“Neither a borrower or a lender be; For loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.”
-William Shakespeare, “Hamlet”
Shakespeare taught us many lessons in his writings. But the quote from Hamlet above is very apropos for those of us who are stock market operators. The lesson is simple: be careful with financial leverage.
Financial leverage is like the blue meth sold by Walter White and his colleagues in the acclaimed TV show Breaking Bad. It is both very addictive and hard to get off the streets. It can also make the sellers very rich in a short period of time.
In the last fifteen or so years, we’ve seen innumerable debt fueled bubbles. The Asian debt crisis, the stock market bubble of the early 2000s, the housing bubble, the sovereign debt crisis, and the list goes on. Shakespeare is correct: returns generated from borrowing dull our analytical focus.
In the spirit of another quote from Shakespeare, “brevity is the soul of wit”, let’s get directly to the global macro grind . . .
Next Wednesday, with all of Wall Street well rested and back from the Hamptons, we are going to update our emerging market outflows theme. Like most macro trends, emerging market outflows is unlikely to be a month or quarter long trend. With the dollar and interest rates being key supporting factors, this one also has legs.
In fact, my colleague Darius Dale looked at the last strong dollar period, from 1995 – 2001, and the MSCI Emerging Market Index CAGR’ed at -5.3% versus the SP500 at +15.8%. So, reasonably, if interest rates are just starting to turn, and the dollar is only in the early stages of a long term strengthening, then emerging markets can be expected to underperform for some time.
In the Chart of the Day, we’ve highlighted recent emerging market equity and bond outflows. As the chart shows, the last four months have been staggering for outflows and emerging market asset classes have performed commensurately. As they say, follow the flows (or at least the projected flows).
After the first big correction is when the “value” investors usually start to get interested in a stock or asset class. No doubt that guy from Franklin Templeton who originally cut his teeth marketing Snoopy is licking his chops right now on emerging markets. The problem is that cheap can get a lot cheaper.
Currently, on an EV/EBITDA basis emerging market equities are still trading at slight premium to the long run mean versus the MSCI World Index. In times of crisis, like in the 1998/1999 period, emerging markets trade at a multiple that are closer to the 30% of the rest of the world (versus north of 70% now). When the proverbial brown stuff hits the fan, emerging markets go no bid.
We will be sending out an update of our emerging market chart book later this morning (ping if you don’t get it) and will also be hosting a call on Wednesday, September 4th at 11:30am eastern. Even if you aren’t invested in emerging markets, this will be an important call in helping to understand global asset allocation flows. Or as we like to call it: The Flow Show.
Speaking of flows, EPFR Global came out with some date this week that highlighted some of the key fund flows in the year-to-date. No surprise, emerging markets lead in outflows with almost $7.8 billion in outflows. On the positive is the United States, which has seen $83 billion in inflows, but in the category of sneaky positive is Europe, which has $9.4 billion of YTD inflows mostly over the past nine weeks.
Europe may only be bouncing on the bottom in terms of an economic recovery, but the money has to flow somewhere. Even more sneaky has been the improvement of sovereign yields in the European periphery, with both Italy and Spain both solidly at 4.5% or below (some of the best levels in years). If the sovereign debt issues in Europe are truly behind us, the flows into Europe will only continue.
It only helps the investment outlook in Europe to have more sane central bankers like Mark Carney, formerly head of the Bank of Canada, running things. In his first newspaper interview since taking over the Bank of England, Carney directly acknowledged the risks of low interest rates when he said:
“We have the responsibility to assess emerging vulnerabilities in the economy such as housing, make those assessments and recommend action. Interest rates are principally an instrument of monetary policy for achieving the inflation outcome and there are other tools that address risks."
Well said, Mr. Carney. Well said.
Speaking of central bankers, this long weekend will give us all some time to consider what might happen at the Fed next if either of the two front runners, Janet Yellen or Larry Summers, take over. Hawk or Dove? Shakespearean tragedy or comedy? To flow, or not to flow?
All joking aside, policy matters so this choice will be critical in contemplating asset allocation in coming years. As Shakespeare said about vision and strategy:
“See first that the design is wise and just; that ascertained, pursue it resolutely.”
As it relates to the leadership change at the Federal Reserve, we can only hope this is the path that is pursued.
