“A coach is someone who can give correction without causing resentment.”
I’ve been blessed with great coaches and teachers in my life. They were never easy on me. Their criticisms didn’t cause any resentment either. To the contrary, they drove me to improve. Trusting your coaches is the first step toward opening your mind.
I make a lot of mistakes. And since I’m the front man for this Hedgeye show, that means every mistake I make is front-and-center in the arena of public market debate. That’s not a bad thing. That’s right where I want to be.
What I do isn’t for everyone. I get that. But the first 5 years of building this firm alongside my teammates has given me a keen appreciation for having the opportunity to make mistakes in an open and accountable forum. It speeds my learning process.
Back to the Global Macro Grind…
One of the toughest things to do in US Equities in 2013 has been to coach myself through market corrections. The new normal correction can last anywhere from 4 hours to 4 days. I know, it’s end of the world type stuff. Remember, nothing is normal.
So, from its all-time closing high of 1709 in the SP500 last week, what will the latest US stock market “correction” be?
A) -0.9% to 1693?
B) -1.9% to 1676?
C) -4.6% to 1630?
Yes, that is a Hedgeye Poll. If you have time, ping me with A, B, or C. One of the most important aspects of working in an open/transparent forum of debate is collaboration. I’m pretty sure the days of opaque #OldWall sentiment checks are dead.
Since I actually need to #timestamp an answer to this question, I’ll choose B.
That’s the highest probability choice because the S&P futures already showed me they can snap my mo mo line of 1693 support this morning. And there’s very little fundamental and/or quantitative evidence that 1630 is in play, yet.
What is the “mo mo” line?
That’s the line I use to front-run the machines. It’s home brewed. It’s my most immediate-term risk management duration. It’s especially useful for day-trading, scalping, etc. Label me long-term cycle guy or Mucker, I’m cool with both. Better to scalp, than be scalped.
Put another way, across our core risk management durations:
- SP500 immediate-term mo mo line of support = 1693; and 1714 is resistance (our Daily Risk Range)
- SP500 immediate-term TRADE support = 1676
- SP500 immediate-term TREND support = 1630
The upside down of the is US Equity front-month volatility (VIX):
- VIX mo mo risk range = 11.71-13.72
- VIX immediate-term TRADE resistance = 14.64
- VIX immediate-term TREND resistance = 18.98
In other words, the bullish TREND in US Equities (and bearish TREND in Fear) isn’t in the area code of being challenged, yet. Therefore, if contextualized within the framework of our risk management process, you woke up every morning reminding yourself to not “fight the TREND”, I’d wholeheartedly agree with that. I’d rather fight the Fed than fight things like math and/or gravity.
One of the biggest challenges I have personally is trying to communicate risk management strategies to clients who all have different risk profiles, holding periods, etc. Through consistent feedback and criticism though, I’ve learned that there’s only one answer to this challenge: keep doing what I do - be Duration Agnostic, and keep working on communicating what that process means.
In my humblest of dreams, that would be my happiest retirement: that my teammates and I were successful in not only communicating our multi-factor, multi-duration Global Macro risk management process – but that the players and peers that we coached trusted us.
Trust isn’t allocated. You have to re-learn how to earn it, every day. We have a long road of learning and teaching ahead.
