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Sovereign Yield Risk

This note was originally published May 14, 2013 at 07:38 in Early Look

“Risk happens fast, and slow.”



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 $1421-1459, $100.35-103.99, $82.63-83.56, 99.61-102.53, 1.82-1.96%, 11.74-14.24, and 1618-1650, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Sovereign Yield Risk - Chart of the Day


Sovereign Yield Risk - Virtual Portfolio


TODAY’S S&P 500 SET-UP – May 23, 2013

As we look at today's setup for the S&P 500, the range is 37 points or 2.14% downside to 1620 and 0.10% upside to 1657.     










  • YIELD CURVE: 1.76 from 1.80
  • VIX closed at 13.82 1 day percent change of 3.37%

MACRO DATA POINTS (Bloomberg Estimates):

  • 6:05am: Fed’s Bullard speaks on monetary policy in London
  • 8:30am: Init Jobless Claims, May 18, est. 345k (prior 360k)
  • 8:30am: Continuing Claims, May 11, est 3m (prior 3.009m)
  • 8:58am: Markit US PMI Preliminary, May
  • 9am: House Price Index M/m, March, est. 0.8% (prior 0.7%)
  • 9am: House Price Purchase Index Q/q, 1Q (prior 1.4%)
  • 9:45am: Bloomberg Consumer Comfort, May 19 (prior -30.2)
  • 10am: New Home Sales, April, est. 425K (prior 417K)
  • 10am: New Home Sales M/m, April, est. 1.9% (prior 1.5%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to buy $3.0b-$3.75b notes in 2019-2020 sector
  • 11am: Kansas City Fed Manuf Act, May, est. -4 (prior -5)
  • 1pm: U.S. to sell 10Y TIPS (reopening)
  • 3:30pm: ECB’s Draghi speaks in London
  • 8pm: St. Louis Fed dialogue on household finl stability
  • 10:55pm: Bank of Japan’s Kuroda speaks at Nikkei Conf


    • 9am: House meets to consider H.R.1911, the “Smarter Solutions for Students Act”
    • 9:30am: House Fin. Svcs. panel hearing on regulatory burdens, focused on Data Collection Relief Act (H.R. 1135); Small Business Capital Access and Jobs Preservation Act (H.R. 1105); Audit Integrity and Job Protection Act (H.R. 1564); proposal to amend Section 913 of Dodd-Frank Act on fiduciary duty for broker-dealers
    • 9:30am: House Judiciary Cmte Chairman Bob Goodlatte, R-Va., Rep. Darrell Issa, R-Calif., introduce high-skilled immigration bill
    • 10am: Senate Foreign Relations Cmte hears from Treasury Undersec. for Intl Affairs Lael Brainard, others, on U.S.-EU Economic relations
    • 10am: Senate Energy and Natural Resources Cmte forum on best practices, environmental concerns in shale development; Noble Energy CEO Charles Davidson to speak
    • 11am: Senate Commerce Cmte hears from Commerce sec. nominee Penny Pritzker
    • 11am: API conf. call on gas prices ahead of Memorial Day, summer driving season
    • 1pm: NTIA holds mtg on privacy, mobile app. transparency
    • 1pm: NOAA issues Atlantic Hurricane Season Outlook
    • 1:30pm: President Obama speaks on al Qaeda, drones, Guantanamo
    • 1:30pm: NASA media event on private sector space exploration, w/ Bigelow Aerospace President Robert Bigelow


  • Sprint’s sweetened offer for Clearwire fails to sway opponents
  • China manufacturing unexpectedly shrinks in blow to growth
  • Lloyds said to plan $8.7b auction of U.S. mortgage bonds
  • Blackstone, Prologis said to buy warehouses for $960m
  • Euro-area services, output rises more than forecast
  • Ford will quit making cars in Australia after 91 years
  • Packer’s Crown said to sell Echo stake for A$264m
  • Qinetiq puts U.S. services unit under review on sales slump
  • Norton Gold may seize on gold’s slump to make acquisitions
  • Wall Street seeks to change Dodd-Frank through trade talks


