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Morning Reads From Our Sector Heads

Brian McGough (Retail):

 

New Non-Martha Home Brands Go Live on Jcpenny.com (via Sourcing Journal Online)

 

Tom Tobin (Healthcare):

 

Feud between hospitals, Medicare contractors explodes over fraud bill (via The Hill)

 

Jay Van Sciver (Industrials):

 

US Airways Reports Record March Load Factor (via US Airways

 

Kevin Kaiser (Energy):

 

Owners With No Skin in the Game - Accounting Conservatism, Innovation, Shareholder Elections, and Passive Management (via Credit Bubble Stocks)

 

Penn takes aim at Magnum's Eagle Ford assets (via Upstream)

 

Rob Campagnino (Consumer Staples):

 

Corn Joins Crop Bear Market on Slow Demand, More Planting (via Bloomberg)

 

Howard Penney (Restaurants):

 

Beijing Prepares For Avian Flu (via Bloomberg Businessweek)

 

Josh Steiner (Financials):

 

U.S. Regulator, Bank of America Reach Mortgage-Loss Settlement (via WSJ)

 

Ex-SEC Enforcement Chief Defends ‘Neither Admit or Deny’ Settlements (via WSJ)

 

S&P Fires New Salvo in Battle With States (via WSJ)

 

 



Consuming Europe

Client Talking Points

Focus On Europe

Keeping a close eye on non-US markets is key to being a global macro player. And right now, we're focused on the DAX and FTSE 100 indices in Germany and the UK, respectively. Both were able to hold above our TRADE lines of support again this morning, which is quite meaningful as commodity-focused markets like Brazil and Russia continue to break down.

The Consumption Game

It's important to pay attention to commodities even if you don't trade them. Coal, corn and copper in particular are all very important to watch right now as consumption increases. An increase in consumption makes for an increase in global growth which helps boost consumption-oriented stocks. We remain bullish on consumption names as a massive divergence continues to widen between consumption assets and commodity assets. The catalyst behind all this is the strong US dollar, which continues, week-after-week, to post gains. Get the dollar right and you get a lot of other things right.

Asset Allocation

CASH 18% US EQUITIES 30%
INTL EQUITIES 25% COMMODITIES 0%
FIXED INCOME 3% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.

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

"The more crisis-mongering and concern, the better for US stocks #study" -@KeithMcCullough

QUOTE OF THE DAY

“I never did give them hell. I just told the truth, and they thought it was hell.” –Harry S. Truman

STAT OF THE DAY

ADP report says economy added 158,000 private-sector jobs in March, coming in below expectations. Economists' consensus was at 215,000.


Psychological Ballet

This note was originally published at 8am on March 20, 2013 for Hedgeye subscribers.

“There’s a kind of psychological ballet: who will outstare who?”

-John Vaillant, The Tiger

 

Sound familiar? After a 3-day correction of 1% from the YTD high in the SP500, look into my eyes and tell me how you really feel. And “you should not suddenly turn tail because the scent of fear passes quickly.”

 

You must back off, slowly, slowly – especially if the tiger has a kill, or if she’s a mother with cubs: she makes a step, you make a step – you must not run away.” (The Tiger, pg 126)

 

To be clear, I remain bullish – and to the well known newsletter author (who sent me hate mail intraday yesterday) who wants me to roll-over and die… well, I say good luck. “Tigers will bluff-charge the same way bears do and, in most cases, all the tiger wants is an indication of submission.” (pg 150). If this market rips from here, I don’t want his apology – I just want him to publicly admit defeat.

 

Back to the Global Macro Grind

 

I know, I know – fights are breaking out and it’s getting gnarly out there. Old Wall guys sending me emails, former Perma Bulls going bearish – it’s all out there right now. It’s a Psychological Ballet. And I like it.

 

I also liked buying on red yesterday. We bought the SP500 (SPY) after seeing the low-end of our immediate-term Risk Range (1538-1565) tested and tried. After 3 straight down days for US stocks, the US 10yr Bond Yield is down a whole 3 basis points.

 

End Of World (#EOW) or correction? Who will outstare who into month and quarter-end?

 

Let’s drop the Siberian tiger stuff and getting into the Global Macro meat of the matter (currencies, countries, fear, etc.):

 

1.   CURRENCIES: the fulcrum piece of our bullish case on Asian and US #GrowthStabilizing remains the US Dollar. What Cyprus Storytelling gave us this week was an even Stronger Dollar, and Weaker Oil. The US Dollar Index is now up for 6 of the last 7 weeks and, not ironically, the CRB Commodities Index is down for 6 of the last 7 weeks.

 

2.   COUNTRIES: note that I wrote Asian and US #GrowthStabilizing; so, if you want to freak-out about Europe, just get over it and short Europe – but make sure you sell the right country (we prefer Italy, Russia, and France – in that order, short side). China’s Shanghai Composite ripped a +2.7% move overnight and Germany’s DAX is +0.8% testing 5-year highs. Not #EOW, yet.

 

3.   VOLATILITY: the epicenter of fear is in both the front-month and term structure of US Equity Volatility (VIX). I’ve written about this exhaustively for 3-months because I want to be Fading Fear (buying High Short Interest, Shorting Gold, Shorting Treasuries, etc.). Front-month VIX just failed at immediate-term TRADE resistance of 14.74 and has no support to 10.77.

 

I could always smell them. Now that they are sending me idle threats of hereditary right, I can see the Old Wall very clearly now. So what is it, gentlemen? To be long or short of stocks here? Buy or sell?  It really is an ok question to answer, transparently and accountably. I am watching you.

 

There are two categories of people when it comes to extreme situations… One gets scared first, and then starts thinking; the other starts thinking first and gets scared after the fact. Only the latter survives in the taiga.” (The Tiger, pg 155)

 

Having made over 2,000 long/short calls (all #timestamped, since 2008), almost 50% of the calls I have made have been on the short side. Inclusive of having to manage plenty of risk to the upside, my batting average on the short side = 79.12%. So A) unlike some of these pundits, I get things wrong and B) I have no problem shorting markets when my process tells me to do so.

 

Fear of fiction or perceived top-calling wisdoms only computes one way into my process – as contrarian indicators. If it’s the Italian Election or Cyprus that you fear, I am not scared. If you’ve been bearish the whole way up and it’s your reputation you fear, I don’t blame you.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1589-1613, $107.14-109.53, $82.61-83.29, 93.68-97.17, 1.89-1.97%, 10.77-14.74, 933-955, and 1538-1565, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Psychological Ballet - Strong Dollar   Strong America

 

Psychological Ballet - Virtual Portfolio


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Macro Evolution

“The book of nature is written in the language of mathematics.”

-Galileo

 

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):

  1. US Equities (SP500) +10% YTD vs Brazil (Bovespa) -10% YTD
  2. 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:

  1. US Healthcare Stocks (XLV) +17.2% YTD
  2. US Consumer Staples (XLP) +15.1% YTD
  3. US Consumer Discretionary (XLY) +11.8% YTD
  4. 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.

  1. Commodity Deflation = good for corporate input prices and real (inflation adjusted) consumption growth, globally
  2. Consumer Staples companies (especially Food, Restaurants, etc.) have massive y/y margin expansion opportunities
  3. 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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro Evolution - Chart of the Day

 

Macro Evolution - Virtual Portfolio


THE M3: EASTER VISITATION; PACQUIAO FIGHT

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.

 


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