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Staying Imbalanced

This note was originally published at 8am on August 13, 2013 for Hedgeye subscribers.

“To achieve an extraordinary result you must choose what matters most and give it all the time it demands.  This requires getting extremely out of balance in relation to all other work issues, with only infrequent counterbalancing to address them.”

-Gary Keller, “The One Thing”

 

Yesterday, I presented to the global finance team of a Fortune 100 company.  Don’t worry, they weren’t paying us and we don’t do research on the company.  In fact, the presentation came at the request of a friend who is the number two person in their finance department.  He wanted to provide his direct reports some insights into how Wall Street research works.

 

The presenter that went before me was a former bulge bracket analyst covering their company.  He was a thoughtful guy and talked about the importance of setting guidance that could consistently be beat.  His view was that that investors don’t like to be surprised, and in part of course he is right.  The perception of predictable returns gives comfort to investors that don’t really do the work (think LINN energy).

 

He went on to talk about the fact that sell side analysts compete for commissions to get paid and try to make a lot of noise so as to garner “II votes”.   This description of traditional sell side analysts obviously gave me the opening to discuss how our model is different.  As I explained to the group, we get paid for two reasons: a) two have investment ideas that work and b) to make our clients think.

 

If we are not succeeding at those two objectives, then our business likely would not be sustainable as we have no asset management, trading, investment banking, or prop desk to cover the overhead.   In his recent book, Gary Keller calls this pursuing the One Thing and explains that the pursuit of this One Thing will ultimately determine your personal or professional success.  Hedgeye’s One Thing is research, what is yours?

 

Back to the global macro grind . . .

 

Every quarter we try to boil down the global macro markets to three key themes.   But in the spirit of this note, I’m going to distill this down to One key theme: #RatesRising.  Especially in light of the Wall Street Journal headline that emerging market growth is trailing the developed world, and thus indicative of our view of slowing emerging market growth being reflected in consensus, it seems likely that the direction of interest rates are likely to be the One Thing (as always subject to change as the facts change).  But consider the following:

 

1.  The Queen Mary of macro trends has inflected– We often use the analogy of the Queen Mary turning to describe the long term trend in interest rates.   The Queen Mary, of course, is the massive ocean super liner that dominated transatlantic voyage before the jet age.  Like any vehicle that is more than 300 meters in length, turning the Queen Mary was no easy task and not without its implications.

 

This analogy is appropriate for interest rates as they have literally been in decline for the last 30 years since peaking in the early 1980s.  This long term decline has enabled any business that depends on borrowing money to fund its business to have a steadily declining cost of capital.  In addition, this has made bonds a compelling asset class with a long term underlying bid to price.

 

In our models in Q2, yields inflected notably and broke out above our TRADE, TREND and TAIL levels.  In fact, as shown in the Chart of the Day, 10-year yields had their largest percentage increase quarter-over-quarter in more than a decade.  Even though 10-year yields have broken out, they remain well below the mean yield since 1989 of 5.21%.

 

2. The market is chalk full of debt – Given the generational trend in interest rates going lower and thus providing a tail wind for bonds, it should be no surprise that investors’ portfolios are chalk full of fixed income.  According to the most recent data, there is $38 trillion of bonds outstanding across all subsectors of the bond market.  Further, bonds outstanding have increased every single year since 1990.

 

The more critical data point from an asset flow perspective is that the notional value of bonds outstanding is currently at 68/32 versus the market capitalization of equities.  This, too, is an extreme ratio based on history and is literally the highest we’ve seen.   For comparative purposes, this ratio was at 50/50 as recently as 1999.

 

3. Volatility and duration across the bond market are in a set up that could lead to meaningful losses – As volatility in an asset class increases, so too does the expected loss and/or return.   According to Merrill Lynch’s MOVE index, bond volatility has almost doubled in the last quarter and is at two year highs.  Meanwhile duration is at close to all-time highs.  My colleague Jonathan Casteleyn of our financials team highlighted this in his recent presentation on asset managers (ping sales@hedgeye.com if you haven’t seen it yet), but based on current duration a roughly 100 basis point move in yields equates to a 8.9% loss on the 10-year treasury.

 

In part we are already starting to see the sort of generational losses in bonds that we should expect from the dynamics outlined above.  Specifically, the Barclay’s Aggregate Bond Index is set for its first loss in 14-years and only third loss since 1990.  While gentleman may prefer bonds, they don’t prefer losses.

 

The reality in markets is that there is rarely One Thing that dominates, but the seismic shift in interest rates will certainly be one of the most critical factors over the coming quarters and years.  As money flows from the bond market to avoid losses, equities will be awaiting with open arms.

