prev

#StrongDollar Truths

This note was originally published at 8am on May 15, 2013 for Hedgeye subscribers.

“This means that truth is not a constant but is actually created.”

-George F. Kennan

 

The aforementioned quote comes Kennan’s 1947 State Department memo titled “Psychological Background.” He was writing about Stalin’s Russia, but he could have very well been writing about Putin’s Russia and/or Bernanke’s US monetary policy today.

 

The leadership is at liberty to put forward for tactical purposes any particular thesis which finds it useful to the cause at any particular moment and to require the faithful and unquestioning acceptance of that thesis by members of the movement.” (George F. Kennan, pg 260)

 

Who are the members of the US Dollar Devaluation Movement? Don’t blame the bureaucrat at the printing press for all of this. There’s no fair share in that. You have to lop together the entire Bush and Obama Administrations alongside Bernanke and his pandering press. Weak US Dollar policy created the weakest America you have seen since the 1970s. #StrongDollar is the only way out.

 

Back to the Global Macro Grind

 

This is why Kennan is so very relevant to US history. Truman’s paper pushers in Washington needed someone who not only lived the game (Kennan lived in Russia), but had a completely different perspective on how to play it going forward. Evolving as time and facts do is as American as most Americans want to believe they are. The American collective eventually sniffs out the truth.

 

One of my investing heroes, Ray Dalio, always asks: “What is the truth?” And I suspect that if you are held accountable to the returns in your accounts every day, that’s an important question for you to answer too. But do central planners trying to uphold their academic dogmas and/or the conflicted media who fawns over them want the truth? Or do they want to save face and access?

 

Sadly, those are rhetorical questions at this point. When it comes to Fed front-running, policy leaks, selective disclosures, IRS preference checks, spending scandals, etc etc. at this point, The People actually expect the government to be lying. That’s not good. Until it is. And I think, with CNBC ratings hitting all-time lows as markets hit all-time highs, conflicted and compromised sources are getting the message.

 

Americans may not be as smart as a TV pundit, but they generally know the truth when they see it.

 

If you have studied the last 40 to 100 years of US Federal Reserve Policy and the US Dollar history born out of its causal maneuverings, you’ll come to a very different definition of the truth about what Americans trust and respect. The highest confidence, hiring, and consumption periods in post WWII history were 1983-1989 (Reagan) and 1993-1999 (Clinton). They were also the strongest periods for the US Dollar.

 

If you need a Canadian to explain that to your elected Congressman and/or wanna be financial market TV star who has never actually played the game, fine – it will take some time though – take it from someone who spent the last 3 years at CNBC trying to explain this to them. In the meantime, the market is doing a really good job explaining it to everyone else who gets paid to listen.

 

What is the truth? Forget about what I think – let’s look at the scoreboard:

  1. US Dollar up another +0.4% yesterday to a fresh YTD high of $83.79 = +5.0% YTD
  2. #CommodityDeflation (CRB Index – 19 Commodities) -0.4% yesterday to 287 = -2.4% YTD
  3. US Stocks (SPY) up another +1% yesterday to a fresh new all-time closing high of 1650 = +15.7% YTD

Indeed fellow Americans (and Canadian green card holders), a #StrongDollar sponsored US #TaxCut!

 

And yeah, I heard the loser whining about how Bernanke’s Friday night whispers to the WSJ about tapering QE was going to create a swoon in stocks. It didn’t though. It ripped my Dollars and rates of return (on my hard earned savings account) higher. The swoon came in the end of the world #EOW trade instead.

 

If you want #EOW, get out there and beg for more of what Gold and Treasury bulls really want – Bernanke to debauch the hard earned currency of the American People and our credibility as a creditor nation while they’re at it.

 

If you want your economic liberties and freedoms back, get out there and start yelling like this crazy Canuck is about #StrongDollar.

 

If you want real (inflation adjusted) US Consumption Growth (ie 71% of US GDP), you want what I want. If you want to spend the rest of your years trying to sell fear to goose your ad revs or ratings, you want crisis. That’s un-American.

 

I may not be able to love this country as much as those of you who were born here. But my wife, kids, and Made In America company can.

 

If my speaking the truth needs to come across as aggressively as a Patriot ripping across British lines did, so be it.  I care more about results than political style, in case you couldn’t tell.

