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Popping The Bubble

Client Talking Points

Goodbye, Gold

Practically overnight, gold fell nearly $100 to $1400/oz. What's the catalyst? A stronger US dollar that has kept appreciating in value over the last three months has helped pop the great commodity bubble brought on by Federal Reserve Chairman Ben Bernanke. We had a 40-year low in the US dollar and 40-year high in gold (read: top) in 2011 that was simply unsustainable. Gold prices are crashing and the metal is going down in flames. Further downside pressure will be exacerbated as fund managers and the retail crowd all flee the crowded theater in an effort to escape, which will drive the ask price lower and lower. 

Consumption = Growth

As commodity prices head lower across the board, consumption in the US has increased which in turn has driven growth. It's really not that complicated when you think about how the downturn in commodities has helped drive growth. When people encounter lower gas prices at the pump and cheaper food at the grocery store, they tend to consume more. 

If you look at the complexion of the S&P 500’s Sector returns for April to-date, it’s the same story (Consumption vs Commodities):

 

  1. US Healthcare Stocks (XLV) = +4.18% for APR to date
  2. US Consumer Discretionary (XLY) = +2.66% for APR to date
  3. Basic Materials (XLB) and Energy (XLE) = -1.65% and -1.12% for APR to date, respectively

 

 

 

The pundits who have been marketing gold under the guise that the end of the world is coming can no longer play that card when the S&P 500 is up +11.5% year-to-date.

Asset Allocation

CASH 31% US EQUITIES 20%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 28%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.

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

"Commodity margin clerks will be ordering lunch in today, big opportunity for Seamless Web." -@ReformedBroker

QUOTE OF THE DAY

"The trouble with normal is it always gets worse." -Bruce Cockburn

STAT OF THE DAY

China's economy grew 7.7% in the first quarter of 2013, missing estimates.


THE M3: NEW MACAU CURBS; SJM AIR QUALITY; PANSY ON MACAU; CHANGI CAPACITY REDUCTION

The Macau Metro Monitor, April 15, 2013

 

 

BEIJING ANNOUNCES CURBS FOR MACAU GAMING TOURS China Daily

The central government’s mouthpiece China Daily has reported that Beijing has imposed new rules for Macau gambling trips.  China Daily said that people who organize trips with more than 10 mainlanders to come to gamble in Macau, and profit from such trips, will be charged with the crime of gambling, in-line with Chinese Criminal Law.  


Since Macau is an independent jurisdiction, the decision as to whether mainland citizens gambling in Macau are doing something illegal or not will “be decided case by case”, the ministry's petition office said at People.com.cn, a website owned by The People’s Daily.

 

SJM TO IMPROVE AIR QUALITY INSIDE CASINOS: ANGELA LEONG Macau Business

SJM CEO Angela Leong said the company would act quickly to improve the air quality inside the casinos and slot machine parlours operated under its gaming licence.  The improvements inside the casinos’ smoking areas would involve further discussion with SJM’s partners.  Almost two thirds (28) of Macau’s gaming venues failed to meet the compulsory air quality requirements for their smoking areas, according to a maiden evaluation by the Health Bureau in late March.

 

MACAU HAS "CLEANED UP": PANSY HO Macau Business

Pansy Ho, the chairperson of MGM China, says the days when Macau was seen as a shady gaming centre, connected with money laundering and violence, are gone.  “It has cleaned up,” Ho said.  “We don’t see any of that happening [now].”  She also said she is confident the central government will continue allowing the number of mainland visitors coming to Macau to increase, albeit not necessarily at double-digit rates.

 

SINGAPORE CHANGI TRAFFIC GROWTH TO SLOW AS QANTAS DROPS HUB AND AIRASIA CLOSES BASE Center for Aviation

Passenger growth at Singapore is slowing significantly, making it very unlikely Changi will expand in 2013 its current streak of three consecutive years of double-digit expansion.  Singapore authorities should still accelerate airport expansion, particularly the opening of a third runway, because the current congestion has already become an impediment to growth.

 

In the latest blow to Changi, AirAsia has decided to close its Singapore base.  Shifting back to Malaysia, the group’s small contingent of Singapore-based crews will have a very slight impact on total passenger figures at Changi.  But it signals the challenges Changi faces as its LCC growth figures start to slow down while other airports in the region continue to record rapid increases.

