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Multi-Year High In Real Earnings Growth

Takeaway: Real Earnings Growth Accelerated to a multi-year high in December. The Dollar - Inflation - Real Growth connection remains the one to watch.

 

The continued burn-off in USD-Equity correlations we saw yesterday with Dollar Up, Stocks Up, & Oil Down remains the bullish factor cocktail we’d like to see persist for us to successfully bridge the inflection gap between #growthstabilzing & real growth accelerating. 

 

The inverse relationship between USD appreciation and energy and commodity deflation remains pronounced across durations. Similarly, the inverse relationship between real earnings growth & commodity inflation over the last 5 years has been distinct – in addition to inflations’ direct drag on the calculation of real earnings growth, it’s likely that as input costs rise and/or real consumption growth slows, employer’s look towards managing the SWB line as a margin supportive offset. 

 

Below we show the trend in Real Earnings Growth (updated for this morning’s release) along with a long duration view of the relationship between Commodities Price Growth, the US Dollar, and  Real Earnings Growth (note that commodity prices are inverted in the charts).   The takeaway from the chart series below is really very simple with the data implying: 

 

USD Higher --> Energy/Commodities lower --> Real Earnings/Real Growth Higher

 

As simplistic as this Dollar based flow model is, it remains the outstanding, untried policy transmission mechanism most capable of catalyzing sustainable real growth both domestically & globally, in our view. 

 

The Real Earnings update for December showed Real Weekly Earnings growth accelerating to +0.6% - a new multi-year high and an obvious positive in the wake of the elimination of the 2% payroll tax holiday to start calendar 2013.  The USD remains bullish on TRADE & TAIL durations and, alongside an easy comp setup through mid-year, should support further positive growth in real earnings should the USD bid continue. 

 

Will legislators & policy makers make a genuine go at sustainable fiscal consolidation domestically, or even just stay out of the way?  Will the phase transition in Japanese monetary policy promised by Taro Aso et al. continue to provide a relative bid to the dollar?  We don’t know either -  but so long as prices continue to confirm and the Dollar Up, Stocks Up dynamic can perpetuate itself, the immediate term game plan on the equities side remains to buy the Dips.    

 

Christian B. Drake

Senior Analyst 

 

 

Multi-Year High In Real Earnings Growth - USD vs CRB

 

Multi-Year High In Real Earnings Growth - Real Weekly Earnings

 

Multi-Year High In Real Earnings Growth - Inflation vs Real Earnings

 

Multi-Year High In Real Earnings Growth - Gas Price vs Real Earnings

 

 


Apple Picking

Takeaway: Here’s a look at our recent trading signals around Apple stock. $AAPL

Below is an excerpt of a note published to our institutional clients earlier this morning. It provides insight into how we trade Apple stock.

 

We bought Apple (AAPL) at immediate-term TRADE oversold yesterday.

 

That doesn’t mean we love Apple (AAPL) long-term here (see chart). It just means what it means – we are at war with consensus and our quantitative process was signaling immediate-term exhaustion on the sell side of a stock that we risk manage like an ETF.

 

Before I get AAPL geniuses in a heat about that, here are the last 3 big signals our process has delivered:

 

1.       June 1, 2012 at $571.86 = BUY  

2.       September 28, 2012 at $677.74 = SELL

3.       December 17,2012 at $502.50 = BUY

 

No research. Just math, and some behavioral context.

 

How many people in our profession thought/think that it’s their own unique, non-inside info, qualitative research edge that made them “smart” being long AAPL? I don’t know. All I know is that a lot of hedge funds have gone away for doing the inside info thing, and a lot more research-only funds that don’t have a quantitative risk management overlay get mad at me.

 

That’s progress.


Bullish Formation: SP500 Levels, Refreshed

Takeaway: The Risk Range is tight – if 1466 breaks, first line of support is 1456.

POSITIONS: 11 LONGS, 8 SHORTS @Hedgeye

 

This is what Bullish Formations do, they frustrate people inasmuch as bearish ones do.

 

They get overbought and they get oversold. This one was overbought, then corrected (briefly), and isn’t as overbought as it was.

