“The book of nature is written in the language of mathematics.”
More so than in any other year since we started the firm (2008), we are getting tons of questions from clients about our process – specifically, how we’ve applied breakthroughs in modern chaos theory (fractal math) to our global macro risk management process.
What’s interesting about answering these questions is that there is no silver bullet book you can read. No, they don’t teach this in business school (yet) either. I built the process on mathematical principles that are relatively new. When I want to consider evolving the process, I don’t read Jeremy Siegel – I dive into behavioral science, applied math, big history/data, etc.
Of the top 3 books that have inspired me on the interconnectedness of the Global Macro ecosystem, Eric Chaisson’s Cosmic Evolution (2001) is one of them. If you are looking to learn about my framework, all you have to do is read his Preface and Prologue. Unless you are in the business of not constantly re-learning how to operate in markets, I guarantee you can’t put this book down after 20 pages.
Back to the Global Macro Grind…
Change is good. So is being long gamma. Convexity in market pricing works on the upside too. And being long a market that continues to make higher-lows (on no-volume down days), and higher-all-time-highs on up days, works for me.
Much to the Crisis-Mongering and bit-coin advertising business chagrin, the SP500 made another fresh all-time closing high yesterday at 1570. That puts the SP500 up +10.1% for the YTD.
But, but (the most commonly used word when I keep telling people I am bullish on Asian and US Equities), “look at copper, coal, corn and…” Yes, precisely – that’s why we think both US Consumption Growth and Consumption oriented Equities are going higher.
To review how the Macro Evolution gods have scored the YTD, there are massive divergences developing between:
A) Consumption assets
B) Commodity assets
And no, an asset doesn’t have to be an asset class – that’s what people call something like Gold, after it’s gone up for 12 straight years. For the YTD, being long Gold (or Gold Miners) is what I call a liability.
#StrongDollar is driving this – there are both positive and negative correlations associated with this breakout in the US Dollar Index. For starters, let’s look at Countries (major macro equity Style Factor):
- US Equities (SP500) +10% YTD vs Brazil (Bovespa) -10% YTD
- UK (FTSE) +10% YTD vs Russia (RTSI) -6% YTD
So, Russia is not Brazil, but both are in an irrelevant #OldWall acronym (BRIC), and neither of these stock markets like it at all when Metal, Food, and Oil prices deflate.
In fact, this morning there’s a headline on Bloomberg that says “Gazprom Falls Under $100B, Putin Frets.” I know, poor Putin. But seriously, who the hell cares about Russians fretting over US Consumption taxes at the pump and their Cypriot laundry?
Enough about that – let’s look at the US Equity market and dig down beneath the ecosystem’s crust to look at another important quantitative Style Factor – Sector Style Risk:
- US Healthcare Stocks (XLV) +17.2% YTD
- US Consumer Staples (XLP) +15.1% YTD
- US Consumer Discretionary (XLY) +11.8% YTD
- US Basic Materials Stocks (XLB) +2.4% YTD
Yes, ‘one of these things is not like the other, one of these things just doesn’t belong’ (when you are modeling fractals you can go right batty at night, so listen to Romper Room tunes and you’ll be fine).
One of these things (Basic Materials) is being impacted by who wins/loses under a pervasively #StrongDollar macro environment.
But, but –
1. “Copper and Coal and Corn going down is a bearish demand signal …”
2. “Consumer Staples outperforming is a defensive signal… “
3. “Italian Elections, Cypriot Chariots of Fire, and North Korean Chubby Wubby, are big risks…”
C’mon man. Let’s get real here.
- Commodity Deflation = good for corporate input prices and real (inflation adjusted) consumption growth, globally
- Consumer Staples companies (especially Food, Restaurants, etc.) have massive y/y margin expansion opportunities
- Crisis-Mongering about Korea? Join the club – CFTC SPY net long position hitting YTD lows as Treasuries net longs ramp
I know I’m whipping around and ranting a bit – but if you truly believe in Embracing Uncertainty like we do, you want to do more of that – especially when our globally interconnected signals do.
“Contingency – randomness, chance, and stochasticity – pervades all of dynamic change on every spatial and temporal scale… science today is no longer in the prediction business… evolution predicts little of the future, yet strives to explain much of the past.” –Chaisson
Changing our positioning as the ecosystem does. Macro Evolution, Hedgeye-style.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $109.11-111.54, $82.58-83.49, 93.07-96.04, 1.84-1.94%, 12.15-13.41, 933-955, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
The Macau Metro Monitor, April 3, 2013
107,230 VISITORS DURING EASTER HOLIDAY Macau Daily Times
Macau received 107,230 visitors during the four-day Easter holiday ending on Monday representing a 2.27% increase in comparison with last year. The Border Gate continued to be the major port for incoming and outgoing travellers, while Hengqin and the Outer Harbor Ferry Terminal were the other busy ports.
