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Ears Up

“You can judge by his eyes and ears. One cannot read bears like that.”

-John Vaillant, The Tiger

 

Is this a bull or a bear? Whatever it is, and whether you decide to use behavioral ecology, interconnected macro math, or licking your finger, you have to decide on some type of signaling process to answer the question.

 

Knowing where you are in an economic cycle matters as much as understanding where your predator is (the other side of the trade). That’s why I think Vaillant’s epic true story of a man-eating tiger in Siberia is so relevant to my market day.  

 

If you see that his ears are down, that’s not a good sign. Then you have to look at him in the eye with all the rage you can muster and the tiger will stop and back off.” (The Tiger, pg 248) When do you think the bulls will back off lifting your offers?

 

Back to the Global Macro Grind

 

How are the bears going to stop the US stock market from going up? Since there’s a bull market in top-calling right now, are they going to talk it down? That sounds scary. But does that have any teeth?

 

You know, the ears are her steering wheel. You can turn off her teeth with the ears” (The Tiger, pg 96).

 

Admittedly,  that advice comes from a Russian who used to “bag” tigers alive. Reading through Vaillant’s account of encounters with these big cats, I wouldn’t take a stroll into the taiga and try that alone. Neither would I short SPY’s with the VIX signaling 10.

 

Process Review: there are 2 main parts to how I make risk managed decisions in markets:

 

1.       Risk Management Signals

2.       Research Views

 

The Research and Risk Signals aren’t always aligned, but when they are, I move. Instead of the ridiculous “risk on, wax off” thing the sell-side implemented into Old Wall vernacular, let’s think of the market’s main risk (beta) as either having its Ears Up/Down.

 

Reminder on our current Global Macro Research View:

  1. #StrongDollar Deflates Commodity Inflation
  2. Commodity Deflation Drives real (inflation adjusted) Consumption Growth
  3. Consumption Growth Drives GDP Growth, Gold Down, Treasuries Down, Ears Up

Our updated Risk Management Signals for US #GrowthStabilizing and/or #Accelerating:

  1. US Dollar Index: up for the 6th consecutive week at $82.96 this morning (+4.0% YTD)
  2. CRB Commodities Index: closed down (with stocks up yesterday) at 294 (down -0.3% YTD)
  3. SP500: for the 1st time in 2013, our Risk Range is signaling a higher all-time high (up at 1568)
  4. Russell2000: already made a higher all-time high (yesterday) at 943 (+11.1% YTD)
  5. US Equity Volatility (VIX): closed at 11.83 yesterday (-38% since FEB25); no support to 10.89
  6. US Treasuries (10yr): made another higher-low this wk and is testing 6 month highs today

Then, on the interconnected Global Macro Equity market signaling front:

  1. Japan’s Nikkei = +1.2% overnight, making another new YTD high (+43% since NOV2012)
  2. China’s Shanghai Composite = +0.3%, making another higher-low, holding 2206 TREND support
  3. South Korea’s KOSPI = +0.12% overnight, remains bullish TRADE and TREND in our model
  4. India’s BSE Sensex = +1.1% overnight, back above TREND line support of 19,419 to 19,581
  5. Germany’s DAX = +0.8% this morning, making a run for fresh new highs (Bullish Formation)
  6. Brazil’s Bovespa = -1.4% yesterday, and continues to break down (Bearish Formation, -5.3% YTD)

Only 1 of those 6 Global Equity markets has its Ears Down. That 1 of 6 is not like the others because the Bovespa is a heavily weighted commodity stock market. This is why not everyone agrees with the fulcrum point of our Research View; not everyone gets paid by a Strong Dollar, Down Commodities. Know how people get paid, and you’ll know their confirmation biases.

 

Ears Down in Oil? Yep. And guess what’s driving that? #StrongDollar. While the immediate-term TRADE correlation between the SP500 and USD  is currently POSITIVE (+0.84), for Brent Oil vs USD it’s NEGATIVE (-0.88). That’s another way to think about signaling without losing yourself in a Ph.D dissertation about causality.

 

Like a charging bull, bear, or tiger, the Correlation Risk happens fast. And unlike these non-domesticated animals, these mathematical monsters run fast, both ways. So keep those eyes and ears open!

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $108.14-110.28, $82.46-83.11, 94.12-97.29, 1.97-2.11%, 10.89-13.18, 933-954, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ears Up - Chart of the Day

 

Ears Up - Virtual Portfolio


Expert Call With Peter Tchir

Expert Call With Peter Tchir - Tchir 3.15.13

 

We will be hosting an expert call on Friday, March 15th at 11:00am EST entitled "Fixed Income: Opportunities and What It Means for Equity Markets." Peter Tchir, the founder of TF Market Advisors, will discuss what he sees as being most impactful from a macro perspective and break down the current trends in fixed income and equity markets.