Our immediate-term Risk Ranges are now as follows (*we have 12 Macro Risk Ranges in our Daily Trading Ranges tool now too – as an example, this morning I’ve attached all of them; the bracketed “bullish” or “bearish” comment is on our TREND duration (3 months or more) whereas the range itself is on our most immediate-term duration):
UST 10yr 2.56-2.73% (bullish on yield)
SPX 1 (bullish)
Nikkei 137 (bullish)
FTSE 6 (bullish)
VIX 11.71-13.72 (bearish)
USD 81.49-82.43 (bullish)
Euro 1.31-1.33 (bullish)
Yen 97.01-98.94 (bearish)
Brent 107.23-109.79 (bullish)
NatGas 3.21-3.46 (bearish)
Gold 1 (bearish)
Copper 3.05-3.18 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – August 7, 2013
As we look at today's setup for the S&P 500, the range is 38 points or 1.26% downside to 1676 and 0.98% upside to 1714.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.33 from 2.34
- VIX closed at 12.72 1 day percent change of 7.43%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: Mortgage Applications, Aug. 2 (prior -3.7%)
- 11am: Fed to buy $1.25b-$1.75b debt in 2036-2043 sector
- 10:30am: DOE Energy Inventories
- 1pm: U.S. to sell $24b 10Y notes
- 1:40pm: Fed’s Pianalto speaks on monetary policy in Cleveland
- 3:00pm: Consumer Credit, June, est. $15b (prior $19.6b)
- Bank of Japan sets target rate, 2014 monetary base rate
- 6:30am: Quinnipiac Univ. N.J. likely voter poll on Senate race; including Democratic, GOP primary voters
- 3:50pm: President Obama delivers speech to troops at Camp Pendleton in Calif.
WHAT TO WATCH:
- Amgen said to boost Onyx Pharmaceuticals bid to $130/shr
- Mead Johnson to pay $33m to end China formula probe
- Disney profit little changed, “Lone Ranger” hits film unit
- Bats said glitch yday was network issue, not w/ software
- Direct Edge, Nasdaq exchanges also had issues yday
- Anadarko doubles qtr div. to 18c/shr from 9c, est. 11c
- Wal-Mart may bid for Li Ka-Shing’s ParknShop: Reuters
- TPG, Carlyle, GIC may bid for H.K.’s Quality Healthcare: SCMP
- Omnicom Investor sues over merger with Publicis Groupe
- Yuan advances to 19-yr high on PBOC fixing, convertibility bet
- AMETEK (AME) 7am, $0.52
- AOL (AOL) 7am, $0.43
- Ariad Pharmaceuticals (ARIA) 7:35am, $(0.40)
- Avnet (AVT) 8am, $0.96
- Carlyle Group (CG) 6:30am, $0.55
- Cimarex Energy (XEC) 6am, $1.27
- CommonWealth REIT (CWH) 6:28am, $0.64
- Devon Energy (DVN) 8am, $0.95 - Preview
- Duke Energy (DUK) 7am, $0.93
- Gogo (GOGO) 7:30am, $(0.37)
- HollyFrontier (HFC) 7:30am, $1.39
- Icahn Enterprises (IEP) 8am, No est
- ING US (VOYA) 5:55am, $0.63
- Lexington Realty Trust (LXP) 7:30am, $0.24
- Marsh & McLennan (MMC) 7am, $0.67
- Melco Crown (MPEL) 7:51am, $0.27
- Molex (MOLX) 7:30am, $0.35
- Newcastle Investment (NCT) 6:30am, $0.11
- Pepco Holdings (POM) 6:03am, $0.23
- Ralph Lauren (RL) 8am, $1.94
- Sinclair Broadcast (SBGI) 7:30am, $0.15
- SunEdison (SUNE) 6am, $(0.15)
- Time Warner (TWX) 7am, $0.76
- Valeant Pharmaceuticals (VRX CN) 6am, $1.28
- Agrium (AGU CN) 5:30pm, $4.97 - Preview
- American Water Works (AWK) 4:15pm, $0.61
- Array BioPharma (ARRY) 4:19pm, $(0.13)
- ARRIS Group (ARRS) 4pm, $0.26
- Brookdale Senior Living (BKD) 4:43pm, $-
- CenturyLink (CTL) 4:07pm, $0.66
- Concho Resources (CXO) 5pm, $1.00
- Continental Resources (CLR) 4:37pm, $1.25
- Corrections Corp of America (CXW) 4:10pm, $0.65
- Diamond Resorts Intl (DRII) After-Mkt, No est.
