“It would all be as if nothing had happened.”
-Michael Sallah & Mitch Weiss
That’s a quote from the end of the book I cited in last week’s Early Look, Tiger Force – A True Story of Men and War. It’s a true story about American war crimes in Vietnam (Pulitzer Prize, 2004). Sadly, it’s how a lot of cover up stories involving the #PoliticalClass end.
“The Pentagon had decided that is was better to cover up what had happened. Let the country move on… there would be no press conferences. There would be nothing at all… and so it was.” (page 306)
To be fair, maybe our central planning overlords do know what’s best for the country. But maybe they don’t. All I know is that whether it’s Bernanke, Geithner, or Petraeus – as Canadian-American Patriots, it’s our responsibility to keep questioning.
Back to the Global Macro Grind…
I’ve been questioning Bernanke and Geithner’s Keynesian Policy To Inflate via US Dollar Debauchery for 6 years. Even if they refuse to acknowledge what has happened publicly, proving this out has been a daily dog fight – and I’m proud to have done the work.
All-time highs in food and energy prices? It Happened in the last 6 years. It all happened under Bernanke and Geithner’s watch. Causality was both fiscal (debt/deficit spending) and monetary (money printing). They both deserve their #FairShare of the blame.
As Bernanke and Paulson promised “shock and awe” rate cuts and bank bailouts, the all-time high in Oil prices happened during the economic crisis (2008). Think about that. Then think about why Gold and Food prices hit their all-time highs in 2011 and 2012, respectively as net long positions in futures & options commodity positions hit all-time highs (twice) in 2012.
All-time is a long-time. It Happened.
Now, deflating these policy mistakes, and popping the bubble in commodity price expectations, perversely, becomes the American and Global consumer’s greatest opportunity to get a real-time tax cut. I like that. If you don’t take car service to D.C. to work every day on US tax moneys and have all your meals bought and paid for, you should too.
From a Global Macro perspective, I also like the following positions:
- LONG Consumption
- SHORT Commodities
Perma marketers can attempt to label me whatever they want. Our clients only pay us if A) we are helping them avoid blowups and B) we are helping them get things right. Never mistake “negativity” with reality. Reality is that, since we launched our Bernanke’s Bubbles Theme, it started happening – the commodity bubble has started to pop, faster, and louder.
Since Bernanke’s Top (September 14th, 2012 when he decided to print to infinity and beyond), the CRB Commodities Index (19 commodity basket) is down -8.7%. That compares with the SP500 that is now down only -3.8%. Some global equity markets (like Germany’s DAX, which is crushing the Dow YTD) are now up versus their early September highs.
The US Dollar, of course, has been up for 8 of the 11 weeks since Bernanke’s last decision. Tomorrow’s FOMC meeting offers him an opportunity to get out of the way. We’ll see if he has the political spine to do that now that the election is out of the way.
All the while, you have had great buying opportunities presented by the #PoliticalClass and their cliff babbling along the way. Our critics will be the last to remind you that on the Hedgeye Best Ideas Conference Call on November 15, 2012, 6 of our 8 Best Ideas were actually longs. Timing matters. And we have a great deal of pride focusing on it.
To review, our 6 LONG US Equity Ideas have returned, on average, +9.9% (versus SP500 +5% off the lows) during the same period:
- International Game Technology (IGT) – Todd Jordan idea = +14.3%
- C&J Energy Services (CJES) – Kevin Kaiser idea = +12.4%
- Jack in The Box (JACK) – Howard Penney idea = +10.4%
- Paccar (PCAR) – Jay Van Sciver idea = +6.5%
- Nike (NKE) – Brian McGough idea = +8.0%
- TCF Financial (TCB) – Josh Steiner idea = +4.8%
That’s not a victory lap. That’s just the score. In what most would agree is a tough alpha generation environment, It Happened.
And I think, for me at least, it’s really important to highlight all the great work the men and women who grind it out for us every day do. They are both resilient and adaptive. They are also transparent and accountable. And for that, I am thankful to have the opportunity to work alongside them each and every day.
Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $105.99-109.26, $3.62-3.72, $80.01-80.51, $1.28-1.30, 1.59-1.65%, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on November 27, 2012 for Hedgeye subscribers.
"The farther backward you can look, the farther forward you are likely to see."
If you think it’s more progressive to look forward than backward, we should take a walk in the bush together on Northern Ontario right before the black bears go into hibernation. My Dad and I recommend keeping your head on a swivel.