 

The truth about #StrongDollar, Strong America that I speak of doesn’t need to be created. It’s always been there – it’s a constant. This isn’t Russia.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are $1409-1454, $100.39-103.89, $82.63-83.94, 100.06-103.09, 1.82-1.99%, 12.12-13.49, and 1626-1654, respectively.

 

Best of luck out there today and God Bless America,

KM

 

Keith R. McCullough
Chief Executive Officer

 

#StrongDollar Truths - Chart of the Day

 

#StrongDollar Truths - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 29, 2013


As we look at today's setup for the S&P 500, the range is 30 points or 0.97% downside to 1644 and 0.84% upside to 1674.    

                                                                                                                           

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: 1.87 from 1.88
  • VIX closed at 14.48 1 day percent change of 3.50%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, May 24 (prior -9.8%)
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 11am: Fed to purchase $2.75b-$3.5b notes in 2020-2023 sector
  • 11:30am: U.S. to sell 4W bills, $25b 52W bills
  • 12:15pm: Former Fed Chairman Volcker speaks in New York
  • 1pm: Fed’s Rosengren speaks on economy in Minneapolis
  • 1pm: U.S. to sell $35b 5Y notes
  • 4:30pm: API energy inventories

GOVERNMENT:

    • House, Senate not in session
    • 9am: Nuclear Regulatory Commission briefing on results of agency action review meeting
    • 9:30am: Executive Office of the President, Office of USTR begin 2-day public hearing on proposed Transatlantic Trade and Investment Agreement
    • 10am: FDIC holds announces 1Q bank, thrift industry earnings, w/ Gruenberg, Chief Economist Rich Brown
    • 10am: Treasury Dept, IRS meet on whether proposed info-collection activities under health-care overhaul should be under its watch
    • 11am: Vice President Biden speaks on U.S.-Brazil partnership in Rio

WHAT TO WATCH

  • Apple CEO says game changers in development to boost lineup
  • SoftBank-Sprint bid said close to national-security approval
  • Crest Says Glass Lewis opposes Sprint’s new Clearwire offer
  • Morgan Stanley said to seek up to $3b for property fund
  • German May unemployment rose adj. 21,000 vs est. 5,000 gain
  • Ex-AIG chief Greenberg seeks end to “dead” Spitzer fraud case
  • Citigroup settles Federal Housing Finance Agency’s bonds suit
  • China growth outlook cut by IMF
  • Thailand cuts benchmark interest rate 1st time this yr
  • Boeing KC-46 Tanker design review likely set for July: Reuters
  • Swiss govt. may disclose bank client data, pay fine: NYT

EARNINGS:

    • Fresh Market (TFM) 6am, $0.44
    • Bank of Montreal (BMO CN) 6:26am, C$1.48 - Preview
    • Michael Kors (KORS) 7am, $0.38
    • DSW (DSW) 7am, $0.90
    • Chico’s FAS (CHS) 7:15am, $0.36
    • RBC Bearings (ROLL) 8am, $0.61
    • Avago Technologies (AVGO) 4:05pm, $0.58

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Diverging From Fine Wine as Bullion Investors Lose Faith
  • China Steelmakers Challenge Platts Iron Ore Pricing: Commodities
  • Shuanghui Agrees to Buy Smithfield Foods for $34-Share in Cash
  • Robusta Coffee Reaches 5-Month Low as Vietnam Sells; Cocoa Drops
  • Gold Demand in India Heads for Quarterly Record After Price Drop
  • WTI Falls From Weekly High as OPEC Signals No Oil-Output Change
  • Wheat Falls on Black Sea Competition and as Rain May Aid Crops
  • Copper Falls on Concern China’s Economy Is Poised to Slow Down
  • Rebar Futures Plunge to Nine-Month Low as Iron Ore Costs Slump
  • Varco to Honghua Vying for $9 Billion of Russia Oil Rigs: Energy
  • Wheat Quality in Australia to Drop With Yield on Dry Weather
  • China’s Aluminum Exports Climb to Seven-Month High: BI Chart
  • Crude Supply Falls in Survey on Fuel Output Gain: Energy Markets
  • Sugar Options Show Bearish Bets Surged as Brazil’s Crop Advanced

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

 

 

 

 

 

 

 

 

 

 



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 78.63%

Illuminating The Past

“This story illuminates, as only great history can, not only the past but also the present.”

