The Economic Data calendar for the week of the 3rd of June through the 7th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Takeaway: Here's a quick look at Keith's top tweets on Twitter today.
"@DougKass typo Doug, should say "Why I've Seen""
(response to Doug Kass' tweet: "Coming up on RealMoneyPro - Why I See Slowing Growth")
"Revolutionaries, Unite - and dial up the transparency and accountability volume"
"The days of Old Media pump and dumping sources that don't show you their score, over"
"Our Competition: half baked comedians, criminals, and journo bloggers who have never traded real markets in their life."
(Shortly followed up with "It's like Canadians playing hockey against Zimbabwe")
Takeaway: India is poised to remain a relative winner amid the sinking ship that our #EmergingOutflows theme continues to call out.
Overnight, India put up a directionally positive, but absolutely weak 1Q13 real GDP number of +4.8% YoY (from +4.7% prior). That, coupled with concerns surrounding recent INR weakness (-5.2% MoM vs. the USD), drove the SENSEX to its biggest 1-day loss in 14 months (-2.3%).
International investors have been net sellers of rupee-denominated bonds each day since holdings touched a record $38.5 billion back on MAY 21. As we have mentioned repeatedly, a tapering of QE or mere expectations that QE will be ended sooner (i.e. “6-handle” in 2014) rather than later (i.e. “6-handle” in 2017) and the accompanying USD strength and US Treasury weakness (i.e. higher rates) are the biggest risks to emerging market asset prices over the long term.
For current account deficit economies like India, the threat of capital outflows – or just sustainably slower capital inflows – puts their respective structural growth outlooks at risk. To India’s credit, imports of the now-crashing gold account for ~80% of the total current account deficit; India also imports ~80% of their crude oil consumption, so #StrongDollar actually mitigates their primary economic risk (per RBI Governor Duvvuri Subbarao on MAY 4) via commodity deflation. Moreover, Finance Minster Chidambaram’s fiscal consolidation plan – while pathetic underneath the hood – is a signal that they are cognizant of these risks and are at least attempting to address them.
Within the EM space – which we clearly do not like across the various asset classes – we continue to prefer overweighting consumption-heavy countries, like India, on the long side with respect to the intermediate-term TREND duration. Another factor in support of maintaining a TREND-duration bullish bias on Indian equities is its robust intermediate-term GIP outlook.
Obviously both incremental rupee weakness and continued political gridlock ahead of the MAY ’14 general elections are key idiosyncratic risks to the downside. That being said, however, political gridlock has largely become the base case scenario during the Singh administration.
As such, any positive momentum on bills to reduce restrictions on foreign investment in the country’s pension and insurance industries, overhaul the 1894 colonial-era Land Acquisition Act and help implement a uniform goods and services tax to encourage commerce would be a dramatic upside surprise for investors ahead of next year’s elections.
All told, India is poised to remain a relative winner amid the sinking ship that our #EmergingOutflows theme continues to call out. To that tune, the latest data shows a $2.9B WoW outflow from EM equities, which was the largest since DEC ’11; moreover, the $200M outflow from EM debt was the first in 51 weeks.
Remember, valuation is not a catalyst when the Queen Mary turns – or better yet, capsizes. It’s important that investors fully comprehend the “Queen Mary” for what it really is/was – an institutionalized search for yield.
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Takeaway: We bought back Nationstar (NSM) at 10:38am this morning at $41.11.
Buying back what we sold yesterday on green (a beauty +5% intraday rip). Hat tip to Hedgeye Jedi Financial Sector Head Josh Steiner. Steiner's bull case hasn't changed here. NSM’s price has. We’re just doing our best to risk manage the range of a high beta stock.
This note was originally published May 24, 2013 at 08:04 in Newsletter
“To you from failing hands we throw the torch. Be yours to hold it high.”
-Lieutenant-Colonel John McCrae
Most of you probably haven’t played for the Montreal Canadiens, but if you had, you would know that the quote above is painted on the wall in the Canadiens locker room. The idea is that current players are expected to live up to traditions of the past. The line itself is taken from a poem called, “In Flanders Fields”, which was written by Dr. John McCrae in World War I.
McCrae enrolled at the age of 41 with Canadian Expeditionary Force following the outbreak of World War I. Instead of joining the medical corps, which he had the option to do based on age and training, he instead volunteered to join a fighting unit as a gunner and medical officer and was immediately sent to the German front in Belgium.
Flanders is a region in Belgium where Germany launched the first chemical attack in the war during the second battle of Ypres. At the conclusion of the battle, McCrae was inspired to write the poem after seeing the poppies grow on the graves of the dead at Ypres, thus the opening line of the poem, “In Flanders fields the poppies blow.” To this day, Canadians wear poppies on Remembrance Day in memory of those who died while serving in the Canadian military.
