“Horse manure sprinkled with tobacco.”
That’s what “a cigar aficionado had once told him” (with him being Paul Volcker) about “his favorite A&C Grenadiar cigar.” In 1979, Volcker would take a big pay cut (“earning $57,500 a year rather than the $110,000 salary”) as President of the New York Fed. (Volcker: The Triumph of Persistence, pg 147)
Unlike some of these pretend patriots you see on Political Economy TV today, Volcker took serving his country in the wallet. Like Benjamin Franklin, he was a frugal man. He, like anyone tasked with central planning, had his issues. But one of those wasn’t credibility. The #PoliticalClass didn’t always like him, but history has treated him well, primarily because he earned The People’s trust.
When Bernanke proclaimed that he has “the best inflation track record of anyone since WWII”, it made me sick to my stomach. Today, in 1964, Americans bought their first Ford Mustang for $2,368. That was also a time when JFK explicitly marketed a #StrongDollar. Hopefully, we’re well on our way to deflating Bernanke’s Commodity Bubbles now. Lord knows, we all need a real-world Tax Cut.
Back to the Global Macro Grind…
Within the context of the immediate-term risk I ranted about in yesterday’s Early Look, yesterday’s +1.43% rip in the SP500 was critical on all three fronts that matter in one of my most basic 3-factor models:
- PRICE – what was 1557 immediate-term TRADE resistance, once again became support (no resistance now to 1601)
- VOLUME – up +3.3% versus what I call my TREND average (up days on up volume = good)
- VOLATILITY – VIX smoked for a -19.2% down move, closing back below TRADE resistance (14.27); next support 10.53
So, I got a little longer (net), going to 10 LONGS, 7 SHORTS @Hedgeye. Process: as beta (SP500) recovered my TRADE line of support (1557), the first moves I made were A) covering consumption shorts and B) buying consumption longs (we’re bullish on US domestic Hospitals, so Tom Tobin had me buyback HCA on sale).
From both a gross and net perspective, I can obviously get a lot longer than this. I have throughout the last 5 months, and I will continue to buy pullbacks, provided that both the Research and Risk Signals tell me to do so. But I will do it at my own pace. Patience is an asset.
What generalist PMs and individual investors alike have to be getting impatient with is more of the same; especially if they aren’t yet positioned LONG CONSUMPTION vs SHORT COMMMODITIES.
Top Down, the YTD score is very straightforward:
- SP500, US Healthcare, and US Consumer Discretionary = +10.4%, +19.7%, and +13.3%, respectively
- CRB Commodities Index, Gold, Russia = -4.1%, -17.3%, and -11.5%, respectively
In terms of US Equity Sector performance, so are the month-to-date returns for April at mid-month:
- Healthcare (XLV) +3.76%, Consumer Staples (XLP) +2.62%, Consumer Discretionary (XLY) +1.40%
- Energy (XLE) -4.50%, Basic Materials (XLB) -3.04%, Industrials (XLI) -1.72%
In other words, the performance divergence between CONSUMPTION and COMMODITY related investments is accelerating at an accelerating rate. We like that. It’s called convexity.
To be clear, like the conflicted and compromised bureaucrats that Volcker and Thatcher had to take head on in the early 1980s, people who don’t get paid by #CommodityDeflation do not like this. Neither do the dudes who get paid to market Gold commercials.
But, like I said on yesterday’s Global Macro Themes call for Q2 2013 (ping if you want the slides/replay), it’s not my job to pander to fear-based advertising for bitcoins. Neither is it to live a regressive life. What’s happening to Gold and Oil in particular is potentially one of the most progressive economic developments in the last 20 years.
Risk Management Questions I addressed on our Q2 Macro Themes call:
- Can the US Dollar Index go to $88, then $98?
- Can the Japanese Yen (vs USD) go to 110, then 150?
- Can the price of crude Oil drop to $19-56/barrel?
It’s all interconnected. And if the answer to all three of those questions were to become yes, all I can say is that A) being long Consumption will be really right, B) being short Commodities will be epic, and C) Putin will be pissed.
Putin? Yes, as in Vlady. Russian geopolitical and said economic-power runs on Oil inflation. He’s been whining in the press for the last few weeks, so expect his next move to be Japanese (devalue the Ruble). Then this flow show party can really get started.
Flow show? No, I’m not talking about my hair. I mean #EmergingOutflows (introduced as our latest Global Macro Theme in yesterday’s conference call). #StrongDollar = bad (for some Emerging Markets). So we’ll have a deeper dive Hedgeye Black Book pending on that. Knock on wood (my hockey head), but horse manure sprinkled with some Hedgeye Macro tobacco has never smelled so good.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, Euro/USD, UST10yr Yield, VIX and the SP500 are now $1, $99.43-103.99, 95.77-101.70, $1.29-1.31, 1.70-1.77%, 10.53-16.65, and 1, respectively.
