“Our trepidation about Volcker’s appointment was later justified.”
That’s what the outgoing President of the United States had to say about Paul Volcker because, “on Thursday, September 25, 1980, the Federal Reserve Board had approved by unanimous vote a one percentage-point increase in the discount rate to 11 percent.”
“Former Fed Chairman, William McChesney Martin led the counter attack. He termed Carter’s comments “deplorable”… a “serious and unfortunate thing”, and added … partisan politics ought not to be around the Dollar.” (Volcker: The Triumph of Persistance, pg 190)
Of course, by the time Carter was losing the election markets were already front-running the US shift in monetary policy. After hitting an all-time high in January of 1980 ($850/oz), Gold didn’t see those highs again for 3 decades. For Gold Bulls, that was a long-time to average down.
Back to the Global Macro Grind…
To be balanced, according to the Gold Bulls of 2013, this time is different. Rather than acknowledging that the market has already discounted the greatest combination of deficit spending and money printing in US history, they’re digging in.
Gold isn’t trading on what they think it should trade on – it’s trading on both absolute and relative expectations vs the US Dollar:
1. ABSOLUTE: On the monetary policy side, no iQe5 upgrade of Gold is coming out of Jackson Hole this year (Bernanke isn’t even going to be there). And on the fiscal side, sequestration combined with US Consumption #GrowthAccelerating, is USD bullish.
2. RELATIVE: Japan is going to print to infinity and beyond and the probability of the Europeans cutting to 0% is rising. Both are bullish for the US Dollar relative to the Yen and the Euro. What’s bullish for the USD remains bearish for Gold.
Last week was another reminder of that:
- US DOLLAR = +0.9% on the week (up for the 7th week in the last 10 and +4% for 2013 YTD)
- CRB Commodities Index = -1.4% on the week (down for the 8th week in the last 10 and -4% for 2013 YTD)
- GOLD and SILVER = down -7% and -13% last week, respectively (taking Gold’s YTD decline to -16.9%)
All the while, the Gold Bulls continue to say almost the opposite of what we have been ranting about for 6 months. Paulson & Co. wrote to their investors that central bank “stimulus will eventually lead to inflation.” But that’s my point, eventually already happened.
We already had the greatest commodity inflation in world history. If the most asymmetric long-term move in all of Global Macro continues higher from here (#StrongDollar), this will continue to be an epic #CommodityDeflation, not inflation.
Don’t take my word for it – ask Mr Market, what was priced in when Bernanke said he’d go to infinity and beyond (6 months ago)?
- Silver is down -29% in the last 6 months
- Rubber is down -25% in the last 6 months
- Japanese Yen is down -25% in the last 6 months
Again, if you get the US Dollar right, you’ll get a lot of other big things right. There are plenty of other ways to make money on this other than being short Gold and Copper Miners (we remain short Freeport, FCX, btw):
- Emerging Markets (EEM)
- Russian Stocks (RSX)
- Peruvian Stocks (EPU)
Peruvian stocks? You have to be kidding me Mucker. Who the heck do you think you are making calls on Peru – what’s next, Peruvian Par Bonds? Ha! Actually Peru just dipped inside of Russia for the world’s 2nd worse performing stock market YTD (Cyprus is the worst at -15%).
The reason why you shouldn’t have your 401k choking on Peru is the same as why you shouldn’t have it stuffed with Gold, Silver, or Corn. Peru a commodity economy (85% of exports) and its stock market is 37% indexed to Basic Material and Energy stocks.
As a point of reference, only 13% of the SP500 is in Basic Materials and Energy. And we don’t want you to be long those S&P Sectors (XLB and XLE) either. Energy (XLE) led USA’s losers last week at -4.4%, only to be outpaced by Russian stocks (on the downside) at -4.9%!
How important is it for a Global Macro investor to get the world’s reserve currency right? Is it all interconnected? If you invest in Global Macro, do you have to get growth and inflation right too? We think the answers to these basic questions are self evident. That’s why we built our proprietary Growth/Inflation/Policy (GIP) Model.