    • Children’s Place Retail Stores (PLCE) 6am, $0.61
    • Hormel Foods (HRL) 6:30am, $0.49
    • Toronto-Dominion Bank(TD CN) 6:30am, C$1.91
    • Patterson (PDCO) 7am, $0.62
    • Buckle (BKE) 7am, $0.82
    • Alkermes (ALKS) 7am, $0.15
    • Signet Jewelers (SIG) 7:08am, $1.12
    • Apollo Investment (AINV) 7:30am, $0.22
    • Dollar Tree (DLTR) 7:35am, $0.57 - Preview
    • Ralph Lauren (RL) 8am, $1.29
    • Ship Finance International (SFL) 8:24am, $0.29
    • Advance Auto Parts (AAP) 8:30am, $1.62
    • Toro (TTC) 8:30am, $1.17
    • GameStop (GME) 8:30am, $0.40
    • Gap (GPS) 4pm, $0.69
    • Ross Stores (ROST) 4pm, $1.07
    • Aeropostale (ARO) 4:01pm, $(0.17)
    • Pandora Media (P) 4:02pm, $(0.10)
    • Marvell Technology (MRVL) 4:03pm, $0.14
    • Williams-Sonoma (WSM) 4:05pm, $0.37
    • Salesforce.com (CRM) 4:05pm, $0.11
    • Infoblox (BLOX) 4:05pm, $0.06
    • Mentor Graphics (MENT) 4:15pm, $0.05
    • Sears Holdings (SHLD) 4:15pm, $(0.59)
    • Nordson (NDSN) 4:30pm, $0.84


  • Commodities Drop on Double Blow of China Data, Bernanke Remarks
  • French Wheat Premium Seen Erased by Russia Rebound: Commodities
  • Soybeans Touch Six-Month High on Lack of Supply Before Harvest
  • Brent Declines to Three-Week Low as China Manufacturing Shrinks
  • Gold Gains on Demand for Protection as Stocks Drop on China PMI
  • Freeport Says Grasberg’s Copper Can Last Days Following Accident
  • Palm Oil Advances to Six-Week High as Production Seen Declining
  • Sugar Imports by India May Jump as Prices Plunge on Global Glut
  • China Rule Changes May Halt Copper-Financing Deals, Goldman Says
  • Rebar Drops After China’s Manufacturing Unexpectedly Contracts
  • Oil Revolt Generates $35 Billion as Icahn-Singer Agitate: Energy
  • Fuel Oil Viscosity Gap Widens; Gasoil Crack Falls: Oil Products
  • Mine Tragedy Jogs Memories of Supply Shortfall: Chart of the Day
  • Non-OPEC Output Cost May Drive Up Crude Prices, Bernstein Says






















The Hedgeye Macro Team











Trade of the Day: LEN

Takeaway: Keith sold shares of Lennar (LEN) this morning for a tidy +2.39% profit.

Keith sold shares in Lennar (LEN) at 9:47am today at $43.35. Miami-based Lennar is one of America’s largest new home builders.


Keith writes of his sale of LEN stock, “Backcheck. Forecheck. Paycheck. Continue to fade the bears on housing, trading the builders with a bullish bias. #HousingsHammer”


Keith now has three winning trades on the long side of LEN since March.


Trade of the Day: LEN - LEN

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The Dollar Is En Fuego

Takeaway: It’s no secret that we like #StrongDollar. #StrongDollar equals Strong America.

This note was originally published May 17, 2013 at 14:17 in Macro

It’s no secret that we like #StrongDollar.  Historically, strong dollar periods have been characterized by lower commodity inflation, low energy prices, rising confidence and strong consumption growth. 


The Dollar is a causal factor in our model and our StrongDollar call over the last 5 months has backstopped our expectation for Gold and Commodity deflation and rising consumption as purchasing power benefits and discretionary share of wallet gets a boost. 


Year-to-date, we’ve seen the $USD march interminably higher alongside declining federal profligacy, improving domestic macro data, increasingly marginalized Fed policy, slower EM growth, emergent European dovishness and explicit Yen debauchery.  We expect the dollar to continue to benefit from a further perpetuation of these dynamics. 


Currently, the $USD remains in Bullish formation (Bullish TRADE/TREND/TAIL) and U.S. dollar correlations to the SPX (+) and Oil, Gold & Commodities (-) remain strong across durations.   