Looking back at sovereign debt cycles (Reinhart & Rogoff go back to the year 1500) helps us look forward at how ridiculous expectations are that Greece is going to be fixed.
I couldn’t make this up if I tried this morning, but this is what Greece Prime Minister, Antonis Samaras, had to say about the latest Greek debt deal: “A new day begins for all Greeks!”
Back to the Global Macro Grind…
A new day in storytelling it is. World Equity markets initially rallied on the Greek “news”, then reversed, and quickly. Chinese stocks closed down -1.3% making fresh new lows, Greek stocks went from +1% to -1.5%, and US Equity Futures went from green to red.
If you’ve never played a shell game, this is how it works: now you see it, now you don’t. Here’s an abbreviated version of the Greek debt deal: €40B in debt is evaporated, then they get a fresh €44B in bailout debt within the next few months (€34.4 billion paid out in Dec and €9.3 billion in Q1 linked to MoU milestones agreed by Troika).
Great. Right? Yeah, just great. For those of you still looking backwards as you attempt to proactively risk manage forward, you can see what all this Greek noise has added up to over the years in Josefine Allain’s Chart of The Day:
- Greek stocks -1.5% on the news to 831 on the Athens Stock Exchange Index
- Greek stocks -7% from their lower long-term highs in October (894 on the Athex)
- Greek stocks -49% from the lower highs they established 2 years ago (November 2011)
To be fair, 2 years ago requires a decent look back. And, admittedly, I forget what the bailout rumors on Greece were 3 years ago. All I know is that whatever the rumors were, they were lies.
Martin Luther King, Jr. said “a lie cannot live.” And, if you have the risk management mandate to look forward far enough, that’s generally an accurate mean reversion assumption to make.
But, if you have an investment mandate to chase weekly and monthly performance bogeys, you’re probably ok to suspend disbelief and pretend the lies are realities. I read my kids fairy tales at bedtime too.
Reality: if you bought Greece (Athex Index) or Apple (AAPL) in November 2011 or September of 2012, you need to be up +96% and 19%, respectively, to get back to break-even. That’s just math.
Ultimately, betting on more of what has not worked (more debt financed government spending) is destroying the world’s long-term equity capital. That’s why I am wedded to looking back at LOWER-HIGHS in long-term prices. While this is a relatively new phenomenon to those who got plugged buying American or Greek stocks in 2007-2008, it’s been happening in Japan for 20 years.
Back to China (and Global #GrowthSlowing)…
Evidently those who were suggesting “China has bottomed” a few months ago were a little off on the timing. Last night’s -1.3% smack-down in the Shanghai Composite puts China 90 basis points away from going back into crash mode.
A crash, by our risk managed definition, is a price that’s made lower-highs on the order of 20% or more. Try it at home with your own money. I can promise you it will feel like what I just called it.
The Shanghai Composite is down -19.1% since #GrowthSlowing started, globally, in March of 2012. While it’s fun for passive Captain Stock Picker to talk about what the Dow is “up year-to-date”, real money that’s managed from a global macro perspective has been seeing lower-highs in prices in pretty much everything that matters since the March-April 2012 highs.
Here’s one really simple 3-factor Hedgeye Global Macro Growth Model to beam up onto your globally interconnected screens:
- CHINA (Shanghai Composite in a Bearish Formation = bearish TRADE, TREND, and TAIL)
- COPPER (Bearish Formation as well, down -11% from its Q112 lower-high)
- BONDS (US Treasuries in a Bullish Formation as Bond Yields are in a Bearish Formation)
Now, if my #OldWall competition wants to tell me that China, Copper, and Bond Yields are flashing a “back to growth” global economy, I’m happy to debate them live anywhere, anytime. Looking Backward, they’ll be forewarned that the Thunder Bay Bear will hold them accountable for missing the 2012 US and Global Growth slowdown just like they did in 2008.
Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1728-1748, $109.91-111.48, $3.43-3.56, $80.05-80.61, $1.28-1.30, 1.54-1.68%, and 1380-1419, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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Takeaway: The Chinese economy continues to improve, albeit slowly. No change to our fundamental outlook.
- Inclusive of the November GROWTH and INFLATION data, we stand pat on our intermediate-term G/I/P outlook for the Chinese economy – an outlook that calls for directionally positive, but relatively muted GROWTH figures; higher-highs in reported INFLATION readings; and limited POLICY based economic reflation. We realize that’s not as sexy as some of the more aggressive “China has bottomed” claims being bandied about the Street, but our call has been and continues to closest to reality.
