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Rotten Apple

Last year, Apple (AAPL) was THE stock to own. Everyone from portfolio managers to grandparents were loading up on the stock as it continued to make new highs week-after-week. Then, in September of 2012, Apple peaked at $702.10 a share and has since begun a descent of epic proportion as people realize that the stock is overvalued and tech continues to get killed. Since September, AAPL has fallen -27.62% to $508.21 and ended up closing today at $509.82 a share. We're looking to buy soon, but only when our signals indicate the time is right; there's a process for everything and you need to stick to it.

 

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THINKING OUTSIDE THE BOX ON GOLD

Takeaway: We update our bearish bias on gold with a contrarian analysis of the fundamental drivers of this asset class.

SUMMARY BULLETS:

 

  • Gold remains a crowded long for a variety of very obvious reasons – one of which could become less supportive, at the margins, on a sustainable basis.
  • In the note below, we thought we’d take a stab at how a core component of the bull case (i.e. central bank diversification) can come unwound over the long-term TAIL. It’s very important to note that we’re not positing this as the only factor driving the market price of gold; nor are we necessarily suggesting that this is a thesis to run out and short gold today with. Rather, we are offering intellectual ammunition to understand what’s likely going on behind the scenes in the event gold continues to make lower-highs over the intermediate-to-long term.
  • Sustained weakness in the JPY and EUR along with a diminished EM central bank purchases of gold (relative to investor expectations) could provide the necessary lubrication for a sustained USD rally and lower-highs in the price of gold over the long term.
  • All told, we think investors should consider reducing their allocation to this asset class. At a bare minimum, it would be prudent for gold bulls to confirm whether or not our TAIL support ($1,669) holds before increasing exposure to gold here. If $1,669 breaks, there’s no true support to the prior closing lows.

 

Gold is widely loved and probably over-owned – at both the institutional and sovereign level. Having appreciated in value for 12 consecutive years with a CAGR of 16.4%, the bull case on gold is well understood by just about every market participant.

 

This is true from traditional L/S equity hedge fund managers all the way down to retail investors, as ETF volumes have been the only thing mitigating the precipitous decline in physical gold demand. The latest data from the World Gold Council (3Q12) showed overall demand had declined -11% YoY from the all-time peak in 3Q11, with every category posting a contraction except “ETF & similar”:

 

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It’s not surprising to see demand for physical gold peaked when the price of hit an all-time peak of ~$1,900 early in the quarter.

 

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We’ll hold off on the discussion on gold supply, as we firmly believe PRICE eventually leads supply in most, if not all commodity markets. For example, if the price of gold rips to the upside, gold miners will likely follow the move by instituting aggressive E&P plans. If the gold price were to plummet, many producers will struggle to operate their mines above the cost of capital and will eventually curb production. Anything in between probably equates to a status quo level of supply growth.

 

Going back to the point we made earlier about the bull case being deeply penetrated, we thought we’d take a stab at how a core component of the bull case (i.e. central bank diversification) can come unwound over the long-term TAIL. It’s very important to note that we’re not positing this as the only factor driving the market price of gold; nor are we necessarily suggesting that this is a thesis to run out and short gold today with. Rather, we are offering intellectual ammunition to understand what’s likely going on behind the scenes in the event gold continues to make lower-highs over the intermediate-to-long term.

 

THE KNOWN-KNOWNS

Gold has ripped for over a decade as central banks increasingly diversified out of the primary world reserve currency and into other, more credible currencies, as well as other assets like SDRs and Gold.

 

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We hold the view that credibility within the FX market is 100% relative and ever-changing. The management of foreign exchange is a 24-hour-per-day phenomenon that is consistently anchors on incremental data. Below, we focus specifically on the US because gold and other internationally traded commodities are priced in and settled in USD.

 

For 10+ years, the stream of incremental data has been a general headwind for the credibility of America’s currency, largely in the form of loose fiscal POLICY and dovish monetary POLICY. That confluence of weak POLICY has created an egregious amount of international money supply that has inflated international reserve assets across both the developed world and non-developed world. Initially, the price of gold appreciated w/o much of a shift in global central bank demand. That changed in 2004 when the confluence of the world’s reserve mangers started to accumulate gold at a rate commensurate with the rate of incremental foreign exchange accumulation. Since 2008 (not ironically when QE1 was introduced), however, they’ve been accumulating gold at a faster rate than incremental FX.

