“There is thy gold, worse poison to men’s souls,
Doing more murder in this loathsome world,
Than these poor compounds that thou mayst not sell.”
My colleagues and I ventured up to Toronto (nicknamed Hogtown due to the vast pork processing plants that used to call Toronto home) yesterday to meet with some old clients and some new prospects. The first prospect’s office we strode into had a massive solid gold coin and paintings from French Impressionists on the walls. Clearly, the commodity, and in particular gold, boom, has been good to Canadian investment managers.
As we made our rounds yesterday, it became increasingly obvious that Canadian money managers were also doing their utmost to diversify from this commodity heritage and in the short run that means diversifying more into U.S. equities. In part, this was actually due to a perception of potential strength in the U.S. dollar, a theme which is very near and dear to our hearts, of course.
One manager actually made a very interesting point on gold companies, which was that as the majors were being increasingly forced to hedge out gold prices, they put their company at even greater risk in the future if, and when, gold prices and operating costs increased. His view is that intrinsic value of many major Canadian gold companies is substantially lower than where Mr. Market is currently valuing them.
Given how much fun we’ve had analyzing the hedging strategies of LINN Energy, the Canadian gold sector may be an interesting short research project to work on next. But as always, while you can marry your longs, it’s highly recommended to only date your shorts.
Back to the global macro grind . . .
Despite a little bit of a market freak out last week, global markets are seemingly stabilizing. An important tell for us on this front is sovereign debt markets in Europe where, logically, risk capital seems to flee first. After peaking over 5% on Monday, Spanish 10-year bonds are back down well below 5% and on their way back to 4.5%.
Admittedly, though, even as some of the risk has decreased over the past couple of days, the low volume price recovery in many key markets has been uninspiring. In Asia, the bounce has been very uninspired with China down small over night and Hong Kong only up 0.5% for the second day of its bounce. In Europe, Greece is back in crash mode as is down -2.7% this morning.
Speaking of yields, the future direction of yields on U.S. Treasuries is one of the topics our international clients are increasingly focused on, which is no surprise given the blood bath that has occurred in the U.S. government debt market over the last thirty days. But, where will yields go from here?
Many bond experts had been adamant that the Federal Reserve would defend the 2% line on the 10-year. Clearly, that was about as defendable as a Canadian Football League offense against a NFL defense. In the Chart of the Day, we look at the yield on the 10-year going back ten years. On a basic level, if the market truly begins to price in the end of quantitative easing, the blood bath in the bond market is likely in early days.
Conversely, as interest rates go up in the U.S., this should bode well for the U.S. dollar especially given the positive relative position versus the Yen and the Euro. In Japan, to generate anywhere close to 2% inflation will require substantially more quantitative easing. Meanwhile in Europe, the continued economic bifurcation between countries makes it unlikely the ECB will tighten anytime soon. On the last point, the best example of this is like the gap in unemployment rate of Germany at 6.8% and the rest of the Euro zone at 12.2%.
Another key theme that will continue to play out if rates in the U.S. increase and the U.S. dollar naturally strengthens is Emerging Markets outflows. In fact, in the strong dollar era from 1995 to 2001, the SP500 CAGR was 15.8% and the CAGR of the MSCI EM Index was -5.3%. Conversely, in the weak dollar period of 2001 to 2011, the SP500 CAGR was 1.4% and the MSCI EM Index returned 14.5%. Now clearly, there were and are other factors at play, but the U.S. dollar will continue to be one of the most influential.
As it relates to interest rates, today’s jobless claims print will be the most important data we will get through the end of the week. If claims are better than expected, then interest rates are likely to continue their ascent. So far, equities have not acted well with interest rates breaking out to the upside, though that could change if a stabilizing economy becomes increasingly evident.
The global markets are having a difficult time finding their identity. As Shakespeare wrote:
“All the world’s a stage, and all the men and women merely players: they have their exits and their entrances; and one man in his time plays many parts, his acts being seven ages.”
