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Special FX

Client Talking Points

Currency Wars

Big moves on the currency front this morning. With Japan's finance minister and central bankers saying that their plan to debauch the Yen is unopposed and A-OK, more people know that further pain in the Yen is coming. It dropped -1% this morning overnight versus the US dollar to 99.12 - a new low. A lower Yen isn't just a mess for Japan, it's hurting Korea too, as evidenced by recent declines in the KOSPI index. Meanwhile, in China, the Yuan is floating high and dry, making a big move to the upside to 6.17 versus the dollar - a 19 year high! This is good for the Chinese consumer. Like the American consumer, they too can appreciate lower prices at the pump and grocery store. 

Playing Ball

The US stock market has been all over the place this week and is constantly changing. We don't sit still when the market makes moves; we move along with it and adjust our risk levels accordingly. We remain bearish on commodities and bullish on consumption, which helps drive global growth. Trust us when we say that no American consumer is out there complaining about lower gas prices at the pump and cheaper food at the store. As far as the almighty S&P 500 goes, our immediate-term TRADE risk range is 1539-1570. We'll be keeping an eye on it today and if our process indicates we should be buying the SPX, then we'll buy it. For now, we're comfortable sitting on the sidelines waiting for our turn to trade.

Asset Allocation

CASH 34% US EQUITIES 20%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 25%

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

"It's Japanese POMO time: BOJ OFFERS TO BUY 300B YEN IN DEBT LONGER THAN 10 YEARS" -@zerohedge

QUOTE OF THE DAY

"Well-timed silence hath more eloquence than speech." -Martin Fraquhar Tupper 

STAT OF THE DAY

IBM reported a profit of $3.03 billion, or $2.70 a share, down from $3.07 billion, or $2.61 a share, a year earlier, missing expectations.


In #StrongDollar, We Trust

This note was originally published at 8am on April 05, 2013 for Hedgeye subscribers.

“Kennedy Pledges He Will Maintain Value of Dollar”

-New York Times, 1960

 

As William Silber points out in Volcker – The Triumph of Persistence, that’s what JFK was rolling with 2 weeks before the 1960 US Presidential Election. It was a pro-growth campaign about American progress. A #StrongDollar has always symbolized that.

 

After LBJ, Nixon, and Carter spent 15 years devaluing the Dollar, this progressive conservative American mantra lost its place in the vernacular of what Hayek called the Political Economy. Why? Currencies and the central bankers that manipulate them get politicized.

 

After watching Bernanke devalue the Dollar as aggressively as any Fed Chairman since Arthur Burns (1970s), now you are watching the Japanese take a page out of his un-American playbook. That’s not a partisan comment either. Long-time Democrats will recall Kennedy’s thoughts about the US Dollar and monetary policy were crystal clear:

 

Price stability belongs on the social contract. We give the government the right to print money because we trust our elected officials not abuse that right, not to debase the currency by inflating… Failure to maintain those promises undermines trust in America. And trust is everything.” (Volcker, pg 53)

 

The world no longer trusts the Japanese.

 

Back to the Global Macro Grind

 

But do Americans trust President Obama and Ben Bernanke? Does Wall Street? Do we trust that if the US unemployment rate continues to surprise on the downside in 2013 that these politicians will get out of our hard earned currency’s way?

 

Today is a big day on that score. While it’s tough to get comfortable with a number that the US government effectively makes up, we’re confident that the market is confident that Bernanke is somehow confident betting the entire bond bubble farm on one made-up number.

 

To be balanced, if there’s one thing we are overly confident in, it’s that Bernanke’s growth forecasts will continue to be wrong. We think both US employment and consumption growth surprises to the upside during #StrongDollar periods like the one you are seeing now.

 

Does the market like this? Which market? First, let’s look at what USD Correlation Risk is telling us on a 1-month duration: 

  1. US Dollar vs SP500 = +0.84
  2. US Dollar vs Brent Oil = -0.71 

Hooowah! Al Pacino couldn’t have said it better. Like taking a flyer in a Ferrari for free, American Consumers absolutely love #StrongDollar, Down Oil. Basic Materials and Energy stocks, not so much.

