“The caliphs fell, and the Caesars trembled on their throne.”
#Fireworks, love’m! But Americans need to remember what fighting for their independence means. For as long as conflicted, compromised, and centralized power remains in the hands of political plunderers, there remains a credible threat to freedom.
As I watched American Independence light up the sky last night in Connecticut, I couldn’t stop thinking why this can’t all turn out the way it always has in this country. Lincoln called it “government of the people, by the people, for the people”; not for MSNBC’s politicians.
Do we have to fight for our hard earned currency, free-markets, and economic liberty? Genghis Kahn bled for this 800 years ago inasmuch as Americans did before and after 1776. “The Mongols did not find honor in fighting: they found honor in winning.” (Genghis Kahn, pg 91)
Back to the Global Macro Grind…
Despite the US stock market’s run of the mill -3-5% correction from her all-time highs, what’s really #winning in 2013?
- Short Fear
- Short #GrowthSlowing
- Short Gold, Treasuries, etc.
Shorting America’s currency and growth expectations works until it doesn’t. It worked for the last decade actually. That’s why plenty a hedge fund growth investor had the style-drift of buying Gold as politicians built the mother of all Bernanke Bubbles in bonds.
Gold and Treasuries hate growth.
If you ask Mr. and Mrs. Gold Bond for inside info on what this morning’s US Employment Report is going to look like, their answer won’t be any different than the answer their boss (Mr. Market) has been giving you since April:
- Gold and Silver -1.2 and -3.2%, respectively, this morning – and both continue to #crash (Gold -26% YTD)
- 10yr US Treasury Yields are testing 3-month highs again this morning, backing up to 2.54%
So why should you pay the caliphs and consultants in Washington such a premium for that super-secret whisper on when and how Bernanke is going to taper, when you can just build a real-time market model to front-run them?
And why, by the way, is it so bad for America (not slices of the asset management business or Federal Reserve talking head speech fees) to see Gold crashing and #RatesRising?
Higher rates and crashing Gold were pro-growth signals in 1982 inasmuch as they were again in 1993. This isn’t a new concept. It’s called a cycle. Anyone who spent their days whining for a half-decade past those two dates doesn’t run real money anyway.
Kahn once said, “there is no good in anything until it is finished” … and the reality is that if you believe in economic gravity, there will be no sustained path to US growth until central planners get out of the way and let the Dollar strengthen alongside #RatesRising.
We know why there is a constituency of Bernanke believers out there who want the opposite of what most Americans should want – they get paid to believe! Follow the money:
- They run levered-long Gold funds
- They have (levered) net long Treasury Bond positions
- They earn fees and/or advertising revenues to promote slow-growth and/or fear
Don’t blame me for that. It’s called a conflict of interest in what was consensus.
“I was not the author of this trouble; grant me strength to exact vengeance.” –Kahn (Genghis Kahn, pg 107)
And while vengeance may be a bad word for those who are being avenged, it’s also called #winning – USA style – for the rest of us who are promoting the only free-market path to prosperity and growth that US central planners from Bush to Obama haven’t yet tried.
Whether today’s jobs report “beats” or not, the timing remains ripe to avenge America’s Throne of Independence via #StrongDollar.
Our immediate-term Risk Ranges are:
UST 10yr 2.45-2.64%
Best of luck out there today and enjoy your liberties this weekend,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on June 21, 2013 for Hedgeye subscribers.
“A government’s first job should be to protect its citizens. But that should be based on informed consent, not blind trust.”
I was flying back from California last night and those few sentences in The Economist article titled “Secrets, lies and America’s spies” got me thinking about the Fed. The article, of course, had nothing to do with Bernanke. But it had everything to do with trust.
How can you trust what you cannot see? I am Canadian, so hard core Americans will have to check my work on this – but didn’t the US Constitution provide a clause for this thing called free elections?
While I hardly doubt Franklin and Jefferson envisioned an America that was hostage to an un-elected and un-accountable central planner’s qualitative views of economic gravity, that doesn’t matter right now – because that’s what you have. The blind trust this country has put in Bernanke’s ability to “smooth” the Waterfall of interconnected risk was a mistake. Now we have to deal with his mess.
Back to the Global Macro Grind…
So how did you like yesterday anyway? Feeling good yet? Want to get Bernanke whispering to Hilsenrath around 320PM EST this afternoon that he didn’t really mean it? Wouldn’t that be cool – then we could do the whole over the Waterfall thing together again!
If you are going to tell me that markets trust how Bernanke is going to manage this going forward, I am going to tell you that you are probably already hammered. It’s always 5 o’clock on a Friday somewhere.
When markets don’t trust something, the forward curve of implied volatility starts to rise. When they really don’t trust something, that volatility rises at a faster rate. It’s called convexity.