 

The AirAsia decision follows Qantas moving its transit hub for European services from Singapore to Dubai, leading to a reduction in total Changi capacity of more than 2%.


The Great Contest

This note was originally published at 8am on April 01, 2013 for Hedgeye subscribers.

“Well, I understand that you are to beat me in this contest.”

-John Adams

 

That, of course, is what Adams told Thomas Jefferson when it became clear to him in 1800 that Jefferson was going to replace him and become the 3rd President of the United States.

 

Mr. Adams, this is no personal contest between you and me… Two systems of principles on the subject of government divide our fellow-citizens into two parties. With one of these you concur, and I with the other.” –Thomas Jefferson (The Art of Power, page 327-328)

 

In all great contests, there are two competitors, teams, and/or ideas. In all great contests, someone wins and someone loses. In the greatest of contests, the winner is gracious in victory – and the loser learns from defeat.

 

Back to the Global Macro Grind

 

Let us, then, fellow-citizens, unite with one heart and one mind” (Jefferson during his inaugural address of 1801), and become Yale Hockey fans as they head to the Frozen Four, for the first time since 1952!

 

(I had to find a way to slip that in there)

 

In other news, crisis-mongering remains in crisis and US stocks hit an all-time high last week.

 

As we like to say here at Hedgeye Risk Management – all-time is a long time, and this all-time high was driven by the fulcrum point of our bull case for US (and Chinese) Consumption Growth – a Strong US Dollar.

 

With the US Dollar up for the 7th week in the last 8 (+0.74% to 83.14 on the US Dollar Index):

  1. Down -3% in the last 2 months, Brent Oil Prices stopped going down last wk (+2.2% to close the wk at $110.02/barrel)
  2. Food Prices continued to get pulverized week-over-week (Wheat -5.8%, Corn -4.3%, and Soy -2.5%, last wk alone)

And the net long positions in commodities (futures and options contracts) continue to go squirrely:

  1. Gold – net long positions fell another -14% on the wk after Gold’s price fell -0.7% (net long position -41% YTD)
  2. Silver – net long position continued to crash (-77% on the wk!) to its lowest level since 2007
  3. Copper – built a record net short position of -30,036 contracts

The thing about shiny metals is that (after Gold went up for 12 years in a row) a lot of people own them now in lieu of what were Burning Bernanke Bucks. That (and all those Gold commercials you still hear on the radio) is a rear-view looking thesis. So is the end of the world.

 

As the great USA Olympic Hockey Coach, Herb Brooks, might say about this morning’s metals update – “Again!”:

  1. Gold is flattish around $1598/oz (down -4.6% YTD)
  2. Silver is down another -0.9% to $28.04/oz (down -13% from its early 2013 high)
  3. Copper leads losers in Global Macro trading this morning, down another -1.3% to $3.35/lb

All the while, The Great Contest between #PTCs (professional top callers) and those of us who change as the game does rages on. Are Food, Energy, and Metals prices deflating a good or a bad thing for the global consumption economy?

 

What do we know, but the last time our models were this bullish on US economic growth prospects relative to consensus was in 2009 when many of these same factors rhymed. The Dollar rose from its ashes and Commodity prices kept crashing well into Q209.

 

But if you sold in May of 2009 and went away, was that a good decision or a bad one? What if you sold in April of 2009? My keen sense from my latest institutional client meetings is that a lot of people are still looking for a big Q2 correction. What if it doesn’t come?

 

Risk obviously happens fast, so we’ll be sure to let you know if anything changes in terms of our intermediate-term TREND view (bullish on Asian and US stocks; bearish on Commodities, Yens, Treasuries). In the meantime, may the great contest between bulls and bears continue!

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1592-1605, $106.75-110.39, $3.34-3.44, $82.61-83.49, 93.44-96.35, 1.84-1.95%, 12.13-14.26, 947-955, and 1556-1572, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Great Contest - Chart of the Day

 

The Great Contest - Virtual Portfolio


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.


Golden Crisis

“The difficulty is that no one is ever prepared to move except in a crisis.”

