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End of the World? Please

Client Talking Points

OIL

Well, they finally snapped an immediate-term TRADE momentum line that the machines are going to have to chase ($115.19 Brent is my signal line there). With crude futures/options net long contracts at all-time highs, will Oil make another lower-high versus its 2008 Bernanke Bubble peak? Consumer Discretionary stocks could be discounting that. The XLY is up +24.7% year-to-date.

MIDDLE EAST

Boom. Up +7.4% this morning. Evidently the United Arab Emirates stock market likes the no-action in Syria call too. Dubai is ripping again. Red hot up over 45% year-to-date now. Can you begin to imagine what happens if the world doesn't come to an end this month? Lots to consider right? #EOW

ASIA

One of the best 2-day moves of the year in Asian Equities. And it was broad based. Even the ugly markets that were imploding like India and Indonesia are both up over 3% this morning. Meanwhile, the Yen down -0.5% versus US Dollar drove the Nikkei up another +1.5%. It's up +7.5% for September and +39.5% YTD); China ripped an overbought signal on stabilized econ data

Asset Allocation

CASH 26% US EQUITIES 26%
INTL EQUITIES 23% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 25%

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.

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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Does No-Action in Syria matter? United Arab Emirates stock market is +7.4% this morning

@KeithMcCullough

QUOTE OF THE DAY

"Greater than the tread of mighty armies is an idea whose time has come." - Victor Hugo

STAT OF THE DAY

Thanks to a sharp increase in home prices, 2.5 million more US mortgage borrowers are no longer underwater. By the end of June, 7.1 million, or 14.5%, of mortgage borrowers remained underwater on their loans compared with 9.6 million, or 19.7%, at the end of the first quarter. In late 2009, during the worst of the housing market's meltdown, 26% of all borrowers owed more on their mortgages than they were worth.  (CoreLogic)


Disorderly Risks

This note was originally published at 8am on August 27, 2013 for Hedgeye subscribers.

“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 1643-1670

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


September 10, 2013

September 10, 2013 - dtr

 

BULLISH TRENDS

September 10, 2013 - 10yr

September 10, 2013 - spx

September 10, 2013 - nik

September 10, 2013 - dax

September 10, 2013 - dxy

September 10, 2013 - oil

BEARISH TRENDS

September 10, 2013 - VIX

September 10, 2013 - yen

September 10, 2013 - gold

September 10, 2013 - copper

 


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End of Their World

Greater than the tread of mighty armies is an idea whose time has come."

-Victor Hugo

 

I’ve spent many early mornings this year attempting to objectively contemplate the end of the world. Despite the Nasdaq (+23% YTD) closing at a fresh YTD high yesterday, on every downtick in US growth stocks everyone and their brother has been worried about it – and there have been big fear-based advertising businesses built on it. How some people get paid is serious stuff.

 

Our Big Macro Idea in 2013 (that the world wouldn’t end) has drawn the ire of everyone, from the old-boy financial media network, to the newbie ad-platform from parts unknown (Zero Hedge). Many of you have seen the comments they chose to flog in public – in Twitter, on TV, in the press.  Only a very few of us have seen the ugliness of some of the emails some of these characters have sent me.  Least said, soonest mended (word to the wise…)

 

We will continue to power forward with an idea whose time has come – a transparent, accountable, and trustworthy independent research platform that has zero conflicts of interest. We have no banking, trading, or advertising revenues to pander to. We aren’t banned from the securities industry either, like some of our snottier critics. We’re right where we want to be - standing in the arena of meritocratic debate.

 

Back to the Global Macro Grind

 

Today is what we call an Event Day @Hedgeye, because we are hosting one of our Best Idea Conference Calls on what we believe is a significantly overvalued company called Kinder Morgan. For those of you who follow either our written research from Energy sector all-star Kevin Kaiser or my #RealTimeAlerts, you’ll know we’ve been bearish in both print and #timestamped KMP short sales since the beginning of August.

 

For the end of the world community that somehow hasn’t called the short side of things that actually go down in 2013 (like Gold, Bonds, or Linn Energy – another short idea from Kaiser), this whole event day thing drives them right squirrel. How dare a “young” and up and coming research and risk management firm interrupt their navel gazing?

 

Admittedly, I’ve only been making short calls for about 15 years, so I may not know as much as the clients who pay for our work. Every morning of my market life, I wake up assuming that I need to learn something. It’s not my job to assume we’re going to be right – it’s to try to prove myself wrong.

 

The #OldWall and its media outlets have a different model – they know everything about everything, 5 miles wide and an inch deep:

 

From our Wall St 2.0 friends at Seeking Alpha > Kinder Morgan Energy Partners (KMP): "There is an outfit that is trying to get this thing down. They are calling it a house of cards. Richard Kinder (the CEO), come on this show. I know they are going to (do) a massive hit job on you. If you want to be able to tell your story, Mad Money welcomes you. This is a stock I like." –Jim Cramer

 

Mr. Cramer got nowhere with his Sound and Fury in our last public debate – which descended into members of the Old-Boy network trying to suggest we were committing a securities violation with our research call on Linn Energy (LINN).  One has to admire the conviction the man brings to the table today, on what looks like a replay of the same tape. Occasionally wrong, never in doubt.

 

Whether you’re a media talking head trying to drive advertising revenues, an Old Wall firm that’s banking one of Kinder’s deals, or just a portfolio manger flat out chasing dividend yield because you have to – it’s all cool with us. So is doing our own work on an idea whose time has come.