In terms of implied volatility in everything that was already crashing (Gold, Treasuries, Emerging Markets, etc), that concept has been pretty straightforward for going on 6 months now. For US Equities, it’s relatively new.
Here are front-month US Equity Volatility’s (VIX) TRADEs and TRENDs:
- Week-to-date, the VIX = +19.4%
- Month-over-month, the VIX = +57.2%
- In the last 3 months, the VIX = +61.6%
In other words, as US consumption, employment, and housing #GrowthAccelerated in the last 3 months, US Equity market expectations went right squirrel. How screwed up is that?
It makes sense though. We have a US Federal Reserve that is A) horrendous in terms of forecasting and B) compromised and conflicted in terms of timing its “communications.” Bernanke made his legacy bed – now we all have to sleep in it.
Another way to think about US growth expectations is bond yields – they love growth:
- Week-to-date UST 10yr Yield = +29 basis points to 2.42%
- Month-over-month UST 10yr Yield = +45 basis points
- In the last 6 months, UST 10yr Yield = +62 basis points
In other words, 10yr Yields ripping yesterday wasn’t new – they’ve been making higher-lows and higher-highs since the November 2012 all-time low. In the last 6 months, 10yr US Treasury Yields are up +35%!
Captain Keynesian is going to say, whoa, whoa, on that Mucker – you are using % moves instead of absolutes. Ah yes, professors, and that’s the precisely the point. Right back at ya – you created an expectation of an absolute zero bound that was reckless and un-precedented.
What else has been front-running Bernanke’s Blind Trust of 0% rates to infinity-and-beyond? Gold:
- Week-to-date Gold = -7.7%! to $1280/oz
- YTD Gold = -23.9% #crashing
- In the last 6 months, Gold = -22.5% #crashing
Gold hates growth and gold loved Bernanke’s anti-consumption growth Policies To Inflate. Period.
Now, to be fair to the community who trades on Washington “consultant” whispers, if you do have a Hilsy rumor in your back pocket this morning, the first thing you’d probably do with that is buy Gold, lever yourself up with some Oil futures, and short Treasuries.
Isn’t that just great for America!
The sad reality is that Americans don’t trust Bernanke’s Fed as far as they can throw Cramer or his buddy’s gnome. The American zeitgeist of distrust in politically driven institutions reaches far beyond the IRS. It’s in your mind each and every market day.
The best thing President Obama can do is say goodbye to Ben S. Bernanke’s concepts of “innovation and communication.” Unless you are all interested in scaling back up the bond-buying Waterfall, ripping a VIX 30 handle, and doing yesterday over and over and over again, that is.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1253-1332, $100.80-103.96, $81.11-82.19, 96.18-97.92, 2.24-2.46%, 17.25-21.56, and 1583-1629, respectively.
Best of luck out there today and enjoy your weekend,
Keith R. McCullough
Chief Executive Officer
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This note was originally published at 8am on June 20, 2013 for Hedgeye subscribers.
“I wonder how much it would take to buy a soap bubble, if there were only one in the world.”
The last of the central planning bubbles left in the world is now popping. It’s called the bubble in super sovereign debt.
Everything else that’s imploding this morning was already popping. That’s not new news.
Gold crashing today isn’t new news either. It’s called capitulation.
Back to the Global Macro Grind…
Our Waterfall metaphor was right because the big macro factors signaling this move in bonds was measurable. As both the VOLUME (of debt) and VELOCITY (rates rising) started rising at a faster rate, you could see Bernanke’s policy decision approaching the dam.
And no, it wasn’t a sign to buy the damn dip. At least not in Gold or US Treasuries, that is…
I don’t think it’s helpful to give you live quotes and/or pictures of this bifurcation point in Global Macro market history. Neither do I think you need me to rant and/or remind you on why we saw this Waterfall coming. It’s time to tell you what we’d do next.
Most of the time, risk management starts with the what not-to-dos:
- Don’t buy Gold, Silver, or Commodities (our asset allocation to those has been 0% for 6 months)
- Don’t buy US Treasuries, or Yield Chasing slow growth Equity ideas like Utilities or MLPs
- Don’t buy Emerging Markets (#EmergingOutlows is our Q213 Macro Theme)
Once you cross all that stuff off your list, you run out of places to put your money.
So, slowly, from here you can start to buy back:
- US Dollars
- US Financials levered to a steepening yield curve
- US Consumption Equities whose demand curves enjoy #StrongDollar tax cuts
Remember, it’s summer time – and the list of options is narrow – so take your time.
Since US Equities are really the only place we‘d like you to be (for now), here are the key levels to watch:
- US Dollar Index intermediate-term TREND support = $81.21
- SP500 intermediate-term TREND support = 1583
- US Financials (XLF) intermediate-term TREND support = $18.43
Rates rising at an accelerating rate is big risk, primarily because consensus was not positioned for it. Again, going back to our favorite thermodynamic metaphor (VOLUME + VELOCITY of water rising at an exponential rate as you approach the dam), what we have here this morning is a lot of unprepared white water tourists getting really wet.
