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Market Generals

This note was originally published at 8am on August 05, 2013 for Hedgeye subscribers.

“In general, our Generals were out generalled.”

-John Adams

 

While that’s what John Adams wrote to his wife, Abigail, in October of 1776, it wasn’t an entirely accurate summary of what happened. The planned escape of American forces in October was based on a British battle lost, but it also helped them win the war.

 

Per Joseph Ellis in Revolutionary Summer, on September 5th, 1776, American General, Nathanael Greene, advised George Washington that a “retreat is absolutely necessary, and that the honor and interest of America require it.” (Ellis, page 135)

 

Although it wasn’t Washington’s style to retreat, Greene was right in advising the Continental Army to do what the Continental Congress probably wouldn’t understand. Out generalling the conventional wisdom of politicians requires flexible leadership.

 

Back to the Global Macro Grind

 

With the US stock market closing at yet another all-time high on Friday (SP500 +19.9% YTD), I’m advising the US Government to retreat from Quantitative Easing and let free-market prices start to clear.

 

While Bernanke has the Congress right freaked-out about the idea of interest #RatesRising, it’s the only way out of the long-term slow-growth problem they have perpetuated under both Bush and Obama economic policy making regimes.

 

Let the US Dollar strengthen and let US interest rates rise and you’ll get two big things:

 

1.       Continued #CommodityDeflation

2.       #Debt Deflation

 

Deflation isn’t a bad word inasmuch as retreat isn’t – so don’t let your local Keynesian of the Princetonian Econ 101 Regimen sucker you into thinking so. Inflations have caused more depressions in the last 180 years than deflations have (*Atkeson/Kehoe study).

 

What’s better, filling up your gas tank 10x for $100/pop, or filling it up 10x for $50? Send that brain teaser to someone on team Bernanke that takes a tax payer funded car service to work.

 

Tapering expectations have already:

  1. Raised the value of American Purchasing Power (US Dollar) by +3% YTD
  2. Deflated the value of Commodities (CRB Index, 19 commodities) by -4% YTD
  3. Crushed the net long futures and options spec positions in everything but Crude Oil contracts

If and when the debate moves from tapering to tightening, I think that we’ll finally get after some deflation at the pump. But we’re nowhere near having an economic General in the Obama Administration stand up for the little guy on this front (yet).

 

Looking at last week’s CFTC futures and options activity, a #StrongDollar #RatesRising week had the following impact:

  1. Total CFTC net long commodities position dropped -15% wk-over-wk
  2. Gold’s net long position fell for the 1st week in 5, down -7% wk-over-wk to +65,517 contracts
  3. Crude Oil’s net long position fell for the 1st week since late June, -5% wk-over-wk, to +318,819

To put that +318,819 net long position in Crude Oil in context, that’s 1-week removed from its all-time high. If you’re telling me Obama and Bernanke couldn’t smoke the oil price via monetary policy, I’ll buy you dinner (on them) for life.

 

#CommodityDeflation has helped drive the core of US Consumption Growth for the last 2 quarters, but that’s going to be less of a tailwind if Oil prices continue to trend higher. Last week, Brent Oil was up +1.7% - and it’s up another +0.3% this morning to $109.30/barrel. Our long-term TAIL risk line (to the upside) for Oil = $107.71/barrel.

 

Put another way, after getting smoked by Bernanke’s Policies To Inflate for the last 6 years, the US Consumer just got some purchasing power back and won a few quarterly battles. But if we don’t back off (taper) and eventually tighten, it’ll be your every day American who loses the inflation war.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.54-2.72%

SPX 1692-1712

VIX 11.72-13.85

USD 81.53-82.48

Brent Oil 107.99-109.67

Gold 1294-1326

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Market Generals - Chart of the Day

 

Market Generals - Virtual Portfolio


THE M3: ARISTOCRAT; EXPENDITURE SURVEY

THE MACAU METRO MONITOR, AUGUST 19, 2013

 

 

ARISTOCRAT FIGHTS TO MAINTAIN MARKET SHARE IN MACAU Australian

Aristocrat Leisure will fight hard to fend off new competition and maintain its powerful market share in Macau as up to 8,000 new gaming machines are installed in casinos in the booming Chinese gaming province over the next five years.


Aristocrat's regional general manager based in Macau, David Punter, said that the group's goal was to maintain its current market share of 50-60% of slot machines in Macau's casinos as the number of machines doubled between now and 2018.  "What you will see over the next five years on Cotai is a doubling in the number of electronic gaming machines for that area of Macau for both slot machines and e-table games. That means 6,000 to 8,000 new machines...Punter said.  Aristocrat's market share at the Wynn Macau is as high as 70%.

