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Spectators and Actors

This note was originally published at 8am on April 30, 2013 for Hedgeye subscribers.

“We have become both spectators and actors in the great drama of existence.”

-Niels Bohr

 

You can’t geek out on quantum mechanics without giving a big shout-out to the great Danish atomic physicist, Niels Bohr. He won the Nobel prize for Physics in 1922. He would have been a beauty running the Hedgeye Research Team. No offense, DJ.

 

I was on a plane to Kansas City from Denver yesterday and couldn’t stop thinking about the progress that our research team has made. I’m actually becoming quite humbled when I read the work of junior analysts who have matured into senior analysts at our firm. They are well ahead of where I was 5 years into being in the game. A collaborative culture provides them a convex learning curve.

 

Applying chaos theory, predictive tracking algos, and the principles of thermodynamics to our Global Macro research is what we are doing. Yes, we are early. And, no, we don’t need to call a management team for “edge” on what the Euro is going to do next. In order to execute on our process, we have to submit ourselves to being both attentive spectators of the game and proactive actors within it.

 

Back to the Global Macro Grind

 

Not unlike playing team sports, you have to adapt to the game that you are in and play it accordingly. Because, no matter where you go this morning, here you are – at the all-time highs in the SP500 (+11.7% YTD). And the great drama of our existence within the game continues…

 

A few weeks ago I contrasted approaching markets from a Darwinian (evolutionary) rather than a Newtonian (time-independent) perspective. “Newton’s 17th century view stipulated the physical world as a closed system dominated by cause and effect” (Cosmic Evolution, pg 34). Whereas opening your mind and risk management process to non-linearity, uncertainty, and interconnectedness is the new frontier.

 

In both calling market tops on “valuation” and picking stocks irrespective of style factor risks, what we are learning here is that we all have a lot more to learn. “Gone is the deterministic and mechanistic paradigm” (Chaisson). Gone is the idea that central planners can smooth economic gravity and/or the unintended consequences associated with their trying to control the game.

 

Tomorrow and Thursday, central planners will once again attempt to do precisely the opposite of what I just wrote:

  1. Fed’s Open Market Committee will hopefully do nothing to our intermediate-term #StrongDollar TREND
  2. European Central Bank (ECB) will either cut rates or allude to cutting them soon

Rather than get upset about what we think these people who are paid to print political compensation should do, what we’ve done is build a model that front-runs their proactively predictable behavior (yes that’s sad). We call it our GIP Model (Growth, Inflation, Policy) where:

 

A)     POLICY is causal to a currency’s price, volatility, and expectations (across risk management durations)

B)     INFLATION is local (to currency moves) and will accelerate or decelerate based on POLICY (causal)

C)     GROWTH reacts (on a currency adjusted basis) to real-time local inflation expectations

 

No one is going to give my team a Nobel Prize for this. We’d have to had racked up debt and toiled in academia to prove out our practitioner’s model (with no real-world experience) for decades – and by that time we would have been way late. But, our Growth and Inflation forecasts have been better than anyone in the marketplace for the last 5 years, and I’m not going to apologize for that. We’re proud of it.

 

So back to the why on an ECB rate cut:

  1. #CommodityDeflation is perpetuating “lower than expected inflation readings” across Europe
  2. Both European employment and real (inflation adjusted) consumption growth remain weak
  3. So, in their central planning box of thinking, this provides theoretical air-cover to devalue the Euro

In market speak, this won’t save what the Europeans have been desperately trying to solve for (GROWTH). To the contrary, this POLICY to INFLATE will devalue the Euro versus the US Dollar, rally European stock markets, and plug the people (again). #EuroCrats, Unite.

 

Sound familiar?

  1. United States of America’s monetary POLICY to inflate (2010-2012) = US Dollar hits 40yr lows
  2. Japan’s Weimar Republic POLICY to inflation (2012 to ?) = Burning Yen, to be continued

Perversely, this is a great opportunity for America. This provides both the President of the United States and his conflicted and compromised Fed and Treasury an opportunity to get out of the way (Treasury just announced they’ll pay down $35B in borrowings!) and let the US Dollar strengthen versus her socialized European and Japanese counterparts.

