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Innovation's Hand

This note was originally published at 8am on September 03, 2013 for Hedgeye subscribers.

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 1631-1661

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


September 17, 2013

September 17, 2013 - dtr

 

BULLISH TRENDS

September 17, 2013 - 10yr

September 17, 2013 - spx

September 17, 2013 - dax

September 17, 2013 - nik

September 17, 2013 - dxy

September 17, 2013 - euro

September 17, 2013 - oil

September 17, 2013 - natgas

 

BEARISH TRENDS

September 17, 2013 - VIX

September 17, 2013 - yen
September 17, 2013 - gold

September 17, 2013 - copper


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 17, 2013


As we look at today's setup for the S&P 500, the range is 34 points or 1.33% downside to 1675 and 0.67% upside to 1709.   

                                                                                                                            

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: 2.45 from 2.48
  • VIX  closed at 14.38 1 day percent change of 1.55%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: CPI M/m, Aug., est. 0.2% (prior 0.2%)
  • 8:30am: CPI Ex Food/Energy M/m, Aug., est. 0.2% (pr 0.2%)
  • 9am: Total Net TIC Flows, July (prior -$19b)
  • 9am: Net Long-term TIC Flows, July, est. -$15b
  • 10am: NAHB Housing Mkt Index, Sept., est. 59 (prior 59)
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills, $22b 52W bills
  • FOMC Meeting starts, preview

GOVERNMENT:

    • CBO releases long-term federal budget outlook. 10am; CBO Director Douglas Elmendorf holds briefing, 11am
    • SEC Advisory Committee on Small and Emerging Companies meets to discuss rules including recently adopted measure lifting ban on general solicitation in private offerings mandated by the Jumpstart Our Business Startups Act, 9:30am

WHAT TO WATCH:

  • Yellen said to top Obama’s Fed list post-Summers’s withdrawal
  • Kerry says U.S. isn’t wavering on goal of ending Assad’s rule
  • GM said to be working on electric car to rival Tesla: WSJ
  • Take-Two’s Grand Theft Auto V to generate $1b in one month
  • Barrick Gold investors seek Munk ouster, board changes: WSJ
  • Brazil may require Google, Facebook to store data locally
  • Penthouse owner FriendFinder files for bankruptcy protection
  • UBS’s $120m Lehman investor settlement wins approval
  • U.K. sees $95m profit on first Lloyds stake sale
  • Philips sets 2016 targets, EU1.5b share buyback
  • Ex-JPMorgan employees indicted over $6.2b derivative loss
  • German ZEW investor sentiment beats est., gains for 2nd month
  • Navy Yard shooter said to be Buddhist with anger-fueled past

EARNINGS:

    • Adobe Systems (ADBE) 4:02pm, $0.34
    • FactSet Research Systems (FDS) 7am, $1.19
    • Tower Group International (TWGP) 4:07pm, $(0.82)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Crude Falls as Syria Risk Wanes While Libya Output Recovers
  • Milk Rally Reversing as New Zealand Drought Recedes: Commodities
  • Festival Demand for Gold in India Seen Hurt by Slowing Economy
  • Copper Steady as Investors Weigh U.S. Tapering Against Growth
  • Soybeans Resume Rally on the Chicago Board of Trade
  • Cocoa Drops on Speculation Investors May Sell; Coffee Retreats
  • Wheat Seen by Australia Extending Slump as Production Climbs
  • Rebar Trades Near Six-Week Low as China Steel Output Gains
  • Natural Gas Futures Gain a Fourth Day on Stockpile Speculation
  • Smallest Ships Profitable Again as Logs Feed China Boom: Freight
  • Cocoa Supplies Seen in Shortage by Macquarie in Next Two Seasons
  • New Copper Mine Supply Expansion Eases Tightness: Bear Case
  • Crude Supplies Drop to One-Year Low in Survey: Energy Markets
  • Japan Warned U.S. of Blackouts in Appeal for LNG Supply: Energy

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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The Hierarchy

“The great thing about fact based decision is that they over rule the hierarchy.”

-Jeff Bezos


Jeff Bezos knows a thing or two about making decisions.  In 1994 after making a cross country drive from New York to Seattle, he made the decision to write up a business plan.  To undertake this cross country drive, he made a decision to leave a “well-paying” job.   The little company that Bezos was developing a business plan for was Amazon.com and the rest, as they say, is history.

 

At the time, Bezos combined two facts that helped him overcome the establishment.  The first was that the internet was growing in leaps and bounds.  The second fact was that the U.S. Supreme Court had ruled (in Quill Corp V. North Dakota) that online retailers would not have to collect sales taxes in states where they lacked a physical presence.

 

This series of decisions paid off handsomely for Bezos as he is now worth an estimated $25.2 billion.   Meanwhile his company Amazon.com has a market capitalization of more than $135 billion and generates more than $65 billion in annual revenues.  Frankly, it kind of makes me want to quit my job and go for a drive!

 

Former Harvard President Larry Summers made a big decision late Sunday to withdraw his name from consideration to replace current Federal Reserve Chairman Ben Bernanke.  Now technically speaking, the fact that five Democrats intended to vote against him in committee kind of forced his hand, but nonetheless a decision was made.

 

In the short run, Mr. Market viewed this development as somewhat positive as stocks were up broadly with the SP500 up 0.57%.  (Strangely, the bell weather master limited partnership, Kinder Morgan Partner (KMP), underperformed and was down -1.50%.) President Obama then chose to come out and spoil the Wall Street party as Obama indicated he will not negotiate an extension of the U.S. debt ceiling as part of the budget fight. 

