What’s Up With the Swissy?

Takeaway: The CHF remains overvalued versus the USD and EUR over the immediate term.

This note was originally published May 28, 2013 at 13:54 in Macro

TRADE Call (3 weeks or less): The CHF remains overvalued versus the USD and EUR; expectations that the SNB could shift the floor in the EUR/CHF or cut rates to negative may burn the CHF lower. (etf: FXF)


TREND Call (3 months or more): We’re bullish on the USD versus the CHF as our #StrongDollar remains intact. However, the CHF could strengthen against major currencies if it moves back to “safe-haven” status, especially should we experience another round of sovereign or banking risk scares out of the Eurozone, and/or if the SNB does not cut below 0%.


The Swiss Nation Bank (SNB) meets next on June 20th to discuss its interest rate policy. There’s speculation based on comments from the SNB’s head Thomas Jordan last week that it could implement negative interest rates and shift the floor in the EUR/CHF. [Last Wednesday the EUR/CHF hit 1.2614, the weakest level for the franc since May 2011].  We believe over the immediate term TRADE there’s more weakness in the EUR/CHF and USD/CHF. Beyond the potential policy moves by the SNB, we’ve seen investors pulling assets from the “safe-haven” trade and we remain grounded in our #StrongDollar call.


As we show in the first chart below, beginning in September 2011 (following the CHF appreciating to an all-time high in August) the SNB bought foreign reserves to maintain a floor in the EUR/CHF at 1.20 francs. Since September 2011 the SNB has increased its FX reserves by +125%, and we have reason to believe that the SNB wants to get involved in the global currency war. Both a cut to the 3M target interest rate (currently at 0%) into negative territory, and continued FX buying and/or an adjustment in the EUR/CHF higher could burn the CHF lower versus the EUR and USD, at least over the near term.  


What’s Up With the Swissy? - YY. FX RESERVES large


What’s Up With the Swissy? - YY. CHF LT



Policy Challenges

In many ways the SNB is in a tough spot to manage the economy. These challenges include:

  • Swings in the currency to and from safe-haven status
  • Steady deflation
  • Low interest rates

The amount of FX buying from the SNB shows just how terrified it is of a strong currency. The worry here is two-fold -- that a strong currency 1.) will cripple export demand and 2.) force domestic companies to lower prices to ward off cheaper imports.


With about 60% of exports destined for the EU, it’s interesting to note that there’s a relatively weak relationship between the overall price of the currency and export demand. Below we show that the correlation between the CHF/EUR and Swiss Exports is +0.41. We think some of the weakness in this correlation can be explained by its basket of export goods, with a heavy mix of pharmaceutical and luxury exports, which command pricing power.


So while rhetorically there might be great emphasis placed on the threat of a strong CHF on exports, we do not think it holds up. 


What’s Up With the Swissy? - YY. EXPORTS


On deflation, Switzerland has been hit by a steady level of deflation since late 2011, with CPI falling for 19th straight months (currently at 0.40% Y/Y). We believe that while Switzerland has benefitted from falling energy prices from a stronger USD, the Bank wrestles with its policy to promote inflation. It fears that under an environment of steady deflation consumers will put off purchasing, assuming prices will go lower in the future.


So, while the Bank is hardly worried about stoking inflation with a rate cut, it’s aware of the policy risks around cutting from 0%:

  • further taxing savers
  • stoking a mortgage and housing bubble
  • chasing away safe-haven assets
  • no ability to guarantee that negative rates will incentivize banks to increase lending

While we’ve yet to see signs of a dangerous expansion in the mortgage and housing market (the SNB cut to 0% in August 2011), this threat remains on the minds of policy makers. We’re also seeing investors park less of their assets in Francs or Franc-denominated assets as the risk climate in the Eurozone improves.


One big question mark that remains is the extent to which banks, especially if the SNB cuts to negative rates, increases their lending to seeks a better return on money.  


What’s Up With the Swissy? - YY. CPI



Broader Fundamentals Appear Strong, Relatively

Below is a snapshot of Swiss GDP. Our call-out here is that with GDP low to depressed across much of the region, we think Switzerland’s relative outperformance will continue to anchor a market of strong investment despite low interest rates.  A weaker CHF versus its trading partners on the margin will also remain a positive.


Swiss GDP is forecast to rise +1.3% this year versus -0.50% in the Eurozone. With a Swiss budget surplus of +0.3% of GDP in 2012 and debt of 53% of GDP last year, its fiscal house remains in order and could quickly transition back to its safe-haven status should we get another round of sovereign or banking risk scares out of the Eurozone.


What’s Up With the Swissy? - YY. GDP


Below is a graphic illustrating our levels on USD/CHF via the etf FXF. We outline the intermediate term TREND line that the FXF violated. We view this as a bearish signal and expect weakness into the SNB’s June 20th meeting. Should the bank act, either in cutting rates, and/or adjusting the floor, or setting future expectations for either, we’d expect further weakness. 


What’s Up With the Swissy? - XX. FXF


The Swiss Market Index (SMI) is up 20.5% YTD, leading the pack as the best performing European index YTD. The SMI is up 4.6% MTD and as we outline in the chart below (via the etf EWL), is in a bullish formation. 


What’s Up With the Swissy? - XX. EWL



Matthew Hedrick

Senior Analyst





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


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 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.


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


Top Long Ideas

Company Ticker Sector Duration

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 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. 


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


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


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


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.

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#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,



Keith R. McCullough
Chief Executive Officer


#StrongDollar Truths - Chart of the Day


#StrongDollar Truths - Virtual Portfolio


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.    










  • 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


    • 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


  • 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


    • 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


  • 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 Macro Team











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