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September Morn...

Client Talking Points

JAPAN

After a big move on bullish European economic data yesterday, a +3% move higher got the party started early in Japanese Equities as the Yen (versus the US Dollar) remains below 96.89 TREND resistance. The Nikkei is up almost 36% year-to-date. Ka-boom! But holding Hedgeye's TREND support of 13,362 is the more important risk management point. We like Japan. The rest of Asia? Not so much.

UK

Paul Krugman? He can stop writing about austerity crushing the UK economy now. The UK economic data sees #GrowthAccelerating yet again in August (so did the USA’s PMI print of 53 on Friday, don’t forget). Witness the blockbuster Construction PMI print of 59.1 this morning (versus 57 in July). Both the FTSE and Pound are bullish TREND in our Hedgeye model.

UST 10YR

Got #RatesRising? In case you missed it, the 10-year US Treasury yield corrected a whopping 4 basis points last week. Well, it bounced again this morning and is making yet another higher-low here trading back to 2.83%. There is no resistance up to 2.93%. Our Hedgeye immediate-term risk range is 2.71-2.93%. We are still bearish on bonds. And yes, we are still bullish on US growth stocks. The yield spread has widened back to +242 basis points. The Financials (XLF)? They like that.

Asset Allocation

CASH 26% US EQUITIES 27%
INTL EQUITIES 23% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

Three for the Road

TWEET OF THE DAY

Yield Spread backs up to +242bps wide (10s minus 2s); should be bullish for $BAC today @KeithMcCullough

QUOTE OF THE DAY

"No matter what business you're in, you can't run in place or someone will pass you by. It doesn't matter how many games you've won." - Jim Valvano

STAT OF THE DAY

#RatesRising? The average rate for high-yield and investment-grade U.S. corporate debt surged almost a full percentage point from May to June. Even with the jump to 4.3%, rates are below the average of 6.9% in the decade before the start of the bull market.(Bloomberg)


Macro Tricks

This note was originally published at 8am on August 20, 2013 for Hedgeye subscribers.

“We were forever inventing new tricks.”

-Hans Bethe

 

From a strategy and teamwork perspective, one of the most fascinating aspects of reading American Prometheus (The Triumph and Tragedy of Robert Oppenheimer) has been how well these to-be-famous scientists collaborated with one another.

 

Hans Bethe, who eventually won the Nobel Prize in Physics in 1967, said “the intellectual experience was unforgettable.” (page 182). Since he was working alongside Oppenheimer, Feynman, and Bohr, I don’t doubt that for one second!

 

I’m not making a political statement on nuclear. I’m simply pointing out how a culture of trust and collaboration can incubate innovation. While the powers that be will likely never acknowledge the Global Macro models we are building here @Hedgeye, we are getting more and more respect from you, the practitioners, every day. On behalf of my team, thank you for this experience.

 

Back to the Global Macro Grind

 

One of the most interesting realities embedded in our independent research process is that we don’t know where we are going to end up next. Our Global Macro Themes are born out of intermediate-term market signals and then contextualized by long-cycle research. If it feels like we’re forever inventing new themes, that’s because the market’s ecosystem is forever reinventing itself.

 

Since #RatesRising and #DebtDeflation have been the two Q313 themes most of our clients want to talk about, that’s what I have focused my time ranting about. That, however, doesn’t mean that our 3rd major Macro Theme for Q3 doesn’t exist. In fact, today is as glaring an example as any in which #AsianContagion should be jumping off your screens.

 

Reviewing the risks of #AsianContagion:

  1. Some overvalued Asian currencies are breaking down from an intermediate-term TREND perspective
  2. Some Asian debt markets are getting increasingly nervous about the negative deficit impact of a weakening currency
  3. When both a country’s currency and debt deflate, you get local inflation and local #RatesRising – that’s bad

From a process perspective, our Senior Asia analyst, Darius Dale, called out the following equity divergences 24 hours ago:

  • Indonesia -5.6% DoD vs. a regional median delta of -0.2%
  • Thailand -3.3% DoD vs. a regional median delta of -0.2%
  • India -9.1% MoM vs. a regional median delta of -1.2%

Then, on Indonesia in particular, he called out yesterday’s key economic data point:

  • 2Q Current Account Balance - current account deficit widened to a record on both a nominal basis and as a % of GDP

And finally, we get this morning’s Bloomberg headlines (under Economy):

 

A)     “Rupiah Forwards Plunge To Lowest Since 2009 As Bond Risk Surges”

B)      “Rupee Drops To Record on Fed Tapering Concern”

 

These macro headlines (i.e. old news) come after Indian, Indonesian, and Thai markets move. The proactive risk management Macro Trick is to know they are moving (and why) before consensus realizes it. This macro theme is 1.5 months old.