 

Commodity-linked country stocks markets don’t like it either:

  1. Russia – RTSI down again this morning and down -13.3% since January 28th 2013
  2. Brazil – Bovespa is a big commodity index, and continues to be just nasty YTD (-10.3%) 

For Commodities overall, the last 2 months have been flat out nasty:

  1. Rubber -21.1%
  2. Silver -15.2%
  3. Corn -14.2%
  4. Copper -10.9%
  5. Platinum -10.7%
  6. Wheat -9.0%
  7. Brent Oil -7.9%
  8. Soybeans -7.8%
  9. Lean Hogs -7.4%
  10. Gold -7.4%

So, I guess if you are really long commodities, being long Gold right now would be your outperformer!

 

Long-time market history fans know that Gold has been annihilated, multiple times, during #StrongDollar periods. Until Nixon and Connolly (his politically compromised Treasury Secretary – the guy who rode in the car with JFK during the assassination) figured out how to Burn The Buck for political victory (1971), US Dollar strength (particularly in the 2nd half of 1969) crushed the Gold bugs.

 

But this is much larger than #AngryBugs at this point. This is really the first opportunity since Q1 of 2009 where #StrongDollar Commodity Deflation has provided a real-time Tax Cut to American Consumers of food and oil.

 

The Fed’s Bill Dudley would disagree with me on this, but I don’t think you can eat platinum or rubber. That said, producers who need such things to make what we consume will pay less for their inputs, if pervasive Dollar strength continues.

 

So, again – I call on the great market minds in Washington D.C. to do what’s right and:

  1. End the most dovish Fed policy in US history
  2. Continue with the shift toward conservatism in fiscal policy
  3. Spread the love about #StrongDollar’s benefits (Obama, Yes You Can!)

Especially at the pump and at our dinner tables, we can trust that a lot more than we’ve trusted the #PoliticalClass under any of the Nixon, Carter, Bush II, or Obama regimes. “And trust is everything.”

 

Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1548-1588, $105.68-108.93, $82.52-83.41, 94.04-96.35, 1.76-1.92%, 12.31-14.61, and 1549-1574, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

In #StrongDollar, We Trust - Chart of the Day

 

In #StrongDollar, We Trust - Virtual Portfolio


THE M3: MBS SINGAPORE LICENSE; COD CONCESSION EXTENSION; GONGBEI HOURS

The Macau Metro Monitor, April 19, 2013

 

 

MARINA BAY SANDS' CASINO LICENSE RENEWED FOR 3 MORE YEARS Strait Times

Marina Bay Sands' casino license has been renewed by another three years by the Casino Regulatory Authority.  The Authority said that it had imposed additional requirements on MBS during this new licence period. While no details were given on what these additional requirements were, the purpose of the requirements was to " institute, strengthen and maintain a rigorous compliance framework that is in line with Singapore's laws and regulations".  MBS' new licence will come into effect from April 26. A CRA spokesman added that MBS' compliance record was one of many factors considered when assessing the licence application.


CITY OF DREAMS' COMPLETION EXTENSION TO GET GREEN LIGHT  Macau Business

MPEL is expecting to be given an extension by the government on the completion deadline for the entire City of Dreams project on Cotai.  Under the current land concession contract, MPEL is still authorized to build an additional four-star apartment hotel at the site. But the company is looking to build one other five-star hotel tower instead.

 

A deal with the government was struck in March, but it has yet to be published in the Official Gazette. Depending on when gazetting occurs, the deal will give MPEL a new completion deadline, extending it by as much as four years from the original deadline of August 2013.

 

GONGBEI UNLIKELY TO OPEN LONGER DURING GOLDEN WEEK Macau Business

Gongbei customs post supervisor Lao Ngai Leong said that it is unlikely that the Gongbei border crossing will be opened for two extra hours during the upcoming May 1 Golden Week period, in which many mainland workers get one week off.

 

During the Ching Ming festival holiday period, from April 4 to 6, the Gongbei crossing opened at 6:00am instead of 7:00am, and closed at 1:00am instead of midnight.  Lao said that for the Gongbei crossing to be open for longer periods during all national holidays, the Zhuhai customs first had to overcome its lack of staff.



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.


Energy Gaps

“For unless man were to be like God and know everything, it his better that he should know nothing.”

-John Buchanan

 

The Gap in the Curtain (1932) is a novel by John Buchanan that speaks to the human desire for certainty, and the dangers its quest can bring.