 

But competition for Aristocrat is increasing. Another Australian gaming company in Macau controlled by billionaire pokies king Len Ainsworth, of Ainsworth Gaming Technology, has snared 10% of the growing slot machine market with its Australian-built machines.  Ainsworth said, "We are selling steadily up there and we are gaining market share, which is satisfactory to us. Aristocrat has the majority of the business but we are biting into that here and there. We are gaining because of the quality of our equipment and we'll continue to gain."

 

Punter said that while slot machines made up only 5% of gaming revenues in Macau, they accounted for up to 20% of earnings. "The growth is coming because of the profitability of the slot machines. They are less labour-intensive and probably less maintenance," he said.

 

VISITOR EXPENDITURE SURVEY FOR 2Q 2013 DSEC

Total spending (excluding gaming expenses) of visitors amounted to MOP13.9 billion in the second quarter of 2013, a notable increase of 23% in comparison with MOP11.4 billion in the second quarter of 2012. 
   
In the second quarter of 2013, per-capita spending by visitors was MOP1,973, up by 15% year-on-year. Mainland visitors had the highest per-capita spending of MOP2,511, and spending of those travelling under the Individual Visit Scheme (IVS) reached MOP2,819; besides, per-capita spending of visitors from Singapore amounted to MOP1,719. 
   
Analysed by consumption structure, visitors spent mostly on Shopping (49%), Accommodation (24%) and Food & Beverage (19%). 

 


MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER

Takeaway: Rates rising seems to be taking some wind out of the sails for the sector in the short term, but ultimately we think it will be a positive.

Key Takeaways:

 

* High Yield  – High Yield continues to rise, adding another 11 bps last week and closing at 6.46%, up from 6.35%. After troughing briefly on July 22nd at 5.91%, rates have been steadily climbing since. Our firm's view on rates is that they'll continue to grind higher making higher highs and higher lows. Historically, we've seen Financials far more correlated with high yield than they are currently. This is a good sign, as the market is differentiating systemic credit risk from risk of rising rates.

 

* 2-10 Spread – Last week the 2-10 spread widened 21 bps to 249 bps. The 2-10 spread is now at its widest since July 28, 2011. We continue to regard this as a longer-term positive. Historically, movements at the long end of the curve has preceded Fed Funds moves by an average of 8-14 months. While it's certainly possible this time could take longer, the bottom line is that rising short rates will help Financials and wider the curve gets the greater the probability that short rates will move within 12 months.

 

* Chinese Steel – Steel prices in China posted another healthy increase last week, rising a further 1.5%. As China stands out to us as one of the primary global risk externalities capable of derailing the ongoing recovery, we regard the rising price of Chinese steel as an important referendum on the risk posed by a Chinese crisis. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 0 out of 13 worsened / 9 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 15

 

1. U.S. Financial CDS -  Swaps widened broadly for U.S. financials last week, though none of the moves were overly noteworthy.  The largest move among big caps was a 6 bps widening at JPMorgan, where a flurry of negative media/headlines weighed on both equity and credit sentiment in the short-term. The rest of the U.S. financials, however, were largely unchanged with the exception of certain high-beta names like MBIA, MTG & RDN.

 

Tightened the most WoW: AON, PRU, TRV

Widened the most WoW: MBI, JPM, RDN

Tightened the most WoW: MTG, PRU, MS

Widened the most MoM: MBI, AGO, CB

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 1

 

2. European Financial CDS - British, Italian and German banks all widened last week. Sberbank of Russia widened another 6 bps last week to 239 bps. 

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 2

 

3. Asian Financial CDS - Indian banks widened further while Chinese banks tightened. The MoM change in Indian bank swaps is becoming noteworthy. The three major banks of India are now wider by 50-55 bps (~20%) vs one month prior. Japanese financials were largely unchanged WoW.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 17

 

4. Sovereign CDS – Italy and Spain tightened last week by 6 and 7 bps, respectively, while France and Japan both widened by 2 bps. The rest of the world's major markets were unchanged. 

