on the downside. Gold Miners getting hammered as they remain over-owned by funds seeing redemptions.
GERMANY – who cares what the Dow is “up YTD” when you could be up +28% YTD owning the German DAX, powering past the September closing highs? With the SP500 -4.4% from the Bernanke SEP Top, this +1.1% move this morning in Germany is definitely the macro move of the morning.
The Hedgeye Macro Team
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
“Few soldiers knew the history, and most didn’t give a damn.”
Sound familiar? History matters. And that doesn’t just hold for the Geneva Conventions (1949). It holds for the Constitutional and economic history of the United States of America too. We shouldn’t give a hall pass to the willfully blind.
The aforementioned quote comes from a chilling book that I am reading right now about Vietnam: Tiger Force - A True Story Of Men and War, by Michael Sallah and Mitch Weiss. It won the Pulitzer Prize in 2004 and is a glaring example of how groupthink can dominate decision making by men abusing authority.
When it comes to the big rules in life, most of us follow them. Some don’t. But when we catch them, they pay the price. What is the free-market price we are willing to pay the #PoliticalClass in this country? Giving up our children’s liberties violates the US Constitution. It may not matter in the moment. But I am guessing that if we keep this up, it eventually will.
Back to the Global Macro Grind…
After the market close yesterday Timmy Geithner proclaimed his mystery of faith that “we’ll fall off the cliff if taxes don’t rise.” Really? Is that a threat? Or is he abusing his political power to do more of what many men and women before him have? Fear monger.
Geithner is one of the more unique authorities of the US #PoliticalClass because he has spent 54% of his born life working for the US government. That’s a long time – and boy has he raised a lot of debt and government spending along the way.
As a reminder, this generational (and Constitutional) debate in America isn’t just about raising the #PoliticalClass’ “revenues”:
Marxists wanted this – so now they have it. This is class war. The #PoliticalClass vs. The Rest of Us.
And if Geithner wants to try to scare the hell out of us threatening to “go off the cliff”, he can go ahead and try – but I for one am not scared of this man. If he was “deeply” worried about this, why in God’s good name was he ramping Government Spending (for the 1st time in 5 quarters) in the last 3 months? Why did he and Obama cheer Bernanke on, printing money and monetizing more US Debt?
Sadly, we all know the answers to these questions.
In other central planning news, Citigroup (C) pulled the ole bait and switch on Geithner and Co. and decided to fire 11,000 people yesterday. If you didn’t know how crony socialism works, here’s the deal: Geithner bails out his boys with your tax dollars, they grease each-other politically saying that they “saved” jobs, then fire everyone so that they can keep getting paid.
The Financials (XLF) liked that yesterday. Meanwhile Apple (AAPL) was collapsing (you only need to be up +30% from here to get back to September’s price to break-even). Now that growth and earnings have slowed, maybe that’s the new bull case – firing people.
What’s a better bull case?
From a US Economic Growth perspective, the only bull case that I can see as sustainable remains Strong Dollar, Down Commodities. Bernanke’s Bubbles (Commodities) are popping, and that’s potentially a very good thing for both US and Global Consumers if Obama just tells Bernanke to get out of the way.
What are the odds of that happening? Low.
Morgan Stanley (MS) is out with a version of the call Goldman (GS) made yesterday (Bloomberg: “Morgan Stanley Backs Gold, Corn, and Beans as Best Picks for 2013”). I smiled when I read that. Our call remains the exact opposite – has been since March 2012.
Despite Goldman pleading that the commodities “super cycle isn’t ending”, it’s pretty clear to us that it has already ended. Whether it’s Freeport McMoran (FCX) or the Gold Miners (GDX) getting blasted yesterday, it’s all one and the same thing to us – over-owned.
The other side of commodities (and their related equity “plays”) melting down since The Bernanke Top (SEP 2012) is of course buying consumption oriented exposures.
That’s why we bought US Housing (ITB) on red yesterday, and reiterate our favorite big cap Consumer long ideas: Starbucks (SBUX), Nike (NKE), and Yum Brands (YUM) this morning.
Our Financials and Housing Sector Head, Josh Steiner, will be hosting a housing call tomorrow at 11AM EST titled: "Could Housing's Recovery Go Parabolic in 2013?" If you’d like access to the call, please ping .
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $108.61-110.05, $3.54-3.68, $79.61-80.19, $1.29-1.31, 1.58-1.66%, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Even though we like them fundamentally, Brazilian equities remain inconclusive from a quantitative perspective.
