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Sin's Knowledge

This note was originally published at 8am on August 29, 2013 for Hedgeye subscribers.

“The physicists have known sin; and this is a knowledge which they cannot lose.”

-Robert Oppenheimer

 

Got introspective accountability? After he (quickly) realized the capacity of the nuclear weapons he helped create, Robert Oppenheimer became very unpopular with the State – primarily because he held both himself and the government to account.

 

Can you imagine a central planner of the Bernanke epoch holding themselves accountable to the highest levels of food, energy, education, etc. inflation in world history? Nah. That would require un-spinning the truth.

 

And the truth is that American political scientists who engaged in devaluing the purchasing power of the American people to 40 year lows in Q2 of 2011 know that sin. This is a market knowledge that history will not lose.

 

Back to the Global Macro Grind

 

If you’ve sat across the table from me and my macro research team in the last few years, you’ll know that I refuse to have a debate about mean reversion risks without contextualizing the post Nixon low in the world’s reserve currency (see chart):

  1. Got Causality? Of course, when a country cuts rates to zero then whispers to everyone front-running their next move that zero really isn’t zero (for Bernanke 0 = 0 minus 1, 2, 3, 4? QE5?), its currency goes down, hard
  2. Post Nixon (i.e. post his devaluing the Dollar by abandoning the Gold Standard in 1971, purely for political gain), the US Dollar Index has never seen a lower-low versus the 2011 low; that’s also when Gold hit its all-time high

Since most global commodities settle in Dollars, why there’s been raging inverse correlation (Dollar Down = Commodities Inflation Up) alongside causality in this relationship is trivial to everyone other than the people who should be held responsible for it.

 

What is less trivial is all of the unintended consequences associated with the ultimate central planning sin (an un-elected overlord confiscating the purchasing power of The People). Here are some of the big ones:

  1. Commodity Bubble
  2. Bond Bubble
  3. Emerging Market Bubble

Yep, that’s going to be a lot for Bernanke’s children (and their children) to noodle over for the next century. That is, of course, unless the next guy or gal running the un-elected agency does what no modern Federal Reserve Chairman has ever not done – raise rates.

For the last 6-12 months, I’ve spent a lot of time ranting about these Global Macro Themes:

  1. #CommodityDeflation
  2. #RatesRising
  3. #EmergingOutflows

These are relatively easy long-term TAIL risk calls to make because all 3 of them are basically about unwinding all 3 of the aforementioned bubbles. Once prices stop making all-time highs (commodities, bonds, or currencies), there’s this big little risk management critter Bernanke has never mentioned under oath called asymmetry.

 

So, alongside an English major who has never traded a macro market in his life being the chief Keynesian access “economist” @CNBC, at this stage of the cycle this is what you get:

  1. US Dollar making a series of intermediate-term TREND higher-lows (off her all-time lows in 2011)
  2. US Interest Rates making a series of intermediate-term TREND higher-lows (off their all-time lows in 2012)
  3. Gold and food prices making a series of intermediate-term TREND lower-highs (off their all-time highs of 2011-2012)

All the while, what we still get from the consensus TV circus that is government #AccessMedia is a bunch of uninformed people begging for more of the drugs that the political scientists got rich selling us.

 

If I am not clear on my long-term policy view, let me state it plainly – stop devaluing the Dollar and trying to smooth economic gravity. If you ever want to see US growth expectations come back, you have to let the US Dollar come back (and let rates rise alongside her).

 

Why am I going off on this today? Well America, we’re at The Crossroad. Unwinding the sin embedded in Bernanke’s post 2012 Jackson Hole policy is what markets have been doing for 10 months.

 

Collectively, we either have the responsibility within all of us to rise up against the tyranny of easy money and currency debauchery, or we do not. At this point, I can only hope the people who voted for this government hold it to account.

 

Our immediate-term Risk Ranges across 6 Big Macros are now as follows:

 

UST 10yr Yield 2.72-2.93%

SPX 1628-1665

VIX 15.26-17.04

USD 80.91-81.69

Brent 111.63-115.98

Gold 1347-1428

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Sin's Knowledge - CHART

Sin's Knowledge - vp


September 12, 2013

September 12, 2013 - dtr

 

BULLISH TRENDS

September 12, 2013 - 10yr

September 12, 2013 - spx

September 12, 2013 - dax

September 12, 2013 - dxy

September 12, 2013 - euro

September 12, 2013 - oil 

BEARISH TRENDS

September 12, 2013 - sensex

September 12, 2013 - VIX

September 12, 2013 - yen

September 12, 2013 - natgas
September 12, 2013 - gold

September 12, 2013 - copper


ICI Fund Flow Survey - Continued Outflows in Bonds But a Slight Improvement

Takeaway: Slightly smaller bond outflows for the week ending Sept 4th but still over $6 billion left fixed income funds. Equity ETFs got hit hard.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Equity mutual fund inflow accelerated week-to-week to $903 million for the 5 day period ending September 4th, up from the $300 million inflow the week prior