- DryShips (DRYS) 4:05pm, $(0.07)
- Energy Transfer Equity (ETE) 5:05pm, $0.54
- Energy Transfer Partners (ETP) 5:09pm, $0.47
- Fifth Street Finance (FSC) 4:28pm, $0.28
- Franco-Nevada (FNV CN) 5:18pm, $0.21
- Frontier Communications (FTR) 4:01pm, $0.06
- Fusion-io (FIO) 4:05pm, $(0.03)
- Green Mountain Coffee (GMCR) 4pm, $0.76
- Groupon (GRPN) 4pm, $0.02
- Halozyme Therapeutics (HALO) 4:05pm, $(0.14)
- MarkWest Energy (MWE) 4:01pm, $0.22
- MBIA (MBI) 4:01pm, $0.14
- Mondelez Intl (MDLZ) 4:01pm, $0.34 - Preview
- Polypore Intl (PPO) 4:01pm, $0.39
- Prudential Financial (PRU) 4:07pm, $1.99
- Redwood Trust (RWT) 4:15pm, $0.34
- SolarCity (SCTY) 4:01pm, $(0.38)
- St Joe (JOE) 4:01pm, $0.02
- Sun Life Financial (SLF CN) 5:10pm, C$0.66
- Tesla Motors (TSLA) 4:01pm, $(0.20)
- Transocean (RIG) 4:30pm, $1.08
- Tronox (TROX) 5:43pm, $(0.05)
- WageWorks (WAGE) 4:05pm, $0.17
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- JPMorgan Sued With Goldman Sachs in Aluminum Antitrust Case
- p Commodities Market, Industry News »
- Palmer’s ‘Mad’ Mine Costs China on Learning Curve: Commodities
- Gold Drops to Three-Week Low on Speculation Fed to Trim Stimulus
- Wheat Declines as Iraq, Egypt Shun Grain From U.S. in Tenders
- Copper Falls on Speculation Fed Will Opt to Limit Debt Purchases
- WTI Crude Fluctuates Amid Signs of Declining U.S. Inventories
- Rebar Climbs to Three-Month High as Iron Ore Prices Gain
- Bank of America’s Blanch Says WTI Crude Could Fall $8 to $10
- Palm Oil Declines to One-Week Low as Peak-Output Cycle Begins
- BHP’s CEO Sees US Shale Expansion as Mineral Demand Grows
- Silver ETF Holdings Approach Record and Critical Price Levels
- Palladium’s Pennant Pattern Signals Increase: Technical Analysis
- Easy Cash Ebbs for $300 Billion Asean Port-to-Rail Cost: Freight
- Corn in U.S. Seen by Cordonnier at Risk of Damage From Frost
The Hedgeye Macro Team
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THE MACAU METRO MONITOR, AUGUST 7, 2013
GOV'T PLANNING TO REVISE SMOKING CONTROL LAW Macau Daily Times
Lei Chin Ion, director of the Health Services, said, “We are now collecting opinions and our work is progressing well, so we will conduct a first revision of the law in 2015.” Lei Chin Ion said that, following an assessment period, the government will reveal what kind of measures will be applied to casinos that do not meet air quality standards. He said that the administrative regime predicts the reduction or removal of smoking areas for casinos that do not comply with the Health Bureau standards.
This month it was revealed that 28 casinos failed the first air quality test conducted by the Health Services Bureau. Those casinos had to undergo a second test and the Bureau is currently analyzing the results and looking to decrease the size of some smoking areas.
Broader Industrial data have gotten resoundingly stronger since May. Since the 2009 recovery, most measures of U.S. industrial growth had shown a relatively steady deceleration. Recent data appear to break that trend. As always, industry specific data vary.
- Nonresidential construction has been notably weak, but the Architectural Billings Index suggests that we should see a rebound in coming months.
- North American Heavy Truck orders (preliminary) in July do not show much impact from new Hours of Service regulations.
- Intermodal rail carload growth appears likely to follow the ISM New Orders index higher in coming weeks.
- Fastenal’s Average Daily Sales have continued to decelerate through July, while small business credit conditions have continued to ease.
