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Becoming American

Client Talking Points

How Low Can You Go?

The Japanese yen recently hit a 27-month low against the US dollar. The Bank of Japan has accepted the task of devaluing the yen in a style not unlike the Federal Reserve. Their theory is that the yen is too strong and thus, they must burn the yen until it glows bright. This, combined with bailouts and other maneuvers is their plan to save the Japanese economy.

 

And much like our stock market, it has inflated the Nikkei and Japanese equities quite a bit, with the Nikkei 225 up 22% for 2012, up 9% in December alone. We mentioned what would happen with Japan if they went this route back in November on our Best Ideas call and here we are. If following in the footsteps of the United States is what Japan is aiming for, they’re doing quite well thus far.

Asset Allocation

CASH 55% US EQUITIES 21%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 0% 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

“Chinese iron ore prices have seen a 54% rally in the last month. Who saw that coming?” -@HedgeyeDJ

QUOTE OF THE DAY

"Sure there are dishonest men in local government. But there are dishonest men in national government too.” -Richard Nixon

STAT OF THE DAY

November Chicago Fed Midwest Manufacturing Index: 93.7 v 92.2 prior


JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS

Takeaway: The labor department's estimates show claims posting another solid week of improvement. We'll see how good they are at estimating next week.

Nineteen states were omitted from the jobless claims data this morning, including California and Texas. As such, the labor department had to estimate claim rates for those states. Needless to say, we wouldn't put too much stock in these numbers.

 

That said, initial jobless claims fell 11k to 350k from 361k. The prior week's number was revised up by 1k to 362k. Incorporating this upward revision, claims were lower by 12k. Rolling claims, meanwhile, fell 11.25k WoW to 357k and non-seasonally adjusted claims rose 39k to 441k. Additionally, the NSA rolling year-over-year change, which we monitor because it excludes the effects of seasonality, was -5.9%.

 

Claims have resumed their "normal" behavior in two respects. First, the effects of Hurricane Sandy are now fully out of the numbers, as we show in the first chart. Second, claims are generally trending lower as we would expect them to through the end of February. This will keep the wind at Financials' back, generally speaking, for the next two months. 

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - Katrina

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - Seasonality

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - Raw

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - Rolling

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - NSA 2

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - Rolling NSA

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - s p

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - Fed   Claims

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - Recessions

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - Claims Linear

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - YoY

 

Yield Spreads

The 2-10 spread fell 6.1 basis points WoW to 148 bps. 4QTD, the 2-10 spread is averaging 142 bps, which is higher by 6 bps relative to 3Q12.

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - 2 10

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over multiple durations.

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - Subsector Performance

 

JOBLESS CLAIMS: TOO MUCH DATA MISSING TO DRAW ANY CONCLUSIONS - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

Rbe

 



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 78.57%

Getting Religion

“Affairs are easier of entrance than exit; and it is but common prudence to see our way out before we venture in.”

-Aesop

 

Yesterday morning I was in the Canadian ski town of Banff, Alberta and today I found myself in Park City, Utah.  Since this is my first trip to Park City, I must admit it is a very picturesque town.  In fact, the beauty here almost offsets the fact the beers and cocktails are all watered down.  Almost being the key word.  But enough beating around the bush, today I’m going to jump right into it.

 

Yesterday morning in the Early Look I noted that violating the debt ceiling was imminent.  Coincidentally or not, later in the day yesterday Treasury Secretary Geithner issued a press release stating that the statutory debt limit would be violated by December 31st but that the Treasury department could take extraordinary measures to extend the ceiling by an additional $200 billion.  In the press release, it was also noted that:

 

1.)    The extraordinary measures can create approximately $200B in headroom under the debt limit; and

 

2.)    Under normal circumstances, that amount of headroom would last approximately two months. However, given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures.

 

To summarize: while there may be two more months of flexibility, the uncertain policy environment makes it difficult to project.  So, just as he is preparing to exit stage door left, Geithner sticks the markets with more uncertainty.  

 

Managing through the fiscal and monetary crises that is looming over the next couple of months would actually require some discipline and willpower.  Unfortunately, both of those attributes are currently in short supply in the hallowed halls of Congress.  Yesterday, I referenced the book “Willpower” by Roy Baumeister and John Tierney.  The authors actually provide some advice as to how to build willpower.  They write:

 

“Religious people are less likely than others to develop unhealthy habits, like getting drunk, engaging in risky sex, taking illicit drugs, and smoking cigarettes.  They’re more likely to wear seat belts, visit a dentist, and take vitamins … And they have better self-control, as McCullough and his colleague at the University of Miami, Brian Willoughby, recently concluded after analyzing hundreds of studies of religion and self control over eight decades.”

 

There you have it, a key way to build will power it to become religious.  Sadly absent a mass baptism, I think it is unlikely that Congress gets fiscal religion in the coming weeks.

