“Money, not morality, is the principle of commercial nations.”
That’s the opening quote to chapter 7, “The Birth of The Dollar”, in Jack Weatherford’s economic history classic The History of Money. We study history so that we can attempt to contextualize the madness of the moment in which we are living. Watching Bernanke debauch the value of the American People’s money is obviously immoral – but who cares?
Morals? This isn’t about morals. This is about getting paid. And for political types, since the speech circuit pay-wheels have already been greased for life, you only get paid by politicians if you can spin. Storytelling that this recent 4-day drop in the US stock market is “all about Congress” is paramount to the unaccountable @FederalReserve’s fiction.
That’s the short-run. In the long run, most politically conflicted narratives are dead. We’re a long way removed from 1787 (1st issuance of coins in the United States) when “copper coins bore the motto “Mind Your Business” (Weatherford, pg 119).” But my business of protecting against the loss of your capital to poorly timed policy decisions remains.
Back to the Global Macro Grind…
My business adheres to a rule that Warren Buffett used to uphold as “Rule #1” of investing (before he went all chuckles @CNBC and pro government socialization of his P&L’s risk on us): “Don’t lose money.”
In order for we commoners who don’t get insider and government “preferred” investment terms to execute on this rule, we need to let Mr. Market tell us what to do next.
As of this morning, the most obvious of the new obvious in our Correlation Risk model is the US Dollar moving to an immediate-term correlation versus bond yields of almost 1.0 (US Dollar Index 3-week correlation to US 10yr Treasury Yield = +0.98).
What does that mean?
- Bernanke’s causal impact on the value of American Purchasing Power (US Dollar) is massive
- There’s an explicit link between US currency and bond yields in the face of policy information surprise
- When moving in tandem, US Dollars and Bond Yields are coincident (leading) US growth indicators
I realize that this isn’t the framework you are going to read from Morgan Stanley this morning. And that’s precisely why our contrarian bull case on US Growth was right this year. Consensus economists and market strategists don’t use our framework.
To review our (and world history’s) account of mapping economic gravity:
- When a country’s currency is rising alongside its country’s interest rates = #GrowthAccelerating signal
- When a country’s currency is falling alongside its country’s interest rates = #GrowthSlowing signal
To be clear, a signal can whip around and change direction more often than you can remain solvent trying to trade every move. But the intermediate-term TREND signals don’t lie nearly as often as the Fed’s forecasts do.
This is why we overlay our A) fundamental research with B) a quantitative risk management signal that is multi-duration and multi-factor. Since I never know what Mr. Market is going to start signaling as risk, I just need to wait and watch for trending signals.
Now some might say that doesn’t make sense because the trends can change. But that is precisely the power of the process. As policies, prices, correlations, etc. change - we do. The alternative strategy is dogmatic naval gazing about what “should” happen.
In summary, what’s “new” in our model as of the last week?
- US DOLLAR: our intermediate-term TREND line of $81.35 broke on Bernanke’s decision to break it
- US 10YR TREASURY YIELD: our immediate-term TRADE line of 2.79% broke; and TREND support of 2.55% is under attack
Since the #1 Style Factor leading market performance in 2013 YTD = LONG GROWTH, this very immediate-term information surprise to the market on both the US Dollar and Bond Yields matters, big time. Why? Because, unlike the Fed’s marked-to-model dogma of 0% interest rates on the short end of the curve, US growth expectations are marked-to-market.
One other way to consider Mr. Market’s current #GrowthSlowing message within this Down Dollar, Rates Down move was in yesterday’s US stock market sub-sector divergences. The Financials (XLF) led losers on the day (-0.6%). The why on that isn’t that complicated to follow – as long-term rates fall, the leading indicator for the Financials (Yield Spread) compresses.
Since Larry Summers was eliminated as a prospective Fed head (his policy would have been more hawkish = #StrongDollar, #RatesRising), the Yield Spread (10yr minus 2yr yield) has compressed by -8.5% to +229 basis points wide. That’s not a point of difference between Bernanke and my definition of morality; that’s just going to eat into the principle of profits.
Our immediate-term Risk Ranges are now as follows (we have 12 Global Macro ranges in our Daily Trading Range product too):
UST 10yr Yield 2.61-2.79%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP – September 25, 2013
As we look at today's setup for the S&P 500, the range is 21 points or 0.85% downside to 1683 and 0.39% upside to 1704.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.30 from 2.33
- VIX closed at 14.08 1 day percent change of -1.61%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, Sept. 20 (prior 11.2%)
- 8:30am: Durable Goods, Aug., est. -0.2% (prior -7.3%)
- 10am: New Home Sales, Aug., est. 420k (prior 394k)
- 10am: Household Change in Net Worth, 2Q (prior $3.003T)
- 10:30am: DOE Energy Inventories
- 11am: Fed to purchase $2.75b-$3.5b in 2020-2023 sector
- 1pm: U.S. to sell $35b 5Y notes
- 6pm: Fed’s Dudley gives remarks at “Fed at 100” Exhibit
- Senate holds cloture vote on continuing resolution to keep government funded as Sen. Ted Cruz, R-Texas, engages in marathon speech against Obamacare
- 8:45am: Sec. of State John Kerry meets French Foreign Minister Laurent Fabius; 12:40pm: UN Security Council
- 10:30am: MGM Resorts CEO Jim Murren at media briefing on co.’s plan to develop resort in Prince George’s County, Md.
