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Deafening Drops

This note was originally published at 8am on August 28, 2013 for Hedgeye subscribers.

“The noise can be deafening.”

-George Gilder

 

When he wrote that in Knowledge and Power, Gilder was referring to government interference (in markets). He also went on to make the critical, but often overlooked, behavioral link between simple market signals (like interest rates) and central planning noise.

 

“Interest rates are critical for information-theory economic analysis because they are an index of real economic conditions. If the government manipulates them, they will issue false signals, breeding confusion that undermines entrepreneurial activity.” (pg 24)

 

That pretty much sums up what I think all of us are struggling with today. Inclusive of yesterday’s drop in interest rates (oil ripping new highs is an economic headwind), the bond market is becoming as good a leading indicator of the slope of US economic growth’s TREND as anything I can back-test.  At the same time, we have to deal with the deafening impact of central planning commentary.

 

Back to the Global Macro Grind

 

Yesterday’s 1-day drop in the US stock market was deafening too. It came on a legitimate Information Surprise (Oil ripping on Syria) and the rotation you’d expect to see when expectations for growth fall (bond yields and US growth stocks have a positive correlation).

 

How did that deafening drop (there was no volume) fair within the context of the Top 3 biggest 1-day drops since April?

  1. June 20th, 2013 = SP500 -2.5%
  2. April 15th,2013 = SP500 -2.3%
  3. August 28th,2013 = SP500 -1.6%

#EOW (end of world) type stuff, I know.

 

In both of the prior 1-day freak-outs (which were bigger in terms of both magnitude and volume), fear spiked (front-month VIX) to higher levels than what you saw yesterday too. In other words:

  1. US stocks keep making higher intermediate-term TREND lows
  2. US Equity Volatility keeps making lower intermediate-term TREND highs

That’s why we do the multi-duration risk management thing. How else are you going to contextualize the immediate-term TRADE noise of Mr. Market if you don’t have anything to signal the intermediate-term TREND?

 

Since we are raging bears on Emerging Market Equities (EEM), this morning’s discussion is more focused on how to interpret US market noise (US markets include big stuff like the currency and bond market). Here are the other two Big Macro Signals I care about most:

  1. US Dollar Index grinded out another higher-low (versus the recent FEB and JUN lows) and held long-term TAIL support
  2. US 10yr Treasury Yield (2.73% this morning) held both TRADE (2.69%) and TREND (2.44%) levels of support = higher-lows

And yes, the TREND is your less noisy friend, until he/she isn’t – I get that. I also get that Oil prices steadily rising from here could cut US consumption growth in half, sequentially. So there’s a lot to think about (including whether this will be the YTD high in oil altogether).

 

But while I think, I have to try hard to take the emotion out of the decisions I make on what to do next. That’s why my immediate-term TRADE signals determine my short-term risk management decisions. I’ve tried the feel thing – and it ends up not feeling good.

 

When running money in a bull market like this for US growth stocks, not selling the lows is one of the most important decisions you can make. What if you read Zero Hedge, capitulated to your emotional state, and sold the April 15th and/or June 20th lows?

  1. By April 18th (3days later), the SP500 locked in another higher-YTD-low of 1541
  2. By June 24th (3days later), the SP500 locked in another higher-YTD-low of 1573

Can you wait 3 more days to see if this noise settles? Or are we all high-frequency blog freaks now? By August 2nd 2013 (when the SP500 hit its all-time closing high of 1709) you’d have been up +11% and/or +8.6% in SPY, respectively. Just saying.

 

Maybe the world is going to end this time. I started making that call around this time in 2007 (and it almost did end). But this is not 2007, and not one of the people and/or risk management processes that called it last time is making that call this time either.

 

Maybe everyone who didn’t call the 2007 topping process is going to nail it this time. But maybe not. All I can tell you is that the noise of #PTCs (professional top callers) since April of 2013 has been deafening.

