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AN END TO THE “END OF THE WORLD” TRADE?

Takeaway: If the crashing yen and tumbling JGB market are signaling anything to us, it’s that the end-of-the-world trade appears to be ending.

This note was originally published May 15, 2013 at 16:26 in Macro

SUMMARY BULLETS:

 

  • JGBs are fast falling in price on a combination of improved domestic and global growth expectations and a parabolic increase in domestic inflation expectations. Credit risk is not a meaningful factor in the recent backup in JGB rates.
  • If the crashing yen and tumbling JGB market are signaling anything to us beyond Japan, it’s that the end-of-the-world trade appears to be ending. To varying degrees, these signals are being confirmed across the US Treasury bond market and in the price of gold, which are also breaking down/broken down quantitatively.
  • Could we see a 1994-style or 2003-style backup in super-sovereign interest rates over the next 12 to 18 months? Absolutely – especially if you believe in the reflexive @HedgeyeMacro bull thesis for the US economy: #StrongDollar = #ConsumptionTaxCut; #HouseholdFormationAcceleration; #BabyMakingBacklog; #ParabolicHousingMarket; and #LaborMarketImprovement.
  • The key question investors should be asking as it pertains to their US equity exposure is whether Wednesday’s setup is more akin to 1994 (SPX down -1.5%) or 2003 (SPX up +26.4%). The Weimar Nikkei 225 doesn’t really care all that much, as it appreciated +13.2% in 1994 and +24.5% in 2003 in spite of the commensurate backups in JGB rates.

 

It would be an understatement to say that JGB yields are backing up across the curve. From their respective YTD lows (2/12 for 2Y; 4/4 for 10Y and 4/5 for 30Y), nominal JGB yields have backed up +11bps, +41bps and +79bps on the 2Y, 10Y and 30Y tenors, respectively. Looking to the 2Y and 10Y tenors, specifically, the JGB market’s pricing in of the regime change at the Bank of Japan (unprecedented monetary base expansion; longer maturity purchases) has now been completely unwound.

 

AN END TO THE “END OF THE WORLD” TRADE? - 1

 

Looking to the 10Y JGB tenor specifically, the recent selloff has some investors believing that the time is now as it relates to a JGB market swoon. Irrespective of the fact that a lot of those same investors have been inappropriately making that call for years, we are finally inclined to side with them at the current juncture as yields have finally broken out above our long-term TAIL line of resistance (now support).

 

AN END TO THE “END OF THE WORLD” TRADE? - 2

 

From our macro team’s perspective, there are three primary reasons why a super-sovereign debt security like a JGB, UST or Bund would fall in price:

 

  1. Expectations of #GrowthAccelerating
  2. Expectations of #InflationAccelerating
  3. Credit risk rising

 

Below, we explore all three from Japan’s perspective and offer up our thoughts on what may be the beginning of the end for the #EOW (end-of-world) trade (i.e. long USTs, JGBs, JPY and Gold).

 

#GrowthAccelerating?

As we mentioned in a recent research note, the trend in Japanese economic data is finally starting to improve – which is to be expected given that the country is attempting to confirm an escape from its third recession in the past five years. From an international perspective, we continue to sing the praises of our non-consensus bullish thesis on US economic growth. #StrongDollar commodity deflation has proven to be a marvelous offset to analytically-loose fiscal policy fears (sequestration and tax-hikes) in the year-to-date.

 

AN END TO THE “END OF THE WORLD” TRADE? - UNITED STATES

 

Jumping back to Japan specifically, BOJ Governor Haruhiko Kuroda today rejected an opposition-party member's argument that the recent surge in the Japanese equity market is out of line with Japan's real economy, stating: "At this moment I do not think they are in a bubble."

 

As previously mentioned, JGB yields are starting to back up in aggressive fashion – much like they did back in 1994 and 2003, alongside a commensurate backup in yields across the US Treasury curve. Both were positive signals for Japanese equities then and the current signal is likely indicative of the asset allocation shift we have been calling for in recent months.

 

AN END TO THE “END OF THE WORLD” TRADE? - 4

 

AN END TO THE “END OF THE WORLD” TRADE? - 5

 

To that tune, only 6.8% of Japanese household financial assets are held in equities vs. 14.4% for the Eurozone and 32.8% for the US. Clearly there’s lots of hay to bale for “Mrs. Watanabe” and her 55.2% allocation to currency and deposits – which then are funneled back into JGBs via bank intermediation.