 

Speaking of getting monetary religion, or lack thereof, probably the most noteworthy move in global macro markets over the last month has been the utter collapse of the Japanese Yen.  Shorting the Yen was actually our top Macro idea in our Best Ideas Call back on November 15th. The flip side of this trade has been an inflation of Japanese equities.  The Nikkei 225 is now up 9% for the month of December and 22% for 2012. On one hand, an inflating stock market benefits those that own Japanese equities, but the longer term issue is that this flagrant printing of money actually leads to a loss of confidence in the Japanese currency with the second derivative being a loss of confidence in Japanese government debt.

 

The more looming concern in Japan may actually be the yet to be implemented fiscal policy of the new administration.  As Darius Dale wrote yesterday in a macro note intraday:

 

“Abe and Aso will craft a “large-scale” supplementary budget for the FY12 year (likely > ¥10 trillion), as well as a FY13 federal budget. Regarding the latter, the previously-imposed ¥71 trillion spending cap for FY13 was recently disregarded by the LDP, suggesting Abe is poised to take public expenditures to new heights. In short, we think Japan’s pending fiscal and monetary POLICY mix risks igniting a backup in JGB yields that could threaten Japan’s fiscal sustainability, potentially triggering a European-style sovereign debt crisis.”

 

Now, clearly shorting Japanese government bonds has been called the “Widow Maker” trade for a reason.  The reason being it has been an utter failure of a trade, but Japanese yields and CDS are starting to back up as the Japanese appear to be on the verge of entering a new era of indulgent Keynesian policy. 

 

The truly scary fact about Japan is that almost 50% of the public budget is financed by debt issuance.  Further, almost a quarter of the annual budget is actually used for debt service.  Astoundingly this is occurring at a time when Japan’s weighted average cost of debt is as low as it has ever been.  Clearly, any sustained back up in rates would be catastrophic for a country that already has a debt-to-GDP of 229%.

 

In positive news, yesterday we had more confirmation of the emerging housing market recovery in the United States.  On a year-over-year basis, the Case-Shiller national home price index was up 4.3% in October, up from a 3.0% increase in September.  On one hand, this is no surprise since Case-Shiller reflects Corelogic data on a lag.  Regardless, as our Financials Sector Head Josh Steiner has been noting, the market, media and Main Street focus on Case-Shiller and the nature of the housing market recovery is that good news will feed on itself.

 

Could the housing recovering reach escape velocity in 2013? It is likely too early to tell, but our models continue to suggest home price recovery will come sooner than the consensus expects.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $108.95-111.58, $3.51-3.61, $79.06-79.92, $1.31-1.33, 1.70-1.85%, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Getting Religion - Chart of the Day

 

Getting Religion - Virtual Portfolio


White Ants

This note was originally published at 8am on December 13, 2012 for Hedgeye subscribers.

“Socialism would make our society comparable to that of the white ant.”

-Winston Churchill

 

After the market close last night I was excited to crack open the biggest brick in my reading pile – The Last Lion: Defender of The Realm (1940-1965). This puppy is 1182 pages long; could take awhile – so prepare for plenty from the Old Man on 10 Downing St.

 

Comparing Britain’s rise and fall from global economic (and currency) power of the early 20th century is very appropriate when considering what the United States of America is doing under Bush/Obama in the 21st. Churchill has always resonated with me, not because I am like him, but because he wasn’t liked by the burgeoning British #PoliticalClass.

 

“Churchill had a natural sympathy for simple people because he himself took a simple view of what was required… That was no doubt why the man-in-the-street loved him and the intellectuals did not… For that reason, Churchill had “dislike and contempt”, of a kind that transcended politics.” (Preamble, page 6)

 

Back to the Global Macro Grind

 

Reading the preamble to Churchill after watching the gong show that became Ben Bernanke’s rock-star presser yesterday may very well have done the unthinkable to me last night – it made me think.

 

How conflicted, constrained, and compromised are we in America at this point to even consider some of the un-qualified spew that comes out of an un-elected and un-accountable professor who is literally making it up at this point on the fly?

 

Educating yourself to contextualize this moment in economic history is one thing – having common sense is entirely another. Bernanke admitted yesterday that his entire policy framework is based on forecasts that you should have no confidence in.

 

Finally, I think global markets actually took his word for it on that.

 

To review Bernanke’s 2012 experimentations (actually he called them “innovations” yesterday, and smirked):

 

1.   January 25th, 2012 – right when Global Growth was accelerating (I was as bullish as anyone in the world on the prospects for US and Global Consumption growth on JAN24), he arbitrarily decided to move his 0% interest rate Policy To Inflate out to 2014 from 2013. Stocks and Commodities ripped for the next month, then topped.

 

2.   September 13th, 2012 – after whispering sweet bailout promises to whoever got the memo (other than me) from Jackson Hole, Bernanke pushes his 0% interest rate Policy To Inflate out to 2015 and beyond. Stocks and Commodities continued to rip for another day, then topped.

 

3.   December 12th, 2012 – whoever was front-running the Fed’s latest “innovation” (knowing he’d move to “targeting” an unemployment rate that you may not see until 2017-2020) didn’t even stick around for the full press conference. Stocks and Commodities topped, intraday!

 

After perpetuating all-time highs in Housing, Education, Oil, Gold, and Food prices (2006-2012), he pushed out 0% rates 3x in 10 months, from 2013 to 2017 and beyond. Each time, the market rallied less (for less time) on less volume. Atta boy Ben!