 

Our immediate-term Risk Ranges are now as follows:

 

UST 10yr 2.57-2.74%

SPX 1680-1714

Nikkei 13339-14023

USD 80.82-82.11

Yen 96.69-98.44

Gold 1276-1341

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Staying Imbalanced - Chart of the Day

 

Staying Imbalanced - Virtual Portfolio


August 27, 2013

August 27, 2013 - dtr2

 

BULLISH TRENDS

August 27, 2013 - 10yr

August 27, 2013 - spx

August 27, 2013 - dax

August 27, 2013 - dxy

August 27, 2013 - euro

August 27, 2013 - oil

 

BEARISH TRENDS

August 27, 2013 - eem

August 27, 2013 - VIX

August 27, 2013 - yen

August 27, 2013 - natgas
August 27, 2013 - gold

August 27, 2013 - copper


THE M3: JULY CHANGI VISITATION; JOCKEY CLUB; HOTEL SUPPLY; UNEMPLOYMENT

THE MACAU METRO MONITOR, AUGUST 27, 2013

 

 

MONTHLY BREAKDOWN OF PASSENGER MOVEMENTS Changi Airport

Singapore's Changi Airport reported a 4% rise YoY in passenger movement in July 2013.

 

THE M3: JULY CHANGI VISITATION; JOCKEY CLUB; HOTEL SUPPLY; UNEMPLOYMENT - CHANGI

 

LOSS-MAKING JOCKEY CLUB CLOSES FOUR BETTING CENTRES Macau Business

The Macau Jockey Club will close four of its seven off-course betting centres next month.  The club did not offer a reason but the Gaming Inspection and Coordination Bureau told the newspaper: “The Macau Jockey Club has responded to the needs of the community by removing several off-course betting stations away from the residential areas.”  The bureau denied it had ordered the closures.

 

ELEVEN HOTELS UNDER CONSTRUCTION, 27 MORE PLANNED Macau Business

Eleven hotels in Macau were under construction at the end of 2Q 2013, the Lands, Public Works and Transport Bureau says.  The bureau says another 27 hotel projects are pending approval from the government.  The 11 hotels under construction will add another 6,200 rooms to the city’s inventory.  Three of those hotels being built in Cotai will add the bulk of the rooms, some 5,326 rooms.  The 27 hotels at the planning phase would add another 16,700 rooms.

 

MACAU EMPLOYMENT SURVEY FOR MAY-JULY 2013 DSEC

More people were looking for work during the Summer Holiday, causing the unemployment rate for May-July 2013 to increase slightly by 0.1% from April-June, at 1.9%.  Total labor force was 366,000 in May-July 2013 and the labor force participation rate stood at 72.6%.  Total employment reached 359,000, up by 1,900 from the previous period.  Analyzed by industry, employment in the Construction sector posed a marked increase of 1,500.


the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 27, 2013


As we look at today's setup for the S&P 500, the range is 27 points or 0.83% downside to 1643 and 0.80% upside to 1670.               

                                                                                                                

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.40 from 2.42
  • VIX  closed at 14.99 1 day percent change of 7.22%

MACRO DATA POINTS (Bloomberg Estimates):

  • 6:50am: Fed’s Williams speaks on monetary policy in Sweden
  • 9am: S&P/Case Shiller 20 City Home Price Index M/m, June, est. 1% (prior 1.05%)
  • 9am: S&P/CS 20 City Composite Y/y, June, est. 12.1%
  • 10am: Richmond Fed Manuf. Index, Aug., est 0 (prior -11)
  • 10am: Consumer Conf. Index, Aug., est. 79 (prior 80.3)
  • 11am: Fed to buy $4.25b-$5.25b in 2017-2018 sector
  • 11:30am: U.S. to sell 4W bills
  • 1pm: U.S. to sell $34b 2Y notes

GOVERNMENT:

    • CMS, HHS hold 2nd semi-annual meeting of Advisory Panel on Hospital Outpatient Payment, 9am
    • Under Sec. of Commerce for Intl Trade Francisco Sanchez visits Brazil, Uruguay to promote U.S. oil, gas exports

WHAT TO WATCH:

  • Pershing hires Citi to sell entire J.C. Penney stake
    • Ackman’s Pershing sells J.C. Penney stake for $504m
  • U.S. girding for Syria move vows to hold Assad liable
  • Seeks Greek permission for Syria campaign: Kathimerini
  • PetroChina says 3 executives resign amid government probe
  • German Aug. IFO confidence beats ests, at 16-month high
  • India may decide on Mylan’s bid for Strides
  • Daimler to invest $2.7b to expand China production
  • Japan’s ANA to buy stake in Myanmar airline

EARNINGS:

    • Avago Tech (AVGO) 4:05pm, $0.66
    • Bank of Montreal (BMO CN) 6:30am, $1.53 - Preview
    • Bank of Nova Scotia (BNS CN) 7:30am, $1.31 - Preview
    • Brown Shoe (BWS) 7am, $0.22
    • Donaldson (DCI) 7am, $0.45
    • DSW (DSW) 7am, $0.79
    • Heico (HEI) 5:12pm, $0.47
    • Regis (RGS) 6am, $0.12
    • Sanderson Farms (SAFM) 6:30am, $2.66
    • Tiffany & Co (TIF) 7am, $0.74
    • TiVo (TIVO) 4:01pm, $(0.10)
    • Wet Seal (WTSLA) 4:05pm, $0.01
    • WMS Industries (WMS) 4pm, $0.31
    • Workday (WDAY) 4:05pm, $(0.18)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Garry Jones Named as Chief Executive of London Metal Exchange
  • Coffee Reserves Seen at 2000 Low on Indonesian Rain: Commodities
  • Brent Rises to Five-Month High on Syria Clash, Libya Supply Loss
  • Gold Climbs to Two-Month High on ETP Holdings, Syrian Tensions
  • Money Managers Boost Cocoa Net Long to 54,382 Contracts Aug. 20
  • Copper Declines After Biggest Gain in Stockpiles in Two Months
  • Russia, Kazakhstan Boost Gold Reserves as Mexico Sells, IMF Says
  • Robusta Coffee Rises as Reserves May Decline; White Sugar Gains
  • Copper’s 340,000 Metric Ton Surplus an Overhang on Market, Price
  • Rebar Climbs as Industrial Profits Strengthen Economic Outlook
  • China Boosts Rapeseed Imports as Global Oilseed Output Rises
  • Shell South African Shale Drive Riles Farmers Over Water: Energy
  • Grain-Carrier Rates Rising as Crop Cargoes Near Record: Freight
  • Record Gold in India Seen Hurting Jewelry Demand as Rupee Slumps

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

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

 

 

 

 

 

 

 

 

 

 

 

 



Disorderly Risks

“What they lacked was a science of disorder and randomness.”

-George Gilder

 

Gilder could have been writing about adults making life decisions inasmuch as he was alluding to both Keynesian and Hayekian policy makers who still don’t get the core chaos theory concept of non-linearity. If you don’t know what I am talking about, have kids.

 

Both life and market risks are grounded in uncertainty. You can take whatever precautions you want; you can be as proactively prepared as you think you can be – but it’s always the surprise of new information that drives decision making.

 

You cannot learn how to embrace uncertainty in a textbook. You have to learn this game by playing it. Since disorder and randomness typify markets, your risk management process should attempt to absorb that dynamism.

 

Back to the Global Macro Grind

 

Three big macro things have really changed in the last 3 months:

  1. Bond Yields in the USA, Germany, and the UK have been rising alongside their respective stock markets #surprise
  2. Growth Stocks (Low Dividend Yield, High EPS Growth, High Short Interest) have been crushing Slow-Growth Stocks
  3. Asian Emerging Market stocks have been dramatically underperforming US Growth Stocks

That sounds a little disorderly, no?

 

If you are bullish on “growth” doesn’t your local pie chart “diversification” manufacturer have you buying “Emerging Markets”? Or are they re-positioning that bad asset allocation decision to you now as something that looks “cheap.” #ThesisDrift

 

In Hedgeye-Jedi speak, “cheap” gets cheaper when:

 

A)     Country Inflation (or costs in the case of a company) Accelerates

B)      Real (inflation adjusted) Growth Slows

 

Back-test it with Apple (AAPL) and you’ll get my point. It doesn’t matter how “good” a company is if it’s about to see:

 

A)     Revenue Growth Slow (versus peak)

B)      Margins Compress (versus peak)

 

When you get A + B, you get multiple compression.

 

Conversely, in our proprietary GIP Model (Growth, Inflation, Policy), when a country:

 

A)     Sees Growth go from slowing to stabilizing to accelerating … and

B)      Is the recipient of inflation slowing via currency appreciation…

 

You get equity market multiple expansion. Look at the chart of any raging “growth” stock that is USA centric (SBUX, TSLA, DDD, NFLX, OPEN, SODA, etc.) and you’ll get what I mean.

 

Simple, right? Even a hockey player can do it.

 

Yes, in hindsight, most things macro are easier to see looking backwards. It’s in observing the chaotic system of colliding global macro market trends (where Growth and Inflation patterns develop) that you get an edge. It’s a grind.

 

Let’s go back to explaining why the aforementioned point #3 (#AsianContagion) has come to be. What’s happening this morning was as obvious in June as it is today:

  1. Indonesia’s Rupiah continues to crash; down big this morning -4.3% (for a currency, that is a lot!)
  2. India’s Rupee continues to crash as well, down another -1.9% this morning

As a country’s currency gets crushed, #InflationAccelerates and #GrowthSlows – then you get:

  1. Indonesia’s stock market down another -4% overnight (down -15% for the month-to-date)
  2. India’s stocks market down another -3.1% overnight (-11.5% since July 23rd)

Sure, it may seem disorderly and random that Asian “growth” markets can dislocate from US domestic growth stocks. It may appear random to the Macro Tourist who doesn’t stare at the matrix of currency and correlation risk like we do all day too.

 

But the other big point about disorder and randomness embedded in chaos theory is that there is a deep simplicity to it all, in hindsight.

 

Our immediate-term Risk Ranges are now as follows (we have 12 Big Macro risk ranges in our Daily Trading Range product now too):

 

UST 10yr Yield 2.71-2.93%

SPX 1

EEM 32.07-38.99

VIX 13.03-15.44

USD 80.93-81.80

Copper 3.30-3.39

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Disorderly Risks - chart

Disorderly Risks - vp


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