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 18

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 3

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 11.4 bps last week, ending the week at 6.46% versus 6.35% the prior week.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 2 points last week, ending at 1803.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 6

 

7. TED Spread Monitor – The TED spread rose 1.1 basis points last week, ending the week at 22.3 bps this week versus last week’s print of 21.2 bps.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 7

 

8. CRB Commodity Price Index – The CRB index rose 3.9%, ending the week at 292 versus 282 the prior week. As compared with the prior month, commodity prices have increased 0.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 37 basis points last week, ending the week at 3.28% versus last week’s print of 2.91%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened, ending the week at 0 bps versus 96 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 11

 

12. Chinese Steel – Steel prices in China rose 1.5% last week, or 51 yuan/ton, to 3568 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 249 bps, 21 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.5% upside to TRADE resistance and 0.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


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.

August 19, 2013

August 19, 2013 - dtr

 

BULLISH TRENDS

August 19, 2013 - 10yrA

August 19, 2013 - spx

August 19, 2013 - nik

August 19, 2013 - dax

August 19, 2013 - dxy

August 19, 2013 - euro

August 19, 2013 - oil

 

BEARISH TRENDS

August 19, 2013 - VIX

August 19, 2013 - yen

August 19, 2013 - natgas
August 19, 2013 - gold

August 19, 2013 - copper


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 19, 2013


As we look at today's setup for the S&P 500, the range is 36 points or 0.84% downside to 1642 and 1.34% upside to 1678.                   

                                                                                                            

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1A

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.51 from 2.49
  • VIX  closed at 14.37 1 day percent change of -2.44%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell $30b 3M, $25b 6M bills
  • 4pm: USDA crop conditions report
  • U.S. Weekly Rates Agenda

GOVERNMENT:

    • Obama to meet with regulators, discuss fin-reg overhaul
    • South Korea, U.S. begin joint military exercises taking place through Aug. 30
    • North Korea agrees to reunion talks after Gaesong pact
    • Washington Weekly Agenda

WHAT TO WATCH:

  • Blackstone said in talks to buy stake in Goldman unit
  • Banks seeking protection from govt. seizure of SAC assets: WSJ
  • SEC probes J.P. Morgan China hires, NYT reports
  • Alibaba in holders’ structure talks with HK Exchange: WSJ
  • Yahoo names Maynard Webb as chairman
  • Petrobras to sell $2.1b in oil, petrochemical assets
  • Apple seeks fingerprint reader patent in Europe: Patently Apple
  • JPMorgan seeking to sell 1 Chase Manhattan Plaza
  • Co. settles with pension funds over Lehman for $23m
  • CVC Capital buys Skrill Group for $800m
  • China July new home prices rise; big cities see record gains
  • Shire hires Lazard to repel takeover bid: Sunday Times
  • News Corp. probed in U.K. as corporate suspect: Independent
  • U.S. seeking appeal requiring Bernanke testimony on AIG
  • Abbott accused of racketeering in Depakote marketing
  • “The Butler” leads film sales w/ $25m for Weinstein
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • Home sales probably rose to 3-yr high: Eco Weekly Preview
  • Jackson Hole, FOMC, Home Sales, Ifo: Wk Ahead Aug. 17-24

EARNINGS:

    • Bob Evans (BOBE) 4pm, $0.57
    • Intl Rectifier (IRF) 4pm, ($0.10)
    • Raven Industries (RAVN) 9am, $0.27
    • Urban Outfitters (URBN) 4pm, $0.48

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Corn-Crop Cuts by USDA Seen Premature as Goldman Predicts Record
  • Gold Bears Retreat as Prices Reach Two-Month High: Commodities
  • Copper Falls as Investors Await Cues on Fed’s Stimulus Stance
  • Gold Trades Below Two-Month High as Rally Spurs Investor Sales
  • Corn and Soybeans Advance as Dry Weather Threatens U.S. Yields
  • Sugar Tumbles as Fund Buying Fails to Spur Rally; Cocoa Retreats
  • WTI Crude Fluctuates as Goldman Raises Brent Forecasts on Supply
  • New Zealand Reveals Second Case of Tainted Milk Exports to China
  • Rebar Ends Near Highest in Four Months on China Demand Outlook
  • Gold Swap Rates Negative on Physical Supply Concerns: BI Chart
  • Tin Sales From Indonesia Drop Most in 18 Months on Purity Rules
  • Hedge Fund Bulls Make Late Exit From Natural Gas: Energy Markets
  • Scottish Independence Case Clouded by Oil Industry Growth Drag
  • Gold Seen Rallying by End of Year as Physical Demand Gains

THE HEDGEYE DAILY OUTLOOK - 5A

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6A

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

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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