-Richard Holbrooke

 

That’s how the late Richard Holbrooke (1) ended his foreword to the latest macro strategy book I started reading this weekend – Paris 1919: Six Months That Changed The World, by Margaret Macmillan (winner of the Samuel Johnson Prize).

 

With the US launching its first drone attack on Pakistan since the US election, I am certain that the likes of Holbrooke (former United States Special Envoy to Afghanistan and Pakistan) could illuminate the history of this US engagement for us. Maybe his sons will tell his stories. Maybe they won’t. Someone always knows something in this world. History teaches us that the herd tends to get the truth on delay.

 

Markets teach us different versions of the truth. They also reflect upon history. Market prices build upon stories told. Whether those stories are fact or fiction is of less concern to me than what people will expect happens next. Holbrooke said his only regret about the 1919 Peace Conference story was that “it was not available a decade ago.” The book was published in 2003. The truth was now 86 years old.

 

Back to the Global Macro Grind

 

“What is the truth?” That’s the most important question to one of the best macro risk managers of our generation (Ray Dalio), so it’s definitely one of the most important ones to me. From a behavior economics perspective, I really care about the truth of expectations.

 

Is it true that rising US Treasury bond yields are a pro-growth signal? Is it true that rising yields (combined with a #StrongDollar) predicted the truth about both the 1982 and 1993 US economic growth recoveries? How do you know the truth if you haven’t studied history?

 

I started on Wall Street during an internship in 1997. The people have changed. But the game of expectations hasn’t. Some people try to game the game by front-running inside information. Apart from potentially going to jail and having history write about you as a cheater, what’s the downside in that? Inside information is, after all, the truth.

 

Then there’s the knucklehead hockey player approach to mapping expectations about the truth (I don’t like orange jump suit risk):

  1. First, have a quantitative process that signals what the truth about expectations are, across multiple-durations
  2. Then, overlay a multi-factor model of research that helps contextualize those market expectations (correlation and/or causality)
  3. And finally, either move – or choose to do nothing

With a multi-duration, multi-factor model contextualized by history in hand each morning, you can:

  1. Do nothing
  2. Do more of what you have been doing
  3. Unwind everything you were doing and do the opposite of that

Contextualizing yesterday’s newsy “breakout” in bond yields is a good working example of how people get whipped around:

  1. US Treasury yields have been breaking out on our TREND duration for almost 3 weeks (1.82% breakout signal)
  2. The causal factor in driving Treasury yields higher, faster, continues to be economic data (jobs, housing, confidence)
  3. Most who are clinging to getting inside info from Bernanke on when the Yield Chasing thing is over, are getting run-over

Again, as I wrote 3 weeks ago, Front-running The Fed is a legal and profitable business. All you have to do is have an accurate process that signals how wrong Bernanke’s forecasts on growth are going to be and then act accordingly. By the time he tells his boys and/or his boys tell their Washington “consultants” that he’s going to “taper”, Mr. Market will have already moved.


So, if you still think both Old Wall and Bernanke are too bearish on growth, how do you front-run the herd’s expectations changing?

  1. You don’t do nothing (especially if you are long Yield Chasing securities like Utilities, Treasuries, MLPs, etc.)
  2. You do more of what’s working – buy growth, which includes US Dollars, Consumer, Healthcare, and Financials

At a capitulation point (like yesterday) people who are still bearish on #GrowthSlowing (like we were until late November 2012) have to go with option #3 (unwind everything they were doing and do the opposite of that). That’s when you really get paid. #Flows!

 

When people said “sell in May and go away”, they must have meant selling the end of the world #GrowthSlowing trades and buying the living daylights out of #GrowthAccelerating. That’s not me pushing a progressive agenda; this is just the score May 2013 will record:

  1. Utilities (XLU) down -7.4% for May 2013 to-date
  2. Financials (XLF) up +6.6% for May 2013 to-date

That’s about as eye opening an equity sector level divergence (one the key risk factors in our multi-factor risk management model) as you will ever see on a 1-month duration. So is a +31% one-month rip (+52 basis points) in 10yr US Treasury yields in Bernanke’s face.

 

Unfortunately (for Bernanke’s legacy), I can’t tell you what history will tell you about all the unintended consequences associated with the US Federal Reserve and Bank of Japan seeing rates rip off of the zero-bound.

 

All I can tell you is that the present is already reflecting asymmetrically on the past – and May 2013 has been illuminating.