 

 

KEY TOPICS WILL INCLUDE

  • Fixed Income: Opportunities and signals versus stocks
  • Europe: Current state of play
  • Treasuries: The lack of float and what the Fed is doing
  • U.S. Corporate Credit: A focus on high yield, leveraged loans and the LBO names
  • Emerging Markets: A focus on currency wars

 

CALL OBJECTIVE

  • Synthesize what is happening in today's global economy  
  • Unveil actionable items in fixed income (via bonds or ETFs)

 

ABOUT PETER TCHIR

  • Traded over $1 trillion of fixed income products during his career, including complex structured transactions, bonds, loans, CDS and index products
  • Previously a portfolio manager at KLS Diversified where he employed a strategy that included single name credit positions and macro trades while actively taking advantage of short term mispricing of securities and indices
  • Founding board member of the CDX suite of indices and started and headed the credit derivatives index businesses at UBS and then RBS
  • Started his career at Bankers Trust where he ran high yield credit derivatives
  • Received BS in mathematics and computer sciences from the University of Waterloo and his MBA with distinction from Vanderbilt University

 

CALL DETAILS

  • Date: Friday, March 15th at 11:00am
  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 818259#
  • Materials: CLICK HERE (full presentation will be available with this link one hour prior to the call)

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CHINA IS IN NO MAN’S LAND

Takeaway: China’s fundamental outlook has become increasingly convoluted in recent weeks, posing material risk to its financial markets.

This note was originally published March 13, 2013 at 11:30 in Macro

SUMMARY CONCLUSIONS:

 

  • The benchmark Shanghai Composite  index is -2.6% below its immediate-term TRADE line of resistance and +2.7% above its intermediate-term TREND line of support – making it truly stuck in between the proverbial “rock and a hard place”. With such a now-convoluted fundamental outlook, we will stick to our tried and true risk management process by deferring to our quantitative signals on what to do with our Chinese equity exposure from here:
  • BUY [more] on a breakout above TRADE resistance (2,324): A probable sequential pickup in MAR growth data and a probable sequential slowing in MAR inflation data supports this action. Moreover, continued USD strength (and, by association, CNY strength) should weigh on int’l raw materials prices and allow the pace of economic activity to creep higher in China, as China’s heavy industry needs energy and raw material deflation to produce more with less credit expansion and the Chinese consumer needs food deflation to consume more discretionary goods and services.
  • SELL/SHORT on a breakdown through TREND support (2,205): As we’ve seen since 2009, the pace of activity in the Chinese property market has become the #1 factor in determining growth rate of Chinese economy – via credit expansion – and the returns of Chinese financial markets. That quantitative signal would be a clear-cut sign that there is likely more policy-perpetuated pain to come in the months ahead – especially to the extent those linkages have not broken down as much as the CCP would’ve liked.

 

Is the Chinese Communist Party and, by extension, the PBOC too concerned about inflation – both in housing and consumer prices? That’s fast become the most critical question as it relates to navigating fundamental risk in the Chinese economy.

 

Per PBOC Governor Zhou Xiaochuan’s latest testimony at the National People’s Congress:

 

“China should be on high alert over inflation… Monetary policy is no longer relaxed and is relatively neutral as demonstrated by a 13 percent target for money-supply growth that’s tighter than expansion in the last two years… Monetary policies to cool home prices will continue or even strengthen in the future.”

 

As an extension of the CCP, Zhou’s overt hawkishness underscores a broader political agenda to quash inflationary pressures on the mainland on all fronts.

 

Interestingly, the predominance of their prudence has been our base-case scenario for many months. As early as OCT ‘11 and all throughout 2012, we have been overtly flagging a sustainable lack of resolve to reflate the Chinese economy amongst Chinese officials.

 

Moreover, as most recently outlined on our 2/27 Best Ideas presentation, consensus finally coming to grips with a structurally subdued Chinese growth outlook was one of the key reasons we have liked Chinese equities on the long side since 12/10.

 

With the Shanghai Composite Index up +8.6% since then (besting the +7.9% advance for the MSCI All-Country Asia Pacific Index), that’s been a somewhat contrarian idea that has worked in our favor.

 

More recently, however, with the SHCOMP Index down -7% from its cycle-peak on 2/6 and the Shanghai Stock Exchange Property Index down nearly -15% from its cycle-peak on 2/5, it’s very clear to us that the latest round of property market tightening – which indeed caught us off guard from a magnitude perspective – is weighting on both price and sentiment in the Chinese equity market.

 

With a Global Macro Risk Manager’s process only as good as his/her last trades (hence our never-ending focus on evolution and embracing uncertainty), the most recent performance begs the question: where to from here?

 

The benchmark Shanghai Composite index is -2.6% below its immediate-term TRADE line of resistance and +2.7% above its intermediate-term TREND line of support – making it truly stuck in between the proverbial “rock and a hard place”.