Now, we’re beginning to see confidence chase the dollar higher as consumer confidence measures begin a nascent break out of their 4 year slumber.   This morning’s University of Michigan Consumer confidence reading accelerated to 83.7 in May from April’s final reading of 76.4, posting it’s highest reading since July 2010.  


The acceleration in the Univ. of Michigan confidence reading agrees with recent breakout to new 5Y highs observed in the Bloomberg Consumer Comfort Index and the steady advance in the Conference Board’s measure of consumer confidence. 


Longer-term, outside of the last four years in which confidence readings essentially flat-lined, consumer confidence has been highly correlated with accelerating economic activity.  A sustained breakout in confidence alongside ongoing housing and labor market improvement represents a fertile factor cocktail capable of catalyzing positive economic reflexivity.    



#StrongDollar = Strong America.



Enjoy the weekend,

Hedgeye Macro


The Dollar Is En Fuego - U.S. Dollar


The Dollar Is En Fuego - Consumer Confidence vs DXY 051813


The Dollar Is En Fuego - Bloomberg Consumer Comfort 051713


The Dollar Is En Fuego - U.S. Dollar  Gas  GDP by Pres


Christian B. Drake

Senior Analyst 


Weimar Nikkei Rips Higher

Takeaway: If you really want to see your stock market rip, just burn your country’s currency.

We had more rip-roaring fun in Japan overnight where the Weimar Nikkei shot up another 1.6%. That brings the index up +51.5% year-to-date. That’s just inside Venezuela which is also devaluing its currency.


I suppose the lesson here is if you really want your stock market to rip, burn your country’s currency. Just hope people don’t pay attention to historical analysis in terms of how that might all end. 

Weimar Nikkei Rips Higher - JP.VN

Apparel Macro: Inflation Spreads Go The Wrong Way

Takeaway: Apparel inflation spreads just went the wrong way. If trends continue, it's enough to eat away 20% of the industry's profit stream.

Conclusion: We're seeing inflation spreads, which have been a positive margin event for the apparel industry's  margins over the past five quarters, revert back to back to more normalized levels as evidenced by the latest datapoints on import and spending data. This has negative implications for makers and sellers of basic apparel that have been printing outsized gross margin improvements due to input cost reductions since 2011. It's still early to step up short exposure here, but the datapoint is not good.


We continue to favor those names that have very defined company-specific growth drivers, such as WWW, RH, FNP, NKE, FL, KORS, and RL. While we still think it's early to put short exposure on in this space, we don't like companies that are more susceptible to easing inflation spreads and/or are meaningfully stepping up capital investment levels, like HBI, DKS, M, PVH, CRI, GPS, and FDO.    




By 'inflation cost spreads' we mean the difference in consumer price and retailer cost. They can't be looked at in isolation. For example, the average garment sells for around $10. But it's only about $3.50 to import at cost. In other words, a 10% hike in input costs leads to about a $0.35 deficit to overcome per garment -- or about a 3.5% change in consumer prices.


The good news is that the latest month shows a +$0.17 per garment spread. The bad news is that just one month ago that spread was $0.41, and the average over the past year was +$0.39. In other words, we're definitely looking at a deceleration on the margin. Two-thirds of the slip was driven by consumer prices, while the other third was import cost. On the consumer price side, the weakest prices were in children's apparel. We don't think it's enough for us to make a blanket call-out as it relates to an impact on CRI or PLCE. But it's a datapoint worth noting.


What does this translate to in aggregate?   It's often hard to put this math in context. But think of it like this. Last year, the apparel industry imported almost 24bn units of apparel.  If we keep units steady on a year/year basis (i.e. making no major assumptions about elasticity) then the change we saw over the past month incrementally accounts for about $5.7bn in pure profit.   This is about a $280bn industry. Let's be generous and say that it has 10% margins ($28bn in profit). So we just saw inflation spreads change (negatively) by 20% of the total profit stream of the apparel retail supply chain.


Many people might argue that you can't make macro calls like this and make any money. But once we chart the data against the industry's gross margins (which are at peak levels, mind you), we think we can make a strong arguement otherwise.


Apparel Macro: Inflation Spreads Go The Wrong Way - 1


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