 

Fixed income mutual fund outflows also improved but still resulted in a $6.7 billion withdrawal by investors, an improvement from the $9.1 billion draw down last week

 

Within ETFs, passive equity products experienced an outsized redemption of $11.3 billion, the second week in three weeks with over a $10 billion withdrawal. Bond ETF flows snapped into positive territory week-to-week with a $2.4 billion inflow this week compared to the $935 million outflow last week 


 

ICI Fund Flow Survey - Continued Outflows in Bonds But a Slight Improvement - ICI chart 1 revised

 

 

For the week ending September 4th, the Investment Company Institute reported improvements in both equity and fixed income mutual fund flows however with bond trends simply booking a smaller outflow. Total equity fund flow totaled a $903 million inflow which broke out to a $1.5 billion inflow into international equity products and a $694 million outflow in domestic stock funds. These trends were an improvement from the prior week's total equity fund inflow of $300 million. Including this acceleration in stock fund flows, the year-to-date weekly average for 2013 now sits at a $2.6 billion inflow for total equity mutual funds, a substantial improvement from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, outflow trends continued for the week ending September 4th with the aggregate of taxable and tax-free bond funds combining to lose $6.7 billion in fund flow. The taxable bond category specifically shed $4.7 billion in the most recent period versus the $6.3 billion loss last week. Tax-free or municipal bonds continued their sharp outflow trends losing another $2.0 billion in the week ending September 4th, continuing its trend from last week which experienced a $2.9 billion outflow. Franklin Resources (BEN) continues to have the most exposure in our coverage group to declining Municipal bond trends with over 10% of its assets-under-management in the tax-free category. The 2013 weekly average for fixed income fund flow has now drastically declined from 2012, now averaging a $324 million weekly outflow this year, a far cry from the $5.8 billion weekly inflow averaged last year.

 

Hybrid funds, or products that combine both fixed income and equity allocation, continue to be the most stable category bringing in another $263 million in the most recent weekly period although dipping below the $1 billion weekly inflow level for the first time in 8 weeks. The year-to-date weekly average inflow for hybrid products is now $1.6 billion for '13, almost a 100% increase from 2012's $911 million weekly average.

 

 

ICI Fund Flow Survey - Continued Outflows in Bonds But a Slight Improvement - ICI chart 2

ICI Fund Flow Survey - Continued Outflows in Bonds But a Slight Improvement - ICI chart 3

ICI Fund Flow Survey - Continued Outflows in Bonds But a Slight Improvement - ICI chart 4

ICI Fund Flow Survey - Continued Outflows in Bonds But a Slight Improvement - ICI chart 5

ICI Fund Flow Survey - Continued Outflows in Bonds But a Slight Improvement - ICI chart 6

 

 

Passive Products - A Big Equity ETF Outflow versus a Stable Fixed Income Inflow:

 

 

Exchange traded funds experienced mixed trends for the week ending September 4th with a massive equity outflow and a stable fixed income inflow. Equity ETFs lost $11.3 billion, the second biggest equity ETF outflow in 5 years next to the $12.9 billion outflow two weeks ago and only the 11th negative week in the 36 weeks of 2013. Despite this week's outflow, 2013 weekly average equity ETF trends are averaging a $2.6 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.

 

Bond ETFs conversely had an improvement week-to-week with a strong $2.4 billion inflow, the biggest fixed income ETF inflow in 8 weeks, which compared to last week's $900 million outflow. Despite this improvement in the most recent period the 2013 weekly bond ETF average is now just a $345 million inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow from 2012.

 

 

ICI Fund Flow Survey - Continued Outflows in Bonds But a Slight Improvement - ICI chart 7

ICI Fund Flow Survey - Continued Outflows in Bonds But a Slight Improvement - ICI chart 8

 

 

HEDGEYE Asset Management Thought of the Week - The Bigger Base of Numbers:

 

Despite the $116 billion fixed income fund outflow that has occurred since the end of May, the largest absolute bond outflow in history, we point out that on a percentage of beginning fixed income assets-under-management that the current 2013 draw down is the smallest in history on a percentage basis. The 2013 running outflow has been just 2.9% of outstanding bond funds, well below the past outflows in 2003-2004 where 5.0% of outstanding bond funds were redeemed and the 14% of bond funds that were drawn down in the 1 outflow. 1 experienced a similar 5.0% redemption of outstanding bond funds, inline with the 2003-2004 fixed income sequence.