That’s also why our views on growth and inflation have been different from consensus for a long time now. We get the #GrowthSlowing via US Dollar Debauchery inflation call (it’s a call we made consistently from 2007-2012). And when you see this week’s US preliminary GDP Growth print (Friday), sequentially in Q113 you’ll see #GrowthAccelerating as #CommodityDeflation takes hold too.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST 10yr Yield, VIX, and the SP500 are now $1, $96.02-101.62, $82.41-83.14, 97.12-101.06, $1.29-1.31, 1.68-1.76%, 14.05-18.69, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – April 22, 2013
As we look at today's setup for the S&P 500, the range is 36 points or 1.49% downside to 1532 and 0.82% upside to 1568.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.50 from 1.48
- VIX closed at 14.97 1 day percent change of -14.75%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Chicago Fed Nat Activity Index, March (prior 0.44)
- 8:30am: Fed’s Dudley speaks at economic conference in New York
- 10am: Existing Home Sales, March, est. 5m (prior 4.98m)
- 11am: Fed to purchase $3b-$3.75b notes in 2019-2020 sector
- 11:30am: U.S. to sell $32b 3M bills, $28b 6M bills
- U.S. Weekly Rates Agenda
- ITC may issue decision in Apple-Google patent dispute
- Senate Judiciary Cmte holds a hearing on legislation that would set up criteria for those now in U.S. illegally as step toward citizenship
- Secretary of State John Kerry attends NATO foreign ministers summit in Brussels
- Martin Dempsey, chairman of Joint Chiefs of Staff, visits Beijing as U.S. seeks greater Chinese pressure on N. Korea
- Washington Week Ahead
WHAT TO WATCH
- IMF talks over wknd included fight over new debt targets
- S&P early victory in U.S. ratings fraud suit seen as unlikely
- Dealers say no end to QE in 2013, Hatzius sees ’16 rates rise
- ABB to buy Power-One for $1b to add solar inverters
- ANA to finish 787 battery repairs by May after FAA approval
- Elan board unanimously rejects Royalty Pharma takeover offer
- Sales of U.S. existing homes probably climbed for 3rd month
- THQ files bankruptcy plan paying creditors from asset sales
- Bernanke to miss Jackson Hole symposium on schedule conflict
- Allstate said to seek offers for Lincoln Benefit business
- BP may delay development of GoM Mad Dog 2 oil field
- Netflix seen cracking down on acct sharing to bolster profit
- Argentina bondholder rejection sets up U.S. court ruling
- China Premier Li urges focus on rescue as quake toll mounts
- Mining in region was halted, Xinhua said; Toyota temporarily stopped production at Chengdu plant
- “Oblivion” is top weekend movie with $38m in NA sales
- 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
- Weekly Eco Preview: Growth in U.S. probably picked up in 1Q
- GDP, Apple, Exxon, BOJ, Iron Man 3: Wk Ahead April 22-27
- Hasbro (HAS) 6:30am, $0.04 - Preview
- Bank of Hawaii (BOH) 6am, $0.87
- Caterpillar (CAT) 7:30am, $1.38 - Preview
- Halliburton (HAL) 7am, $0.57 - Preview
- NVR (NVR) 8:50am, $7.86
- Lennox International (LII) 8am, $0.27
- Six Flags Entertainment (SIX) 8am, $(1.75)
- BancorpSouth (BXS) 4pm, $0.21
- Hexcel (HXL) 4pm, $0.41
- Swift Transportation (SWFT) 4pm, $0.16
- United Stationers (USTR) 4pm, $0.55
- Woodward (WWD) 4pm, $0.60
- Canadian National Railway (CNR CN) 4:01pm, $1.21 - Preview
- Ameriprise Financial (AMP) 4:05pm, $1.57
- Illumina (ILMN) 4:05pm, $0.38
- Netflix (NFLX) 4:05pm, $0.20 - Preview
- Rogers Communications (RCI/B CN) 4:05pm, C$0.77 - Preview
- Zions Bancorporation (ZION) 4:10pm, $0.40
- Rent-A-Center (RCII) 4:15pm, $0.87
- Texas Instruments (TXN) 4:30pm, $0.30
- Brookfield Canada Office (BOX-U CN) 5pm, C$0.39
- Packaging of America (PKG) 5pm, $0.56
- Crane (CR) 5:15pm, $1.03
- IDEX (IEX) 5:22pm, $0.71
- BBCN Bancorp (BBCN) Aft-mkt, $0.27
- MB Financial (MBFI) Aft-mkt, $0.42
- Pennsylvania REIT (PEI) Aft-mkt, $0.43
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Gold Advances for Fifth Day in Longest Winning Streak This Year
- Hedge Fund Gold Wagers Defy Worst Slump in 33 Years: Commodities
- Brent Below $100 a Fifth Day as U.S. Funds Reduce Bullish Bets
- Copper Falls as Lower Imports Into China Stoke Demand Concern
- Sugar Falls as Investor Buying Fails to Spur Rally; Cocoa Gains
