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Strong Dollar

Client Talking Points

Just Pump It Up

Having a strong US dollar is one of the most important things for our country right now. Why? Because having a strong dollar will ultimately help stocks. Now while that may seem to be the opposite agenda, a strong dollar helps drive down commodity prices like crude oil. Low oil prices and lower commodity prices help increase consumption among consumers when they visit places like the gas station and the grocery store. An increase in consumption is an increase in growth and growth helps everyone in the long run.

Asset Allocation

CASH 22% US EQUITIES 24%
INTL EQUITIES 24% COMMODITIES 6%
FIXED INCOME 0% INTL CURRENCIES 24%

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.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

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

"New week!! Go get 'em!!!" -@TheKillir

QUOTE OF THE DAY

"In politics, absurdity is not a handicap." -Napoleon Bonaparte

STAT OF THE DAY

10-year Treasury hits a six-month high this morning of 2.05%.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 11, 2013

 

As we look at today's setup for the S&P 500, the range is 37 points or 1.49% downside to 1528 and 0.89% upside to 1565.                

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.70 from 1.69
  • VIX  closed at 12.59 1 day percent change of -3.60%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. to sell $35b 3-mo. bills, $30b 6-mo. bills
  • Weekly rates agenda

GOVERNMENT:

    • House, Senate in session
    • Treasury may report $205b deficit for Feb.: Bloomberg
    • CSIS, Natl Assn of Manufacturers hold forum on APEC, 8am
    • Washington Week Ahead

WHAT TO WATCH

  • SEC denies Goldman request to drop indep. chairman proposal
  • Disney’s “Oz” has yr’s best NA opening wknd at $80m
  • China to revamp railway, energy, food-safety ministries
  • Japan’s machinery orders tumbled 13% in Jan.
  • Kuroda says Bank of Japan will consider buying derivatives
  • Korean-American Bank Hanmi’s talks w/ rivals said to stall
  • AT&T may buy >25% of Reliance Jio Infocomm: Times of India
  • Oaktree buys Wells Fargo-leased offices for $240m
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • U.S. Retail Sales, Samsung, EU Summit: Wk Ahead March 11-16

EARNINGS:

    • Dick’s Sporting Goods (DKS) 7:30am, $1.07
    • Casey’s General Stores (CASY) 4pm, $0.47
    • Urban Outfitters (URBN) 4pm, $0.57
    • Scientific Games (SGMS), 4pm, $0.05
    • Heckmann (HEK) 4:01pm, $(0.02)
    • Synageva BioPharma (GEVA) 4:05pm, $(0.60)
    • Analogic (ALOG) 4:15pm, $0.90
    • Home Inns & Hotels (HMIN) 5pm, $0.44
    • CVR Energy (CVI) After-mkt, $0.89
    • CVR Refining (CVRR) After-mkt, $0.63

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Brent Oil Drops for Second Day as China Industrial Output Slows
  • Hedge Funds Cut Bets to ’09 Low as Goldman Says Buy: Commodities
  • Zinc Declines for a Second Day on Chinese Industrial Production
  • Corn Climbs as Livestock-Feed Demand Keep U.S. Inventories Low
  • Gold Swings as Investors Weigh U.S. Growth Against Europe Crisis
  • White Sugar Gains as Demand Leaves Limited Supply; Cocoa Falls
  • Fukushima Seeks Revival in Radiation-Free Farms With No Soil
  • Rebar Falls as China Industrial Output Shows Weaker Start to ’13
  • Vietnam Coffee Harvest May Drop 30% on Drought, Vicofa Says
  • Nuclear Industry Withers in U.S. as Wind Pummels Prices: Energy
  • Palladium May Extend Gains to Test 2011 Peak: Technical Analysis
  • Shell Seeks Fujairah Crude Tanks as U.A.E. Port Plans Berths
  • Bat-Killing Fungal Disease Has U.S. Lumber Firms Fighting States
  • Cooking Oil Imports by India Seen Advancing for a Third Month

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 


THE M3: FRANCIS LUI COMMENTS; CHINA NEW LOANS; IVS

The Macau Metro Monitor, March 11, 2013

 

 

FRANCIS LUI CONFIDENT GALAXY MACAU WILL GET ENOUGH TABLES Macau Business

Galaxy chairman Francis Lui says he is confident the gaming operator will get enough live gaming tables for the upcoming phases of its Galaxy Macau casino resort, in Cotai.  According to figures previously released, Galaxy Macau’s phase two will have around 500 live gaming tables, phase three around 600 and phase four another 400.  He added that currently no gaming operator in Macau is really short of tables, but stressed the tables could be more evenly distributed among the six concessionaries.

 

CHINA FEB NEW LOANS AT 620 BLN YUAN, M2 UP 15.2% YoY Reuters

China's M2 measure of money supply grew 15.2% in February from a year earlier, in line with market expectations of a 15.1% rise and down slightly from the previous month's 15.9% rise, central bank data showed on Sunday.  Chinese banks also made 620 billion yuan worth of new loans in February, down from market forecasts of 750 billion yuan.