 

Our immediate-term Risk Ranges are now as follows:

 

UST 10yr Yield 2.70-2.93%

SPX 1621-1666

EEM (Emerging Markets) 36.91-38.49

VIX 15.05-18.98
USD 80.91-81.73

Brent 110.69-115.98

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deafening Drops - CHART

Deafening Drops - vp


VIDEO: Hedgeye's Best Ideas: Kinder Morgan

 

Hedgeye Risk Management Senior Energy Analyst Kevin Kaiser speaks with Hedgeye Managing Director Todd Jordan about his concerns regarding energy behemoth Kinder Morgan.


Kaiser illuminates some of the key points from his rigorous, in-depth research on North America's largest oil and gas pipeline and processing company which he says is "misunderstood and mispriced."


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 11, 2013


As we look at today's setup for the S&P 500, the range is 32 points or 1.37% downside to 1661 and 0.54% upside to 1693.      

                                                                                                                         

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10A


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.48 from 2.49
  • VIX  closed at 14.53 1 day percent change of -7.04%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Sept. 6 (prior 1.3%)
  • 10am: Wholesale Inventories M/m, July, est. 0.3% (pr -0.2%)
  • 10am: Wholesale Sales M/m, July, est. 0.5% (prior 0.4%)
  • 10:30am: DoE Inventories
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 1pm: U.S. to sell $21b 10Y notes in re-opening

GOVERNMENT:

    • De Blasio gets most votes in New York Democratic mayoral primary
    • House, Senate in session
    • House Transportation and Infrastructure Cmte to unveil Water Resources Reform and Development Act of 2013, 2pm
    • House Oversight panel meets to review TARP inspector general’s report on Treasury role in Delphi pension bailout, 1:30pm
    • House Financial Svcs panel holds hearing on the Fed at 100 years, 2pm

WHAT TO WATCH:

  • Obama pursues Russian proposal on Syria chemical weapons
  • IBM to sell customer-service business to Synnex for $505m
  • Apple iPhone 5C seen as expensive: analysts
  • Vodafone $10.2b Kabel Deutschland deal under threat
  • Disney delays fifth “Pirates of the Caribbean” film
  • Canada, Ontario sell $1.1b in GM shares
  • Verizon said to plan record bond sale of up to $49b
  • China’s richest man hunts hotel mgmt cos. in U.S.
  • KKR said to weigh teaming with Japan INCJ for Panasonic unit
  • U.K. unemployment unexpectedly falls to 7.7%

EARNINGS:

    • Dollarama (DOL CN) 7:30am, C$0.78
    • Evertz Technologies (ET CN) 4pm, C$0.14
    • Men’s Wearhouse (MW) 5:30pm, $1.14
    • Vera Bradley (VRA) 4:03pm, $0.32

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Ruthenium Slides to Eight-Year Low as Hard-Disk Demand Declines
  • Tin Shortage Worsens as Indonesia Rules Curb Supply: Commodities
  • Copper Climbs as Banks Project Stronger Chinese Economic Growth
  • Brent Crude Rises From Two-Week Low as Syria Strike Risk Remains
  • Gold Swings Near Three-Week Low as Obama Seeks Syria Delay
  • Soybeans Gain Before USDA Report Set to Signal Lower U.S. Output
  • Cocoa Rises to 1-Year High in New York on Shortage; Coffee Gains
  • Aluminum Buyers in Japan Said to Win Fee Cut From Suppliers
  • Sugar Harvest in India Seen Beating Estimate to Worsen Glut
  • Hurricane Humberto Is First of Season; Storm Gabrielle Weakens
  • Goldman Expects Decline in Commodities Index in 12 Months on Oil
  • Power Prices to Hold Near 8-Year Low on Weather: Energy Markets
  • China Scrap Copper Imports Surge as Smelters Struggle: BI Chart
  • Gold Decline Seen by Goldman as Fed’s Tapering to Spur Selling

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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End of Their World

This note was originally published September 10, 2013 at 07:58 in Early Look

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 sales@Hedgeye.com 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 1658-1678

VIX 14.73-17.41

USD 81.22-82.68

Brent 111.91-115.19

Gold 1361-1398

 

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



A New Light

“Understanding the errors may afford new light.”