 

Politically driven causal factors driving entropy into an unstable and non-linear market ecosystem of colliding global currencies, commodities, and country factors … Yes, this is war - a Currency War (thank you Jim Rickards). We’re just spectators and actors trying to perform within it.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1362-1493, $97.13-104.38, $3.06-3.26, $81.93-83.31, $1.29-1.31, 97.11-100.94, 1.66-1.76%, 11.71-14.61, and 1570-1603, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Spectators and Actors - Chart of the Day

 

Spectators and Actors - Virtual Portfolio



Sovereign Yield Risk

“Risk happens fast, and slow.”

-KM

 

I’m always looking for someone more intelligent than me to preface the Early Look with a quote that encompasses what I am thinking that day. It’s called validation theory. Especially in our group-thinking profession, it’s usually easier to convince people a new idea is a good one if someone else came up with it.

 

I also enjoy making stuff up. Today’s quote is a play on the title of one of my favorite investing books of the last 5 years, Thinking, Fast and Slow, by Daniel Kahneman. What I liked most about Kahneman’s thought process (and it’s really embedded in the title of his book) is that it’s Duration Agnostic. In a world where everyone wants certainty about timing risks, I say you embrace uncertainty instead.

 

One framework to apply to a duration agnostic risk signaling process is Chaos Theory. Think multi-duration, multi-factor. “The interplay between random factors (at the bifurcation point) and deterministic factors (between bifurcations) not only guides the systems from their old states into new configurations, but also specifies which new configurations are realized.” (Cosmic Evolution, pg 54)

 

Back to the Global Macro Grind

 

So how do you know which factors are random and which ones are deterministic? Can a random factor start to become deterministic? Oh, and how the hell do we know when we are at the bifurcation point?

 

Welcome to my thick mind staring into at a massive correlation matrix… It can be boring as the day is long, but it sure beats trading on inside information. It’s only when something really new begins that I get really excited. Sometimes that happens fast – sometimes it’s slow.

 

Whether you are looking at a market system or a physical one in nature, patterns have a not so ironic way of re-appearing. “… biological systems do change in response to an unpredictable mixture of randomness…” too (Cosmic Evolution, pg 54).

 

We’re just trying to adapt as the market’s ecosystem is telling us to…

 

So why rant about this today instead of yesterday? Well, the answer is pretty simple – and it’s born out of everything I just wrote. Something just jumped off my page as new – JGB Yields.

 

JGB, yeah you know me – as in the most asymmetrically depressed live market quote in all of Global Macro – as in Japanese Government Bond Yields:

  1. 10yr JGB Yields +10bps day-over-day to 0.84%
  2. 10yr JGB Yields are now +23bps month-over-month
  3. 10yr JGB Yields just jumped above my long-term TAIL risk line of 0.82%

Oh yes, darkness my old friend, I have been waiting for you. But for how long will you stay? I have never shorted you before. Are you toying with my emotions this morning, or are you for real? If you are for real, what will central planners in Japan do to tone you down?

 

Consensus has spent most of the last 6 months looking for a crisis that never happened. If and when this one happens, it will matter. And the if part isn’t the question in my mind. It’s the when that really matters – when will Japanese and US Government Bond Yields stop baking in that they’ll never go up?

 

Now that the Greenspan/Bernanke Top 3 (major bubbles) have popped (Tech, Housing, and Commodities), this is really the last of the mega bubbles left – the Bubble in Super Sovereign Debt.

 

I don’t like shorting a bubble until that bubble starts:

  1. Making lower all-time highs
  2. Confirming those lower-highs at what I define as my bifurcation point (my TREND line)

In terms of signaling Sovereign Yield Risk, measuring and monitoring the bubble happens upside down. Which is kind of cool; especially versus the alternative (i.e. being levered long US and Japanese Sovereign Debt for May 2013 to date).