 

This circuitous  method of sovereign financing has saddled roughly one-fourth of Japanese banks balance sheets with low-yielding JGBs – exposing them to a meaningful degree of interest rate risk. Per a 2H12 report out of the BOJ:

 

  • Japanese banks would face a total of 6.7 trillion yen ($84 billion) in losses if rates rise by +100bps;
  • Losses at major banks would total 3.7 trillion yen, while those at regional banks would amount to 3 trillion yen; and
  • The average maturity of Japanese debt held by large lenders is about 2.5 years and about 4 years for regional banks.  

 

Of course, Japanese banks would love for yields to back up in a controlled manner (i.e. at a rate where credit expansion can occur to help offset marked-to-market losses on existing holdings). The average interest rate on new loans across the Japanese banking system has consistently tracked the 10Y JGB yield to new all-time lows over the past 20 years, compressing banks’ net Interest margins and eroding banks’ earnings power in the process.

 

AN END TO THE “END OF THE WORLD” TRADE? - 6

 

#InflationAccelerating?

You know where we stand on Policies To Inflate and the likely unintended consequences of Japan burning its currency at the stake, so there’s no sense in wasting anyone’s time rehashing that here. What is worth pointing out, however, is the fact that Japanese breakevens have gone absolutely parabolic, closing at 1.84% on the 5Y tenor. The JGB market is taking Abenomics quite seriously.

 

AN END TO THE “END OF THE WORLD” TRADE? - 7

 

AN END TO THE “END OF THE WORLD” TRADE? - 8

 

On the recently released April Consumer Confidence report (which ticked down -0.3 month-on-month to 44.5), the percentage of Japanese households that expected consumer prices to rise increased +370bps MoM to 82.8% – good for a ~4.5yr high.

 

#CreditRiskAccelerating?

This is probably the least likely cause of the recent plunge in JGB prices. At this point, reminding investors of Japan’s bleak sovereign fiscal situation is not worth the time it would take to type it. That being said, however, the Japanese sovereign itself is not immune to interest rate risk – particularly if the aforementioned backup in rates is being driven by inflation, rather than economic growth.

 

It’s worth noting that debt service already consumes 47.2% of tax and fee revenue in Japan, which also equates to about 4.6% of nominal GDP. The sovereign interest expense alone accounts for 44.5% of debt service and 1.8% of nominal GDP – and that’s on a weighted average cost of capital of 1.2%.

 

AN END TO THE “END OF THE WORLD” TRADE? - 9

 

AN END TO THE “END OF THE WORLD” TRADE? - 10

 

AN END TO THE “END OF THE WORLD” TRADE? - 11

 

From a credit market perspective, buyers and sellers of CDS contracts on the Japanese sovereign continue to see waning risk of a sovereign default. That’s bad news for crisis sellers across the investment landscape. Again, you won’t ever see us #timestamp a call on sovereign credit risk without some confirming evidence from the credit market itself – of which there is none in Japan at the current juncture.

 

AN END TO THE “END OF THE WORLD” TRADE? - 12

 

All told, we see limited signs that the recent backup in JGB yields is being driven by credit risk. The only new news on the Japanese fiscal policy front worth mentioning is the Ministry of Finance’s decision to punt the announcement of its medium-term fiscal reconstruction plan to the SEP G-20 Summit in Russia, originally scheduled for next month’s G-8 meeting in the UK.

 

That’s an extremely loose catalyst for the credit risk camp to hang their hats on here. In fact, the only bearish credit risk scenario we can piece together from that is the fact that it will come after the Upper House elections in late-JUL. By then the LDP will have a likely majority there as well, giving it full reign to enact whatever fiscal policies it pleases – including kicking the can down the road on the first VAT hike, which is scheduled to occur early next year. Recall that former DPJ Prime Minster Yoshihiko Noda staked his political career on getting that piece of legislation ratified.

 

#EOW Ending?

If the crashing yen and tumbling JGB market are signaling anything to us, it’s that the end-of-the-world trade appears to be ending. To varying degrees, these signals are being confirmed across the US Treasury bond market and in the price of gold, which are also breaking down/broken down quantitatively.