PACQUIAO-MARQUEZ FIGHT IN SINGAPORE CASINO? Strait Times
Promoter Bob Arum said he is trying to put together a fifth fight between Pacquiao and Juan Manuel Marquez and shopping it to casinos in Macau and Singapore. He said on Saturday night at the Brandon Rios-Mike Alvarado fight that the bout would likely be at one of the Venetian hotel-casinos in Macau or Singapore.
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.
TODAY’S S&P 500 SET-UP – April 3, 2013
As we look at today's setup for the S&P 500, the range is 17 points or 0.72% downside to 1559 and 0.37% upside to 1576.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.62 from 1.62
- VIX closed at 12.78 1 day percent change of -5.89%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, March 29 (prior 7.7%)
- 8:15am: ADP Employment Change, March, est. 200k (prior 198k)
- 10am: ISM Non-Manuf Composite, March, est. 55.5 (prior 56)
- 10:30am: DoE inventory reports
- 11am: Fed to buy $3b-$3.75b in 2019-2020 sector
- 3:30pm: Fed’s Williams speaks in Los Angeles
- 5pm: Fed’s Bullard to introduce lecture in St. Louis
- Senate, House not in session
- President Obama speaks on gun control in Denver
- FDIC holds discussion about community banks, 8:30am
- Hagel speaks on consequences of fiscal constraints
- NRC staff meets w/ officials from Edison Intl, which is seeking to resume operations at its San Onofre plant. 1pm
- House Energy and Commerce panel holds hearing on ACA’s Pre-Existing Condition Insurance Program, 1pm
WHAT TO WATCH
- News Corp. is said to consider sale of its community newspapers
- Verizon denies report that it’s considering a bid for Vodafone
- SEC approves using Facebook, Twitter for company disclosures
- Lagarde says IMF to contribute ~EU1b to Cyprus Deal
- Cyprus swears in new finance minister as bank controls eased
- Adelson’s Sands faces $328m trial over Macau license
- MBIA wins ruling on loan buybacks in Bank of America lawsuit
- S&P says U.S. didn’t disclose role with states to court
- Related said to sell NYC’s Monterey Apartments for $250m
- Euro-Area March inflation slows less than economists Eetimated
- China’s service industries expanded at faster pace in March
- BOJ’s Kuroda faces 1-yr window on ending deflation
- U.K. Banks try to dodge EU bonus caps by defining risk-taker
- Rio Tinto seeks buyers for Australian coal mine stakes: WSJ
- CNPC, Petronas eye Marathon Oil’s Angola fields: Reuters
- Conn’s (CONN) 7am, $0.56
- ConAgra Foods (CAG) 7:30am, $0.56
- Monsanto (MON) 8am, $2.57
- Schnitzer Steel (SCHN) 8:30am, $0.25
- Acuity Brands (AYI) 8:32am, $0.63
- Dominion Diamond (DDC CN) 5pm, $0.18
- Harry Winston (HW CN) 5pm, $0.18
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Corn Joins Bear Market for Crops as Demand Slows, Planting Gains
- Lonmin New CEO Shoulders Output Push as Costs Soar: Commodities
- WTI Drops as U.S. Crude Stockpiles Increase Most in Four Weeks
- Copper Falls for Fourth Day on Concern Demand Has Yet to Rebound
- Silver Drops to 8-Month Low in Bear Market in London; Gold Falls
- Rice Gains to Highest in a Month as U.S. Farmers Cut Planting
- Asian Palm-Oil Planters Head to Africa to Meet World Demand
- Wheat From India Seen Shunned as State-Set Price Deters Buyers
- Corn-Price Drop Won’t Deter Sugar Buys for Ethanol, Vilsack Says
- Canada Seen Beating U.S. in $150 Billion Asia LNG Race: Energy
- Rebar Rises for Second Day on Expectations for Spring Demand
- Nestle to Spend $16 Million on China Coffee Center on Sales View
- Silver Seen Extending Losses to $26 an Ounce: Technical Analysis
- Palm Oil in Malaysia Climbs as Much as 0.5%, Erasing Losses
The Hedgeye Macro Team
Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money this evening to talk stocks and how the gold market is breaking down. Keith notes that now that gold has been breaking down over the past four weeks, sell-side analysts are going to get bearish on it, which will only add to the sell off. To see Keith’s full take on gold, skip ahead to 2:35 in the video posted above.
Corporations are enjoying record high levels of cash, low amounts of debt and financial flexibility in the current economy. The question is: can companies continue to keep paying out sweet dividends? Hedgeye Director of Research Daryl Jones thinks dividends will increase over time and lays out his case starting at 0:45 in the above video. Names Jones likes include Darden Restaurants (DRI) and Proctor and Gamble (PG).
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.