- China Sugar Stockpile Plan to Reduce Need for Imports, Jia Says
- Corn Slumps to One-Week Low on Demand Concerns for U.S. Grain
- Thai Sugar Premium Drops as Futures Rise in New York: Green Pool
- Shanghai Gold Exchange Benchmark Contract Volume Jumps to Record
- Bullish Crude Wagers Drop the Most in Two Months: Energy Markets
- Singapore’s SGX Said to Gauge Demand for LNG Futures Trading
- Tata Faces Crisis as $20 Billion Spent on Water: Corporate India
- WTI Crude May Rebound in Weekly ‘Triangle’: Technical Analysis
- N.Z. Set for More Rainfall as Residents Assess Weekend Damage
The Hedgeye Macro Team
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Takeaway: Current Investing Ideas CAG, DRI, FDX, HOLX, MPEL
Investing Ideas Updates:
CAG: Consumer Staples sector head Rob Campagnino is less concerned about ConAgra’s earnings report and continues to like this name, in large part because of its sensitivity to declines in commodity prices. With the CRB commodity index well off its October 2012 and trending towards the lows of last June, Hedgeye continues bearish on the outlook for commodities. This resonates in the private label food business, which CAG has just expanded through a substantial acquisition. The private label business is primarily exposed to the costs of its inputs – by definition, consumers don’t buy no-name products out of brand loyalty. Campagnino notes that continued declines in commodity prices contribute to substantial expansion of CAG’s profit margins. (Please click here to see the latest Stock Report on CAG.)
HOLX: Health Care is not immunized to earnings any more than other sectors. Sector head Tom Tobin notes weak results so far this earnings season. Poor admissions results from Health Management Associates (HMA), HCA Holdings (HCA, formerly Hospitals Corporation of America) and weak lab volumes from Quest Diagnostics (DGX) indicate Hologic may report weak diagnostics revenues. Based on the way health care stocks have reacted to earnings reports so far this earnings season, this may be a non-event. Certainly for investors holding HOLX for longer-term profits, Tobin remains bullish. His fundamental case remains strong: a replacement cycle in mammography equipment, acceleration in doctor visits, and especially Tobin’s unique analysis pointing to a rise in birth rates, reversing a 40-year decline. (Please click here to see the latest Stock Report on HOLX.)
DRI: Restaurants sector head Howard Penney says the “win-win set up” remains intact at Darden Restaurants. Penney remains critical of DRI management which “continues to fall short of the standards we believe the investment community is demanding.” But, he says, “equity holders shouldn’t panic.” Penney says sequential improvement in industry trends should bail out the company’s business through the rest of this year, giving holders breathing room while we wait for a likely group of activists to emerge. Finally, at these prices the dividend yield is around 4% - much more than Treasury Secretary Jack Lew is paying these days! (Please click here to see the latest Stock Report on DRI.)
FDX: Industrials sector head Jay Van Sciver is skeptical on this week’s downgrades by analysts followingFederal Express. Says Van Sciver, “FedEx Ground is using its structural advantages to take market share from UPS,” but other Wall Street analysts prefer FDX’s “Big Brown” competitor. Van Sciver believes this could be because UPS is simpler to understand – not a compelling case for investment. This is like the joke about the man looking for his lost car keys under a streetlamp. “Did you lose them here?” asks his friend. “No,” replies the man. “I lost them across the street, but there’s a lot more light here.” Analysts are downgrading FDX now that it’s down almost 20% off its highs. Van Sciver tweeted “Looking at impact of mix shift is looking at yesterday’s news – actually, last year’s news. #oldnews.” And he points to concerns about the impact of the new Teamsters’ contract on FDX. Note to other analysts: FDX is non-union, giving them a huge labor cost advantage over UPS on ground. Van Sciver’s long-term bullish case for FDX remains in place. (Please click here to see the latest Stock Report on FDX.)