Back to the global macro grind . . .
This idea of transition from past to present is one we discussed in great detail on an expert call yesterday with Jim Rickards, the author of “Currency Wars: The Making of the Next Global Crisis”. The focus of our discussion of transition related to the Federal Reserve. Specifically, what will happen as Chairman Bernanke’s term ends in January 2014?
On a basic level, if Bernanke moves on, whoever comes in to lead the Fed will be burdened with unwinding the most dovish monetary policy in the history of central banking, including the longest run of zero interest rate policy and a quantitative easing program that is without parallel. Ultimately, the Fed will have to unwind the $3.4 trillion in securities on its balance sheet. That torch is passed to you Mr. or Mrs. Next Fed Head!
One area in which we would hope to see an improvement from the next Chairman of the Federal Reserve is in economic projections. In the Chart of the Day, we look at the U.S. GDP growth projections supplied by the Fed going back to the 2010. Here is the skinny:
If you didn’t know that economics isn’t a science, well, now you know.
In terms of improving their internal models, we may just send the new Chairman of the Federal Reserve a Hedgeye dart board and some darts. On a serious note, the fundamental problem with such shoddy projections is that the Federal Reserve is actually setting monetary policy based on these numbers, which currently involves purchasing $85 billion in securities monthly. It should be no surprise then that we have market volatility.
Speaking of central banking induced volatility, the Nikkei had a 7% intraday swing yesterday. What was the catalyst you ask? The Bank of Japan’s Kuroda came out midday and said that the “BOJ has announced sufficient monetary easing.” Obviously, the markets don’t believe him. Neither do we and therefore we are keeping our short Japanese Yen recommendation in our Best Ideas product. We are also negative on JGBs on the recent break out above 1% on the 10-year.
No surprise, the Keynesian economic standard bearer Paul Krugman is taking the other side of our research this morning in an op-ed in the New York Times and calling, “Japan the Model”. Like a fledgling hedge fund analyst that has to defend his position to the seasoned portfolio manager, Krugman finds the facts that best support his case. We behavioral economists call this framing.
Interestingly, on one hand Krugman is heralding the success of Japanese monetary policy because “Japanese stocks have soared”. Conversely though, he tells us not to worry about the recent sharp sell-off in Japanese equities when he writes:
“I’m old enough to remember Black Monday in 1987, when U.S. stocks suddenly fell more than 20 percent for no obvious reason, and the ongoing economic recovery suffered not at all.”
You can’t have your cake and eat it too Dr. Krugman!
Our ever savvy Healthcare sector head Tom Tobin offers an alternative thesis to the long decline of Japan’s economy, which is simply that over the last 50 years the population growth rate has been in steady decline. Not surprisingly, this decline in population growth has correlated very closely with GDP growth. That’s not our prognostication on the holy pages of the New York Times, but rather the simple math.
The fundamental problem that Keynesian economists who advocate printing to infinity and beyond have is that they can’t explain how printing leads to more jobs and higher employment. Simply put, that is because debasing a currency doesn’t incentivize companies to invest and hire. In fact, it does the opposite.
We are happy to continue to trade the market volatility induced by Keynesian economics, but at some point we do hope that the torch is passed on from these charlatans.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Weimar Nikkei, and the SP500 are now $1343-1424, $101.61-103.92, $83.24-84.29, 101.42-103.69, 1.95-2.05%, 13.11-15.73, 14,271-15,097, and 1634-1657, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Excellent month to be long our #GrowthAccelerating call. S&P 500 +3.5% in May. No, we weren’t in the “Sell in May, Go away” camp. Not by a long shot. Financials up almost 8% for the month. Talk about sector divergence: utilities down over 8% for month. 1600 basis point divergence there. Futures were down this morning which represented another buying opportunity. When you’re long #GrowthAccelerating as we are, you don’t buy gold or Treasuries. You buy financials and consumption. Stick with what’s working.
We bought back one of our big macro favorites #StrongDollar yesterday. It was oversold within our bullish intermediate-term trend. Should have shorted the Euro which banged the top end of our risk range at 1.30. Yes, I make mistakes sometimes.
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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.
Tons of "smart" people in this business; their intelligence often impedes their mental flexibility
“I have noticed even people who claim everything is predestined, and that we can do nothing to change it, look before they cross the road.” - Stephen Hawking
72,600,000: Record number of Americans enrolled in Medicaid for at least one month in fiscal 2012.
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