Our immediate-term Macro Risk Ranges are now as follows:
UST 10yr Yield 2.70-2.93%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
This note was originally published at 8am on August 16, 2013 for Hedgeye subscribers.
“Fear is static that prevents me from hearing myself.”
Scared yet? For parts of yesterday, I certainly was. I was buying into some really red stuff. And I felt alone. But I wasn’t.
It took me a lot longer (10-15 years) to not live in complete terror of my investment process than it did putting on a pair of skates. Imagine suiting up for every game in complete distrust of everything you have prepared for; imagine every time you were down by a few goals and were getting yelled at, you just left the game altogether (or Twitter)…
I am far too human to explain how and why I make all the mistakes that I make throughout my business building and market timing day. All I can tell you is that when I can’t hear myself – and I mean my process and my principles – I have no business leading anyone into making game time decisions.
Back to the Global Macro Grind…
In yesterday’s Hedgeye Poll I asked whether the SP500’s correction from its all-time closing high (1709) would be:
I chose B. #Wrong again. (No one chose 4% this time, just fyi).
The correction is marked to market now at -2.8%. So now it’s probably time to freak right out.
Since the most differentiated call Hedgeye has had on the US side of growth in 2013 is employment #GrowthAccelerating, I also ended yesterday’s rant by emphasizing the importance of yesterday’s US weekly jobless claims report (pre-open).
If you would have personally handed me the report (that’s illegal) 3 hours before game time, I would have chose option A) and, having perfect “fundamental” economic data in hand, I would have been dead wrong on the market outcome.
In an intraday jobs note, our Senior USA Macro Analyst, Christian Drake, dissected the difference between NSA (yes, we are watching you) and SA:
1. NSA: Non-seasonally adjusted claims, our preferred read on the underlying labor market trend, made a new absolute low for the cycle at 280K - marking its third consecutive sub-300K reading in a row and the lowest since September 2007. On a YoY basis, initial claims accelerated to -11.7% from -9.9% the week prior with the 4-week rolling average improving 50bps to -8% from -7.5% the week prior.
2. SA: The seasonally adjusted, headline claims number printed its best number of the year, and best number since October 2007, at 320K. This week’s data represents an accelerating YoY rate of improvement of -12.8% YoY (vs -9% the week prior) with 4-wk rolling average down 4K WoW.
In other words, the latest bear market crash call has now been edited to “the US employment data is too good.” Alrighty then.
Obviously, if you’ve had this right for the last 9 months, the legitimate “market top” call (that approximately 116 pundits have now tried to make on the US stock market YTD) was to call the all-time top in bonds in November of 2012.
Top calling is not a risk management process. Markets that eventually top:
- Start putting in a series of lower-all-time highs
- Then snap their immediate-term TRADE lines of support
- And finally crash through their long-term TAIL lines of support on accelerating volume
If you haven’t read that in a book – that’s because I made that up myself. Cool, eh!
What isn’t cool is trying to sell advertising or “thoughtfulness” based on one-way fear. With Twitter, this bearish style is basically the upside down version of what has becomes formally known as perma-bull. Zero Hedge minces no words on this. Sharp guy. Dead wrong on the market this year because perma-bear on US stocks doesn’t work any better than the bullish version does.
Perma-uncertainty? I’ll roll with that instead.
This way we can buy red and sell green; fade fear and book hope. It’s not for everyone. I know. But being everyone’s everything is no way to live anyway.
What to do from here? I’ve already made my move. I put up an intraday note titled “Buyem” yesterday at 1104AM EST. I think the actions (#timestamps) alongside the word were straightforward. The most important new Macro moves I made were:
- Buying the Nasdaq (QQQ)
- Buying British Equities (EWU)
- Shorting Fear (VXX)
For better or worse, I’m one of those players in this game who is maybe dense enough to just make calls. But, make no mistake, there is a tested and tried process behind every move I make. And I didn’t learn how to shoot on the #OldWall either – a long time ago, Gretzky taught me that you’ll miss 100% of the shots you don’t take.
Our immediate-term Risk Ranges (we have 12 big Macro ranges in our Daily Trading Range product too) are now:
UST 10yr 2.66-2.79%
Best of luck out there today and enjoy your weekend,
Keith R. McCullough
Chief Executive Officer
get free cartoon of the day!
Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox
By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.
