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GLOBAL MACRO GRIND

Client Talking Points

CHINA

We reiterated our short call earlier this week on emerging markets and China. (Ping us if you want a copy of this concise presentation.)  Our short call has played out positively and is backed by asset flows out of emerging markets funds. In the most recent week the exodus from emerging market funds was $9 billion - the third largest weekly outflow ever (after March 2007 and January 2008). Credit growth in China is slowing and the increasing likelihood that the PBOC tightens will provide an impediment to credit growth.

UNITED STATES

#GrowthAccelerating. The dreary global growth outlook we have continues to push us back to the one economy (and stock market) we remain positive on – the US. As it relates to macro data coming out today, the big one is of course Michigan Consumer Confidence. It will be a decent “tell” on how the US consumer is feeling on top of yesterday's nice retail sales number. As we look at today's setup for the S&P 500, the range is 48 points or 1.92% downside to 1605 and 1.02% upside to 1653.          

Asset Allocation

CASH 48% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NSM

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.  

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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

Today the High Freaks will know before everyone else how confident Americans are in the stock market (Reuters/UMich invoice in the mail) @zerohedge

QUOTE OF THE DAY

"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute."

- William Feather

STAT OF THE DAY

340,000,000: The # of tweets that are sent every day on Twitter.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 14, 2013


As we look at today's setup for the S&P 500, the range is 48 points or 1.92% downside to 1605 and 1.02% upside to 1653.          

                                                                                                                     

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1A

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10A


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.85 from 1.87
  • VIX  closed at 16.41 1 day percent change of -11.73%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Producer Price Index, May, est. 0.1% (prior -0.7%)
  • 8:30am: Current Acct Bal., 1Q, est. -$110.8b (pr  -$110.4b)
  • 9:15am: Industrial Production, May, est. 0.2% (prior -0.5%)
  • 9:15am: Capacity Utilization, May, est. 77.8% (prior 77.8%)
  • 9:15am: Manuf (SIC) Production, May, est. 0.1% (prior -0.4%)
  • 9:55am: UMich. cons. sentiment index, June prelim, est. 84.5
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • Iranian presidential election will be the first since 2009, which sparked street protests amid allegations that MahmoudAhmadinejad’s re-election was the result of ballot fraud
    • 8:30am: Sen. Max Baucus, Rep. Dave Camp discuss tax overhaul efforts at CSM breakfast
    • IMF Managing Director Christine Lagarde holds press conference on U.S. economy

WHAT TO WATCH

  • Exchanges preparing pilot programs for changing tick sizes
  • FX rates said to face global regulation after Libor review
  • U.S. agencies said to swap intelligence w/thousands of firms
  • Johnson & Johnson sells last of 25.4m shares of Elan
  • SoftBank, Sprint dismiss Dish claim to FCC of broken pledge
  • Visa sues Wal-Mart to stop co. from filing swipe fee claims
  • Marchionne said close on Fiat-Chrysler refinancing agreement
  • Airbus A350 becomes airborne as test pilots start first flight
  • Boeing seen reaping $6b/yr on 787 output rising again
  • Senate committee approves $625b defense spending measure
  • Wal-Mart says approved Ranbaxy products “safe and effective”
  • Gene patent ruling triggers race to mkt cancer risk scans
  • Bernanke, G-8 Summit, Paris Air Show, NBA: Wk Ahead June 15-22

EARNINGS

    • Smithfield Foods (SFD) 6am, $0.43
    • NGL Energy Partners (NGL) Bef-Mkt, $1.03

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Corn Set for Weekly Drop as Demand Slows and U.S. Crop Rebounds
  • Gold Bears Return as ETP Rout Extends to 17th Week: Commodities
  • Copper Climbs on Indications of Rebounding Economy in the U.S.
  • WTI Rises to 10-Week High Amid U.S. Growth, Middle East Tensions
  • Aluminum Fees Immune to Abenomics as Japan Buyers Don’t Budge
  • Gold Declines as Investors Cut ETP Holdings on Stimulus Outlook
  • Thailand Sets Record Sugar Production Target of 13 Million Tons
  • Rebar Trades Near Lowest Level in Nine Months on China Concerns
  • Lower Crop Prices Seen Erasing Savings in U.S. House Farm Plan
  • Nickel Glut Fuels Price Slump for LME Laggard: Chart of the Day
  • U.K. Power Price to Double German on Wind, Solar: Energy Markets
  • U.S.-Europe Diesel Flow Seen Rising Amid Output at 23-Year High
  • Oil Hunted in Mozambique After World’s Largest Gas Discoveries
  • Crop Price Decline Top Commodity Opportunity at Goldman Sachs

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4A

 

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

 

 

 

 

 

 

 

 

 

 



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Tape(r) Worms

“Shy and proud men are more liable to fall into the hands of parasites and creatures of low character.  For in the intimacies which are formed by shy men, they do not choose, they are chosen.”