 

Indonesian stocks are -11% in the last 3 days and India’s stock market continues to be one of the worst in the world for 2013 YTD – all for Hedgeye playbook reasoning (this kind of stuff confuses Keynesians who think weak FX is a good thing!).

 

Again, to review in the most simplest of complexity’s terms:

  1. Currency Burns, then local  
  2. Inflation Accelerates and Growth Slows; and finally          
  3. Deficit worries (and credit risk) rise; and bonds fall (#DebtDeflation)

If you want to be really worried about something other than the US Bond market crashing, we’d suggest Asia (ex-Japan). That’s not a new Hedgeye Jedi Macro mind trick as of this morning either. That’s what was already trending.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.70-2.91%

SPX 1642-1676

VIX 13.51-15.36

USD 80.91-81.96

Yen 97.11-98.26

Copper 3.25-3.39

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro Tricks - Chart of the Day

 

Macro Tricks - Virtual Portfolio


September 3, 2013

September 3, 2013 - dtr

 

BULLISH TRENDS

September 3, 2013 - 10yr

September 3, 2013 - spx

September 3, 2013 - dax

September 3, 2013 - nik

September 3, 2013 - dxy

September 3, 2013 - euro

September 3, 2013 - oil

September 3, 2013 - natgas2

 

BEARISH TRENDS

September 3, 2013 - VIX

September 3, 2013 - yen
September 3, 2013 - gold

September 3, 2013 - copper


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 3, 2013


As we look at today's setup for the S&P 500, the range is 30 points or 0.12% downside to 1631 and 1.72% upside to 1661.          

                                                                                                                     

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: 2.41 from 2.39
  • VIX  closed at 17.01 1 day percent change of 1.19%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:58am: Markit US PMI Final, Aug.
  • 10am: Construction Spending, July, est. 0.4% (prior -0.6%)
  • 10am: ISM Manufacturing, Aug., est. 54 (prior 55.4)
  • 10am: IBD/TIPP Eco. Optimism, Sept., est. 46 (prior 45.1)
  • 11:30am: U.S. to sell $30b 3M, $25b 6M bills
  • 4pm: USDA crop-conditions report

GOVERNMENT:

    • President Obama travels to Sweden for talks on trade

WHAT TO WATCH:

  • Microsoft to buy Nokia’s handset business for $7.2b
  • Microsoft, ValueAct pact has option for Morfit to join board
  • Verizon to buy Vodafone’s 45% stake in Verizon Wireless for $130b
  • Vodafone to look at acquisitions if value creation seen
  • Vodafone U.S. wireless exit not so simple for holders
  • Verizon-Vodafone talked merger before agreeing to stake sale
  • CBS deal ends blackout on Time Warner Cable ahead of NFL season
  • Obama begins push to get Congress behind Syria action
  • Bank of America seeking $1.5b in China Construction Bank offer
  • China PMI manufacturing activity rises to 16-month high
  • Russia detected missiles targeting East Mediterranean, RIA says
  • Jarden to buy Yankee Candle for $1.75b: WSJ
  • BofA $160m Merrill bias deal goes to once-skeptical judge
  • Banks must boost swaps-trade collateral under Basel plan
  • FSB to set creditor-loss rules for failing banks
  • Coca-Cola Femsa to buy Brazil’s Spaipa in $1.86b deal

EARNINGS:

    • ABM Industries (ABM) 5pm, $0.39
    • Guidewire Software (GWRE) 4:01pm, $0.14
    • H&R Block (HRB) 4:03pm, $(0.37)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Swings Below $1,400 After Report on Mediterranean Missiles
  • Copper Rally Reversing as Glut Expands to ’01 High: Commodities
  • Brent Oil Fluctuates as Lawmakers Urge Military Action on Syria
  • Soybeans Climb Most in Week as Lack of Rain May Hurt U.S. Crops
  • Copper Declines Following Report of Detection of Missile Launch
  • Nickel Seen Falling Toward Four-Year Low: Technical Analysis
  • Sugar Climbs in New York on Signs of Import Demand; Cocoa Gains
  • Natural Gas Rises as Warm-Weather Forecast Boosts Demand Bets
  • Gold Miners Set to Start Strike as South Africa Stoppages Spread
  • Tankers Worst Since 1997 as Africa Oil to China Slows: Freight
  • Carbon’s Four-Month Rally Faces EU Permit Hurdle: Energy Markets
  • Decades of Ruptures From Defect Show Perils of Old Pipe: Energy
  • Steel Demand May Follow Rig Count Higher as Crude Climbs
  • Rebar Falls First Time in Three Days as Demand Trails Futures

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

 

 

 

 

 

 

 

 

 

 

 

 



Innovation's Hand

Economists everywhere have counseled governments to attend to everything except what matters most: innovation.”