 

Our immediate-term Risk Range for Gold, Oil (Brent), Corn, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $101.74-105.28, $6.36-6.71, $83.92-84.58, 101.23-103.67, 1.98-2.18%, 12.29-14.82, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Illuminating The Past - yy. the breakout

 

Illuminating The Past - Virtual Portfolio


THE M3: TAIWAN VISA; SMOKING TEST; UNIVERSAL

The Macau Metro Monitor, May 29, 2013

 

EASIER ENTRY VISAS TO TAIWAN IN AUGUST Macau Business

The Taiwan government announced that it will be easier for visitors from Macau to get a multiple entry visa.  The policy may be implemented in August.  Those measures include a plan to “loosen visa procedures for mainland, Hong Kong and Macau travellers to allow multiple entry” visas, the government’s statement says.

 

Currently, Macau citizens are able to apply online free of charge for Taiwan visas.  If the request is accepted, all tourists will have to do is print out the visa agreement.  The entry permit will be valid for three months and will allow visitors to stay on the island for a month.

 

CASINO AIR TEST DOESN'T COVER VIP ROOMS: GOV'T ACCUSED OF BEING "SOFT" ON CASINOS IN SMOKING BAN Macau Daily Times, Macau Business


Trade unions blamed the government for being too lenient towards casinos in the enforcement of partial smoking bans in all gaming venues.  Representatives of casino staff unions said nearly half a year after the tobacco control law came into effect, the government is yet to conduct air quality tests on VIP rooms where tobacco smoke is most dense and the authority has also failed to take legal action against gaming facilities that cannot meet ventilation requirements. 

 

The Health Bureau conducted a second check on the casinos that failed to meet the requirements in the first test last month. A total of 28 out of the city’s 46 gaming venues – including slot parlours - or 63.6% of the total, had air quality issues.

 

UNIVERSAL SAYS ROBINSONS TALKS ON CASINO PUT ON HOLD Bloomberg

Universal Entertainment Corp. said talks with Philippine billionaire John Gokongwei’s Robinsons Land Corp to jointly build a casino in Manila were put on hold.  Robinsons Land, the Manila-based developer, said in December that it had signed a preliminary agreement with Universal for the project.

 

Universal will consider developing a casino in the Philippines on its own or with other partners.  Universal boss Okada faces a U.S. criminal investigation related to his Philippine casino project, with the U.S. asking to intervene in a lawsuit by WYNN accusing Okada of making improper payments to Philippine gambling regulators.

 



MEXICO: GETTING HAMMERED

Takeaway: Domestic and international headwinds are weighing on Mexican capital markets and that’s not something that we see reversing anytime soon.

This note was originally published May 28, 2013 at 15:11 in Macro

SUMMARY BULLETS:

 

  • Mexican capital markets are getting hammered from both sides – domestically on political risks and internationally on rising duration risk – and that’s not something that we see reversing anytime soon – at least until President Nieto’s reform agenda gets firmly back on track. Using the yield on the 10Y US Treasury as a proxy for financial repression in the US, it’s no surprise to see that Mexican 10Y yields have a +0.85 positive correlation to their American counterparts on a trailing 3Y basis.
  • Additionally, with no trustworthy way of modeling intraparty and interparty political risk, we have deferred to our quantitative risk management signals, which have confirmed a TRADE & TREND breakdown in the Mexican equity market. We have interpreted that to mean there is a high probability of more political consternation ahead.
  • With super-sovereign yields backing up globally now (review our detailed thoughts HERE, HERE, HERE and HERE), it’s no surprise to see one of the favorite yield chasing plays of US and Japanese investors throughout recent years is getting tattooed. Moreover, with everything we now know about EM crises cycles (CLICK HERE for our 120+ page presentation), it’s getting a lot easier to spot these risks in real-time and reallocate assets before it’s too late.
  • We’ve obviously been the bulls on domestic equities and USD exposure in the YTD, but for those of you who must remain invested in emerging markets, we continue to like consumption-oriented markets like the Philippines, India and Indonesia in lieu of commodity/inflation oriented markets such as Russia, Brazil, South Africa and Peru. If you’re looking to play our thesis in the FX market, we continue to warn of material downside across the currencies of Latin American and African commodity producing nations.