Happy Birthday Laura, and best of luck to you out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – April 17, 2013
As we look at today's setup for the S&P 500, the range is 44 points or 1.12% downside to 1557 and 1.68% upside to 1601.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.50 from 1.50
- VIX closed at 13.96 1 day percent change of -19.17%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, April 12 (prior 4.5%)
- 9am: Fed’s Stein speaks on banking regulation at IMF
- 9:30am: Fed’s Bullard speaks in New York
- 10:30am: DOE Energy Inventories
- 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
- 12pm: Fed’s Rosengren speaks in New York
- 2pm: Fed releases Beige Book
- 9:30am: House Oversight Cmte hearing Postal Service’s financial situation
- 9:30am: Defense Sec. Chuck Hagel testifies on Pentagon’s proposed budget before Senate Armed Svcs Cmte
- 10am: Housing Sec. Shaun Donovan testifies before House Appropriations panel on agency budget
- 10am: House Armed Svcs Cmte hears from Gen. Joseph Dunford, commander of U.S. forces in Afghanistan, on developments there
- 2:30pm: Senate Armed Svcs Cmte briefing on Syria
- 2:30pm: Senate Commerce and Transportation panel hears from Amtrak Chairman Joseph Boardman on future of passenger rail service in Northeast Corridor
- 2:30pm: Senate Judiciary Cmte hears from Homeland Security Sec. Janet Napolitano on immigration overhaul
WHAT TO WATCH
- Gold wipes $560b from central banks as equities rally
- Europe car sales fall with industry heading for 20-year low
- ING to raise as much as $1.54b in U.S. insurance unit IPO
- Paulson says Dish proposal for Sprint better than Softbank offer
- Tesco to exit U.S. after first profit drop in about 20 years
- Yahoo’s Mayer faces setbacks as sales forecast misses estimates
- Intel sales may top estimates on demand for server chips
- Boeing boosts Duberstein duties ahead of investor oversight vote
- News Corp. plans to call entertainment spinoff 21st Century Fox
- Macy’s wins temporary bar on some Stewart sales at J.C. Penney
- FAA near decision on Boeing Dreamliners after tests completed
- AMC delays sale of ‘Iron Man 3’ tickets in dispute with Disney
- Former MF global rogue trader gets 5 yrs, must repay $141m
- Johnson & Johnson wins Chicago jury verdict over hip implant
- Former Leerink Swann banker pleads guilty to insider trading
- Huntington Bancshares (HBAN) 5:55am, $0.16
- Mattel (MAT) 6am, $0.08
- PNC Financial Services Group (PNC) 6:30am, $1.56
- Bank of New York Mellon (BK) 6:30am, $0.52
- Textron (TXT) 6:30am, $0.45
- Bank of America (BAC) 7am, $0.23
- Dover (DOV) 7am, $1.08
- Quest Diagnostics (DGX) 7am, $1.03
- St Jude Medical (STJ) 7:30am, $0.91
- Abbott Laboratories (ABT) 7:44am, $0.41
- Crown Holdings (CCK) 4:01pm, $0.48
- CYS Investments (CYS) 4:01pm, $0.32
- Albemarle (ALB) 4:03pm, $1.00
- American Express Co (AXP) 4:04pm, $1.12
- Kinder Morgan (KMI) 4:05pm, $0.32
- Kinder Morgan Energy Partners (KMP) 4:05pm, $0.66
- SanDisk (SNDK) 4:05pm, $0.79
- Covanta Holding (CVA) 4:05pm, ($0.12)
- LaSalle Hotel Properties (LHO) 4:05pm, $0.25
- El Paso Pipeline Partners (EPB) 4:07pm, $0.55
- Core Laboratories (CLB) 4:08pm, $1.16
- EBay (EBAY) 4:15pm, $0.62
- SLM (SLM) 4:15pm, $0.60
- East West Bancorp (EWBC) 4:45pm, $0.49
- Noble (NE) 5pm, $0.51
- Steel Dynamics (STLD) 6pm, $0.21
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Gold Climbs for Second Day as Plunge Lures Buyers; Futures Drop
- Hog Glut Gains as U.S. Exports Drop Most in Decade: Commodities
- Cyprus Finance Minister Sees Gold Sale Within Next Few Months
- WTI Crude Trades Near Four-Month Low Before U.S. Inventory Data
- Copper Declines on Indications Demand Will Take Time to Revive
- Wheat Seen Gaining as Cold Weather Threatens Crops; Corn Drops
- Cocoa Swings in New York as Europe Processing Dips; Sugar Drops
- Gold Wipes $560 Billion From Central Banks as Equities Rally
- Rebar Retreats to Lowest in Four Months as Iron Ore Declines
- Gold’s Slump to Two-Year Low Roils Forecasters: Chart of the Day
- Energy as Dirty as 20 Years Ago on Slow Climate Effort, IEA Says
- Shell Shut Out as Africa’s Gas Trove Lures Asian States: Energy
- Bird Flu Panic in China Leads CP to Warn Over Chicken Sales
- Gold Slump Spurs Surge in Business at Australia’s Perth Mint
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After falling as much as 14% yesterday, gold was on every investor’s mind today as the metal staged a comeback of sorts, bouncing from $1300/oz to $1372/oz. Hedgeye CEO Keith McCullough co-hosted CNBC’s Fast Money this evening and argued that gold has yet to fully bottom and is capable of declining in price even further. Keith reiterates how he wants to be long consumption stocks when commodities are having a fire sale like they did yesterday. The commodity bubble brought on by the Federal Reserve’s monetary policy has provided an opportunity to take the other side of the short commodities trade; getting long Starbucks (SBUX) is just one example of doing just that.
Skip ahead to 5:10 in the video embedded above for Keith’s full take on the markets.
Today we bought HCA Holdings (HCA) at $36.07 a share at 10:18 AM EDT in our Real-Time Alerts. Coming back to the long side of US Consumption/Utilization (Hospitals) here. Hedgeye Healthcare Sector Head Tom Tobin thinks the HCA quarter is a lagging indicator. Seeing bullish sequential accelerations in births, ortho, cardio, and outpatient).
Commodity prices have been under pressure since the beginning of the year. The rise of the value of the US dollar has contributed greatly to the decline in prices across the board. On Monday, gold, oil and other commodities sold off en masse as investors fled the asset class and liquidated their positions. Gold fell anywhere between -10% intraday to -7.5% at the close. The CRB Commodity Index, which measures 19 different types of commodities, took a big hit on top of an already difficult year yesterday. You can see the decline in the chart below.
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