 

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THE LESS-KNOWN KNOWNS

The first major run-up in gold (2004-2008) was occurred as DM central banks began favoring gold over incremental foreign exchange, at the margins. The second major leg up in gold prices came as EM central banks began to do the same (2008-present). This is where the real “juice” likely came from, as EM central banks have increasingly held the lion share of international reserve assets.

 

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The latter point is super intuitive, given that EM economies, on balance, have tended to be more manufacturing and export-oriented in nature (think: China). Additionally, EM central banks have likely aggressively accumulated large amounts of foreign exchange (in lieu of gold, at the margins) over the last 10+ years to resist appreciation pressure on their currencies (think: Chinese yuan and Brazilian Finance Minister Guido Mantega’s “Currency War”).

 

For reference, Switzerland has been doing exactly this (i.e. accumulating foreign exchange at a rate faster than gold) for the better part of 30 years, as the SNB has semi-perpetually combated the specter of a secular loss of competitiveness – which is a real threat given the country’s +42.9% real exchange rate appreciation over that duration. The CHF’s de-facto ceiling vs. the EUR is yet another example of the Swizz central bank being forced to accumulate incremental FX, lest the country suffer the perceived consequences of having a strong currency amid the international “race to zero” in today’s “Beggar Thy Neighbor” global economy.

 

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That brings us to our final point, which is really a question:

 

Can EM central banks ever really accumulate that much gold – especially relative to consensus expectations that they are poised to be big players in that market in perpetuity?

 

There seems to be little political will across the developing world to allow for any dramatic currency appreciation – especially with global GROWTH likely tracking in the +2-3% range for the foreseeable future. This means EM central bankers will continue to be forced to daub up large amounts of fiat currency over the long-term, absent a phase change in the global monetary POLICY landscape.

 

In light of this, it’s important to note that the People’s Bank of China (a key player in the FX reserve accumulation sphere) now views the yuan at/near an “equilibrium level” and they have been using their USD/CNY reference rate as a tool to temper appreciation pressure emanating from the market for several months now. Incremental Polices To Inflate out of DM central banks will force them to accelerate their pace of foreign exchange accumulation if they are going to resist upward pressure on CNY exchange rates from current levels.

 

What’s new across developed markets is the political will for the Europeans and the Japanese to pursue incrementally aggressive currency devaluation strategies over the intermediate-to-long term. Keep in mind that we haven’t even seen the ECB really go to town w/ unsterilized bond purchases and that the BOJ’s balance sheet is poised to expand to new heights in a variety of experimental manners under the pending LDP regime.

 

In short, we think Japan faces the risk of a currency crash (peak-to-trough decline > 20%) over the next 12-18 months. Moreover, unless Europe has been magically fixed (are the Greek and Spanish unemployment situations even “fixable”??), the EUR is likely to continue making lower-highs over the long term. In the eyes of the world’s central bankers, the perceived credibility of the JPY and EUR are likely to be materially eroded over the long term, which, on the margin, is positive for other countries’ currencies to the extent they are credible candidates for international reserve management.

 

In the aforementioned Global Macro scenario, could we see the USD grind higher against a broad basket of currencies over the intermediate-to-long term? Absolutely – especially if US fiscal POLICY starts to get hawkish on the margin (think: Fiscal Cliff). Perhaps that’s why the US Dollar Index is down less than 100bps YoY, despite the Federal Reserve kicking the ZIRP can down the road 3x in the YTD and instituting perpetual QE – twice in the last three months!