 

CHINA IS IN NO MAN’S LAND - 1

 

With such a now-convoluted fundamental outlook, we will stick to our tried and true risk management process by deferring to our quantitative signals on what to do with our Chinese equity exposure from here:

 

  • BUY [more] on a breakout above TRADE resistance (2,324): A probable sequential pickup in MAR growth data and a probable sequential slowing in MAR inflation data supports this action. Moreover, continued USD strength (and, by association, CNY strength) should weigh on int’l raw materials prices and allow the pace of economic activity to creep higher in China, as China’s heavy industry needs energy and raw material deflation to produce more with less credit expansion and the Chinese consumer needs food deflation to consume more discretionary goods and services.
  • SELL/SHORT on a breakdown through TREND support (2,205): As we’ve seen since 2009, the pace of activity in the Chinese property market has become the #1 factor in determining growth rate of Chinese economy – via credit expansion – and the returns of Chinese financial markets. That quantitative signal would be a clear-cut sign that there is likely more policy-perpetuated pain to come in the months ahead – especially to the extent those linkages have not broken down as much as the CCP would’ve liked.

 

All told, we are watching China like hawks here and it should be noted that we are in the process of reconsidering our bullish bias on Chinese equities.

 

Needless to say, stay tuned.

  

CHINA IS IN NO MAN’S LAND - 2

 

CHINA IS IN NO MAN’S LAND - 3

 

CHINA IS IN NO MAN’S LAND - 4


Q4 Earnings in a Single Chart

“Of all of our inventions for mass communication, pictures still speak the most universally understood language.”

 - Walt Disney

 

Our average note is right around 940 words, so this picture isn't quite worth a thousand, but we still think it's useful.

 

Calendar Q4 Revenue and EPS versus consensus:

Q4 Earnings in a Single Chart - Q4 EPS

 

Kind regards,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst

 


House Calls

Takeaway: Here are two investing ideas that are likely to play well in a strong housing environment.

We hosted a deep-dive Flash Call Tuesday titled “Housing’s Sledgehammer,” led by Financials Sector Head Josh Steiner, whose work indicates the latest bullishness in the housing sector could be too cautious, as home prices could roar back and take everyone by surprise.  Josh was joined by three other sector heads.  Here we offer their individual ideas on companies that play well in a strong housing environment.

 

Restoration Hardware - RH

Retail Sector Head Brian McGough is bullish on RH, which he believes should stand out in the messy sector that is Home Remodeling.  Home remodeling generates over $140 billion in annual revenues but is highly fragmented, comprising everything from DIY house repair, to bathroom fittings, to bedroom suites, dining room sets and patio furniture.  With only about a 1% share of the total market, RH is one of largest retailers in “soft” side of home space and stands to reap large rewards in a housing upturn. 

The simple driver of McGough’s bull thesis is: in order to sell stuff, you have to show stuff.  Think of it: you might buy kitchen cabinet handles over the internet, but you want to actually lie down on that bedroom set, or sit in those patio chairs before you commit.  RH is one of the few home remodeling retailers that has made a push to aggressively expand the square footage in their stores – McGough cites their 8,000 square foot Boston location and compares it to the new 40,000 square foot Design Center.  This alone should drive more than 20% annualized sales growth over the next three years as both in-store and catalogue sales expand.  With over 70 locations nationwide, RH has enough individual locations to be a solid competitor.  But McGough says the average floor space is so small that only about a quarter of RH’s products actually make it into the showroom.  That’s changing.   

More space = more variety of new product categories on the floor = more attractions for more folks to buy = more revenues = higher stock prices.  McGough compares this to WalMart’s successful store expansion, where the company added new categories and drew a whole new group of customers.

The catch: our housing call may prove over-optimistic.  In which case McGough says the Design Center model is still superior to their existing locations – just not as superior in an inferior market.  And remember that, if people are not buying new homes, they will have to keep fixing the ones they’ve got.

 

NewellRubbermaid – NWL

Consumer Staples sector head Rob Campagnino calls NWL an inexpensive name in a sector where value is hard to find.  Rob says NWL showcases two of his favorite themes: free cash flow, and “bad company that is getting better.”

You will recognize NWL because of its Rubbermaid brand.  You may also recognize its Irwin, Lenox, or Hilmor brands.  Or its Levolor, Ace, Solano or Calphalon brands.  That, says Campagnino, is one of NWL’s problems: investors who run consumer staples portfolios don’t buy companies – they buy brands.  And just like a consumer, their brand loyalty can blind them to quality if it comes in a different package.  NWL has a perception problem.  From construction tools, to home solution, to writing implements and baby care, NWL actually represents a diversified portfolio that can benefit from an upturn in housing and in new family formation – both of which Hedgeye is calling for – but also in consumer sentiment and, as the unemployment figures tick lower, office employment.

NWL is also a turnaround story that, says Campagnino, has rounded the near turn and is coming into the home stretch.  NWL’s new CEO has been in the driver’s seat for two years, after successful turns at Kraft and Unilever.  Still, because of its brand perception issue, NWL actually trades at a lower multiple today than when it was a worse company.  With $1.85 a share in free cash flow – good for dividends or share buybacks – Campagnino believes the “bear case” – if we are wrong on housing, for example, is lots of cash lying around to return to shareholders.

 

Conclusion

Demographers have identified a simple basic trend in new household formation: get married, buy house, get dog, have baby.  Hedgeye has identified positive trends in new home purchases, pet buying, and new family unit formation.  Companies poised to benefit from any of these should come into their own as trends become clear.

 

 


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