-Henry Taylor

 

Tapeworm infestation is not something we would wish on our worst enemies.  According to Wikipedia, tapeworm infestation is the infection of the digestive tract by adult parasitic flatworms called cestodes or tapeworms.  Typically, consuming uncooked food is the way in which tapeworm larva find their way into humans.  Once inside the digestive tract, a larva can grow into a very large tapeworm.

 

No doubt waking up to read about tapeworms is the last thing you need.  Alas, we couldn’t think of a more appropriate analogy given the market’s recent fascination with the potential tapering of QE by the Federal Reserve.  Yesterday, the market actually rallied on this tapering rumor based on a blog by Jon Hilsenrath in the Wall Street Journal that tapering, if it is to occur, would be a more manageable version, perhaps something akin to Taper-lite.

 

We haven’t been stock market operators as long as many of you, but we certainly don’t remember a period in which there has been such a fascination with, and focus on, the next move of the Federal Reserve.  But until the market host rids itself of the QE parasite, this fascination and volatility associated with the next move of the Fed is likely to continue.

 

Back to the global macro grind . . .

 

Earlier this week, we reiterated our short call on emerging markets and China with a concise presentation by our Senior Asia Analyst Darius Dale. (Email to get a copy of the presentation.)  This short call has played out positively for us and has been backed by asset flows out of emerging markets funds.  In fact, in the most recent week the exodus from emerging market funds was $9 billion, which was the third largest weekly outflow ever (after March 2007 and January 2008).

 

The key new research we provided in the presentation was related to short Chinese financials.  We view this thesis as three fold:

  • Credit growth is slowing – The increasing likelihood that the People’s Bank of China tightens will provide an impediment to credit growth;
  • NIM compression is occurring – Based on the current NIM spread, we think this ratio can only tighten from current levels, which will pressure bank margins; and
  • Non-performing loans are rising – Even though the data is very opaque, NPLs of 20% are a reasonable estimate given by many experts.

In the Chart of the Day, we’ve highlighted one of the more insightful charts in the presentation, which is the Chinese 7-day repo rate monthly average, which highlights how tight money is in China currently.  This rate has gone from about 3.5% in May to 5.7% in June, which is the second highest monthly rate in the last five years and a staggering shift month-over-month.  If money sustainably tightens in China, economic growth will most certainly take a hit.

 

Our Senior Analyst covering Europe Matt Hedrick also gave a very lengthy and thoughtful update on Europe this week (once again email if you want to see this presentation).  While we don’t see the financial sector risks in Europe that we do in China, the economic outlook does remain largely bleak in Europe. Some of the key points that we highlighted in the presentation included:

  • Fundamentals in Europe remain challenged and we should expect long-term below mean growth;
  • We see limited risk to any country leaving the Eurozone or the Euro being disbanded, so another Cyprus flare-up is unlikely;
  • The bifurcation in Europe will continue and we are fundamentally bullish of Germany and the U.K. and fundamentally bearish of France, Italy and Spain; and
  • ECB is unlikely to shift policy anytime soon, which should continue to support our strong dollar call.

A structural issue that makes it inherently difficult for Europe to recover quickly is the inflexibility of the labor force.  In the United States, labor can flow freely from state to state based on employment opportunities.   So, in theory, the U.S. would be very unlikely to have states where the unemployment rate was north of 26%, such as in Spain and Greece, and other states where the unemployment rate is below 7%, such as Germany and Denmark.

 

Given the inability of labor to flow easily through European borders, due to differing qualification levels, work quotas and cultural barriers, it is no surprise then that a recession in Europe should be more protracted.  The bigger issue, of course, is that it creates unemployment hot spots, such as Greece, Cyprus, and Spain, that will have an inability to re-balance their economies, except over very lengthy time periods.

 

This dreary global growth outlook we have continues to push us back to the one economy and stock market we remain positive on – the U.S. of A.  On that front, as it relates to macro data coming out today, the big one is Michigan Consumer Confidence which is released at 9:55am to the masses, and five minutes early for those that pay up for the early look!  Regardless of who gets it ahead of you, it will still be a decent “tell” on how the consumer is feeling.

 

Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.21-105.43, $80.26-80.24, 93.54-95.85, 2.07-2.27%, 15.21-1857, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Tape(r) Worms - Chart of the Day

 

Tape(r) Worms - Virtual Portfolio


June 14, 2013

June 14, 2013 - dtr

 

BULLISH TRENDS

June 14, 2013 - 10yr

June 14, 2013 - spx

June 14, 2013 - dax

June 14, 2013 - euro

June 14, 2013 - yen

 

BEARISH TRENDS

June 14, 2013 - VIX

June 14, 2013 - dxy

June 14, 2013 - oil

June 14, 2013 - natgas

June 14, 2013 - gold

June 14, 2013 - copper 


Macro Imagination

This note was originally published at 8am on May 31, 2013 for Hedgeye subscribers.