MPEL: Melco Crown Entertainment remains Gaming, Lodging & Leisure sector head Todd Jordan’s favorite name “with the catalyst of a terrific first quarter earnings release looming.” Jordan shared his projections this week, looking for net revenue that’s 3% above Wall Street consensus projections – and $267 million of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, a widely-used measure of basic operational profitability of a company) – 5% ahead of consensus. Jordan says “another strong quarter should bring the company closer to gaining the respect that it deserves from the investment community.” Jordan looks forMPEL to “transition from a trading vehicle to a core long-term holding” for large institutional holders, adding a further boost to multiple expansion. (Please click here to see the latest Stock Report on MPEL.)
Macro Theme of the Week – Buggin’ On Gold
All that glisters is not gold: In “Merchant of Venice,” the winner of Shakespeare’s challenge gets to marry the wealthy and alluring Portia, while the losers must foreswear marriage and remain celibate forever. That’s a big wager – but no bigger than those recommending you dive into the (increasingly less-) precious metal today.
Hedgeye CEO Keith McCullough tweets, “Hedgeye is putting together a list of un-accountable pundits who had you buy Gold $1755 and $AAPL $702 in SEP2012.” (Follow Keith @KeithMcCullough.) Keith is more than justified as the Hedgeye Macro team has been consistently bearish on gold for over a year. Meanwhile the price of gold has seen a 26% peak-to-trough decline going back to 2011 highs. That’s a Crash in anyone’s book.
Factors driving the decline in gold:
- Strong US Dollar – Gold is a haven, as in “any port in a storm.” But the dollar is recovering from a decade of decline and starting to turn up. Recent central bank moves to flood their markets with local currency only help make the dollar look better. The Bank of Japan (BoJ) just announced a plan to inject 500 trillion Yen into the economy – that’s about US$ 1.4 trillion today, but you’d better look quick, because the week the BoJ made the announcement, the Dollar rose more than 4% against the Japanese currency and looks poised to keep going higher.
- Economies are weak – In a world full scrambling for a crust of bread, there’s precious little demand for non-economic assets. Right now Warren Buffett’s observations about gold make all the sense in the world: you can’t eat it, you can’t wear it, you can’t live in it. Its only utility is to exercise the Greater Fool Theory: find a greater fool than yourself and sell it to him.
- Value compared to what? – “Haven Assets” are considered safe because they do not behave like other assets. In Wall Street jargon, they are “uncorrelated.” Investors afraid of the stock and bond markets traditionally fled to the shelter of gold and silver. In the past decade, so many investors bought so much gold – and so much more was sucked directly into the stock market in the form of various gold ETFs – that the “haven asset” now trades more like a stock. Its market behavior has changed and may enter an extended period of adjustment. Not only is gold no longer a Haven Asset, it’s not clear what it is. There are very few Absolute Rules of investing, but one that has stood us in good stead is: When uncertainty rules, prices go down.
- Price, price, and price – Markets move on Momentum. Rising prices beget more rising prices, while declines snowball into avalanches. The downward move in the price of gold has taken center stage. Price itself has become a negative catalyst, giving truth to the adage “the lower it goes, the lower it can go.” OK, that wasn’t an adage before. But it is now. Gold spot prices remain in a bearish formation, based on Hedgeye’s quantitative models, and don’t look like they will recover any time soon.
All That Is Gold Does Not Glitter: In his fantasy trilogy Lord of the Rings, J.R.R. Tolkein turns Shakespeare inside out to teach that some things are more precious than they appear. Our Macro team has identified what looks like the solid underpinnings of a return to stability in the US economy. From an investment point of view, Stability is often more desirable than Growth. (Remember: when uncertainty reigns, prices go down.)
This is at odds with what you will hear from most of Wall Street, where no one else seems to be embracing the notion of growth and stability coming back into the US economy. Here are a few of Hedgeye’s main points:
- Housing recovery – For the first time since before the financial crisis, the value of your home and the value of your stock portfolio are rising together. This happened when you weren’t looking.
- Submerging markets – The BRICS are BROCEN. Hedgeye’s Macro team says emerging markets are likely on the brink (“BRINC”…?) of the next crisis. Brazil just raised interest rates after admitting they can’t control inflation. Russia has no economy with oil prices in decline. And Hedgeye’s analysis pegs India as having tremendous exposure to risks from its corrupt political process and conflicted regulatory regime.