 

In our recent initiation of the asset management sector, we forecasted that a $1 trillion shift out of bonds and into equities could occur (this would include ETFs and single holdings of individual bonds in addition to bond funds) taking in consideration that bond outstandings in the U.S. are at new record highs and that modified duration, the return of volatility in fixed income, and the lack of liquidity in the bond markets would dislodge the asset class. The enclosed links present this initiation again:

 

http://docs.hedgeye.com/HE_F_AssetMgmt_launch.pdf

http://docs.hedgeye.com/DomesticAssetManagementCoverage_07.29.13.pdf 

 

 

ICI Fund Flow Survey - Continued Outflows in Bonds But a Slight Improvement - ICI chart 9

 

 

 

Jonathan Casteleyn, CFA, CMT

 

 

Joshua Steiner, CFA


 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 12, 2013


As we look at today's setup for the S&P 500, the range is 33 points or 1.61% downside to 1662 and 0.35% upside to 1695.                                      

                                                                                         

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: 2.45 from 2.47
  • VIX  closed at 13.82 1 day percent change of -4.89%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, Sept. 7, est. 330k
  • 8:30am: Cont. Claims, Aug. 31, est. 2.968m (prior 2.95m)
  • 8:30am: Import Price Index M/m, Aug., est. 0.5% (prior 0.2%)
  • 8:45am: Bloomberg Sept. U.S. Economic Survey
  • 9am: Fed’s Dudley speaks on panel on OTC derivatives
  • 9:45am: Bloomberg Consumer Comfort, Sept. 8
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $2.75b-$3.5b in 2020-2023 sector
  • 12pm: Wasde agricultural report
  • 1pm: U.S. to sell $13b 30Y bonds in re-opening
  • 2pm: Monthly Budget Statement, Aug., est. -$147b

GOVERNMENT:

    • Sec. of State John Kerry meets with Russian Foreign Minister Sergei Lavrov in Geneva to discuss Syria
    • SEC holds private meeting with heads of exchanges, other self-regulatory organizations to discuss market-data dissemination systems, 3-hour trading halt on Aug. 22
    • CFTC holds meeting of technology advisory cmte that may discuss concept release for regulating high-speed trading, issues related to swaps trading and record-keeping; approval would trigger a public-comment period, 10am
    • Medicare Payment Advisory Commission begins 2-day mtg, 9:30am
    • House, Senate in session
    • Senate Banking Cmte hears from SunTrust Mortgage CEO Jerome Lienhard on housing finance revisions, 10am

WHAT TO WATCH:

  • Michael Dell, Silver Lake poised to clinch $24.9b buyout
  • SEC’s White to push exchange execs for better data backups
  • Umpqua to buy Sterling Financial for about $30.52/shr
  • Vertex, Ametek to replace AMD, SAIC in S&P 500 on Sept. 20
  • Qualcomm plans $5b share buyback to placate investors
  • Gabrielle weakens to tropical depression, Humberto moves north
  • Indonesia unexpectedly raises key rate to stem currency slide
  • Putin appeals to U.S. public before Kerry-Lavrov Syria talks
  • Italy industrial output unexpectedly falls as slump persists
  • Euro-area industrial output drops more than estimated
  • Josef Ackermann said to plan resignation from Siemens board

EARNINGS:

    • Analogic (ALOG) 4:15pm, $1.35
    • Brady (BRC) 8am, $0.52
    • BRP (DOO CN) 6am, C$0.05
    • Empire (EMP/A CN) 7:03am, C$1.55
    • Hudson’s Bay (HBC CN) 7am, C$0.12
    • Kroger (KR) 8:30am, $0.60
    • Lululemon Athletica (LULU) 7:15am, $0.35
    • Transcontinental (TCL/A CN) 8:52am, C$0.38
    • Ulta Salon (ULTA) 4pm, $0.67
    • United Natural Foods (UNFI) 4:05pm, $0.60

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Goldman Sees Commodity Demand in China Rebounding to December
  • Deere Lures Africa’s First-Time Buyers of Tractors: Commodities
  • Gold Sinks to Four-Week Low as Silver Declines on Taper Bets
  • Copper Reaches One-Week Low on Concern About Outlook for Demand
  • Cocoa Falls in New York on Prospects Rain Will Benefit New Crops
  • Soybeans Climb for Second Day as USDA Seen Cutting Crop Outlook
  • Mistry Sees Palm Weakening as Prices Set for Worst Run Since ’96
  • IEA Sees Less Need for OPEC Crude in 2014 as U.S. Supply Booms
  • Rebar Drops to Five-Week Low as Property Curbs Weaken Outlook
  • Cocoa Shortage Expanding as Chocolate Sales Climb to Record
  • Vietnam’s Rice Output Faces Slide on Crop Switch: Southeast Asia
  • Polar Sea Lane Finds Favor as Suez Security Doubts Grow: Freight
  • Gold May Fall to $1,270 on Head and Shoulder: Technical Analysis
  • Tropical Depression Gabrielle Keeps Speed, Humberto Moves North            

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 - 8

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 9

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 10

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 



Take Profits

“In faith there is profit.”