 

Two weekends ago, National Action Party (PAN) Chairman Gustavo Madero decided against his party’s wishes to remove 45-year-old former Finance Minister Ernesto Cordero from his post as PAN Senate leader (24 of the PAN's 38 senators signed a letter in support of Cordero). The internal struggle atop the PAN, one of Mexico’s three main political parties, has accentuated the divide between PAN lawmakers willing to work with the ruling Institutional Revolutionary Party (PRI) and those who believe the party must mount a robust opposition to the galvanizing Pena Nieto in order to mitigate the risk becoming irrelevant (i.e. Cordero and the 24 senators that openly support him).

 

The key issue with this is that President Pena Nieto's PRI, which remains short of a majority in Mexican Congress, needs support from the conservative PAN to advance his economic reform agenda, which includes re-working the Mexican Constitution to overhaul state oil behemoth Pemex and to broaden the tax base. It would be hard to argue that President Nieto’s reform agenda has not been the primary driver of positive sentiment among international investors surrounding Mexico’s economic outlook in the YTD, so to the extent this creates a sustained rift within the PAN, you could see incremental selling pressure upon Mexican capital markets.

 

All that being said, some solace should be taken in the fact that Madero has openly stated that removing Cordero was merely an attempt to improve relationship between PAN party leaders and senators, insinuating that the move was unrelated to differences about party’s future in the  “Pact For Mexico” alliance (i.e. the tri-party political vehicle responsible for streamlining economic reforms). At any rate, it’s tough to see how much of the reform agenda is permanently derailed by this act until the political dust settles, which, last month, included allegations of corruption upon PRI officials at the state level.

 

With no trustworthy way of modeling intraparty and interparty political risk, we have deferred to our quantitative risk management signals, which have confirmed a TRADE & TREND breakdown in the Mexican equity market. Specifically, we have interpreted that to mean there is a high probability of more political consternation ahead.

 

MEXICO: GETTING HAMMERED - 1

 

Since early last week, the Mexican political scene has been relatively quiet with no major developments regarding the now-shaky Pact For Mexico and President Nieto’s economic reform agenda. What has weighed on Mexican capital markets in recent days has been rising investor expectations that the Federal Reserve’s QE program is poised to be pared back at some point over the intermediate term.

 

Mexico, due to its proximity and economic integration with the US (as opposed to a recessionary Europe and structurally slower China; the US accounts for 80% of Mexican exports) has been a darling for yield-chasing capital during the Ben S. Bernanke financial repression era. As such, we’re really starting to see Mexican capital markets break down in recent weeks amid the recent backing up of global interest rates. Through yesterday’s close:

 

  • Mexico’s benchmark IPC Index fell -4.2% MoM and -9% on a trailing 3M basis;
  • The Mexican peso (MXN) dropped -1.1% WoW vs. the USD and -2.6% MoM;
  • 3M Implied Volatility on the USD/MXN increased +16.9% WoW and +24.4% MoM through yesterday’s closing price of 11.485 – the highest level since last SEP;
  • Yields on 2Y sovereign peso bonds are up +21bps WoW and 14bps MoM; and
  • Yields on 10Y sovereign peso bonds are up +39bps WoW and +68bps MoM.

 

Net-net, Mexican capital markets are getting hammered from both sides – domestically and internationally – and that’s not something that we see reversing anytime soon – at least until President Nieto’s reform agenda gets firmly back on track. Using the yield on the 10Y US Treasury as a proxy for financial repression in the US, it’s no surprise to see that Mexican 10Y yields have a +0.85 positive correlation to their American counterparts on a trailing 3Y basis.

 

With super-sovereign yields backing up globally now (review our detailed thoughts HERE, HERE, HERE and HERE), it’s no surprise to see one of the favorite yield chasing plays of US and Japanese investors throughout recent years is getting tattooed. Moreover, with everything we now know about EM crises cycles (CLICK HERE for our 120+ page presentation), it’s getting a lot easier to spot these risks in real-time and reallocate assets before it’s too late.

 

We’ve obviously been the bulls on domestic equities and USD exposure in the YTD, but for those of you who must remain invested in emerging markets, we continue to like consumption-oriented markets like the Philippines, India and Indonesia in lieu of commodity/inflation oriented markets such as Russia, Brazil, South Africa and Peru. If you’re looking to play our thesis in the FX market, we continue to warn of material downside across the currencies of Latin American and African commodity producing nations.

 

Best of luck navigating these globally-interconnected risks.

 

Darius Dale

Senior Analyst


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next