- Since our 11/1 note titled: “TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED”, we continue to affirm that the Chinese economy is in the latter stages of a bottoming process and the data continues to bear this out. That said, however, China’s likely bottom doesn’t mean investors should run out and buy production-related commodities and their producers; China’s strategic economic rebalancing means the slope of Chinese demand growth for raw materials is likely to be flat-to-negative for a really long time.
- If you are looking for a less consensus way to play the China recovery theme, we are positive on the Chinese consumer and consumption-oriented sectors and subsectors throughout the Chinese stock market, as well as international consumer companies that are taking market share in China – especially with the CNY hitting a ~20-year high vs. the USD in recent weeks. Refer to our 11/8 note titled: “HU SPEAKS; IS ANYONE LISTENING?: NOTES FROM CHINA’S 18TH PARTY CONGRESS” for more details.
- We are also have been positive on Hong Kong’s Hang Seng Index since 11/16 for its own merits, but also see incremental upside potential stemming from institutional capital flows as sentiment regarding the mainland economy continues to improve. As a point of reference, the Heng Seng Index has appreciated +5.3% from that date.
Over the weekend, China reported a plethora of NOV economic statistics. On balance, China’s GROWTH data was flat-to-up sequentially in NOV; Retail Sales and Industrial Production accelerated, while FAI came in flat and the Trade Data slowed. The country’s NOV CPI and PPI readings came in faster sequentially, underscoring previous calls by Chinese policymakers for a hawkish trend in INFLATION readings on the mainland over the intermediate term and throughout 2013. We summarize the data below:
- NOV CPI: +2% YoY from +1.7%
- Food: 3% YoY from 1.8%
- Non-Food: +1.6% YoY from +1.7%
- NOV PPI: -2.2% YoY from -2.8%
- Manufacturing: -2.9%
- NOV Industrial Production: +10.1% YoY from +9.6%
- Cement Production: +6.9% YoY from +10.2%
- Electricity Output: +7.9% YoY (strongest since DEC-2011) from +6.4%
- NOV Retail Sales: +14.9% YoY from +14.5%
- YTD through NOV Fixed Assets Investment: flat at +20.7% YoY
- Real Estate Development: +16.7% YoY from +15.4%
- Local Projects: +21.7% YoY from +21.8%
- NOV Exports: +2.9% YoY from +11.6%
- NOV Imports: flat YoY from +2.4%
- NOV Trade Balance: $19.6B from $32.1B
Since our 11/1 note titled: “TAKE THEIR WORD FOR IT – CHINA HAS BOTTOMED”, we continue to affirm that the Chinese economy is in the latter stages of a bottoming process and the data continues to bear this out. That said, however, China’s likely bottom doesn’t mean investors should run out and buy production-related commodities and their producers; China’s strategic economic rebalancing means the slope of Chinese demand growth for raw materials is likely to be flat-to-negative for a really long time.
Additionally, we find it flat-out silly that US-centric investors are using China as a reason to be incrementally bullish on US stocks now – especially given that they were bullish on domestic equities the entire time China was slowing. We’re not sure why the Chinese economy suddenly matters to perma-bulls now, but it is indeed a sentiment nugget worth flagging:
If you are looking for a less consensus way to play the China recovery theme, we are positive on the Chinese consumer and consumption-oriented sectors and subsectors throughout the Chinese stock market, as well as international consumer companies that are taking market share in China – especially with the CNY hitting a ~20-year high vs. the USD in recent weeks. Refer to our 11/8 note titled: “HU SPEAKS; IS ANYONE LISTENING?: NOTES FROM CHINA’S 18TH PARTY CONGRESS” for more details.
We are also have been positive on Hong Kong’s Hang Seng Index since 11/16 for its own merits, but also see incremental upside potential stemming from institutional capital flows as sentiment regarding the mainland economy continues to improve. As a point of reference, the Heng Seng Index has appreciated +5.3% from that date.
Jumping back to China specifically, the Shanghai Composite recently recaptured its TRADE line (now support), which is the first time our quantitative signals have confirmed our updated fundamental view on the Chinese economy. We would be incrementally more positive on the situation there if the Shanghai Composite were to recapture its TREND line (just +30bps above today’s closing price). To some extent, however, the recently revised IPO rules (shelving new issues through at least Chinese New Year) might have had an immediate-term positive effect on the Chinese equity market.