 

For those of you who think it’s a big positive that Rich Kinder “bought stock” in KMI here are a few research nuggets to consider as you contextualize that headline:

  1. Kinder bought 500,000 shares = $18M worth of stock = increasing his stake by 0.2%
  2. Kinder holds 241,000,000 shares of KMI = $8.8B (yes, that’s a B, as in $8.8 billion worth)
  3. Kinder receives more than $400M (per year) in dividend and distribution payments from his KMI holdings

In other words, Kinder has more than a few billion reasons to defend both his stock’s crazy valuation and how he gets paid. The old-boy network of Old Wall Street and the media brotherhood are going to help him do that.

 

After Bear Stearns crashing … and all that we have gone through in the last 5 years as a profession, is this the best the said savants of the closed-network that was Wall St 1.0 can do?

 

Or, after missing epic declines in both Gold and Bonds (and after trying to freak people out at yet another higher-low for the US stock market at the August lows), is this just the end of their world as they knew it?

 

We don’t purport to know everything. But we do our own work and we’re looking forward to objective analysis that attempts to refute our well researched opinion. Dial into our call on Kinder Morgan at 11AM (ping for access) and, instead of calling just calling us “young” (Daryl Jones and Todd Jordan are getting old!), please tell us what you think.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.84-3.02%

SPX 1

VIX 14.73-17.41

USD 81.22-82.68

Brent 111.91-115.19

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

End of Their World - Chart of the Day

 

End of Their World - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 10, 2013


As we look at today's setup for the S&P 500, the range is 20 points or 0.82% downside to 1658 and 0.38% upside to 1678.                           

                                                                                                    

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: 2.49 from 2.47
  • VIX  closed at 15.63 1 day percent change of -1.39%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business Optimism, Aug., est. 95
  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales 8:55am
  • 10am: JOLTs Job Openings, July (prior 3.936m)
  • 11am: Fed to buy $1b-$1.5b TIPS in 2018-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 1pm: U.S. to sell $31b 3Y notes
  • 4:30pm: API weekly oil inventories

GOVERNMENT:

    • President Obama to address nation on need for military intervention in Syria, 9pm
    • New York City holds mayoral primary elections; General Election is Nov. 5
    • House, Senate in session
    • House Armed Svcs Cmte hears from Sec. of State John Kerry. Defense Sec. Chuck Hagel, Joint Chiefs of Staff Chairman Martin Dempsey on proposed use of forces in Syria, 10am
    • U.S. Financial Stability Oversight Council holds closed session at U.S. Treasury
    • House Oversight Committee hears from CFTC Chairman Gary Gensler and former EPA Administrator Lisa Jackson on preventing violations of federal transparency laws, 9am
    • Executives from CenturyLink, DISH, American Cable Assn and National Assn of Broadcasters testify for House Judiciary panel on satellite TV laws, 10am

WHAT TO WATCH:

  • Apple event may focus on iPhone 5C price, new carriers
  • China industrial growth accelerates to 17-mos. high
  • Retail sales up 13.4% vs est. 13.3%; auto sales gain most in 4 mos.
  • China new credit rises more than forecast to 4-mth high
  • Russia bid to get Syria to surrender chemical weapons shifts debate
  • McDonald’s Aug. comps. growth may have slowed m/m
  • Twitter to buy mobile advertising exchange MoPub
  • BofA cuts jobs amid mortgage refinance slump
  • Time Inc. said to be in talks to buy American Express publishing arm
  • Abe ally says failure to raise sales tax may cause Japan selloff
  • Putin’s judo partner may buy Uralkali stake: Kommersant
  • Novartis CEO Jimenez says no decision on Roche stake: JPMorgan
  • Glencore raises Xstrata merger synergies est. to $2b for 2014
  • Thor offers $1.4b for Empire State Building’s title

EARNINGS:

    • Oxford Industries (OXM) 4pm, $0.98
    • Pep Boys (PBY) 4:30pm, $0.19
    • Restoration Hardware (RH) 4:06pm, $0.42
    • Triangle Petroleum (TPLM) Pre-mkt, $0.14

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Falls a Second Day as Obama Seeks Syrian Weapons Surrender        
  • Fastest Wheat Sales in Six Years Diminish Inventory: Commodities
  • Tin Exports From Indonesia Seen Down to Seven-Year Low by Timah
  • Gold Declines in London on Russia’s Syria Proposal; Silver Falls
  • Soybeans Drop for Second Day as Midwest Rain May Boost Harvest
  • Sugar Advances a Fourth Day Before Options Expiry; Cocoa Slides
  • Copper Erases Decline in London, Advances 0.1% to $7,203 a Ton
  • Rebar Falls From One-Week High as Steel Mills Boost Production
  • Mutant Wheat Resistant to Killer Ug99 Fungus Seen Lifting Yields
  • Crude Stockpiles Fall to One-Year Low in Survey: Energy Markets
  • Gold’s War History Showing Short-Lived Premium: Chart of the Day
  • Shipping Rates Seen at 2010 High on Record Ore to China: Freight
  • Taxpayer $14 Billion to Crop Insurers Some Call Money Laundering
  • Australia Cuts Wheat Outlook on Dry Weather, Exports to Drop

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

 

 

 

 

 

 

 

 

 

 

 

 


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