 

In a London country house, five party-goers partake in an experiment that allows them a glance at a newspaper that will be printed exactly one year in the future.  The rest of the book tells the story of how that information affected each of their lives over the next year. 

 

One man reads of a business merger, spends the next year painstakingly traveling the world buying every share of the to-be-acquired company he can find, only to find that the business combination he read of was one nearly out of bankruptcy…  Another character reads his own obituary and dies of a heart attack the night before it prints; he does not live long enough to read the correction the paper issues on the following day for the typo…

 

---

 

This exchange from Core Laboratories’ (CLB) earnings call yesterday reminded me of the novel:

 

Analyst: “So, what’s your prediction, where is oil going from here?”


David Demshur, CEO of CLB: “Don’t have a clue, my friend.”


I sympathize with the analyst’s question – wouldn’t that be nice to know! – but, more so, I appreciated Demshur’s candid answer.

 

Gold is going to $2,000…  Oil will spike to $200/bbl…  My price target for the S&P500 at year-end 2013 is 1,458…


Wall Street loves making declarative statements.  I used to think that I had to make them too – I was scared to say “I don’t know,” as if I should have the answers to so many inherently unknowable questions.  But after several humbling experiences early in my career – i.e. being wrong – I have “resigned from the professional undertaking of coin-flipping,” to quote one of my favorite risk managers and thinkers, Hugh Hendry.

 

Sure, I have my biases – commodity prices tend to mean revert, oil lower (possibly a lot lower), Peyto Exploration (PEY.CN) higher (possibly a lot higher), LINN Energy (LINE, LNCO) and EV Energy Partners (EVEP) lower – but really I try to let the market tell me what to do (embrace uncertainty and our complexity-based models) and make solid risk-adjusted investment decisions given those signals.

 

Our playbook since the beginning of the year has been long USD and US consumption-oriented sectors, and short commodities and commodity beta.  Our Macro Team reviewed our #StrongDollar theme on our 2Q13 Macro Call on Tuesday – we’re bullish on the USD due to:

 

-          All-time low interest rates with the prospect of a hike;

-          Cessation of QE initiatives;

-          Improving housing and employment picture;

-          Addressing all-time highs in sovereign debt and deficit ratios;

-          USD solidified as world reserve currency at the expense of a weaker Yen and Euro.

 

From there we think that a #StrongDollar deflates commodity inflation and takes commodity-levered sectors (XLE and XLB) lower with it.  If you don’t think I should paint a broad brush across “commodities,” tell me why gold and oil have a +0.92 correlation since ’09 (see Chart of the Day).  We think it’s the same “inflation hedge” trade that’s now unwinding… 

 

Today, the risk management signals across the “financialized” commodity complex are still not good:

 

-          Gold is bearish TREND (needs to recover: $1,681)

-          Copper is bearish TREND ($3.58)

-          Brent Crude is bearish TREND ($110.54)

-          WTI Crude is bearish TREND ($93.88)

-          Energy Stocks (XLE) are bearish TREND ($76.87)

 

So as our fundamental #StrongDollar theme plays out, and oil and energy stocks begin to break down across our core TREND duration, we want to be underweight energy, looking for energy stocks to sell/short, and know that our energy long ideas have to be really tight (imminent catalysts or special situations) or levered mostly to natural gas prices (bullish TREND).

 

---

 

Two stocks that I think are worth selling are LINN Energy (LINE, LINCO) and EV Energy Partners (EVEP).  I wanted to hit on this in this note because these stocks are hugely popular among retail investors, which are attracted to that juicy yield (LINE 8%, EVEP 6.5%).  It’s kind of funny – any time Keith or I tweet about LINE/LNCO we get borderline hate-mail in return!  But how much cash a company pays out to its shareholders says nothing of the intrinsic value of the business – and these stocks are hugely overvalued, and their distributions sustained with capital raises.  The distributions paid are inconsistent with the economics of the businesses, and we think it ends in tears.  Hedgeye subscribers, do not be left holding the bag!

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST10yr Yield, VIX, and the SP500 are now $1, $96.72-102.27, $81.95-83.11, 96.63-101.57, $1.29-1.31, 1.68-1.76%, 14.27-18.68, and 1, respectively.