 

AN END TO THE “END OF THE WORLD” TRADE? - 13

 

AN END TO THE “END OF THE WORLD” TRADE? - 14

 

Could we see a 1994-style or 2003-style backup in super-sovereign interest rates over the next 12-18 months? Absolutely – especially if you believe in the reflexive @HedgeyeMacro bull thesis for the US economy: #StrongDollar = #ConsumptionTaxCut; #HouseholdFormationAcceleration; #BabyMakingBacklog; #ParabolicHousingMarket; and #LaborMarketImprovement.

 

The key question investors should be asking as it pertains to their US equity exposure is whether today’s setup is more akin to 1994 (SPX down -1.5%) or 2003 (SPX up +26.4%). The Weimar Nikkei 225 doesn’t really care all that much, as it appreciated +13.2% in 1994 and +24.5% in 2003 in spite of the commensurate backups in JGB rates.

 


Gold Crushed

Client Talking Points

Gold Getting Crushed

Gold prices are dropping further and faster, down another 1.5% overnight, and down 25% since September. It’s getting close to our oversold signal. We’ve have crystal clear on the reasons why. Like 1982 when consensus didn’t think the US economy was recovering, it was actually recovering. Gold didn’t like #GrowthAccelerating 31 years ago, and it doesn’t like it today.

JGBs Again

We had one of the biggest moves in the JGB market in roughly a decade in the past week. We had a 30 basis point move higher, then overnight we had a 10 basis point drop to a yield of 0.82%. Machine tool orders were weaker, and consumer confidence was slightly lower in Japan. We’re watching JGBs closely here.

Asset Allocation

CASH 48% US EQUITIES 15%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 22%

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.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 

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.

Three for the Road

TWEET OF THE DAY

“Some of these mining execs are straight out of Atlas Shrugged. Horrible for shareholders.” -- @KeithMcCullough

QUOTE OF THE DAY

“It’s hard to beat the person who never gives up.” – Babe Ruth

STAT OF THE DAY

45-3, the Miami Heat’s record in their last 48 games following their playoff series victory over Chicago last night


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 16, 2013   


As we look at today's setup for the S&P 500, the range is 27 points or 1.55% downside to 1633 and 0.07% upside to 1660.

                                                                                               

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10A


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.70 from 1.70
  • VIX  closed at 12.81 1 day percent change of 0.31%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: Fed’s Rosengren speaks in Milan
  • 8:30am: CPI M/m, April, est. -0.3% (prior -0.2%)
  • 8:30am: CPI Ex Food & Energy M/m, April, est. 0.2%
  • 8:30am: Init Jobless Claims, May 11, est. 330k (prior 323k)
  • 8:30am: Continuing Claims, May 4, est. 3m (prior 3.005m)
  • 8:30am: Housing Starts, April, est. 970k (prior 1.036m)
  • 8:30am: Housing Starts M/m, April, est. -6.4% (prior 7.0%)
  • 8:30am: Building Permits, April, est. 941k
  • 8:30am: Building Permits M/m, April, est. 3.8%
  • 8:30am: Annual revisions to earlier data
  • 9am: Fed’s Fisher speaks at NABE conference in Houston
  • 9:45am: Bloomberg Economic Expectations, May (prior -4)
  • 9:45am: Bloomberg Consumer Comfort, May 12 (prior -29.5)
  • 10am: Philadelphia Fed, May, est. 2 (prior 1.3)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector
  • 12:30pm: Fed’s Raskin speaks on economy in Washington
  • 3:05pm: Fed’s Williams speaks in Portland, Ore.
  • 6pm: Riksbank’s Stefan Ingves speaks in Chicago 

GOVERNMENT:

    • President Obama meets with Prime Minister Recep Tayyip Erdogan of Turkey to discuss Syria, trade, countering terrorism
    • 9:30am: Senate Armed Svcs Cmte holds hearing on 2001 Authorization for Use of Military Force
    • 9:30am: House Transportation and Infrastructure Cmte marks up H.R. 3, which would give Congress power to issue approval for Keystone XL pipeline
    • 10am: House Oversight and Government Reform Cmte, Data Transparency Coalition hold a “DATA Demonstration Day,” to show how digital technologies would improve efficiency, management, accountability of government
    • 10am: House Financial Svcs Cmte hears from SEC’s Mary Jo White on commission’s budget request
    • 10:30am: House Oversight and Government Reform panel holds hearing on oil, gas production on federal lands
    • 10:30am: Senate Small Business Cmte holds hearing on effect of E-Verify systems
    • 11am: House Judiciary panel holds hearing on electronic employment eligibility verification systems
    • 1pm: House Judiciary panel holds hearing on Agricultural Guest Worker Act
    • Obama seeks to revive reporter-shield bill post-AP subpoenas