ISM New Orders
The rebound in new order activity in both the Manufacturing and Non-Manufacturing ISM indices appears to be a meaningful breakout. However, these measures also spiked higher in February 2013, only to fade in the following months. Nonetheless, strength in this measure is an encouraging sign amid recent stall-speed industrial activity.
Durable Goods Orders
The February 2013 spike in the ISM Manufacturing New Orders sub-index was not well reflected in several other measures of industrial order activity, including Durable Goods Orders. The coinciding upward move in July Durable Goods Orders provides support for the higher ISM New Orders reading.
Heavy Truck Orders
Preliminary North American Class 8 truck orders were relatively tame in July. A potential decline in truck demand from new Hours of Service (HOS) regulations, which became effective July 1, could set-up a buying opportunity for high quality truck OEMs, like PCAR. We will monitor the next few months, which are seasonally higher volume than July, for any HOS-related weakness/opportunity.
A notable pocket of weakness has been nonresidential construction. The weakness is in part due to reduced government spending and a slow recovery in certain commercial real estate markets. Nonresidential construction tends to be ‘late cycle’ and may pick-up later this year.
Architectural Billings Index (ABI)
The ABI only turned slightly positive in August of 2012 and typically leads non-residential construction activity by 9-12 months. If the index performs as a leading indicator in the current environment, nonresidential construction should strengthen through the back half of 2013.
Residential Home Improvement Spending
In contrast to nonresidential, construction spending on residential home improvement continues to spike higher, following a long period of stagnation after the housing bust.
Fastenal Average Daily Sales
Fastenal’s average daily sales growth has continued to decelerate, failing to reflect the bounce in the ISM or Durable Goods measures. While that could just be a lag between industrial orders and FAST sales, we think that easing credit conditions have been and will remain an important headwind.
NFIB Credit Conditions
Business credit continues to ease. Industrial supply companies served as an attractive source of working capital during the tight credit conditions following the financial crisis. As credit conditions thaw, industrial supply companies may see that tailwind turn into a growth headwind.
Intermodal Rail Carload Growth
Intermodal Rail Carload growth has not yet reflected recent strength in the ISM and Durable Goods new orders readings. Looking at the historical relationship between new orders and intermodal rail volumes, we would expect to see a pick-up in coming weeks.
Takeaway: This is not a sound buying opportunity; in fact, we’d welcome a continued squeeze in the Aussie dollar as an opportunity to short into.
- A structurally depressed growth outlook should continue to dictate Australian monetary and fiscal policy over the long-term TAIL – compressing the relative policy spread between Australia and peer economies (most notably the US). As such, we would not identify this as a sound buying opportunity in Australia’s currency.
- In fact, we’d graciously welcome a continued squeeze in the Aussie dollar as a ripe opportunity to short into. Having outlined our bearish bias on Australia’s currency back in JUN ’12 in a note titled, “SLOWDOWN-UNDER” we’ve been purposefully quiet [in print] on Australia since. Indeed, this is one of those rare cases where the [bearish] fundamentals have played out largely according to plan.
- Moreover, it can be reasonably argued that we’re still in the early-to-middle innings as it relates to the aforementioned bearish fundamental story (which we detail below). Unless you’re of the view that US growth is set to TREND lower from here and that Bernanke/Yellen/Summers/Unknown is likely to roll back tapering expectations or foster outright expectations of incremental easing out of the Federal Reserve (we definitely aren’t), we can’t see why FX market participants would expect the Aussie dollar to sustainably buck its young trend, given how stretched the currency was on both a nominal and REER basis.
THE AUSSIE DOLLAR IS A CROWDED, LIKELY WELL-UNDERSTOOD SHORT
Prior to and likely inclusive of today’s short covering, the Aussie dollar was/is a crowded short. It’s -12.4% depreciation vs. the USD over the past 3M is far and away the steepest decline across DM FX and the most recently reported net short position among non-commercial futures and options contracts (74.2k) was an all-time high for the shorts and -2.4x standard deviations below the trailing 1Y mean.