 

In terms of big bang risk, the 2 most important live quotes on my risk management screens next to the US Dollar Index are:

  1. US Treasury 10yr Yield of 1.82%
  2. Japanese 10yr Government Bond Yield of 0.82%

These are what I call my long-term TAIL risk lines. And they matter – big time; especially when A) they continue to confirm (becoming less random) and B) have causal research (deterministic) factors explaining their confirmations.

 

What’s causal in driving our call for a continued #StrongDollar and higher-lows in UST bond yields? That’s easy – employment, housing, and consumption #GrowthAcellerating as the Fed is forced to tone down bond purchases.

 

What’s causal in driving higher JGB Yields? That’s less easy – credit risk is as likely as a growth scare. Since one or the other can really get bond yields to move, which one will it be? The only thing we know is that there has never been a country with its debt and deficit positions (as a % of GDP) that has burned its currency and not ended up in crisis.

 

So we’ll see. These Japanese risks can happen fast, or slow. They may not happen at all. But, on my risk signaling scorecard, the improbable risk of rising Yield Risk in both US and Japanese Sovereign Debt just went up in the last 2 weeks, not down.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.35-103.99, $82.63-83.56, 99.61-102.53, 1.82-1.96%, 11.74-14.24, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sovereign Yield Risk - Chart of the Day

 

Sovereign Yield Risk - 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.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 14, 2013   


As we look at today's setup for the S&P 500, the range is 32 points or 0.97% downside to 1618 and 0.99% upside to 1650.

                                                                                               

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: 1.67 from 1.68
  • VIX  closed at 12.55 1 day percent change of -0.32%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus. Optim, Apr, est. 90.5 (prior 89.5)
  • 7:45am: ICSC weekly sales
  • 8:30am: Import Price Index M/m, Apr, est. -0.5% (pr -0.5%)
  • 8:30am: Import Price Index Y/y, Apr, est. -3.1% (pr -2.7%)
  • 8:55am: Johnson/Redbook weekly sales
  • 11am: Fed to purchase $2.75b-3.5b notes in 2020-2023 sector
  • 11am: New York Fed issues quarterly household debt report
  • 11:30am: U.S. to sell 4W bills
  • 4:30pm: API energy inventories

GOVERNMENT:

    • House, Senate in session
    • SEC hosts Credit Ratings Roundtable w/panels on potential creation of assignment system for asset-backed securities, alternatives to issuer-pay business model
    • Senate Banking panel holds hearing on “Returning Private Capital to Mortgage Markets: A Fundamental for Housing Finance Reform,” 3:15pm
    • Senate Agriculture Cmte considers farm bill, 10am
    • Senate Judiciary Cmte considers immigration bill, 10am
    • House Energy and Commerce marks up H.R.1407, the “Animal Drug User Fee Amendments of 2013;” and H.R.1919, the “Safeguarding America’s Pharmaceuticals Act of 2013,” 4pm
    • IFC hosts Global Private Equity Conference w/speakers incl. TPG Founding Partner David Bonderman, World Bank Pres. Jim Yong Kim, 8:30am
    • U.S. Court of Appeals for the D.C. Circuit hears arguments over how Export-Import Bank processes loan-guarantee applications from foreign airlines, 9:30am

WHAT TO WATCH

  • Verizon Wireless agrees to pay co-owners $7b dividend
  • Vodafone may not announce more investor returns: JPMorgan
  • Third Point said to urge Sony to sell part of entertainment unit
  • Commerzbank to sell $3.25b shares at 38% discount to repay debt
  • CFTC probes use of derivatives by commodities traders: FT
  • XD Group said in talks to buy GE Prolec for as much as $1b
  • AstraZeneca, Cubist, Astellas said to make bids for Optimer
  • Ex-BlackRock manager said to be arrested in U.K. insider probe
  • Goldman Sachs investors should oppose pay plan, Glass Lewis says
  • Fed’s Plosser says slowing inflation not a concern for policy
  • German ZEW investor confidence rises less than forecast
  • Tata Steel expects $1.6b writedown on sluggish Europe demand
  • ECB picks fight with Germany on rules for handling failing banks
  • Spain sells 12-mo. bills at yield below 1% for first time since 2010