-Paul Volcker

 

That’s what Paul Volcker had to say about where central planners found themselves post Nixon’s re-election. It was 1973 and the US had just devalued the Dollar for the 2nd time in two years. One of Gold’s great policy driven inflations was on the move.

 

George Shultz (Treasury Secretary at the time in 1973) “said that the increase in the official gold price from $38.00 and ounce to $42.22 an ounce was a technical change.” (Volcker: The Triumph of Persistence, pg 117)

 

“Technical”, yep. Technically, both the Nixon/Carter and Bush/Obama central planning teams (back to back Republican/Democrat Administrations) spent their time looking for ways to devalue the currency of the American people. These were the two worst post WWII decades in US Consumer Confidence. When someone takes away your purchasing power, that’s how it feels.

 

Back to the Global Macro Grind

 

We’ve affectionately referred to the most recent decade-long inflation in the Gold price as Bernanke’s Bubble. Since both Greenspan and Congress deserve some credit, it’s not entirely fair to blame it all on Ben. But I like to pick on him. So call me a bully.

 

The fact remains that a 40yr low in the US Dollar (2011) coincided with a 40yr top in Gold and Commodity prices (2011). This all happened on Bernanke’s watch. Historical prices can be annoying; especially if they don’t fit the narrative a professor is trying to paint.

 

This morning’s move in Gold futures is gnarly. On my scorecard, on our immediate-term TRADE duration, this is almost a 5 standard deviation move to the downside. Gold prices are now officially crashing from their all-time high (-26%).

 

This shouldn’t surprise any readers of my rants – since cutting our Hedgeye Asset Allocation to Commodities to 0% in September of 2012, then labeling 1 of our Top 3 Global Macro Themes in Q412 “Bubble #3 (Commodities)”, we’ve been crystal clear on this.

 

It hasn’t been clear to the Gold and Commodity Bulls. One way I like to show their disbelief (that commodity prices can indeed go a lot lower) is the weekly net long positions in futures and options contracts (CFTC data) – on that score, here’s what happened last week:

  1. Gold’s net long position was up +19% wk-over-wk to +56,084
  2. Oil’s net long position finally started to break-down, -4.4% on the week to +196,330
  3. Farm Goods net long position continues to crash, down another -45% last wk to +56,404

In other words:

  1. Gold bulls who thought last week’s -5% decline in price was the bottom will see a new bottom this morning
  2. Oil (which has been in a Bearish Formation in our model for 2 months) will finally start to deflate, faster
  3. Food Prices will remain under pressure providing for a Consumption Tax Cut, globally

Consensus didn’t think this could happen (commodities down, US stocks up) 1, 2, and 3 months ago – but it’s happening. Last week we obviously registered an all-time closing high in the SP500 again (1593) with Commodity prices (CRB Index) down again on the week.

 

If you look at the complexion of the SP500’s Sector returns for April to-date, it’s the same story (Consumption vs Commodities):

  1. US Healthcare Stocks (XLV) = +4.18% for APR to date
  2. US Consumer Discretionary (XLY) = +2.66% for APR to date
  3. Basic Materials (XLB) and Energy (XLE) = -1.65% and -1.12% for APR to date, respectively

Like I said last week – it’s not that complicated.

 

What is complicated is explaining to people who are in the business of marketing gold and/or fear that this Golden Crisis is a tremendous opportunity for US politicians to force their conflicted and compromised central planners into getting out of the way on the most ultra dovish US Dollar policy since Nixon/Carter.

 

This isn’t a conspiracy theory. This is the way monetary policy in this country really works. In late 1971 (Nixon’s re-election campaign), “the president wanted more. The day before Christmas, he told his budget director, George Shultz, “If I have to talk to him (Burns) again, I’ll do it. Next time I’ll just bring him in.” (Volcker, pg 105)

 

Burns, as in Arthur Burns, was the closest thing to Ben Bernanke that the United States of America ever had (he monetized the US Debt, and De-valued US Dollar). Shortly after Burns left (1978), the speculative bid to the price of Gold left. I still think Bernanke will be gone by the end of his term this year. And the $1 all-time highs for the price of Gold will be long gone too.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, VIX, Russell2000 and the SP500 are now $1, $100.28-105.61, $82.03-82.76, 97.35-102.18, $1.27-1.31, 11.56-13.15, 935-955, and 1, respectively.