Having outlined our bearish bias on Australia’s currency back in JUN ’12 in a note titled, “SLOWDOWN-UNDER” we’ve been purposefully quiet [in print] on Australia since. Indeed, this is one of those rare cases where the fundamentals have played out largely according to plan:
- #GrowthSlowing: Raw materials account for 60% of Australian exports and the mining industry accounts for 65.3% of all incremental CapEx in Australia… With the CRB Raw Industrials Materials Index down -12.3% YoY, it’s fairly easy to do the math on why Australian real GDP growth has fallen in a straight line from the cycle peak of +4.4% YoY in 1Q12 to +2.5% YoY in the most recently reported quarter (1Q13).
- #MonetaryEasing: Over the past year, the RBA has cut its benchmark cash rate by a cumulative 100bps to a record low of 2.5% – matching the benchmark rate of fellow commodity currency and central banking rival New Zealand (RBNZ) for the first time since APR ’09.
- #CommodityRelatedFiscalDeterioration: The latest budget outlook from the Australian Treasury confirms our view that Australian policymakers inappropriately levered their country’s fiscal coffers up to a topping mining CapEx bubble under the leadership of the Labor Party (which may or may not be on its way out; we’ll learn more after elections that must be called by NOV 30). Citing “faster than expected falls in commodity prices”, new Treasury secretary Chris Bowen revised down the country’s 2013-17 revenue estimates by -A$33 billion from forecasts that he inherited from outgoing Treasury secretary Wayne Swan just ~2.5M ago. The most recent budget outlook also calls for the country’s unemployment rate to back up to a 10Y-high of 6.25% by the end of 2Q14… Assuming the [currently] more popular Kevin Rudd captures the premiership in the upcoming election for the Labor Party (in lieu of the more fiscally-hawkish Tony Abbot of the Liberal-National Coalition), we would expect to see Australia’s fiscal position continue to deteriorate over time. International investors own 70% of Australian gov’t debt, so as US Treasury rates continue to back up, they may be less willing to finance the Australian sovereign, at the margins.
In accordance with the title of this note, we don’t think it’s prudent to run-out and short the Aussie dollar here; in fact, we’d argue that today’s short squeeze is has quite a few more pips to run because it is underpinned by what we’d argue is a moderately hawkish shift in the RBA’s policy bias.
In the process cutting its benchmark cash rate to a record low of 2.5%, the RBA board conspicuously left out a clear path for further easing in its guidance, instead stating that the board “will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time”. It also chimed in with the following statement on the AUD: “It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.”
THERE’S LIKELY MORE PAIN TO COME, THOUGH… BUT DON’T JUST TAKE OUR WORD FOR IT
It should be duly noted that the RBA was in a small pool of DM central banks that helped its economy steer clear of recession during the 2008-09 Global Financial Crisis; the fact that they are just now cutting rates to an all-time low TODAY only augments our structurally bearish bias on the Australian economy – which itself continues to be supported by our structurally negative biases on Chinese economic growth and commodity prices (email us if you’d like to get up to speed on either view) – the confluence of which have underpinned marginal improvement in Australia’s current account dynamics over the past 5-10 years.
Moreover, it can be reasonably argued that we’re still in the early-to-middle innings as it relates to points #1-3, as outlined above. Unless you’re of the view that US growth is set to TREND lower from here and that Bernanke/Yellen/Summers/Unknown is likely to roll back tapering expectations or foster outright expectations of incremental easing out of the Federal Reserve (we definitely aren’t), we can’t see why FX market participants would expect the Aussie dollar to sustainably buck its young trend, given how stretched the currency was on both a nominal and REER basis.
In that light, we’d graciously welcome a continued squeeze in the Aussie dollar as a ripe opportunity to short into. More importantly, we would not identify this as a sound buying opportunity in Australia’s currency – particularly from an intermediate-to-long-term perspective.
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