Indeed, we are all stock market players. The key is to make sure, whether it is gold, U.S. treasuries, or LINN Energy, that we are not the last players to exit.
Our immediate-term TRADE Risk Ranges are now (TREND bullish or bearish in brackets):
UST 10yr 2.39%-2.74% (bullish)
SPX 1 (neutral)
DAX 7 (bearish)
Nikkei 12,9 (bearish)
VIX 15.17-20.97 (bullish)
USD 82.27-83.67 (bullish)
Euro 1.29-1.31 (bearish)
Yen 96.41-99.53 (bearish)
Oil 98.98-103.36 (bearish)
NatGas 3.64-3.89 (bearish)
Gold 1 (bearish)
Copper 2.98-3.12 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
This note was originally published at 8am on June 13, 2013 for Hedgeye subscribers.
“Somebody had to pay.”
That’s what Britain’s Prime Minister had to say about German reparations at the Paris Peace Conference of 1919. He added, “If Germany could not pay, it meant the British taxpayer had to pay. Those who ought to pay were those who caused the loss.” (Paris 1919,pg 181)
What George forgot to mention was his founding of the British welfare state; part of the British bill had to cover government spending. The Germans didn’t like that. They didn’t like the pomp of John Maynard Keynes floating around Paris smoking the peace pipe either.
Oh yes, my friends, there are roots to this central planning Gong Show. They run far deeper than through Krugman’s craw. Japan is going to learn that the hard way now. Indeed, someone needs to pay the price. For the last decade American, European, and Japanese politicians have tried imposing that tax on their people via currency devaluation. Now the timing is ripe for politicians to pay the piper.
Back to the Global Macro Grind…
“To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears. Never mind a country that starts doing it with a quadrillion in debt, there has never been a country in the history of humanity that has devalued their way to long-term economic prosperity. Championing Japan’s economics today is the equivalent of cheering on the Weimar Republic circa 1924.”
The title of that Early Look was “Weimar Nikkei.” The date was May 30th, 2012. Today, the Japanese stock market is crashing.
To crash or not to crash, remains the question. Darius Dale and I get into this debate with clients all of the time – “so, when do you guys think this all hits the fan?”, “can’t the Japanese keep this going for a little while longer?”
It’s a very intellectual debate because all of Wall Street is trying to figure out how long a failed team of politicians (we call Abe and Aso the Keynesian Duo) is going to be able to suspend economic gravity.
And maybe that’s why even a hockey and football player (Darius was a 325lb offensive lineman at Yale) can remind you that there’s nothing intellectual about Krugman and/or Abe’s Policy To Inflate at all. It might sound clever, but as a practical matter it’s just dumb.
So what’s the risk to the Japanese completely screwing this up?
- The currency market stops believing this will end well (i.e. in sustained Japanese economic growth)
- The Yen rips and the US Dollar falls
- The Correlation Risk (USD vs SPX = +0.84 on our TREND duration) goes squirrel
I’d say those are some pretty big risks.
But don’t blame the politicians. Don’t ask them to pay the price. This isn’t the time to be talking about pounds of flesh or anything at all like that. Instead, let’s just watch the country where this whole money-printing experiment started (Japan) implode on the world stage.
The context of central planning history is critical:
- Post 1913 Federal Reserve Act gave birth to Bloomsbury flower power act of John Maynard Keynes
- Paris Peace Conference 1919 gave a platform for government spending gurus to lay the railway tracks of political plunder
- Post 1971 Nixon abandoning the Gold Standard, 1997 was a no brainer for Krugman to tell Japan to “PRINT LOTS OF MONEY”
To be fair, going back to the 13th century, free-market folks like Genghis Kahn have been fighting the aristocracy of kingdoms and political plunderers. So the idea that Charles de Gaulle devaluing his people’s currency was going to fail inasmuch as the Weimar Republic’s did and/or the 2013 Japanese version of the same will may be consensus amongst people who have studied history.
