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Morning Reads From Our Sector Heads

Takeaway: Here's a quick look at articles Hedgeye Sector Heads are reading this morning.

Keith McCullough - CEO

Volcker's Aim: Responsive Government (via New York Times)

South China Sea Tension Mounts Near Filipino Shipwreck (via Reuters)

Pakistan: Deadly 'US Drone Strike' in Waziristan (via BBC)

 

Howard Penney - Restaurants

Wendy's Last Among Big Burger Chains With Hispanics: Survey (via AdAge)

 

Felix Wang - Gaming, Lodging & Leisure

Universal Says Robinsons Talks on Casino Put on Hold (via Bloomberg)

Easier Taiwan Visa In August (via Macau Business Daily)

Poor Norwegian Breakaway Design Claim Divided (via CruiseShipNews)

 

Rob Campagnino - Consumer Staples

Smithfield to Be Sold to Chinese Meat Processor (via New York Times)

 

Daryl Jones - Macro

Upside of Low Employment Is Longer Life (via Bloomberg)

Death By Carry (via Zero Hedge)

 

Josh Steiner - Financials

Fannie, Freddie Regulator Reaches Settlement With Citigroup (via WSJ)

Morgan Stanley Gears Up for Property Fund (via WSJ)

 

Kevin Kaiser – Energy

Peyto Drilling in Natural Gas Downturn Rewards Investors (via Bloomberg)

 


Don't Fight the Data!

Client Talking Points

UST 10YR

We've got a nice yield rip alongside very bullish US consumer confidence, jobless claims, and housing data as of late. Consensus says don’t fight the Fed; I say don’t fight the data. Bernanke is way behind the curve now. +187bps wide and widening on the 10s/2s spread makes the Financials a happy hunting ground to buy on red. We bought NSM back yesterday; 2.17% 10yr Yield, overbought up here.

RUSSIA

Russia remains one of our top macro short ideas next to Yens and JGBs right now, so this was a position we didn’t cover on red last week. RTSI -2.2% this morning leads losers in a weak European Equity session. Russia is back down double digits (-10.3% YTD) and should continue to weaken, provided that the PetroDollar trade of the last decade remains under #StrongDollar attack.

HANG SENG

It's been a while since Hong Kong flashed the negative divergence of the Asian session, but here it is. Despite China holding its gains, Hang Seng down -1.6%, breaking my immediate-term TRADE line of 22,796 support (that’s new, so we’ll watch that). Meanwhile, Philippines +1.6% (we’re long) led gainers in Asia; KOSPI +0.4%, back to bullish TRADE and TREND.

Asset Allocation

CASH 34% US EQUITIES 20%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 28%

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

"consensus says don’t fight the Fed; I say don’t fight the data – Bernanke way behind the curve now" @KeithMcCullough

QUOTE OF THE DAY

“Somewhere in the world someone is training when you are not. When you race him, he will win.” -Tom Fleming

STAT OF THE DAY

According to Gallup, three-quarters of U.S. adult workers say they will continue working past retirement age, with 40% saying they will do so because they want to, and 35% because they will have to.


#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 macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

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

 

 

 

 

 

 

 

 

 

 



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


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