 

Congratulations to Yale Hockey on winning the NCAA National Championship! Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Golden Crisis - Chart of the Day

 

Golden Crisis - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 15, 2013


As we look at today's setup for the S&P 500, the range is 30 points or 1.12% downside to 1571 and 0.76% upside to 1601.             

                                                                                                                  

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.48 from 1.50
  • VIX closed at 12.06 1 day percent change of -1.47%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, April, est. 7.00 (prior 9.24)
  • 9am: Total Net TIC Flows, Feb. (prior $110.9b)
  • 10am: NAHB Housing Market Index, April, est. 45 (prior 44)
  • 11am: Fed to purchase $4.75b-$5.75b notes in 2018 range
  • 11:30am: U.S. to sell $35b 3M, $30b 6M bills
  • U.S. Weekly Rates Agenda

GOVERNMENT:

    • Deadline for citizens to file their income taxes with IRS
    • North Korea celebrates the 101st anniversary of state founder Kim Il Sung’s birth. Pyongyang has in the past timed military demonstrations to coincide with the event, including firing a long-range rocket last yr
    • Kerry invites North Korea back to nuclear talks
    • Washington Week Ahead

WHAT TO WATCH

  • Thermo said to bid >$75/shr for Life Technologies
  • Cyprus counting on gold sales for bailout: finance minister
  • China GDP grows lower-than-estimated 7.7% in 1Q
  • Centrica, Qatar buy $1b of gas fields in Canada
  • Banks drop off ISDAFix panel as CFTC probes rate-rigging
  • Mitsubishi UFJ CEO plans to boost U.S. energy-sector loans
  • Citigroup Europe CEO sees U.S. universal banks gaining share
  • China XD said to mull buying assets from GE Mexico venture
  • GM, Ford to jointly design more fuel-efficient transmissions
  • Time Warner’s “42” opens as top film on sales of $27m
  • Google offer to settle EU antitrust probe unacceptable to rivals
  • Lehman international creditors may be repaid in full, PwC says
  • Construction wages seen rising as much as 30% from Keystone XL
  • Symptom-free bird-flu case suggests H7N9 spreads wider
  • J.C. Penney execs said to lose Johnson-era perks: N.Y. Post
  • Time Warner’s 42 opens as top film on sales of $27m
  • 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
  • G-20, IMF Meeting, Google, North Korea: Wk Ahead April 13-20

EARNINGS:

    • First Republic Bank (FRC) 7am, $0.73
    • Webster Financial (WBS) 7:55am, $0.46
    • Citigroup (C) 8am, $1.17 - Preview
    • M&T Bank (MTB) 8:05am, $1.98
    • Charles Schwab (SCHW) 8:45am, $0.16
    • Brown & Brown (BRO) 4:15pm, $0.39

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Commodities Extend Drop to Cheapest Since July on China Slowdown
  • Gold Bulls Endure Bear Market as Goldman Says Sell: Commodities
  • Brent Crude Declines to Lowest in Nine Months on China Slowdown
  • Copper Reaches 9-Month Low on Weaker-Than-Estimated China Growth
  • Investor Jim Rogers Says Gold Needs Correction, Isn’t Buying Yet
  • Soybeans and Corn Drop as Chinese Growth Fuels Demand Concern
  • Piracy Attacks Plunge as Armed Guards and Navies Secure Shipping
  • Iron-Ore Swaps Decline as Demand Seen Slowing on Chinese Growth
  • New Deal for Roosevelt’s TVA Seen as Hard Sell for Obama: Energy
  • Palm Drops to Lowest This Year as Crude Fall Cuts Biofuel Appeal
  • Indians Defer Gold Purchases, Betting Bear Market May Deepen
  • Oil Price Forecasts Unleash Scottish Bulls in Independence Push
  • Vietnam Coffee Region Forecast to Get Drought-Relieving Rain
  • Comex Gold Stockpiles Slump to 3 1/2-Year Low: Chart of the Day
  • Gold Extends Bear-Market Plunge Below $1,400 on U.S. Recovery

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

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

 

 

 

 

 

 

 

 

 

 


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