 

INDIVIDUAL VISA NEEDS OPTIMIZATION: LIAISON OFFICE Macau Business

The director of the Central People's Government Liaison Office in Macau, Bai Zhijian, said that Macau should focus on how to optimise the individual visitor scheme for mainland Chinese tourists, but should not tighten the policy.  Bai said the city should “strive for a balance” in serving both residents and visitors.  His comments came after the government’s think tank announced it will carry out a study to assess the effect of the mainland’s individual visa scheme on the city’s economic development.


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Emotion Sellers

This note was originally published at 8am on February 25, 2013 for Hedgeye subscribers.

“We live by emotion, prejudice, and pride.”

-Dwight D. Eisenhower

 

That’s what President Eisenhower wrote in a letter to Winston Churchill in the early 1950s after the Korean War. He added: “It is remarkable how little concern men seem to have for logic, statistics, and even, indeed, survival.” (Ike’s Bluff, pg 105)

 

Sounds a lot like risk managing the 2013 Global Macro market to me. So far, with the underpinnings of real (inflation adjusted) global economic growth stabilizing (instead of slowing), the best way to survive the game has been to be long growth, not gold.

 

We all have our investment-style prejudices. We all have plenty of emotion too. The hardest thing to do is keep that all checked at the door before we turn on our screens every morning. The Behavioral side of this game has never been so important.

 

Back to the Global Macro Grind

 

Admittedly, I was all fired-up covering shorts and getting longer (equities) during last week’s 2-day correction. Was I being emotional? Or were the sellers? Now I’m questioning whether I got Bullish Enough?

 

At Augusta in 1954 the legendary Sam Sneed told Ike, “you’ve got to stick your butt out more, Mr. President” (Ike’s Bluff, pg 115). While Eisenhower didn’t like having other people tell him what to do, he listened. Sneed’s advice wasn’t from some local pro.

 

When I stick my old hockey bubble-butt out and make a market call, I don’t ask a local pundit for permission. It’s always based on two very important things that we are trying to hammer home with clients – they are both critical to our process:

 

1.       The Risk Management Signal

2.       The Team’s Research Views


Note which one of the two comes first. Indeed, it is the signal I prioritize over what can often become research noise. All that said, when both are aligned, I’m learning to get over how I look - and I just do it (stick out my butt).

 

When you boil down the difference between our bullish Research View on growth versus competitor views, it’s quite simple:

  1. Our view is Dollar centric: Strong Dollar = Down Commodities (deflation) = Stronger Consumption
  2. Their view is Commodity centric: they are either calling for inflation OR thinking deflation is a bearish leading indicator

Irrespective of your research team’s view, this is what Mr. Market’s signals think:

  1. Strong Dollar = up another +1.1% last week; up for 3 consecutive weeks on a +3% run
  2. Commodity Deflation = down another -1.7% last week; down for 3 consecutive weeks (-3.9% all in)

No, the world’s economies and stock markets didn’t end on that. In fact, despite Oil prices reacting late relative to Gold (Brent Oil finally down -2.9% last wk), the two key US consumption demand points we care on (US employment growth and housing) held up quite well. The question now is how well do they react to prices at the pump falling, instead of rising?

 

If you Embrace Uncertainty at the core of your process, the simple answer is usually going to be ‘I don’t know.’ You’ll know when market prices and high-frequency economic data either refute or support your thesis. Advice: don’t marry your thesis.

 

If you were buying commodities futures and options contracts since the Bernanke Top (September 2012), the CRB Commodities Index is one of the worst places you could have been invested (down -9% from there to here). And finally, in the last few weeks of Commodity Deflation, the net long (CFTC futures/options position) has capitulated to its lowest level since DEC 2011:

  1. Copper contracts crashed last week, down -51%! to +11,413 (lowest since NOV 2012)
  2. Gold contracts crashed (again) last week, down another -40% to 42,318 (lowest since JUL 2007)
  3. Farm Goods contracts capitulated too, down -44% last week to 190,892 (lowest since March 2009)

Farm Goods still has the biggest net long position because food prices were the last of the commodities to put in their all-time tops. Corn’s all-time high was in August of 2012. Corn prices are now on the verge of crashing (greater than 20% peak-to-trough decline) from that all-time top and net long contracts in corn were down -48% last week to +65,303.

 

Are falling food prices good for you? Do you eat? If you don’t (or someone in Washington buys all your meals with our tax “revenues”), you can safely assume, with no emotion or prejudice, that the rest of the world does.

 

Hedgeye reiterates our 0% asset allocations to both Commodities and Fixed Income this morning. Sure, we will take down these equity asset allocations when the signals tell us too. But we didn’t get those signals at Thursday’s lows. Emotional sellers did.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1548-1611, $112.61-115.15 (Oil is bearish TRADE now), $3.51-3.65 (Copper is back in a Bearish Formation), $80.57-81.71 (USD = Bullish Formation), 92.72-94.41 (we re-shorted Yen last wk), 1.96-2.05% (Bond Yields = Bullish Formation), and 1502-1530, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Emotion Sellers - Chart of the Day

 

Emotion Sellers - Virtual Portfolio



Strong Dollar Knowledge

“Knowledge, indeed is a desirable, a lovely possession.”

