White House Says Stalemate Means Automatic Cuts Will Hit (via Bloomberg)
This note was originally published at 8am on February 11, 2013 for Hedgeye subscribers.
“For a theory is a very dangerous thing to have.”
I just got back from an island in the Bahamas and I’m flying to London this morning. As a result, February will be a very productive month of reading. I just finished grinding though both The Last Lion and Antifragility. I’m digging into Ike’s Bluff next.
The problem with self-education is that the more you read, the less you know. This helps contextualize how clueless the people who are trying to centrally plan your life actually are. Particularly when it comes to economic policies, I agree with Taleb that their “theories are superfragile.”
He also goes on (and on and on) to differentiate between social and hard sciences: “Physics is privileged; it is the exception, which makes its imitation by other disciplines similar to attempts to make a whale fly like an eagle.” (Antifragility, pg 116)
Back to the Global Macro Grind…
After closing up for the 6th consecutive week, the US stock market is flying like something – and it’s not the London Whale. On almost no volume on Friday (down -21% from my YTD average for market up days), the Russell2000 made yet another all-time high.
As we like to say at Hedgeye, all-time is a long time… but now we’ve been writing about all-time for a pretty long time too. For perma-bears, this has to be leaving a mark. Last week’s II Bull/Bear Sentiment Survey saw Bears capitulate to a fresh new YTD low of 21.1%.
Other than playing with my kids in the Bahamian sun, what did I like about last week?
I know some of our competitors keep talking about the risk of raging inflation – but that’s a Dangerous Theory to have if the US Dollar continues to make a series of long-term (40 year) higher-lows.
We’re not theorizing that Bernanke’s Bubbles (Commodities) will continue to pop from their all-time highs (2008-2012). They are already popping. Oil topped in 2008; Gold and the CRB Index stopped going up in 2011; and Food Prices put in their all-time highs in 2012.
If your theory was that the Fed would print to infinity and beyond and you bought Gold, Silver, etc. on that in 2008-2009, great call. But what happens to your theory if employment and housing #GrowthStabilizes in 2012-2013 and the Fed gets out of the way?
What didn’t I like about last week?
Since everything that matters in our macro model happens on the margin, what we call negative divergences (they do bad things when the US stock market headlines are doing good things) really matter.
Some clean-cut negative divergences vs the SP500 closing at its YTD high (1517) were as follows:
Then, in terms of positive divergences (US Equities), some of the Bullish Style Factors we have been bulled up about got as extended as they have been versus the SP500’s +6.4% YTD return:
Since A) I have extension (immediate-term TRADE overbought) in our most bullish factors and B) I’ve finally been issued some fairly broad based negative divergences across asset classes, my decision late last week was to take down Global Equity exposure and raise Cash.
That’s not theorizing. That’s doing it in real-time and holding ourselves accountable to explaining the decisions we make. I guess that probably makes us dangerous too. But that’s just a theory.
Our immediate-term Risk Ranges for Gold, Oil (Brent), CRB Index, US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1659-1683, $116.38-118.83, 299-303, $79.79-80.39, 92.67-94.41, 1.93-2.01%, and 1507-1521, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
Worse Start to Year versus 2012
Current moisture conditions in crop regions (in particular west of the Mississippi) are no doubt much worse than a year ago (see progression below). However, conditions have improved since the start of the year and with some projected moisture events coming up, we continue to think the bias is downward in terms of corn prices. The futures curve would seem to agree with us. Further, the set-up on the futures curve appears identical to this year versus 2012.
We think it’s very difficult to be long corn at this point (as supported by recent CFTC data that shows non-commercial buyers becoming less long corn), with significant time (and weather) remaining until the crop goes in the ground. As it currently stands, we would not be surprised to see 97 million acres of corn planted in the U.S this year – the USDA’s current estimate stands at 96.5 million acres. The incentive certainly exists for farmers to plant as much corn as possible.
We aren't in the habit of making bets on Mother Nature, but we do try to estimate what is currently priced in with respect to various assets and it appears to us that ADM at current levels remains a reasonably priced option with respect to the quantity and cost of the upcoming corn crop.
After a very nice run post EPS and with the news that Berkshire Hathaway is an investor, ADM has traded off its highs as the balance of the agricultural complex (fertilizer stocks) have languished in the face of broadly weaker commodity prices. To be clear, ADM is not a play on higher corn prices – lower corn prices benefit ethanol margins and a larger crop benefits merchandise and handling margins – think big crop with no price spikes, and ADM can continue to work from its current level.
Lower corn prices would also be constructive for protein stocks (SFD, TSN, PPC, SAFM) - though at current levels, only SFD interests us on the long side.
Have a good week,
HEDGEYE RISK MANAGEMENT, LLC
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.
We would characterize CAGNY 2013 as largely uneventful and in some cases downright boring. We didn’t hear much that changed our thinking relative to how we came into the year or how we left Q1 earnings season. Briefly, the key themes running through the presentations were:
Where did our thinking change?
We won’t rehash the presentations, but as a quick summary:
CPB – less likely to want to short as core soup business potentially stabilizes
KRFT – one of our favorite presentations, would be a buyer lower – upside to low $50s
HSH – again, one of our favorite presentations, more constructive
BG – doing more work here on the long side after an awful quarter, good long-term theme
PG – less impressed with potential progress on top-line, but cost-savings likely preserve EPS
CLX – can’t abide by the multiple, but with good visibility on margins and innovation, tougher short
MDLZ – feels earlier, but risk/reward profile strikes us as very favorable over longer duration
NWL – we liked the story going in, presentation reinforced our belief that the stock can continue to rerate.
KO – interesting commentary on incremental bottler consolidation. Does Iberia represent a new potential acquirer for German assets?
We are, of course, happy to discuss any and all names in greater detail.
Enjoy your Sunday,
In preparation for CZR's F4Q earnings release Monday, we’ve put together the recent pertinent forward looking company commentary.
YOUTUBE FROM 4Q CONFERENCE CALL
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