Again, we are keen to temper our comments with respect to the intermediate term outlook for Chinese GROWTH. As recently as a couple months ago, we were in the overwhelming minority in calling for a lack of POLICY based economic reflation over the intermediate term. To some extent, our initially contrarian call has become reasonably consensus – after all, both Xi Jinping and Li Keqiang (China’s future President and Premier, respectively) have been out confirming that more-or-less in recent weeks. Another example of this is Chinese interest rate markets having completely priced out the possibility monetary easing over the NTM, replacing that with some expectations of tightening (OIS).
Other PRICE trends in Chinese financial markets that support our directionally positive, but relatively muted intermediate-term outlook for Chinese GROWTH are:
- Compression in the sovereign yield curve (10Y-2Y spread), largely driven by a demonstrable back up on the short end; the less aggressive back up on the long end is positive, however.
- Expectations for NTM weakness in the CNY and CNH vs. the USD, per the NDF market; the widening CNH premium to the CNY is a positive sign from a sentiment perspective, however.
- Chinese rebar prices continue to make lower-highs from an intermediate-to-long-term perspective; the mostly normal sloping curve is a recent positive phenomenon, however, after having been inverted for quite some time.
All told, inclusive of the November GROWTH and INFLATION data, we stand pat on our intermediate-term G/I/P outlook for the Chinese economy – an outlook that calls for directionally positive, but relatively muted GROWTH figures; higher-highs in reported INFLATION readings; and limited POLICY based economic reflation. We realize that’s not as sexy as some of the more aggressive “China has bottomed” claims being bandied about the Street, but our call has been and continues to closest to reality.
With 2013 less than a month away, let's review where we're at in 2012 thus far. It's become clear that the game of printing money at the Federal Reserve (i.e. quantitative easing) isn't working the way many had hoped it would. The S&P 500 is up 13.5% on a year-to-date basis but has yet to reclaim the levels seen since the Bernanke Top (September 14). Gold continues to remain inflated courtesy of the Fed having also declined in price since September. Brent crude oil is down significantly since its February highs and we expect it to head lower into the new year. 2013 will largely be affected by the outcome of the fiscal cliff. Should Congress get its act together, we can, at least for the short-term, expect a buyer's rally across multiple asset classes.
McDonald’s reported Global SSS growth of +2.4% in November versus Consensus Metrix -0.1%. Importantly, the US posted +2.4% SSS versus consensus of -0.8%. Europe grew SSS 1.4% in November, 130 bps ahead of consensus, and APMEA grew comps +0.6% versus consensus of -0.4%.
The US business reported +2.5% same-store sales growth, far in excess of -0.8% consensus. The US division was benefiting from a calendar shift and a heavy value push. On a two-year average basis, trends improved to +4.5% from 1.5%. October was negatively impacted by calendar shifts; the chart below, on the right, shows calendar adjusted trends which illustrate a more modest improvement in November from the previous month’s trend.
November was driven by a heavy focus on the Dollar Menu. Looking forward, the McRib makes its comeback on December 17th (pushed back from original relaunch date in late October) but 4Q12 trends are still facing an uphill battle as MCD faces its toughest compares of the year in December. Heading into 1Q13, compares will remain very difficult and the competition will also be heating up with Taco Bell ramping up its national voice.
MCD Europe reported 1.4% comps in November, beating +0.1% consensus. The calendar shift impact helped business in Europe with many previously-negative markets turning positive in November. The UK continued to see positive organic growth in its business. Germany, one of the most important markets in Europe, continues to act as a drag on overall results. Margins in Europe are tracking lower-than-planned this quarter as promoting value has taken a toll.
The APMEA business grew same-store sales +0.6%, led by Australia, despite ongoing weakness in Japan. A significant portion of the headline improvement in two-year average trends in APMEA was due to the calendar shift. The value message continues to resonate in Australia but trends in China continue to decelerate with trends roughly flat in November.
November was a decent month for McDonald’s but, combining October and November to smooth out calendar-shift impacts shows a trend roughly level with September. We believe that the business, on a global basis, did improve sequentially but by much less than the headline numbers might suggest. The true improvement was modest, in our view, and we would need to see several months of improvement for our skepticism to reverse. We continue to expect margin pressure in 2013 and view FY13 consensus EPS estimates of $5.80 as overly bullish. Until expectations come in, we are not advising clients to buy this stock.
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