But who cares about causality (central planners), let’s talk correlation – this is where this market’s risk is at!
- As soon as the Japanese Yen snapped our 95.85 TREND line, the Weimar Nikkei went squirrel last night
- Closing down -6.4%, that puts the #WeimarNikkei in crash mode (-20.4% since May 22nd!)
- When the big stuff starts snapping and crashing like that, we get out of the way
Actually, we got out of the way before it happened – think Hedgeye-style “Waterfall” - and how we proactively risk manage the oncoming entropy of a burst of interconnected H20 crashing over the damn. #oncoming!
With time this Correlation Risk (driven by political causality) will burn off – but not today; water doesn’t burn:
- USD/YEN snaps 95.85 TREND line as US Dollar Index snaps 81.21 TREND line
- Weimar Nikkei’s TREND line of 13,848 #snapped
- China, Hong Kong, Germany – all of their Equity markets are over the waterfall now too (bearish TREND)
Most of this isn’t new. It’s just all happening faster now. That’s how risk works – it happens fast. This is big water, moving real fast, and I can assure you that most of the macro “tourists” out there who didn’t respect either the Yen or Nikkei signal are now very wet.
What does this mean for our asset allocation?
- We already have a 0% asset allocation to Fixed Income (Bond Yields aren’t going down on this fyi)
- We already have a 0% asset allocation to Commodities (Gold is down on this, fyi)
- We’d already cut our US Equities allocation in half versus its max (on Monday)
Since we are bearish on #EmergingOutflows (Emerging Markets), we don’t have to deal with that this morning either. What we need to make a decision on is whether to get out of US Equities altogether.
Here’s how I think about US Equity Market risk:
- It all starts and ends with the Dollar; the TREND is broken (but can be recovered with time; long-term TAIL support = 79.11)
- SP500 TRADE line of 1624 is broken, but TREND support of 1583 remains intact
- US Equity Volatility TREND resistance of 18.98 is going to be under siege this morning
Volatility, entropy, convexity – this is the stuff that makes people go squirrel. Yes, I’ve used the squirrely metaphor 3x this morning because that’s what my inbox looks like. We are getting a lot of questions on this. Which means institutional clients are in the water.
My first move this morning will be to do nothing. We’re not wet, so we can watch this political gonger play out a little before we let the market tell us which of these interconnected TREND risks confirms.
As for who ultimately pays the price for all these unintended consequences, I formally nominate Bernanke, Kuroda, and Aso. Especially for that Aso guy, ripping their countrymen a new one via currency devaluation is something they should all be ashamed of.
Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1370-1418, $100.36-103.94, $80.46-81.21, 93.69-95.85, 2.06-2.27%, 14.61-18.98, and 1601-1624, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – June 27, 2013
As we look at today's setup for the S&P 500, the range is 60 points or 2.82% downside to 1558 and 0.92% upside to 1618.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.14 from 2.16
- VIX closed at 17.21 1 day percent change of -6.82%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Personal Income, May, est. 0.2% (prior 0.0%)
- 8:30am: Init Jobless Claims, June 22, est. 345k (prior 354k)
- 9:45am: Bloomberg Consumer Comfort, June 23 (prior -29.4)
- 10am: Pending Home Sales M/m, May, est. 1.0% (prior 0.3%)
- 10am: Freddie Mac mortgage rates
- 10am: Fed’s Dudley speaks on labor market in New York
- 10:30am: Fed’s Powell speaks on monetary policy in D.C.
- 10:30am: EIA natural-gas storage change
- 11am: Kansas City Fed Manuf Activity, June, est. 3 (prior 2)
- 11am: Fed to buy $4.25b-$5.25b debt in in 2017-2018 sector
- 12:30pm: Fed’s Lockhart speaks on economy in Marietta, Ga.