 

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If one is bearish on the US Dollar from here, we can’t even begin to fathom what their next catalyst is, given the USD’s resilience in the face of all that…

 

In the past, strong USD has been really bad for gold (early-to-mid 1980’s and late 1990’s). The most recent period of sustained USD appreciation came on the strength of the Balanced Budget Act of 1997, so it’s critically important to avoid underweighting fiscal POLICY as a factor for the market price of America’s currency. If Congress and the White House can figure out a way to resolve the Fiscal Cliff in a sustainable and effective manner (a really big “if”), we could see the US Dollar Index approach the high 80s/low 90s level over the intermediate term. That would not be good for gold.

 

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Our quantitative risk management levels for Gold are included in the chart below. If $1,669 breaks, there’s no true support to the prior closing lows. That’s something to think about as you ponder, “Who’s the incremental buyer of gold from here?” For some, that question sounds more like, “Who can I offload my gold to if and when I want to head for the exits before the crowd does?”.

 

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Gold remains a crowded long for a variety of very obvious reasons – one of which could become less supportive, at the margins, on a sustainable basis.

 

Darius Dale

Senior Analyst


RH: The Right Stuff

Restoration Hardware (RH) took a hit yesterday despite a solid quarter. The Street is not happy about the lack of guidance on the stock and short-term events that cause disruption a la Hurricane Sandy and the West Coast Port Strike. Nonetheless, we believe the company is executing well on its growth strategy and have confidence that the stock could be at $62 a share in two years, $51 in one-year out. We’ll be a buyer of RH on down days.

 

RH: The Right Stuff  - RHsetup


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 80.33%
  • SHORT SIGNALS 78.51%

PODCAST: Upside Surprise

On today’s morning investment call held for Hedgeye subscribers, we discussed how markets are shifting to a bullish sentiment now that growth is beginning to stabilize. Commodities will continue to drop, as economic recovery doesn’t occur when oil is at $150 a barrel. More importantly, global markets are up across the board and the S&P 500 is holding its key line of support at 1419. That decision to hold at support signals that the market is keen to go higher. 

 

You can listen to Hedgeye CEO Keith McCullough address our Q&A session in the call in the audio we've posted below.

 


Run Of The Bulls

Client Talking Points

Stabilize and Economize

With global markets melting up this morning and the S&P 500 holding its key TRADE line of support (1419), markets are attracting the bulls like a red cape being waved in Barcelona. The overall theme is now switching from #GrowthSlowing to #StabilizingGrowth, which is a very positive catalyst for the markets. China saw the Shanghai Composite up +4.3% overnight and Germany saw the DAX make higher highs, blowing past September’s numbers. As for commodities, keep in mind that economic recoveries don’t occur when oil is at $150 a barrel and gold at $1900/oz. 

Asset Allocation

CASH 49% US EQUITIES 18%
INTL EQUITIES 9% COMMODITIES 0%
FIXED INCOME 12% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NKE

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.

SBUX

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.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“Commodity Deflation is bullish for consumers; bearish for commodities. Period.” -@KeithMcCullough

QUOTE OF THE DAY

“A man may be so much of everything that he is nothing of anything.” -Samuel Johnson

STAT OF THE DAY

US November Consumer Prices fall 0.3%, Core Rate Rises 0.1%.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 14, 2012

 

As we look at today's setup for the S&P 500, the range is 25 points or 0.67% downside to 1410 and 1.10% upside to 1435.     

                                                                                                                                                          

SECTOR AND GLOBAL PERFORMANCE

 

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EQUITY SENTIMENT:


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CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.49 from 1.48
  • VIX closed at 16.56 1 day percent change of 3.82%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Consumer Price Index M/m, Nov. est. -0.2% (prior 0.1%)
  • 8:30am: CPI ex-Food & Energy M/m, Nov. est. 0.2% (prior 0.2%)
  • 8:58am: Markit US PMI Preliminary, Dec. est. 51.8 (prior 52.4)
  • 9:15am: Industrial Production, Nov. est. 0.3% (prior -0.4%)
  • 9:15am: Capacity Utilization, Nov. est. 78.0% (prior 77.8%)
  • 11am: Fed to buy $1.5b-$2.25b notes due 2/15/36-11/15/42
  • 1pm: Baker Hughes rig count
  • 3pm: Fed holds open meeting in D.C. on foreign bank standards

GOVERNMENT:

    • Elisse Walter succeeds Mary Schapiro as chairman of SEC
    • Federal Reserve Board will hold open board meeting to discuss standards for foreign banks operating in the U.S., 3pm
    • Deadline for state governors to tell federal government whether they plan to build health exchanges, control sale of health insurance in their states after 2013
    • Deadline set by FERC for Barclays to respond to show-cause order in market manipulation case, $470m penalty

WHAT TO WATCH

  • Obama meets with Boehner as pressure builds for U.S. budget deal
  • PPG buys Akzo’s U.S. household paints unit for $1.05b
  • Hostess said to attract first-round bids from Wal-Mart, Kroger
  • S&P ordered by Japanese regulator to improve ratings system
  • GE may boost its qtr dividend to 20c/shr from 17c/shr
  • Alcatel wins $2.1b loans from Goldman, Credit Suisse
  • UBS said to face fines of over $1b in Libor-fixing probes
  • Another Facebook lockup expires; FB shrs up 34% since Oct. 31
  • Schulze seen making bid for Best Buy; faces Dec. 16 deadline
  • FTC may rule on Google search in coming days: reports
  • Europe Nov. car sales fall as EU demand at 19-year low
  • Manufacturing in China may grow at faster pace in Dec., HSBC data show
  • Liberty Media contacts possible buyers for Starz: NY Post
  • ITC judge to issue findings in patent-infringement case against Intel brought by X2y Attenuators
  • Bank of America says MBIA defaulted on contested securities
  • Southwest Airlines, Illinois Tool Works host investor mtgs
  • Japan Elections, S. Korea, U.S. Housing: Week Ahead Dec. 15-22

EARNINGS:

    • North West (NWC CN) C$0.38

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


COMMODITIES – CRB Index down another -1% on the wk to 292 and Gold down again this morning is a very good thing for #GrowthStabilizing, globally, on the margin. Economic recoveries don’t occur w/ $150 Oil and $1900 Gold, fyi. Sets up great for our LONG Consumption vs SHORT Commodities theme.

  • Oil Heads for Weekly Gain on China, U.S. Manufacturing Outlook
  • Wheat Bulls Retreat as U.S. Estimates Roil Markets: Commodities
  • Copper Extends Fifth Weekly Gain After China Data Boost Outlook
  • Gold Swings Between Gains and Drops on Stimulus, Budget Concerns
  • SHFE Copper Stockpiles Climb as Lead Jumps to 14-Month High
  • Soybeans Advance to One-Week High as U.S. Export Sales Increase
  • OPEC Status Reduced to Sentiment Driver as Oil Share Wanes
  • Rebar Climbs to Five-Month High as China Data Boost Outlook
  • Sugar Exports From Pakistan May Miss Target on Global Surplus
  • Oil May Drop on Uncertainty in Budget Talks, Survey Shows
  • Ethanol’s Discount to Gasoline Narrows on U.S. Budget Stalemate
  • Air Cargo Slowdown Puts Squeeze on Specialist Carriers: Freight
  • China’s 2012-2013 Corn Imports to Decline, Sinograin Says
  • Rubber Jumps to Six-Month High on China’s Manufacturing Outlook

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CURRENCIES


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EUROPEAN MARKETS


GERMANY – now the DAX (which is crushing the Dow) is A) making higher-highs vs the SEP highs (US stocks haven’t, yet) and B) the high-frequency economic data supports it (Germany’s Service PMI reading for early DEC 52.1 vs 49.7 NOV, finally signaling some expansion – the ZEW was solid earlier this wk as well). Both China and Germany going the right way at the same time – that’s new.


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ASIAN MARKETS


CHINA – massive melt-up in Chinese stocks overnight; +4.3% taking the Shanghai Comp to +9.6% in 2 weeks – that’ll get the machines’ attention; so will a breakout > 2095 TREND resistance (now support) for the Chinese A-shares Index. China has had its best moves in the last 5 years when commodity deflation starts to take hold – time for Bernanke to get out of the world’s way.

 

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MIDDLE EAST


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The Hedgeye Macro Team

 

 

 


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