 

And people wonder why the commodity/stock market casino of front-running whatever Bernanke makes up next doesn’t reflect the underlying fundamentals of A) the economy and/or B) corporate revenue/earnings growth? Wonder no more. His explanation of what he is doing and why yesterday was so scary that even Gold wouldn’t keep going up.

 

And boom! Gold and Silver fall another -1.2% to 2.4%, respectively, this morning. To me at least, it’s like watching White Ants marching over their own expectations cliff. If you’re really long this stuff (say, for example, you own 21% of the Gold ETF), what, precisely, is your next catalyst? 2050?

 

As Churchill said, “Never, ever, give up!” And I won’t in contextualizing the moment markets are in within the lessons of history learned. Gold has been up (year-over-year) for 12 consecutive years. One might assume that the market has sufficiently discounted:

  1. Japan cutting to zero (and now setting the Yen on fire)
  2. USA cutting to zero (and then re-defining zero)
  3. Europe readying itself to create the fiscal/debt union to accomplish Japanese/American Style Zero

Zero. Think about what zero means. If the risk-free rate is zero, going forward it’s going to be increasingly difficult to beat zero.

 

I think most people who run money get that. And if you’re being honest with yourself (all you have to do is look at the balances in your equity market accounts versus where they were in December 2007 to get the point), you’d be happy to get back to zero (break-even). Like the Nikkei post its real-estate/asset 1980s price bubble, the SP500 keeps making lower long-term highs.

 

As I’ve written multiple times since stocks bottomed at higher-lows in November, there will be a great economic opportunity born out of food and energy price deflation if we allow Bernanke’s Bubbles (Commodities) to pop.

 

Deflating The Inflation Expectations out there will definitely take time – but at this point you don’t even have to have faith. You don’t have to believe the Keynesian intellectuals who are failing all-over themselves anymore either.

 

Just be a simpleton, like me. Think mean reversion, gravity, and White Ants.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, Shanghai Composite, and the SP500 are now $1684-1719, $105.43-109.65, $3.61-3.71, $1.29-1.31, 1.66-1.72%, 2035-2095, and 1419-1432, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

White Ants - Chart of the Day

 

White Ants - Virtual Portfolio


Consumer Staples and Utilities – Birds of a Feather?

Last week, during our initiation on the Consumer Staples sector, we suggested that some investors have been involved in the sector in an effort to chase yield, given that lack of yield in other investment vehicles.  In this note, we expand our original analysis of the XLP to include the Utility sector (XLU), another sector whose constituents enjoy stable and consistent cash flows and pay out a significant portion of those cash flows to investors in the form of dividends.  As one would suspect, the XLU has seen some of the same anomalous behavior relative to history that we pointed out
regarding the XLP.  In fact, the recent correlation of the price of the XLU and the 10 year yield is higher (r2 = 0.5485) that that of XLP versus the 10 year (r2=0.4836).  Both sectors correlation to the yield of the 10 year is a relatively new phenomenon (since 2009) and represents a break with historical trends.

 

Consumer Staples and Utilities – Birds of a Feather? - XLP vs. 10 year

 

Consumer Staples and Utilities – Birds of a Feather? - XLU vs. 10 year

 

Unsurprisingly, the difference between the yield of the XLU and the yield of the XLP has been remarkably consistent since the beginning of 2009, with an average of 1.42% (the XLU has the greater yield) with a standard deviation of 0.22% - very stable.  The yield spreads of each sector versus the yield of the 10 year are stable in relationship to each other as well – this makes sense intuitively as investors wouldn’t likely see a need to shift between the XLP and the XLU, but rather to simply look at the yield of each index in relation to the yield of the 10 year.

 

Consumer Staples and Utilities – Birds of a Feather? - Yield Spread XLU v. XLP

 

Consumer Staples and Utilities – Birds of a Feather? - Relative Yield Spreads

 

With regard to the price of each index, we were hoping for some predictive ability in terms of price movements, but were disappointed.  Peaks and troughs for the two sectors occurred simultaneously or with inconsistent leadership by sector.  Intuitively, the XLU, with the higher yield, should have been more sensitive to changes in the 10 year – this turned out not to be the case.

 

What was the case (again, unsurprisingly), was that the price movements for the two sectors were highly correlated (r2 =0.9259), lending significant support to our view that both sectors have seen significant inflows as investors search for yield in a yield-less world.  At the same time, we have seen the multiple of the consumer staples sector creep upward.  We believe that this increases the risk for fundamental investors in the staples sector, to the extent that fund flows are being dictated by circumstances unrelated to business fundamentals - it would not surprise us at all that at a point when investors should start to see improvement in the underlying business as the broader economy recovers, money flows out of the sector as rates creep upward.  This will likely be in addition to any sector allocation strategies that might favor more recovery-oriented sectors.

 

Consumer Staples and Utilities – Birds of a Feather? - XLP and XLU price

 

In summary, our analysis shows that the XLU does indeed display the same anomalies with respect to investors chasing yield the past several years as does the XLP, and this phenomenon increases the risk for fundamental investors in both sectors.

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

 

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