- 1pm: U.S. to sell $29b 7Y notes
- 10am: Senate Banking Cmte hears from Rep. Mel Watt, D-N.C., to be head of FHFA, Jason Furman on his nomination to be CEA chairman, and Kara Stein, Michael Piwowar to be SEC members
- 10am: House Transportation panel hears from Federal Railroad Administration chief Joseph Szabo on national rail policy
- 10am: House Ways and Means Cmte hears from acting IRS Commissioner Danny Werfel on agency’s taxpayer targeting practices
- 10am: Senate Environment and Public Works Cmte holds hearing on federal oversight of chemical plants, including those in West, Tx., and Geismar, La.
- 10:30am: FCC Acting Chairwoman Mignon Clyburn will seek protection against disclosure of some information stored on mobile devices at agency monthly meeting
- 10:30am: Qualcomm’s Dean Brenner, CTIA’s Christopher Guttman-McCabe, NTIA’s Karl Nebbia, Defense Dept CIO Teri Takai testify before House Energy and Commerce Cmte on equipping carriers, agencies in wireless era
- 11am: Center on Budget and Policy Priorities briefing on changing projections in long-term budget outlook, incorporating Social Security, Medicare trustees’ reports, CBO’s May budget baseline
WHAT TO WATCH
- EU finance chiefs reach deal on how to handle failing banks
- New York Times set to sell Globe for ~10% of purchase price
- U.K. 1Q GDP rises 0.3%, matching previous est.
- U.K. disposable income in 1Q fell most in 25 yrs
- HD Supply, CDW raise 31% less than sought after stocks tumble
- Oracle, Salesforce.com to hold call on partnership at 4pm
- Canada regulators to rule on BCE’s bid to acquire Astral Media, 4pm
- Eurozone June economic confidence rises to 91.3; est. 90.4
- German unemployment unexpectedly drops as eco. recovery seen
- FHFA nominee faces Senate skepticism of skills to oversee GSEs
- KKR submits formal bid for Bushnell, N.Y. Post says
- McCormick (MKC) 6:30am, $0.61
- Commercial Metals (CMC) 7am, $0.18
- ConAgra Foods (CAG) 7:30am, $0.59
- KB Home (KBH) 8am, $(0.06)
- Worthington Industries (WOR) 8:30am, $0.63
- Empire (EMP/A CN) 9:30am, C$1.33
- Accenture (ACN) 4:01pm, $1.14
- Nike (NKE) 4:15pm, $0.74 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- StanChart to Build Hong Kong as Metals Center as East Moves
- Corn Futures Swing to Limits on China-Sized Errors: Commodities
- Risk of Cookie Shortage Prompts Japan to Test New Wheat Tender
- WTI Rises for a Fourth Day on U.S. Refining Boost, China Profits
- Nickel Leads Metals Rebound as Lower Prices Attract Investors
- Palm Oil Drops to One-Month Low on Rising Soybean Oil Supplies
- Sugar Falls After Unica Report on Higher Output; Cocoa Declines
- HKEx, LME and China Beijing Intl Mining Exchange Sign Agreement
- Rebar Pares Quarterly Loss as China’s Industrial Profit Improves
- Aluminum Shipments by Japan Decrease For Seventh Month in May
- LNG in Paradigm Shift as Shippers See Savings: Energy Markets
- Cocoa Crop in Ivory Coast Seen by Growers Boosted After Rain
- Colombia Coffee Growers Threaten Road Blocks, Strikes, Protests
- Corn Declines for a Sixth Day as Record Production Is Forecast
The Hedgeye Macro Team
THE MACAU METRO MONITOR, JUNE 27 2013
MONTHLY BREAKDOWN OF PASSENGER MOVEMENTS Changi Airport
May passenger volume at Singapore's Changi Airport rose 4.7% in May to 4,281,153.
EMPLOYMENT SURVEY FOR MARCH-MAY 2013 DSEC
The unemployment rate for March - May 2013 was 1.8%, down by 0.1% point over the previous period (February-April).
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