- 2pm: Goldman CEO Blankfein at Clinton Global Init. in NYC
- 2:30pm: Sens. Dianne Feinstein, D-Calif., Chuck Grassley, R-Iowa, attend Senate Caucus on Intl Narcotics Control hearing on dangers of synthetic drugs
WHAT TO WATCH:
- JPMorgan said in talks to settle U.S. mortgage-bond probe
- Noble sees splitting in two to focus on deepwater rigs
- Alibaba IPO talks with Hong Kong said to break down; U.S. listing possible
- New York Life to buy Dexia Asset Management for $512m
- ICAP staff may face criminal charges in Libor case, WSJ says
- Amazon unveils faster, pricier Kindle Fires to take on Apple
- Federal trial against BofA’s Countrywide unit begins
- Medical-device makers see EU rules slowing U.S. approvals
- U.S. probing 16 financial institutions over RMBS, firm says
- China Beige Book shows slowdown in contrast with data
- Big banks had $155b Basel capital shortfall at end 2012
- Royal Caribbean considers Oslo delisting, Finansavisen reports
- AGF Management (AGF/B CN) 8am, $0.13
- AutoZone (AZO) 7am, $10.34
- Bed Bath & Beyond (BBBY) 4:15pm, $1.15 - Preview
- HB Fuller (FUL) Aft-mkt, $0.67
- Jabil Circuit (JBL) 4:02pm, $0.54
- Progress Software (PRGS) 4:15pm, $0.24
- Synnex (SNX) 4:05pm, $0.94
- Worthington Industries (WOR) 8:30am, $0.58
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Rusal Urges LME to Delay Rule Changes on Warehouse Withdrawals
- Rattlesnake Frontier Answers Brazil’s Land Shortage: Commodities
- WTI Crude Snaps Four-Day Loss on Forecast U.S. Stockpiles Shrank
- Copper Rises Before Report Seen Showing Higher U.S. House Sales
- Soybeans Climb as Midwest Rains Seen Too Late to Improve Crop
- Indonesia Seen Avoiding Complete Ore Export Ban to Save Jobs
- Gold Swings as Investors Weigh Stimulus Against Budget Talks
- Palm Oil Drops to One-Month Low as Production Boosts Stockpiles
- U.S. Carmakers’ Aluminum Usage Seen by Novelis Outpacing Europe
- Chinese Metal Demand Rising or Falling? Data Tell Both Stories
- Thai Gold Buyer Doubles Imports After Bear Slump: Southeast Asia
- Paris Wheat Seen Falling on Fibonacci Breach: Technical Analysis
- Iron Ore Seen Supported by Morgan Stanley as Citi Is Bearish
- Rubber Declines to One-Week Low as Chinese Demand May Weaken
The Hedgeye Macro Team
THE MACAU METRO MONITOR, SEPTEMBER 25, 2013
NEW RULES TO BRING A 50% DROP IN MAINLAND TOURIST GROUPS Macau Daily Times
A new Mainland tourism law could result in a 50% drop in the number of tourist groups in October. According to Max Lau, head of the Macau Travel Agency Association, the new law will steer tourists towards “rational consumption”. “Prices of tourist groups will increase according to the new law. Tourists will gradually find that what they paid in the past was not the real cost of the trip.”
Article 35 of the new tourism law prohibits China’s domestic travel agencies from “organizing tourism activities and luring tourists with unreasonably low prices, which is estimated to cause the previously under-market package rate to surge instantly.” Furthermore, Chinese travel agencies shall not “designate specific shopping places, or provide tourism services that require additional payment.”
FEWER LOCALS VISIT THE CASINOS: ONLY 7.7% MADE MORE THAN ONE VISIT IN PAST 3 YEARS Strait Times
According to the Casino Regulatory Authority (CRA) in Singapore, only 7.7% of locals here made more than one visit to the two casinos here in the past three years. CRA said that the vast majority of the remaining 92.3% did not visit the casinos at all.
The total number of visits to the casinos by Singaporeans and permanent residents has also dropped, in a sign that the novelty factor could be wearing off, said CRA's president Richard Magnus.
They made a daily average of 17,000 visits last year, down from 20,000 visits when the casinos first opened in 2010. CRA also attributed the drop in the number of casino visits to the effectiveness of its safeguards in deterring vulnerable individuals from problem gambling.
LESS TOURISTS DURING MID-AUTUMN FESTIVAL Macau Daily Times
According to the Public Security Police Force (PSP), visitors to Macau during the mid-autumn festival recorded a decrease of 6.74% YoY or 470,000 visitors. From September 19 to 22, a total of 729,614 arrivals was recorded through seven immigration checkpoints: namely Border Gate, Lotus Bridge, Outer Harbor Ferry Terminal, Inner Harbor Wharf, Macau International Airport, Cross-border Industrial Zone and Taipa Temporary Ferry Terminal.
Takeaway: Why buy a market that was overbought for the wrong reasons (Fed randomly devaluing the Dollar) when it’s not yet oversold?
This note was originally published September 24, 2013 at 10:42 in Macro
POSITION: 5 LONGS, 5 SHORTS @Hedgeye
I don’t know about you, but ever since Bernanke moved the goal posts again, I have no idea what to do. Whenever that happens, I take down both my gross and net exposure.
Across our core risk management durations, here are the lines that matter to me most:
- Immediate-term TRADE overbought = 1725
- Immediate-term TRADE support = 1682
- Intermediate-term TREND support = 1655
In other words, why buy a market that was overbought for the wrong reasons (Fed randomly devaluing the Dollar) when it’s not yet oversold? You could have bought all your wanted with the SP500 at 1630 in AUG – and we did.
Not here – not now. No thanks, Ben.
Keith R. McCullough
Chief Executive Officer
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