-George Gilder

 

As I was banging around NYC client meetings yesterday, the US stock market was hitting fresh September highs (new YTD high of +23.5% for the Nasdaq), and the sun was shining. It was a great day. It’s been a great year.

 

On this day in 2001, many of us were devastated. My thoughts are with all my friends and those families who are still feeling that pain. While it will always be there, we still need to find the courage to carry on. We can only do that together.

 

As families, friends, and firms, we share that opportunity every day. It’s an opportunity to listen to one another and learn from our many human mistakes. Risk managing markets is a lot like life that way. For the open-minded, there is always a light to be found somewhere. Her virtues are time, patience, and change.

 

Back to the Global Macro Grind

 

One of the most obvious changes I’ve had the pleasure and privilege in seeing in our client base over the course of the last 5 years is dismissing many of the economic dogmas of academia. You (as in the buy-side) are way ahead of the world on that.

 

Yes, these are early days. Change takes time. But we are finally getting broad-based and cross-disciplinary support on this front from some of the most coincident indicators there are – books.

 

Whether it’s from the behavioral side of economics (Dan Kahneman’s Thinking Fast, and Slow) or the more recent applications of Chaos Theory to market-based economics (George Gilder’s Knowledge and Power) it’s getting out there – and the new light I wake up to every morning certainly feels good.

 

In Chapter 7 of Knowledge and Power, Gilder does a great job summarizing the history of economic theory:

 

“During much of the century, they clustered in tribes around three or four major totemic light sources: Adam Smith, with his magical self-extending markets; John Maynard Keynes, with his amazing self-fulfilling demand… Meanwhile Hayek and Samuelson defended the spontaneous order and equilibrium of Walras and Marshall.” (pg 62)

 

All the while, the entrepreneurial spirit of capitalists crushed Smith’s invisible hand; Keynes government spending ideas morphed into multipliers of mass currency destruction; and some people who gave up on both Smith and Keynes just decided to be Hayekian because they had no idea what else to sign up for…

 

Like most fictional stories in human history, enlightenments like the one we are experiencing in economics put all of these dogmas to bed. Eventually, everyone who gets it moves on. And we have the opportunity to start growing intellectually again.

 

I don’t worship at the altar of a social science. I’m not a Hayekian. I’m no Keynesian either. I am Mucker. I have my own team and market based models. Here’s what Mr. Market has been telling me to think about for the last 10 months:

  1. Bullish on the US Dollar
  2. Bullish on US Growth Stocks
  3. Bearish on almost everything Slow-Growth (Gold, Bonds, etc)

In our multi-factor, multi-duration model, the 2nd derivative matters most (visually speaking, it’s the slope of the line). That’s why we’ve been bullish on US #GrowthAccelerating. A #StrongDollar and #RatesRising perpetuate that.

 

For those of your friends who are still locked-down in the dark ages by their textbooks and compensation structures, here’s a friendly fact for them on how impactful a “weak currency” was to “export growth”:

  1. US Dollar Index hit a 40yr low in Q2 of 2011 (post Nixon abandoning the Gold Standard in 1971)
  2. US Net Exports in Q4 of 2011 were down (as in negative) -0.6% in terms of their quarterly contribution to US GDP

In other words, a strong currency coincides with a strong country. Strength in currency = strength in consumption, confidence, and character. This is not a new light I am shining on our failed academic institutions this morning. This is economic history.

 

And yes, after moves like we’ve had to start September (the US Dollar has been up for 4 weeks in a row and the SP500 is up +3.12% for the month-to-date), it’s scary to be chasing the stocks you could have bought with the VIX 20% lower in August…

 

So don’t do that – the SP500 and QQQ’s are immediate-term TRADE overbought (within their bullish TREND), so sell some of what you bought when everyone was whining about another opportunity to buy things on sale. And enjoy the rest of your day.

 

UST 10yr 2.86-3.03%

SPX 1

VIX 14.18-15.34

USD 81.42-82.64

Yen 98.79-100.98

Brent 111.63-114.86

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

A New Light - Chart of the Day

A New Light - Virtual Portfolio


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