If you’ve never tried this at home, don’t try Niagra first. Class VI Whitewater Rafting in West Virginia will get you all the hands on experience you’ll need. When you participate in markets, you have to respect that there are other people (who may not be able to swim) in your raft. And the risk associated with decisions they are forced to make happens fast.
If you have already hedged your Commodities and/or Fixed Income exposures this morning, you are on the shore. So take the time to think through the opportunity that you are staring at downstream:
- This point of max entropy (ripping yields) won’t happen every day – that risk is already over the Waterfall
- Rising bond yields is a pro-growth signal backed by accelerating 6 month consumption, employment, and housing growth
- Steepening curve (bond yields) = wider Yield Spread = bullish for Financials (XLF) that earn an accelerating return on that
I am sure Bernanke is a wonderful father and a nice man. But, folks, he has failed in being able to arrest gravity. He had no business promising people smoothing economic gravity was possible. That was his mistake. That’s his legacy. It’s also yesterday’s news now. The last of his soapy bubbles is finally popping. And there’s no price where he can buy “price stability” in bonds back.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1297-1379, $104.08-106.64, $81.21-82.18, 96.17-98.83, 2.21-2.46%, 14.76-18.98, and 1605-1656, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Another strong week for the labor market as non-seasonally adjusted claims continue to register accelerating improvement.
A Steadily Widening Divergence
This past week's claims data looks almost identical to that of the prior week. Rolling NSA claims were better by 9.6% YoY, which was a hair better than the 9.5% improvement in the previous week. SA claims were better WoW but essentially flat on a rolling basis. Clearly all eyes are on the Friday payrolls report. Historically the ability to forecast NFP with claims has been poor, i.e. there's typically a high correlation but with a fairly high standard error. Nevertheless, the 4-wk print (SA) this week was 346.5k, which was actually down from the 4-wk print for May at 352.5k. Based on this and last month's NSA print of 175k and this month's consensus of 161k, we'll go out on a limb and suggest that there's a better than 50% chance the NFP print will come in nominally ahead of expectations.
Tactically thinking about the Friday number aside, the real takeaway is that the fundamentals of the labor market (NSA YoY) continue to improve at an accelerating rate. Deep value, credit quality-levered longs like BAC remain among our top picks on this basis, coupled with the fact the recovering housing market shows no signs of derailing on the recent back-up in rates.
Prior to revision, initial jobless claims fell 3k to 343k from 346k WoW, as the prior week's number was revised up by 2k to 348k.
The headline (unrevised) number shows claims were lower by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.75k WoW to 346.5k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -9.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -9.5%
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: We believe LINE has room to fall much further. In fact, Hedgeye believes that fair value for LINE (LNCO) is around ~8.00/unit (share).
What a difference a couple of days can make. In case you haven’t been following this story, the price of LINN Energy (LINE) has cratered the last two days.
What triggered LINE’s plunge? News that the SEC is now investigating the company’s use of use of non-GAAP financial measures, its hedging strategies, and its proposed acquisition of Berry Petroleum Company (BRY) jointly with its affiliate, Linn Co, LLC.
According to the press release put out by LINN Energy Monday night:
The SEC has requested the preservation of documents and communications that are potentially relevant to, among other things, LinnCo's proposed merger with Berry Petroleum Company, and LINN and LinnCo's use of non-GAAP financial measures and hedging strategy.
For the record, Hedgeye Energy Analyst Kevin Kaiser has been all over the “Old Wall Street” aggressive accounting practices over at LINN Energy. Kaiser first sounded the siren back in February when the stock was trading around $38. It’s currently trading around $23 dollars.
We have been relentlessly banging the drum of transparency, and shining the light of accountability for all investors who bothered to listen. It has not been an easy road. All along, we have been attacked and vilified by various high-profile members of the mainstream media, big shots on Wall Street and angry people long LINN on Twitter. These attacks didn’t weaken our resolve. Rather, it strengthened our determination to get the truth out.
Fortunately, it now appears the market has come around. To paraphrase a line from Jim Chanos, “We are not the only guys crying in the wilderness” about the accounting at LINN now. While we certainly do not celebrate the losses of investors long LINN Energy, we do celebrate the market holding this company accountable. We don’t like it when companies play games. It’s bad for the markets and it’s bad for America.
For the record, Hedgeye believes this SEC inquiry puts the proposed LINN/BRY merger at serious risk. And yes, we believe the stock has room to fall much further. In fact, Hedgeye believes that fair value for LINE (LNCO) is around ~8.00/unit (share).
We’re not done with LINN – we think this story is far from over.
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