WHAT TO WATCH

  • Cisco 4Q adj. EPS view in line, rev. view midpoint misses
  • Time Warner Cable said to weigh stake in Hulu web-video service
  • Roche’s GA101 gets FDA breakthrough-therapy designation
  • Apple said to be subject of U.S. Senate offshore tax hearing
  • Obama forces out acting IRS chief in bid to restore trust
  • Novartis considers bid for Actavis: WSJ
  • Plosser says Fed should exit mortgage-backed securities market
  • Hartford Financial hires Deutsche Bank to seek buyer for Japanese unit
  • Japan 1Q GDP rose most in yr on consumer spending, exports
  • Tesla to raise as much as $830m to repay U.S. green-car program
  • Bristol-Myers drug cocktail quells melanoma tumors: Study
  • Cancer treatment’s brutal side effects may be cut: Studies
  • Platts retains energy trader confidence amid price-fix probe
  • U.S. wants $5b from Swiss banks to end tax row: Handelszeitung
  • William Lyon Homes raises $217.5m pricing shares above range
  • MSCI announces changes from semiannual global index review
  • Investors see U.S. markets with best return in global poll

EARNINGS:

    • Prestige Brands (PBH) 5:30am, $0.35
    • Flowers Foods (FLO) 6:30am, $0.43
    • Kohl’s (KSS) 7am, $0.57 - Preview
    • Wal-Mart Stores (WMT) 7am, $1.15 - Preview
    • CAE (CAE CN) 8:18am, C$0.18
    • Applied Materials (AMAT) 4pm, $0.13
    • Dell (DELL) 4:01pm, $0.35
    • Autodesk (ADSK) 4:01pm, $0.45
    • Aruba Networks (ARUN) 4:03pm, $0.12
    • Brocade Communications (BRCD) 4:04pm, $0.15
    • Brady (BRC) 4:04pm, $0.60
    • Nordstrom (JWN) 4:05pm, $0.76 - Preview
    • ViaSat (VSAT) 4:05pm, $0.01
    • J.C. Penney (JCP) 4:30pm, $(1.05) - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Near One-Month Low as Soros, Blackrock Reduce ETP Holdings
  • Soros Joins Gold-Stake Cuts Before Bear Market Drop: Commodities
  • Strict Checks on China Scrap Copper Imports Boost Ore Demand
  • Copper Falls for Third Day on Mounting Signs of China Slowdown
  • Gold Demand Slid 13% to Three-Year Low on Investor ETP Sales
  • China’s Copper Output in April Rises 14 Percent to 558,000 Tons
  • Gold Demand in China Surges 20% to Record in First Quarter
  • WTI Crude Declines as Fuel Demand Drops Amid Economic Weakness
  • Sugar Falls to 2010-Low on Brazil, Thailand Output; Cocoa Drops
  • Soybeans Advance on Indications of Sustained Demand From China
  • China’s June Soybean Imports May Reach Record, Govt Center Says
  • Gold Price Slump Increased India Appetite for Bullion, WGC Says
  • Paulson Sold Gold Miners, Bought Family Dollar Last Quarter
  • Platts Retains Energy Trader Confidence Amid Price-Fix Probe
  • Freeport Stops Papua Mining After Tunnel Collapse Kills Five

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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Unstable Systems

This note was originally published at 8am on May 02, 2013 for Hedgeye subscribers.

“Certainty does not necessarily hold for unstable systems.”

-Eric Chaisson

 

Markets and economies are unstable systems. They could be less unstable if governments just left them alone – but that’s not going to happen, so Embrace Uncertainty. By changing a few words in a FOMC or an ECB statement, a central planner can change your life.

 

For the growing base of the gainfully employed trying to sell you certainty, I am becoming the anti-christ. I kind of like that. My team’s work is grounded in history (context), math (process), and evolution. Government forecasters are more like Newtonian navel-gazers.

 

The biggest risk to Bernanke (Fed), Draghi (ECB), and Kuroda (BOJ) policies isn’t the policy itself; it’s the expectation embedded in their forecasts that drive those policies . No one actually trusts that these guys will ever get it right – we’re all just trying to front run them.