- Classical gas – Global oil and gas trades in both the spot and futures markets settle in dollars, so a strengthening dollar drives energy prices lower. A single consumer saving $5 a week at the pump is fairly insignificant. But multiplied and annualized across 240 registered vehicles in the US… You do the math – all these big numbers make our head hurt.
As a public service, we remind you that being bullish on economic growth doesn’t mean buy indiscriminately stock market at any price. These Macro correlations are not eternal truths, they’re just what’s going on right now. As Keith constantly reminds us, the Rule is, that the Rule is going to change. Don’t touch that dial.
Sector Spotlight – Gaming, Lodging & Leisure
Sector head Todd Jordan saw average daily revenue at the Macau gaming tables rise in the most recent week, bolstering his outlook for a double-digit increase this month. The gaming floors remain busy, apparently discounting the new Bird Flu scare and reports of harsh new border controls – the China Daily writes that junket operators will be criminally prosecuted if they organize a trip into Macau with more than 10 mainland citizens.
MGM China head Pansy Ho says Macau has cleaned up its act. “We don’t see any of that now” she said, referring to the days of money laundering and violence when shady characters surrounded the gaming venues. Adding to the cleanup, local operators are committing to improving air quality in gaming areas, after 28% of Macau venues failed an initial Health Ministry screen under the new smoking ban.
Not to be outdone by their neighbor across the straits, Taiwan is drafting legislation to permit gaming. A cabinet minister says the proposal includes a stipulation that there will be no tax imposed on gaming winnings for 20 years following the establishment of casinos in Taiwan. As they say in China, “Watch This Space.”
Investment Term: Support and Resistance
Perhaps the most widely discussed tools of the technical analyst, Support and Resistance represent price levels where stocks tend to run out of momentum. As their names suggest, they are levels it is difficult to break through – nearly immovable objects that stand in the way of the sometimes irresistible force of stock prices.
“Resistance” represents a pattern of high prices in a trend over a discreet time frame. Standard analytical approaches use segments such as 30 days, 50 days, 200 days, and one year. There are problems associated with all these approaches, notably the self-delusional phenomenon known as Confirmation Bias, when we see patterns that may not exist, and which confirm our pre-existing irrational and deeply held beliefs. If none of this makes sense to you, you may have suffered at one time from Repetitive Trading Loss Syndrome. Don’t worry, it afflicts nine out of every ten investors.
In the simplest of terms, chartists draw a line connecting the peaks in price. When the line forms a solid ceiling that prices keep hitting, but not breaking through, that price level comes to be called “Resistance.” It is the upper price that a stock resists breaking above.
“Support” is the same process, only with low prices. The support level of a stock is the price below which we should not expect the stock to trade. Taken together, Resistance and Support levels form the Trading Range of a stock. Like all other predictive measures of the investment markets, this works until it doesn’t.
Sometimes momentum builds up and stock prices shoot through the upper bound of the trading range. This is known as an Upside Breakout, or simply a Breakout. A Downside Breakout does the same thing, only to lower stock prices. Breakouts can signal that the stock is setting up to establish a new trading range. But upside breakouts can also be the sign of topping out, if they do not sustain the higher prices. And downside breakouts can turn into capitulations, when the last sellers dump their positions. When a stock trades through resistance it may be the signal that the very last buyer has finally bought – the stock will then have nowhere to go but down. And a breakdown through support can signal capitulation, with the last holdouts finally selling their shares, thus enabling the stock to trend higher.
Breakouts can result from irrational mass behavior as investors go into a frenzy of buying or selling. When fear becomes contagious on a trading floor, a stock can go into Meltdown – all bets are temporarily off as any semblance of rational decision making is cast aside and the markets go into panic mode.
A similar dynamic can take hold on the upside, as investors go into a feeding frenzy. When a stock gets hit with a wave of panic selling, it goes into a Meltdown. When the panic is a wave of buying, that’s sometimes known as a… Did you say “Meltup”? Hey, you’re getting good at this!
Gold isn't the only commodity getting crushed this year; crude oil is also taking a hit as the US dollar appreciates in value. We trade oil using the iPath S&P GSCI Crude Oil TR Index ETN (OIL) and not only is it down -6.75% year-to-date, it's down nearly -20% over a one year period. Energy is taking it on the chin this year and while it might be a bane for the energy companies, lower prices at the pump are welcomed by commuters worldwide. Lower oil prices help drive consumption which in turn drives global growth.
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