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A New Light

This note was originally published at 8am on September 11, 2013 for Hedgeye subscribers.

“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 1661-1693

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



Mind Your Business

“Money, not morality, is the principle of commercial nations.”

-Thomas Jefferson

 

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?

  1. Bernanke’s causal impact on the value of American Purchasing Power (US Dollar) is massive
  2. There’s an explicit link between US currency and bond yields in the face of policy information surprise
  3. 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:

  1. When a country’s currency is rising alongside its country’s interest rates = #GrowthAccelerating signal
  2. 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?

  1. US DOLLAR: our intermediate-term TREND line of $81.35 broke on Bernanke’s decision to break it
  2. 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%

SPX 1

Nikkei 144

VIX 12.95-14.98

USD 80.24-81.34

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Mind Your Business - Chart of the Day

 

Mind Your Business - Virtual Portfolio


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.

September 25, 2013

September 25, 2013 - dtr

 

BULLISH TRENDS

September 25, 2013 - 10yr

September 25, 2013 - spx

September 25, 2013 - ftse

September 25, 2013 - nik

September 25, 2013 - euro

September 25, 2013 - oil

 

BEARISH TRENDS

September 25, 2013 - VIX

September 25, 2013 - dxy

September 25, 2013 - yen

September 25, 2013 - natgas
September 25, 2013 - gold

September 25, 2013 - copper


THE HEDGEYE DAILY OUTLOOK

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.                         

                                                                                                      

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: 2.30 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

GOVERNMENT:

    • 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

EARNINGS:

    • 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 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

 

 

 

 

 

 

 

 

 

 

 

 


THE M3: NEW MAINLAND TOURISM LAW; DROP IN S'PORE LOCALS; MID-AUTUMN TOURISTS

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.  

 


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