-Saikaku Ihara

 

In blind faith (in government and/or your research process), there are also losses. So make sure you keep moving out there. The history of your money in public markets is that politicians and/or Mr. Market are always looking to take it away.

 

The aforementioned quote comes from an epic chapter in the late Jack Weatherford’s The History of Money titled “Knights of Commerce”, where he chronicles the history of The Knights Templars who, at one point, “became businessmen who ran the world’s greatest national banking corporation.” (pg 65)

 

Then along came a French plunderer (King Philip IV) and that was about it for the Knights. “Phillip took the management of his finances out of the hands of the Templars and established the Royal Treasury at the Louvre… Philips desperate need for money arose after he tried a trick that Nero had pulled a thousand years earlier: he debased the silver currency of his realm.” (pg 68)

 

Back to the Global Macro Grind

 

Both Gold (-1.6% to -20% YTD) and Silver (-2% to -26% YTD) are being debased (again) this morning. So you have to be careful in defining what you think “money” is. In the intermediate-term, the value of all moneys is cyclical. And you have to risk manage that.

 

Or at least that’s how I roll. I don’t really trust that the value of anything that trades on anything that is attempted to be centrally planned has a super secret biblical “value.” Every morning we wake up to politicians trying to mess with our profit plan.

 

The plan remains that the plan is going to change – and with that, let’s get on with our day. Here’s this morning’s setup:

  1. US Equities = immediate-term TRADE overbought within a bullish intermediate-term TREND
  2. Japanese, German, and British Equities = immediate-term TRADE overbought within bullish TRENDs
  3. Government Bonds (Treasuries, JGBs, Bunds, and Gillts) = immediate-term TRADE oversold within bearish TRENDs

In other words, being long stocks (and short bonds) for the last few weeks has been fantastic – so take some profits.

 

While it’s a pretty straight forward communication process to tell you when I am buying things while people are freaking out on red, sometimes I confuse people when I then turnaround and sell some of what I bought.

 

I don’t take offense to that as I am often confusing myself! That’s where embracing the uncertainty (signals) in my process leaves me at this stage of my career. I listen to the risk management signals before I listen to the little squirrels in my head.

 

#squirrely

 

To boil this process down to the bare Mucker bones:

  1. When a stock, bond, currency, or commodity is immediate-term TRADE overbought, I sell some
  2. When a stock, bond, currency, or commodity is immediate-term TRADE oversold, I buy some

That’s it. So easy a hockey player can do it.

 

And by making every mistake I make out loud for the last 5 years (over 2,000 long/short positions #timestamped on a spreadsheet in the public domain), it’s helped me learn how to make less mistakes faster.

 

No, that doesn’t mean I won’t make a big mistake like I did yesterday (I should have sold Restoration Hardware (RH) on the immediate-term TRADE overbought signal into the print, and bought it back on the red reaction).

 

It just means that I usually understand what I did wrong and why.

 

What makes this whole “taking profits” exercise all the more confusing is this un-cooperative little critter called research. I’ve built my entire research team (27 analysts) on a platform that is looking to make intermediate to long-term calls on stocks, bonds, currencies, and commodities. That means (sometimes) the immediate-term signal conflicts with the longer-term picture.

 

Sound familiar?

 

You bet it does. I don’t care if you are a day trader or someone who has bought and held since Nero. What is happening right here, right now, affects you in some way, shape, or form. If it doesn’t, you aren’t reading this anyway.

 

Back to the RH example. Brian McGough’s long-term view on Restoration Hardware (RH) is that the company will earn $8.00/share. So, even if the signal said it was immediate-term TRADE overbought at $80, why would I sell some of that? Well, that’s pretty straightforward too. Because it just had a 12% down day after signaling immediate-term TRADE overbought!

 

The risk management lesson here is that there is only a chance to take profits if you have faith that your process is repeatable. You have to understand why you make every move. Otherwise you’re just guessing. And one day, Mr. Market will take all those profits away.

 

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

 

UST 10yr Yield 2.86-3.03%

SPX 1

VIX 13.17-14.98

USD 81.41-82.09

Yen 98.75-100.91

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Take Profits - Chart of the Day

 

Take Profits - Virtual Portfolio


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