-George Gilder

 

When Adam Smith published Wealth of Nations (1776), he wasn’t thinking about the American Revolution or Twitter – neither was he considering real-time streaming information in the palm of your hand as a birth child of Silicon Valley-style free market capitalism.

 

“The Wealth of Nations depicts macroeconomics as a “Great Machine” in which every cog of every gear, governed by an “invisible hand,” functions perfectly in its time and place, as smoothly and reliably as Newton’s gravity.” (Knowledge & Power, pg 28)

 

While that might make for an tidy intro to an economics textbook at Yale, it doesn’t reflect the new reality of what we’ve learned about economies and markets. They are non-linear. And they observe large doses of surprise (entropy), whose “opposites are predictability, order, equilibrium, and tyranny” (pg 34 - Gilder absolutely nails our framework in chapter 4, “Entropy Economics”).

 

Back to the Global Macro Grind

 

After the lowest volume week of 2013, the SP500 holds @Hedgeye TREND support of 1631 and #RatesRising looks just about right again this morning. We like growth stocks. We don’t like Gold or Bonds. Welcome to September.

 

“The most important feature of an information economy, in which information is defined as surprise, is the overthrow, not the attainment of equilibrium.” (Knowledge & Power, pg 30)

 

I make lots of little mistakes, but the baseline process behind not making the really big macro mistakes adheres to the 2nd law of thermodynamics (entropy). Assuming Bernanke’s Fed (and the entire bond market) wouldn’t be surprised by bullish economic surprises has rendered itself the biggest macro mistake you could have made in 2013.

 

Why did the SP500 hold TREND support last week?

  1. JOBS: US weekly jobless claims hit another fresh YTD low last week (NSA rolling avg = -10.6% y/y, YTD lows)
  2. GROWTH: New Orders component of the August PMI accelerated to 57.2 versus 53.9 in July (fresh YTD highs)
  3. CONFIDENCE: US Consumer Confidence (U of Michigan Survey) bumped back up to 82.1 AUG vs 80.0 last

Well, maybe that’s not why the US stocks held support – maybe it’s just coincidence. But in our model all economic surprises matter to the extent that the market says they do. Against the heavy-hands of your big government gods, US interest #RatesRising  (see 10yr US Treasury Yield in our Chart of The Day) has fit US #GrowthAccelerating data since last November like a glove.

 

And, sorry Krugman fans – this simple real-time market model fits almost perfectly in the birthing zones of John Maynard Keynes and Adam Smith themselves. Check out the direness of it all, born out of UK style austerity:

  1. United Kingdom Producer Manufacturing Index (PMI) for AUG = 57.2 versus 54.6 in JUL = new highs
  2. United Kingdom Construction PMI for AUG = 59.1! (versus 57 in JUL) = new highs
  3. UK 10yr Gilts (Bonds) up to 2.84% this morning = +44bps (+18%) month-over-month (+121bps y/y)

Maybe that’s why the UK stock market (FTSE) held its intermediate-term TREND support line of 6378 too. Maybe not – maybe it’s just coincidence. Regardless, if the world is really ending, I don’t mind living in it while it lasts.

 

I know it’s crazy, but I have to say I’m loving life and Innovation’s Hand altogether this morning. Information empowers the average person like me to take on the tyranny of perceived wisdoms. Summer time is over, and it’s time to create!

 

Are you crazy? I can be; especially when I get bullish. June got me more bullish on buying growth (and shorting slow-growth assets like Bonds, MLPs, etc.). So did August. This time I could be dead wrong. But if I’m wrong that will mean consensus finally has it right.

 

Here’s my real-time sanity (consensus sentiment) check:

  1. Front-month fear (US Equity VIX) just ripped a +23% w/w move to another lower-high (TREND = 18.98 resistance)
  2. II Bull/Bear Survey just registered the least amount of Bulls in 2013 at 38.1%
  3. II Bull/Bear Spread (Bulls minus Bears) just dropped from +3310 in the 1st wk of AUG to +1460

In other words, since the US stock market registered all-time highs (1st week of August 2013):

  1. VIX = +44%
  2. II Bull/Bear Spread = -56%

And that’s ahead of the seasonal headwind in the most important leading indicator for US employment #GrowthAccelerating (NSA rolling Jobless Claims) turning into a tailwind (until February 2014) in September.

 

#cool

 

And so are the entrepreneurs and innovators who have been getting it done while a bunch of politically-partisan and compensation-conflicted folks in this country have spent the last 9 months whining.

 

We’ve always been the backbone of American Free-Market Capitalism, and unless you let some government dude take that liberty away from us, we’ll be cranking out the change you all want to see in this country while Krugman is sleeping.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield = 2.71-2.93%

SPX 1

DAX 8180-8292

Nikkei 13,362-13,998

VIX 15.74-17.81

USD 81.83-82.29

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Innovation's Hand - Claims vs 10Y 082913

 

Innovation's Hand - Virtual Portfolio


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