 

Slight digression, yes the debt ceiling debate is looming again.  As Yogi Berra said, this is déjà vu all over again.  You may recall, in 2011 Congress raised the debt ceiling to $16.7 trillion, an increase of over $2 trillion.  Currently, based on projections from the Treasury department, the federal government could hit the debt ceiling as soon as mid-October.

 

In the chart of the day, we highlight a chart from the Bipartisan Policy Center that shows that the debt ceiling is likely to be breached to between October 18th to November 5th.   Technically speaking, the United States hit its debt limit on May 19th, but as my colleague Christian Drake has written about, via a number of extraordinary measures, the ceiling has been extended, but these measures will run out at some point in the time frame noted above at which point the federal government will only have enough tax revenue to cover about 68% of its bills.

 

Incidentally, and for those that don’t have their calendars in front of them, the “X-date” is just over a month away.  And just think, most investors are worried about who is going to be the next Chairman / Chairperson of the Federal Reserve!  Given the uncertainty around the direction of policy, a looming fiscal crisis, and the fact that U.S. equities have performed quite well in the year-to-date, it should be no surprise that some savvy investors like Stan Druckenmiller are indicating they are largely underinvested.

 

We certainly get the risks, but one point that has and will continue to benefit equities, is bond outflows.  Since May we have seen $116 billion fixed income fund outflows, which is the largest absolute bond outflow in history.

 

Interestingly though, as our Financials team pointed out yesterday,  as a percentage of beginning fixed income assets-under-management, 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.  So while there are certainly risks looking for equities, the continuation of bond outflows will be a meaningful tailwind. 

 

Nonetheless, many of the large investors we speak with remain focused, and rightfully so, on the direction of leadership at the Fed.  Given this focus, I thought I’d highlight a few fun facts about the Fed:

 

1) The greatest long term period of economic growth in the United States was between the Civil War and 1913 when there was no Fed.

 

2) Prior to the creation of the Federal Reserve, the estimated rate of inflation in the United States was 0.5% and it is   estimated to be at 3.5% in the ensuing century.

 

3) The permanent income tax was introduced in the same year as the Federal Reserve.

 

4) In 1913, Congress promised that if the Federal Reserve Act was passed it would eliminate the business cycle.

 

5) The value of the U.S. dollar has declined, by some estimates by more than 95% since the Fed was created.

 

6) There have been 10 recessions since 1950 (arguably many Fed induced).

 

I borrowed some of these points above from a blog called End of the American dream and, as we touched up on in the past, it kind of begs the question, as Bezos would say, as to whether the best fact based decision is to overrule the Federal Reserve hierarchy in its entirety.  Based on the points above, ending the Fed wouldn’t be the worst decision the Federal Government ever made.

 

Our immediate-term Macro Risk Ranges are now as follows:

 

UST 10yr Yield 2.80-2.98%  

SPX 1 

VIX 13.33-14.98 

USD 80.89-81.75  

Euro 1.32-1.34 

Gold 1 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Hierarchy - Chart of the Day

The Hierarchy - VP

 

 


EXPERT CALL TODAY at 11am: Brent Willis Discusses New Excitement in Electronic Cigarettes

Today at 11:00am EDT the Hedgeye Consumer Staples team hosts an expert call on electronic cigarettes featuring Brent Willis, a leading consumer products executive and Chairman and CEO of Victory Electronic Cigarettes. 

 

Dialing Instructions:

  • Toll Free Number:
  • Conference Code: 946694# 

Materials: CLICK HERE

 

 

CALL OBJECTIVE 

Mr. Willis will contribute his expertise to Hedgeye's ongoing research on the electronic cigarette category.

 

 

KEY CALL TOPICS WILL INCLUDE

  • The industry landscape: What does the future hold for e-cigs?
  • Key metrics to evaluate the industry
  • Competition in the marketplace
  • Big vs Small: E-cigarette companies take on Big Tobacco

 

ABOUT BRENT WILLIS, CEO OF VICTORY ELECTRONIC CIGARETTES

Mr. Willis is an accomplished executive in the consumer packaged goods industry. Prior to directing a number of companies in which he remains a significant private equity investor, Mr. Willis served as the CEO for Cott Corporation, the world's largest retailer-brand beverage company. He previously was the Global CCO and President at InBev, where he developed and implemented the strategies that led the Company to become the world's largest beer company. Prior to creating InBev, Mr. Willis was a President in Latin America for The Coca-Cola Company, where he led the most successful turnaround in the company's history and won recognition as one of Latin America's top senior executives. Mr. Willis has also served as senior marketing executive for Kraft Foods, Inc., with wide operational and strategic responsibilities. Mr. Willis is a graduate of West Point and a decorated Army veteran, where he attained the rank of Captain.

 

 

ABOUT VICTORY ELECTRONIC CIGARETTES 

Victory Electronic Cigarettes describes itself as "dedicated to providing a cleaner and healthier alternative to smoking and is one of the leading companies in this rapidly emerging and fast-growing industry. The Company began online sales in 2012 and expanded to retail early in 2013. Since that time, the growth rate of the firm has been exponential. Victory offers consumers a full product portfolio that incorporates the highest quality and latest technology, and has been ranked superior for real tobacco taste amongst major brands. Recently public through a reverse merger, Victory's new but experienced management team is positioned to leverage its clearly differentiated and well-recognized brand. Victory is well positioned with an established online presence and a low-cost infrastructure to accelerate growth and drive significant value for its shareholders. Victory is listed on the OTC market under the ticker ECIG."

 

Disclosures: Victory (ECIG) is a newly-public company with limited trading history and liquidity. Hedgeye has no investment opinion on Victory and no current plans to publish research on the company. Certain Hedgeye executives may become involved in a transaction with Victory or related entities.


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