THE MACAU METRO MONITOR, AUGUST 30, 2013
CHINA TO REIN IN EXTRAVAGANT INVESTMENT TEAMS SENT TO HONG KONG, MACAU SCMP
The Ministry of Commerce has pledged to rein in extravagance by local government delegations sent to Hong Kong and Macau to drum up investment, following a highly critical article about such trips in People's Daily. Yao Jian, a ministry spokesman, said that Beijing was aware of the overblown nature of business delegations visiting Hong Kong and Macau, pointing out that some local governments had overstated the number of participants and the value of deals signed during their promotional activities.
"They were desperate to get a big number of foreign businesspeople attending the events and re-signed agreements which had previously been sealed to shore up the total transaction value," Yao said. "The phenomenon reflects a severe level of artificiality and extravagance."
This was the first time that a Communist Party mouthpiece had fired a salvo at such investment-promotion practices.
People'sDaily also said anti-graft officials would investigate and punish those who outrageously wasted money on trips, because their behaviour tainted the government's image.
TODAY’S S&P 500 SET-UP – August 30, 2013
As we look at today's setup for the S&P 500, the range is 38 points or 0.80% downside to 1625 and 1.52% upside to 1663.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.38 from 2.37
- VIX closed at 16.81 1 day percent change of 1.94%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Personal Income, July, est. 0.2% (prior 0.3%)
- 9am: Fed’s Bullard speaks in Memphis
- 9:30am: ISM Milwaukee, Aug., est. 53 (prior 52.43)
- 9:45am: Chicago Purchasing Mgrs Index, Aug., est. 53
- 9:55am: UMich. Sentiment, Aug. final, est. 80.5 (prior 80)
- 1pm: Baker Hughes rig count
- President Obama meets with presidents of Estonia, Lithuania, Latvia, discussion will include NATO defense matters, cybersecurity, proposed Transatlantic Trade and Investment Partnership
WHAT TO WATCH:
- Sinopec to acquire $3.1b stake in Apache’s Egypt assets
- America Movil says it’s ready to drop $9.5b KPN bid
- Carl Icahn increases stake in Nuance, may seek seat on board
- Microsoft vying w/American Express for stake in Foursquare
- ADM’s offer for GrainCorp needs more scrutiny, lawmakers say
- Verizon-Vodafone seen yielding over $240m in fee bonanza
- GE set to exit retail lending, prepares unit spin off: WSJ
- Radian reaches accord w/Freddie Mac to cap claim expenses
- Ackermann quit Zurich Insurance after mention in suicide note
- AMR, US Airways clash w/U.S. on rush to trial in merger case
- Jacobs Engineering close to deal for Sinclair Knight: AFR
- China will fine Everbright $85m for legal violations: Xinhua
- Japan’s prices rise most since 2008 in boost for Abe
- Renault COO Tavares said to have asked CEO for wider role
- G-20, U.S. Jobs, Australia Election: Wk Ahead Aug. 31-Sept. 7
- U.S. markets closed Monday for Labor Day holiday
- Alimentation Couche-Tard (ATD/B CN) 8:39am, $0.96
- Big Lots (BIG) 6am, $0.24
- Laurentian Bank (LB CN) 8:45am, C$1.33
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Gold Cuts Monthly Advance on Speculation Fed Will Slow Stimulus
- Gold Trade Most Bullish Since March on Syria Crisis: Commodities
- Sumitomo Sees Aluminum Glut Extending to 2014 as China Slows
- WTI Drops for a Second Day as U.K Lawmakers Reject Syrian Action
- Soybeans Drop as Rain Forecasts for Midwest Ease Yield Concern
- Aluminum Reaches Three-Week Low on Prospects for Larger Surplus
- Indonesia With Malaysia to Support Palm Prices by More Biodiesel
- Saudi Arabian Crude Output Surges to 24-Year High in OPEC Survey
- BullionVault Offers Storage at Toronto Vault on Demand From U.S.
- Cotton Fibonacci Signaling Slump to June Low: Technical Analysis
- Oil Patch Follows Smartphone Makers in Patent Defenses: Energy
- Cocoa-Butter Ratio Rises to Highest Since 2008 as Demand Climbs
- Iron Ore, Met Coal Buying From China May Soften in Short Term
- Aluminum to Extend Slump on Moving Averages: Technical Analysis
The Hedgeye Macro Team