EARNINGS:

    • Rona (RON CN) 7am, C$(0.14)
    • Valspar (VAL) 7:30am, $0.90
    • Argonaut Gold (AR CN) 7:30am, $0.08
    • Taminco (TAM) Bef-mkt
    • Vipshop Holdings (VIPS) 4:01pm, $0.04
    • Agilent Technologies (A) 4:05pm, $0.67
    • Eagle Materials (EXP) 4:15pm, $0.39
    • Taylor Morrison Home (TMHC) Aft-mkt, $0.22 - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Trades Near One-Week Low on U.S. Supply; IEA Sees Shale Boom
  • Used Gold Supply Heads for ’08 Low as Sellers Balk: Commodities
  • Gold Trades Near 2-Week Low on Physical Demand, Dollar Strength
  • Copper Falls Most in Two Weeks on Indications of China Slowdown
  • Corn Falls as Planting May Accelerate on Drier U.S. Weather
  • Cocoa Gains as Supply May Be Limited Before Expiry; Coffee Rises
  • Cooking Oil Imports by India Slump on Stockpiles, Low Demand
  • Rebar Falls After Chinese Industrial Output Signals Weak Outlook
  • Crude Supplies Gain for Fourth Week in Survey: Energy Markets
  • IEA Sees U.S. Oil Shockwaves Ousting OPEC as Supply Driver
  • Gold Rush Lifts Profit at Biggest Jewelry Maker: Corporate India
  • Gasoline Rises Most in Three Months at U.S. Pumps, Report Shows
  • Brazil Oil Auction Gathers Drillers With Taste of Africa: Energy
  • Deutsche Bank Sees SPDR Gold Falling 2-4 Million More Ounces

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

 

 

 

 

 

 

 

 

 

 

 


Trade of the Day: YUM

Takeaway: Keith bought shares of YUM today on weakness.

Keith bought YUM Brands (YUM) at 3:15pm today at $68.85 a share.

 

Keith writes, “(YUM is a) great trading stock because there's always something qualitative China and flu to tell stories about. (We’re) buying it back on red because (Restaurants sector head Howard) Penney likes the intermediate-term research view.”

 

Trade of the Day: YUM - YUM


USA: Was April Better than March?

 

TRADE vs. TREND:  In contrast to the general deceleration observed in March, on balance, the April Macro data to date is registering sequential improvement and agreeing with the TREND in the domestic economic data which has been one of discrete acceleration since November.  

 

As we have highlighted, with the consumer related data (housing, labor, confidence, consumption, commodity deflation) remaining strong, we have been inclined to stick with the TREND view as it relates to asset class positioning and targeted exposure in domestic, consumer facing equities.  We show the M/M (TRADE) as well as the Q/Q and Y/Y (TREND) changes in the table below.

 

April:  The bulk of the reported consumer, housing, confidence and inflation data continued to come-in positive in April. And while the ISM New Orders, Backlog and Current Production components all improved sequentially with the latest reading, the regional manufacturing data slowed further in aggregate. On the balance sheet side of the consumer, given the strong purchase application and pending home sales figures, we expect the April Housing data to remain strong.      

 

Retail Sales:  This morning's data showed U.S. Retail Sales growth accelerating sequentially across the various index aggregates. Total Retail and Food Service Sales accelerated to +0.1% m/m in April vs a revised -0.5% in March.  On a year-over-year basis, growth in Total Retail Sales and Retail Sales less Food and Auto accelerated 70 bps and 60 bps sequentially, respectively.  

 

On the tax refund front, the latest treasury data (5/9/13) shows individual income tax refunds are currently lagging last years total by ~$8.8B. In addition to higher refund totals stemming from higher nominal tax receipts in FY12, we expect the remaining delta due to tax refund processing delays to resolve positively over the balance of the month.

 

USA: Was April Better than March? - U.S. Eco Summary Table 051313

 

 

Christian B. Drake

Senior Analyst 

 


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