It’s tough to not buy bank stocks with the Yield Spread (10s - 2s) widening to +193 basis points wide this morning. Bank of America remains one of Hedgeye Financial Sector Head Josh Steiner's Best Ideas in 2013.
Takeaway: “Peak Oil” has not only peaked. It has flipped.
(Editor's note: The excerpt that follows below is from Hedgeye's popular "Investing Ideas" newsletter which is sent out on Saturday mornings. Investing Ideas is for the savvy, longer-term self directed investor looking for fresh, long-only opportunities. It also features macro commentary like the excerpt below. With your subscription, you'll know immediately when one of our award-winning analysts uncovers a new Idea or changes a current one. Click here to learn more.)
Remember “Peak Oil”?
The notion was making the rounds a few years ago that the world had run out of its readily-producible supply of oil, and that Life As We Know It would soon grind to a halt, predicated as it has been since WWII on an unending supply of cheap oil.
Oil is already no longer cheap – the US Department of Energy says that, in constant 2011 dollars, the price of gasoline rose from under $1.50 a gallon on the eve of the Arab Oil Embargo of 1974, to over $3.50 by the end of 2011. Peak Oil says oil is also no longer plentiful, because we have drilled the world down to a diminishing petroleum reserve.
Books and articles proliferated – because not many people can make money trading markets, but a whole lot of folks can make money writing about how to trade markets – predicting how dire our lives were about to turn, and how soon.
Now “Peak Oil” has not only peaked. It has flipped.
Now, when folks use the term, they mean that demand for oil has peaked and the combination of fracking and newly-discovered US gas reserves will make our energy woes a thing of the past.
We have no idea who will be proved right, but we again observe that it pays to speak in superlatives and paint extreme scenarios if you want to sell books about investing.
Takeaway: Our #EmergingOutflows theme continues to ring the bell in both Brazil and China.
One of Hedgeye's big Q2 Global Macro Themes has been #EmergingOutflows. Our theme continues to ring the bell - particularly in Brazil.
In case you missed it, Brazil’s Bovespa dropped below 50,000 yesterday. It is now officially in crash mode (down -22.5% since January 3rd) as the biggest Brazilian protests in twenty years sweep the streets.
Click on the chart below. #NotPretty
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Takeaway: We remain the bears on emerging market asset prices.
This note was originally published June 14, 2013 at 13:10 in Macro
Per Bank of America Merrill Lynch data, redemptions from EM debt and equity funds totaled $8.9 billion last week, which the third largest week ever for aggregate outflows (bested only by outflows during MAR ’07 and JAN ’08). The $2.5 billion in outflows from EM debt funds was the second largest weekly outflow on record and the $6.4 billion in outflows from EM equity funds was the largest weekly outflow since AUG ’11.
According to their Investment Strategy Team’s EM Flow Trading Rule, another $8-10 billion of outflows next week or $11-12 billion of outflows over the next two weeks from EM equity funds would trigger a “contrarian buy” signal, as the trailing four weeks of outflows would then equal 3% of total AUM, up from 1.9% currently.
We are obviously inclined to fade such a signal – particularly given that it doesn’t necessarily source economic history across multiple cycles. One of the most common mistakes we see analysts make is not pulling the charts back far enough – particularly with respect to any sort of mean reversion-based analysis.
In light of this, we’d certainly be interested to see how the aforementioned analysis held up during the 1990s (and even 1980s) emerging market crises cycles. Needless to say, we have our doubts.
At any rate, a “contrarian buying opportunity” is only a buying opportunity if EM equities are poised to meaningfully rally from here. Irrespective of the #WeakDollar sweet nothings Jon Hilsenrath continues “blog” about, we think our #EmergingOutflows thesis paints a pretty clear picture on why that is a low probability scenario. Moreover, we remain the bulls on the US Dollar with respect to the long-term TAIL and our analysis shows that a sustained bout of dollar appreciation (and its ancillary effects) tends to be a major headwind for EM capital markets and currencies.
In the event you missed our 122-slide and 61-slide presentations detailing our bearish thesis on emerging markets, please shoot us an email we’d be delighted to walk you through them.
All told, we remain the bears on emerging market asset prices. And while many EM asset classes are oversold on our quantitative risk management signals, we would be inclined to fade any dead-cat bounces in this space.
Have a great weekend,
There were some important pieces of data out of Europe this morning that we believe are in line with our European update call titled “Where Does Europe Go From Here?” that we gave last Tuesday. (Presentation: CLICK HERE ; Podcast: CLICK HERE)
Below we’ll reiterate our presentation’s main points and reference them to today’s data:
1.) Do not discount the ECB’s intervention commitment to stoke markets and preserve the common currency.
2). Fundamentals remain sluggish across the region and we expect long-term below-mean growth.
Here are the figures broken down by manufacturer, with change Y/Y, according to the European Automobile Manufacturers' Association (ACEA):
Volkswagen (VOW.GR) 264,768 (2.8%)
PSA (UG.FP) 132,670 (13.2%)
GM (GM) 99,183 (11.3%)
Renault (RNO.FP) 94,535 (10.0%)
Fiat (F.IM) 80,930 (10.8%)
Daimler (DAI.GR) 58,360 +0.7%
Toyota (TM) 41,413 (4.9%)
BMW (BMW.GR) 65,392 (7.2%)
Nissan (NSANY) 33,747 +5.8%
Honda (HMC) 10,401 (3.5%)
Ford (F) 82,953 (0.3%)
3.) Europe will remain bifurcated, with clear winners and losers.
4.) Long the UK on the Rebound
Takeaway: A quick look at top stories and videos on the Hedgeye radar screen.
Josh Steiner – Financials
Insight: Why Citi wants to rack up U.S. taxes (via Reuters)
Daryl Jones – Macro
European Car Sales Fall to 20-Year Low Amid Unemployment (via Bloomberg)
Quant Trading Comes to Main Street (via Fortune)
Keith McCullough – CEO
Brazil protests spread in Sao Paulo, Brasilia and Rio (via BBC)
India Can Take More Steps to Cut Gold Imports, Mayaram Says (via Bloomberg)
The bumbling building boom in China (Video via Thomson Reuters)
Brian McGough - Retail
Labor Unrest On the Rise in Cambodia (via Sourcing Journal Online)
Matt Hedrick – Macro
Draghi Says ECB Has ‘Open Mind’ on Non-Standard Measures (via Bloomberg)
Swiss Bankers Stripped of Secrecy as Data Swap Embraced (via Bloomberg)
Darius Dale – Macro
Obama: Bernanke Stayed Longer Than Fed Chief Wanted (Video via Bloomberg)
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