-Thomas Jefferson

 

Part I of John Meacham’s Thomas Jefferson – The Art of Power is called “The Scion” (Beginnings to 1774). I absolutely loved it. It brought me back to Jefferson’s formative years. Like Einstein, he was very much self-taught and self-motivated to challenge perceived wisdoms.

 

Jefferson studied fifteen hours a day, rising at dawn and reading until two o’clock each morning… for Jefferson laziness was a sin.” He’d say “of all the cankers of human happiness, none corrodes it with so silent, yet so baneful, a tooth, as indolence.” (pg 19)

 

To a degree, this is how I think about doing Global Macro Research. There is absolutely no other way to contextualize short to intermediate-term market risks without studying the longest of long-term histories. Knowledge isn’t allocated – it’s hard work.

 

Back to the Global Macro Grind

 

Having been on the road talking to clients about our Commodity Bubble theme for the better part of the last 3 months, I still don’t think the long-term investment implications of  #StrongDollar Knowledge is as pervasive as the US Dollar’s strength has been for 2013 YTD.

 

That’s not to say everyone doesn’t get it. Some clients know this cold. It’s just a friendly reminder that the fulcrum piece of our bullish view of the US stock market isn’t what consensus bulls consider bullish, yet.

 

As you can see from Darius Dale’s Chart of The Day, #StrongDollar = Strong America:

  1. Reagan: Avg price of USD during Presidency = $115.25; avg price of Oil = $16.53/barrel
  2. Clinton: Avg price of USD during Presidency = $97.89; avg price of Oil = $19.69/barrel
  3. Obama: Avg price of USD during Presidency = $79.52; avg price of Oil = $102/barrel

In other words, if President Obama figures this out (like Clinton did, getting fiscally responsible under a Republican House in his 2nd term), this could be the biggest economic opportunity he has seen yet. Barry, think legacy my man.

 

Really? Why? How?

  1. Fiscal and Monetary Policy are causal to currency moves
  2. Fiscal opportunity = Sequestration (tighter, and more conservative on spending, is bullish for the US Dollar)
  3. Monetary opportunity = get Bernanke’s Policy To Inflate out of the way (i.e. out of market expectations)

The first (fiscal) step is A) trivial and B) already in motion. The second (monetary policy) step is A) nuanced and B) being handicapped by market participants, daily. Do you think the currency, commodity, stock, and bond markets are going to wait for Bernanke’s permission to sell their over-indexed position to US Treasuries? C’mon.

 

Market players are data dependent. And the risk to Bernanke’s ZIRP (zero percent rate policy) has always been his forecast. His 6.5% unemployment rate target was based on his own expectation that labor market conditions wouldn’t improve until he is long gone from his seat (2016-2017). With the unemployment rate now at 7.7%, our call for a “6-handle” on the US unemployment rate by Q413 remains intact.

 

There is nothing more dangerous in this game than someone’s forecast – so don’t take our word for it on this. Ask Mr Market:

  1. US Dollar Index just closed up for the 5th consecutive week at a 3.5 year high of $$82.71 (+4.6% in 5wks)
  2. US 10yr Treasury Yield was up big (+20bps) last week; now trading at a 6-mth high of 2.05% this morning
  3. US Stocks (SP500 and Russell2000) are trading at their YTD highs and all-time highs (Russell = 942), respectively

Sure, 6 month and 3.5 year highs might not get the long-term investors knowledge on #StrongDollar impact triggered, yet – but all-time highs (a long-time) in stocks has them asking themselves the questions: “what am I missing? what’s next?”

 

How about more of the same? Look at expectations for commodity inflation (weekly CFTC futures and options contract data):

  1. Total Commodity Net Long Positions = down another -9% last wk to 405,885 (down 70% from the Bernanke Top in SEP12!)
  2. Gold net long contracts = down another -27% last wk to 39,631 (down -61% YTD!)
  3. Oil net long contracts = down only -4% last wk to 167,498

Again, because we know Obama calls them “middle class folks”, we know this is a huge opportunity for him. Imagine seeing him get on TV, weekly, championing what Reagan and Clinton did – Strong Dollar, Down Oil! It’s a Tax Cut!

 

With the immediate-term TRADE correlation between Brent Oil and the US Dollar now at -0.97, that Presidential leadership message (and getting the Bernanke put out of the way), would eviscerate what’s left of the net long position in Oil, fast. And, to borrow from Jefferson’s knowledge, oh what a “lovely possession” that would be for most of us, indeed.

 

Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $109.35-111.34, $82.07-82.91, 93.46-96.15, 1.94-2.06%, 11.68-14.34, 921-949, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Strong Dollar Knowledge - Strong Dollar   Strong America

 

Strong Dollar Knowledge - Virtual Portfolio


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