Brazil has been a country we’ve been hot and cold on in the YTD from an equity market and FX perspective. When we last touched base here in our OCT 24 note titled: “IS BRAZIL’S RECENT BREAKDOWN A HUGE RED FLAG FOR RISK ASSETS?”, we posited:
“The Bovespa’s TREND-line breakdown diminishes our formerly positive bias and affirms our negative cyclical concerns regarding ‘risk assets’.”
In the ~3 weeks following that note, the Bovespa traded down -3.1% to its NOV 16 closing low 55,402 and has since rebounded to +91bps higher than the original 10/24 closing price of 57,161. the S&P 500 (as a proxy for “risk assets”) dropped -3.9% to its NOV 15 closing low of 1,353 and has since recovered to the original 10/24 closing price of 1,409.
What to do from here depends largely on the quantitative setup, which we will continue to receive from Keith in real time. A confirmed breakout above the Bovespa’s TREND line of 58,498 would be a signal to us to increase our exposure to Brazil on the long side. We especially like consumer oriented names as Bubble #3 continues to pop amid a confluence of noteworthy domestic tax and tariff reductions.
We would also expect to see some strength in industrials names (particularly within the construction industry) as both FIFA and the IOC have recently come out and flagged Brazil as being “way behind schedule” in both World Cup (2014) and Olympic Games (2016) preparations.
We expect President Rousseff & Co. to address the situation with some Chinese-style command economy policies in the coming quarters as she seeks to protect the reputations of both herself and a her country from the scorn of the international community. Finance Minister Guido Mantega appears ready to follow suit at moment’s notice, suggesting his crew is working to increase investments in the country’s “inefficient infrastructure” per his own recent statement.
From a top-down perspective, Brazil’s GIP outlook remains robust and is supportive of further equity market and currency gains w/ respect to the intermediate-term TREND. We also like that consensus 2013 GDP estimates have come down to a more realistic +3.9% from a peak of +4.5% as recently as five months ago; +3.9% is in line with the latest projections out of the Brazilian Finance Ministry (+4%) – inclusive of last week’s demonstrable miss on the 3Q12 real GDP print (+0.9% YoY vs. Bloomberg Consensus at +1.9%).
While we remain somewhat skeptical of those projections – especially given that aggressive monetary easing (525bps worth of cuts), record low interest rates (7.25% nominal; 1.8% real), subsidized credit (YTD State bank credit up +25.5% YoY vs. only +11.7% for private banks), tax breaks for consumer products and financial services and new tax incentives for various industries have all failed to demonstrably accelerate GROWTH in the YTD – we cannot deny that the Brazilian economy is finally headed in the right direction; everything that matters in the relative world of Global Macro occurs on the margin.
Moreover, we continue to anticipate the positive effects of the cumulative stimulus efforts to continue to roll through on a lag(s), setting Brazil up to economically outperform peer economies, at the margins, over the intermediate term.
As we have stressed all along in our recent work on the Brazilian economy, POLICY uncertainty – particularly the flurried nature of the announcements and notable anti-international investor and anti-private sector bias – has been the key driver of Brazil’s underperformance in the YTD, with the Bovespa ranking 83rd out of the 106 country-level and international sector-specific indices we track across the Global Macro universe.
Additionally, fiscal slippage may have also contributed some to weakness, as Finance Minister Guido Mantega recently confirmed that Brazil won’t hit its fiscal year budget targets and will opt to use an accounting ploy to discount public investments to make them less accretive to the deficit. Moving the goal posts mid-game remains a tried and true way to discourage the cross border capital deployment – especially for Latin American economies, which have received a black eye over the LTM as a result of President Fernandez’s (Argentina) aggressive spate of Big Government Intervention and expropriation.
We did, however, receive some positive news on the POLICY front in the week-to-date:
We’ve said it before and we’ll keep pounding the table on this critical point: removing currency translation risk from the perspective of Brazilian companies (whose balance sheets are levered with foreign currency denominated debt) and from the perspective of international investors improves the outlook for both earnings growth and foreign currency denominated returns within the Brazilian equity market.
All told, Brazilian equities – particularly the consumer oriented names and industrials names – continue to look interesting to us on the long side with respect to the intermediate-term TREND. That said, however, we fully understand the lack of investor enthusiasm for this contrarian play (accelerated Big Government Intervention and Bubble #3 popping) and are not surprised to see the Bovespa continue to trade below its TREND line.
Is the Bovespa’s recent TRADE breakout a leading indicator of better things to come in Brazilian financial markets or is it merely a beta-driven head fake to be ultimately faded? While we don’t know the answer to that question at the current juncture, we do know what we plan to do if: A) the Bovespa follows through with a confirmed TREND breakout (buy Brazilian equities, unhedged from a FX perspective) or B) the index fails at its TREND line (more of the same = nothing).
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.