 

Back to the Global Macro Grind

 

“When a system is orderly (that is, low in entropy and rich in structure), more can be known about that system than when it is disorderly and high in entropy” (Cosmic Evolution, pg 49). That’s a great way to characterize what the modern day market system is not (orderly).

 

Expectations drive volatility. Unless you are the guy on the other end of the phone getting inside information on a central planner’s next big move, there is nothing orderly about market expectations. Everything can change, fast.

 

For now, the only thing that’s been changing really fast (down Gold, Oil, etc.) is the expectation that Bernanke is going to be able to devalue the dollar in perpetuity. That expectation has two big year-over-year parts:

  1. ABSOLUTE – both US fiscal and monetary policy expectations are tighter, on the margin
  2. RELATIVE – both ECB and BOJ fiscal/monetary policy expectations are looser, on the margin

And, unless the collective consensus that is America’s new transparency/accountability/trust transmission mechanism (Twitter) fails at demanding more of what has been working in the US economy (and at the pump, and in the stock market, and in terms of home price appreciation) for the last 4 months, I expect to see more of the same on those two big parts throughout the coming months.

 

Remember, this isn’t like the April/May ‘sell and go away’ calls that Hedgeye has made, literally, every year for the last 3 years (2010, 2011, 2012 #timestamped). The spring/summer of 2013 is more like 2009 where:

  1. Q109 #StrongDollar drove #CommodityDeflation (lower prices at the pump into the spring/summer into Q209)
  2. Consumption #GrowthAccelerating (from Q109 to Q2/Q3 2009) when consensus didn’t expect it

Our proprietary Hedgeye GIP (Growth/Inflation/Policy) Model has not changed since 2008. That’s why we were as bullish in March of 2009 on the US Consumption #GrowthAccelerating front as we are now. Competitively speaking, the good news is that Old Wall’s models didn’t change either.

 

What was different in 2010, 2011, and 2012 (coming out of Q1 versus 2009), wasn’t our model – it was what makes an already (and endemically) unstable market system more unstable – incremental government policy expectations (ie. multiple QEs).

 

In each of the last 3 years, Bernanke imposed a Dollar Devaluation Policy on global market expectations in Q1:

  1. Inflation expectations then rose, sequentially, from Q1 to Q2
  2. Markets front-ran the Fed, chasing food/oil prices higher from Q1 to Q2
  3. And, rising inflation (sequentially) slowed real inflation-adjusted consumption growth

Then… the Fed’s finest, in their vigilant pursuit of selling their employers (politicians) “stability” and certainty, had to whisper sweet nothings to the old boys throughout the market swallows of the summer. Then… ta-dah… another QE coming out of Jackson Hole… markets (especially Gold) ripped… economy did nothing… etc. etc. etc.

 

Unfortunately (for him), that’s all Bernanke’s historical baggage to deal with now. I’m personally done with the guy. Away from some family weddings, the best news of my 2013 summer is that he’s not going to be in Jackson Hole this year.

 

When I read yesterday’s FOMC statement, I breathed a sigh of relief. My life is uncertain enough. Having a little more certainty that this man is going to be doing nothing for the next little while made me sleep easier. I hope it did the same for you too.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1374-1483, $98.41-103.92, $81.42-82.53, $1.29-1.32, 97.11-100.53, 1.63-1.73%, 12.91-14.96, 918-955, and 1576-1605, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unstable Systems - Chart of the Day

 

Unstable Systems - Virtual Portfolio



Mercy Calling

“Nothing emboldens sin so much as mercy.”

-Shakespeare

 

US stock market bears and Gold bulls alike are begging for mercy this morning, and we will give it to them. I am getting my first coordinated overbought (SP500) and oversold (Gold) signal of 2013. Both signals are explicitly linked to an overbought one in the US Dollar Index. #StrongDollar, on behalf of the 99% of us, we salute you.

 

The aforementioned quote is one of my favorites in Shakespeare’s Timon of Athens. When I read it in college, I glazed right over it. When I re-read it in William Silber’s Volcker – The Triumph of Persistence, I smiled. I have had 2 feet on the floor, every day, for 5 years competing with sell-side research that doesn’t have the downside I do if I start to get things really wrong. I don’t want mercy.