“I raise my flags, don my clothes
It's a revolution, I suppose.”

-Imagine Dragons

 

For the last five plus years, Hedgeye has delivered an Early Look to your inbox every market morning.  Primarily, it has been Keith delivering the goods with the rest of the team chipping in from time to time.  With over 1,000 Early Looks written, you would think it takes some sort of Macro Imagination to get these notes out the door every morning. 

 

Fortunately for us the world provides a great amount of economic fodder and this morning is no exception, but to be fair some amount of creativity is required to keep these notes at least somewhat interesting.  Moreover our research team, like your teams, requires creativity to generate interesting investment ideas.  But, what exactly is the root of creativity?

 

A study by Jordan Peterson of the University of Toronto found that the, “decreased latent inhibition of environment stimuli appears to correlate with greater creativity among people with high IQ.”  In layman’s terms, the research says that people whose brains are more open to stimuli from the outside environment will likely be more creative.

 

Conversely, the risk of too much outside stimuli is mental illness due to overload.  In this regard, the differentiator between creativity and madness is a good working memory and a high IQ. In essence, with these attributes a person has the capacity to “think about many things at once, discriminate among ideas and find patterns”.  Without them, one can’t handle the increased stimuli.

 

So even if we know the root of creativity and innovation, how do we accelerate it within our companies and ourselves?  Interestingly social networks may be giving us a huge leg up in this regard.  According to Martin Ruef from Stanford Business School:

 

“Entrepreneurs who spend more time with a diverse network of strong and weak ties...are three times more likely to innovate than entrepreneurs stuck within a uniform network."

 

In a nutshell, creative people are more open to outside stimuli and best leverage that creativity when exposed to broad network of loose ties. (And just think, my ex-girlfriend used to tell me I spent too much time on Facebook!)

 

Back to the global macro grind . . .

 

As I noted earlier, this morning is certainly providing a fair amount of economic fodder.  A few points to call out:

  • The Shanghai composite sold off hard into the close on chatter that tomorrow’s manufacturing PMI will come in below 50.  This is consistent with the flash PMI reading from Hong Kong and also the pattern of economic data being leaked early (we removed long Chinese equities from our Best Ideas list earlier this year);
  • Japanese equities outperformed over night, but finished down -5.7% on the week.  The more interesting data point from Japan was April CPI which came in at -0.4% and clearly signals that the Bank of Japan has more to do before sustainable inflation is generated (Short Yen remains on our Best Ideas list); and
  • Japanese government pension fund with $1.1 trillion in assets indicated it would consider increasing its allocation to equities.  To buy one asset class, another asset class must be sold.  If the action in the Japanese government bond market is telling us anything it is that this allocation is already occurring as yields on 10-year JGBs have been spiking recently.

Domestically, our thesis of economic growth going from stabilization to acceleration continues to be validated.  Market internals clearly support this as the SP500 is up more than 16% this year and the treasury market is literally at 12-month lows.  If you didn’t know, now you know . . . economic growth is good for equities and bad for bonds.

 

As we dig deeper in the market internals, the performance of the sub-sectors of the SP500 validate this view even more.  As of last night, the top two performing sectors in the year-to-date are healthcare up 23.3% and financials up 23.0% and the two worst performing sectors are utilities up 8.6% and materials up 9.1%.  There we have it again, the growth sectors are dramatically outperforming. 

 

Now if you are a thoughtful stock market operator, you probably want to call me out on something from the last sentence, which is that materials should do well in an environment in which growth is accelerating.  This is true except for the one important factor: the U.S. dollar.  In the Chart of the Day, we highlight the impact of the dollar and the associated correlations over the last 180 days, which are +0.80 with the SP500, -0.72 with the CRB index, and -0.83 for gold.  A strong dollar equals weak commodities.

 

This Macro theme of up dollar and down commodities is very positive for a number of sectors.  This year our Restaurant team of Howard Penney and Rory Green has done an outstanding job leveraging the macro call with their stock specific work.  One of their best ideas in my view has been a sell call on McDonald’s on April 25th and since then the stock has underperformed the market by some 800 basis points.

 

At the time more than 30 firms had recommendations on MCD and no one had a sell.  This is creative and contrarian research at its finest.  Needless to say, our restaurant team eats alpha for breakfast, lunch and most value meals!  Ping us at sales@hedgeye.com if you want access to trial our restaurant research.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, and the SP500 are $1354-1423, $101.03-103.89, $83.10-83.98, 100.31-103.71, 2.03-2.19%, 12.28-15.31, and 1641-1674, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Chief Creative Officer

 

Macro Imagination - Chart of the Day

 

Macro Imagination - Virtual Portfolio


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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