 

Overbought doesn’t always happen at the same price. Time, Volume, and Volatility signals all matter – so does the catalyst calendar. It’s a lot, but managing beta risk isn’t for rookies either.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1478
  2. Immediate-term TRADE support = 1466
  3. Intermediate-term TREND support = 1421

 

In other words, the Risk Range is tight – and I like it tight, because that makes our job easier before it becomes more difficult again (it will). If 1466 breaks, first line of support is 1456.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bullish Formation: SP500 Levels, Refreshed  - SPX


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JPM: A Solid Quarter

JP Morgan (JPM) released its Q4 2012 earnings this morning and overall, the numbers were solid. The company earned $1.39 vs. expectations for $1.20. We estimate core earnings were closer to $1.16, which adjusts for all of JPM's itemized one-time items as well as its reserve release. Net interest margin (NIM) fell three basis points but was in-line with estimates and much better than its peers such as Wells Fargo (WFC).

 

Though the stock currently trades near the high end of its range over the last few years, it’s still trading a 16% discount to fair value of $53.89. There’s room for upside with JPM’s stock, even after an impressive quarter.

 

JPM: A Solid Quarter - tbvps jpm normal


Moving With The Markets

Client Talking Points

Cover Up And Buy

Our Q1 2013 Global Macro Themes call was yesterday and we’re pleased that our subscribers and Twitter followers enjoyed what we had to say. Our three themes - #GrowthStabilizing, #HousingsHammer and #QuadrillYen - are all key pieces of solving the global macro puzzle. With the market moving up, we covered our Metals (XME) and Phillip Morris (PM) shorts and bought Apple (AAPL) and Singapore (EWS). The Apple trade is one we really like. The media twirls itself into such a frenzy over newsflow that it fails to see the bigger picture. We bought on red and like Apple in the range of $492 to $518 a share. 

Asset Allocation

CASH 46% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

ADM

ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“Goldman really cut comp big time in 4Q. It was just 21% of revenue, about half of what the firm usually pays people. $GS” -@LaurenLaCapra

QUOTE OF THE DAY

“All things are difficult before they are easy.” -Dr. Thomas Fuller

STAT OF THE DAY

U.S. consumer price index remain unchanged in December, unadjusted CPI index at 229.601


THE M3: SANDS CHINA DIVIDEND; OKADA FBI PROBE; MELCO TROUBLE; SMOKING BAN; 4Q TPI... MORE

The Macau Metro Monitor, January 16, 2013

 

 

SANDS CHINA TO CONSIDER DIVIDEND macaubusiness.com

Sands China's board of directors will meet on January 25th to consider the payment of an interim dividend

 

OKADA FACES FBI PROBE ON PHILIPPINES LICENSE: PAGCOR BOSS bloomberg

Okada is now facing a FBI investigation on how he obtained a gaming license in the Philippines. “We were informed of the FBI investigation and we are always open to agencies that would like to investigate,” Mr Naguiat, the chairman and CE of PAGCOR told Bloomberg.

 

DOUBLE TROUBLE macaubusiness.com

The CEO of MCE, the unit of Melco Crown being investigated for illegal money transfers between Taiwan and Macau, is also name in a separate litigation in the United States.  Clarence Chung Yuk Man, the CEO of MCE, was the target of a suit filed in the US in 2010 by several large shareholders alleging  “false misleading statements” made between 2007 and 2008 about a slot business operated by the company.

 

TOO SOON TO REVIEW CASINO SMOKING BAN: CHEUNG U macaubusiness.com

While its too early to evaluate the impact of the smoking ban, the Macau Gaming Industry Workers Association has suggested casino operators give some concessions to croupiers working in smoking areas, including an extra rest day or a cash allowance, plus fewer working hours.

 

TOURIST PRICE INDEX FOR THE 4TH QUARTER 2012 DSEC

The Tourist Price Index (TPI) increased 4.45% YoY to 133.78 in 4Q12. Sectors with the the highest increase in the price index included: Clothing & Footwear (+16.46%); Transport & Communications (+7.15%); and Entertainment & Cultural Activities (+6.73%) on account of rising prices of handbags, as well as higher charges for outbound transport and entertainment services. Price index of hotel rooms decreased by 2.40% year-on-year.

 

CHUI GOES TO BEIJING TO DISCUSS NEW BORDER CHECKPOINT macaubusiness.com

CE Fernando Chui Sai On will be heading to Beijing from January 21-23rd, to discuss the construction of the new border checkpoint between Macau and Zhuhai.  The border is expected to function 24 hours a day and handle the flow of 250,000 daily crossings. 


Daily Trading Ranges

20 Proprietary Risk Ranges

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.

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