 

Volcker believed in mercy – but he also believed free market actors needed to understand and feel pain. After the Policies to Inflate of the 1970s , Volcker reminded Dan Cordtz on ABC in 1980 that “people need to change their expectations and their behavior, and that is always an uncomfortable process.” (Volcker, pg 198). So was being long “inflation” and/or commodities for the next 7-8 years.

 

Back to the Global Macro Grind

 

Bernanke, of course, doesn’t have the spine to say anything remotely close to what Volcker did throughout the early 1980s. And the sad reality of our centrally planned market lives (after Bernanke) is that someone like Janet Yellen or Turbo Tax Timmy won’t either.

 

But, as my man Einstein, would say – everything is relative. And the probabilities continue to mount that both the Japanese and Europeans will be more dovish than anyone at the Fed is allowed to be; particularly when we see a 6% handle on US unemployment.

 

American confidence in government was so beaten down by Nixon, Carter, and Arthur Burns (the 1970s version of Bernanke), that by the time 1982 rolled around consensus couldn’t believe that #CommodityDeflation served as a tax cut. Growth stabilized and:

  1. Gold kept getting hammered as #GrowthAccelerating became clearer in 1
  2. Oil prices went straight down – the average price per barrel under Reagan = $16.53!
  3. US Dollars ripped the #EOW America camp a new one (average USD Index = $115.25 under Reagan)

No this isn’t an I love Reagan thing. Have mercy on me, please. US politics makes me sick, blah! If the US Dollar Index were to scream +37% to the upside (from today’s price), and Oil were to crash (like down more than 80% from here), would you be happy?

 

That’s what I am talking about when I say #StrongDollar, Strong America. Russian oligarchs, Middle Eastern Kings, and American Oil/Mining execs might disagree with me on that. Just a bit.

 

What’s in your wallet? How much Gold are you going to bring to buy beers at tonight’s Bruins game? The shiny metal expectations of a Ben Bernanke to Infinity and Beyond world are fading folks. Gold is crashing (-25% since that epic policy day for Bernanke in September of 2012, when Cramer proclaimed “I love Gold here!”); smoked again this morning, -1.5% to $1372/oz.

 

Here are my big mercy signals (immediate-term TRADE overbought and oversold) born out of this USD/Gold capitulation:

  1. US Dollar Index = immediate-term TRADE overbought at $84.21 (remains in a Bullish Formation)
  2. Gold = immediate-term TRADE oversold at $1370 (remains in a Bearish Formation)
  3. SP500 = immediate-term TRADE overbought at 1660 (remains in a Bullish Formation)

Overbought and oversold is as prices do. So I could be wrong on this (i.e. early) by 1-2 days or I could be really right. The entire point about my risk management process is making mercy decisions when the pain points to the highest probabilities I can model.

 

The hardest thing to do in this game is wait on your pitch. I still swing at outside pitches way too often. Whenever I do, it’s either my emotions or our research views that get the best of me. For those mistakes, I have no one to blame but myself.

 

The easiest thing to do in Global Macro is ride trends. The big moves (particularly at bifurcation points in policy) tend to be more glacial than you see in single stocks. Gold went up for 12 straight years don’t forget. Unwinding #EOW (end of the world trade) will take time.

 

Process Review - our risk management model is Duration Agnostic. That means we contextualize the short term within the long-term:

  1. TRADE = 3 weeks or less (our immediate-term risk ranges live in this time frame)
  2. TREND = 3 months or more (our best backtests live here – i.e. the calls we tend to get the most right)
  3. TAIL = 3 years or less (usually our best rate of change signal, only when the TREND agrees with it)

So, Bullish Formations are securities that are bullish on all 3 of our core durations (TRADE, TREND, and TAIL) and Bearish Formations are just the mirror opposite of that.

 

Gold is the mirror opposite of the US Dollar and the SP500 right now. That’s why we are very loud and consistent about our views on all 3 of these big macro moves. Get the US Dollar right, and you tend to get a lot of other big things right.

 

Getting the mercy pain points right is a very immediate-term risk management exercise. I do all of that timing/probability work underneath the hood myself. I used to tar basement walls for my Dad too. I like getting my hands dirty (if someone pays me to). Mercy Calling is a dirty job, but someone has to do it.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $100.18-103.98, $82.93-84.21, $1.28-1.30, 100.21-103.39, 1.86-1.99%, 12.23-13.87, 971-993, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Mercy Calling - Chart of the Day

 

Mercy Calling - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
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