 

Have a great weekend,

 

Kevin Kaiser

Senior Analyst

 

Energy Gaps - Chart of the Day

 

Energy Gaps - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 19, 2013


As we look at today's setup for the S&P 500, the range is 24 points or 0.56% downside to 1533 and 1.00% upside to 1557.     

                                                                                                                          

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 1.46
  • VIX closed at 17.56 1 day percent change of 6.36%

MACRO DATA POINTS (Bloomberg Estimates):

  • G-20 meeting of finance ministers, central bankers, Washington
  • 7:30am: ECB’s Weidmann, Germany’s Schaeuble hold press breakfast in Washington
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 12pm: Fed’s Stein speaks in Charlotte, N.C.
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • IMF/World Bank officially begin three-day spring meetings
    • 10am: Senate Judiciary Cmte holds hearing on immigration laws, w/ Homeland Security Sec Janet Napolitano
    • 2pm: State Dept releases 2012 Human Rights Reports

WHAT TO WATCH

  • Schaeuble says G-20 must honor deficit-cutting commitments
  • Blackstone is said to pull out of bidding for Dell
  • Softbank not planning higher Sprint bid, company executive says
  • Lenovo said to be in talks to buy IBM low-end server unit
  • FAA said ready to end Boeing 787 grounding as fix approved
  • U.S. bank profits disappoint most in 3 yrs as revenue falls
  • Fisker said to spend $660K on each $103K plug-in car built
  • Banker groups sue Treasury, IRS over account reporting rule
  • Viacom copyright suit against Google’s YouTube again dismissed
  • J.C. Penney’s operating chief joins talent head in departing
  • Pilot Corp. suspected of fraud in diesel rebates, FBI agent says
  • Humana fires law firm tied to alleged leak of Medicare decision
  • Toyota said to reveal plans to begin production of Lexus in U.S.
  • GDP, Apple, Exxon, BOJ, Iron Man 3: Week Ahead April 20-27
  • One Boston marathon bombing suspect dead, Federal official says 

EARNINGS:

    • Schlumberger (SLB) 6am, $0.98 - Preview
    • Baker Hughes (BHI) 6am, $0.62 - Preview
    • SunTrust Banks (STI) 6am, $0.61
    • General Electric (GE) 6:30am, $0.35 - Preview
    • Laboratory Corp of America (LH) 6:45am, $1.77
    • Honeywell International (HON) 7am, $1.14 - Preview
    • Genuine Parts (GPC) 7am, $0.98
    • Under Armour (UA) 7am, $0.03
    • Interpublic Group (IPG) 7am, ($0.13)
    • First Horizon National (FHN) 7am, $0.17
    • Kimberly-Clark (KMB) 7:15am, $1.34 - Preview
    • First Niagara Financial (FNFG) 7:15am, $0.17
    • State Street (STT) 7:21am, $0.93
    • Rockwell Collins (COL) 7:30am, $1.17
    • Manpower (MAN) 7:30am, $0.45
    • McDonald’s (MCD) 7:58am, $1.27 - Preview
    • TCF Financial (TCB) 8am, $0.19
    • Kansas City Southern (KSU) 8:01am, $0.88 - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Gaining as Physical Demand Said to Be ‘Extraordinary’
  • Gold Traders Split on Outlook as Asian Jewelers Buy: Commodities
  • U.S. Wheat Faces Damage Threat as Plains See Another Freeze
  • Copper Set for Biggest Weekly Drop in 16 Months on Demand View
  • Palm Oil Posts Fourth Weekly Decline on Biofuel Demand Concern
  • WTI Crude Advances for a Second Day to Pare Third Weekly Decline
  • Cocoa Climbs After North America Grindings Gain; Sugar Declines
  • Monsoon Seen Normal in South Asia Set to Boost India Growth
  • Carbon-Intensive Investors Risk $6 Trillion ‘Bubble,’ Study Says
  • Crude May Fall on Weaker Economy as Output Gains, Survey Shows
  • California Power Facing Biggest Test Since Enron: Energy Markets
  • Biggest LBO Collapse Seen as Boon to Texas Power Market: Energy
  • Nickel Surplus Seen Bigger by Macquarie Than Forecast Last Month
  • Rebar Rises to Pare Weekly Loss, Supported by Iron Ore, Demand

THE HEDGEYE DAILY OUTLOOK - 5A

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6A

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4A

 

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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