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The Biggest Loser

“Get comfortable with being uncomfortable.”

-Jillian Michaels

 

That’s a varsity quote from one of the original trainers on NBC’s “The Biggest Loser.” To a degree, Jillian Michaels typifies the attitude of my generation of entrepreneurs in America. She’s a 39 year old self-made business woman. She didn’t get anything handed to her in life. She bartended her way through college, sucked it up, and lived the American dream.

 

What is the American dream? Is it a bunch of big political and media losers getting paid to perpetuate fear and crisis on cable TV? Or is it the polar opposite of that? Bernanke, Boehner, and Obama can’t shut us down. No, no, no ladies and gentlemen. Today we are going to do what we do at the top of every risk management morning – we are going to grind.

 

Grinding in the arena of business life has been celebrated by this country for generations. In 1925, President Calvin Coolidge reminded the American Society of Newspaper Editors that “the chief business of the American people is business” (The History of Money, pg 169). So that’s the headline coming out of this 2.0 Financial Media upstart from Stamford, CT this morning. Rise Above that.

 

Back to the Global Macro Grind

 

What’s fascinating about watching both the US stock market futures and the bond market this morning is that neither of them seem to care whatsoever about Old Media’s politicized fear-mongering. Mr. Market is shutting the media’s message down.

 

That shouldn’t surprise you. As newspaper editors and television producers look backward, markets look forward. Up next is the US Employment Report for the month of September.

 

September (and the 3rd quarter in general) was one of the best quarters for US growth expectations in half a decade:

  1. US Growth Stocks hit all-time highs (for SEP Industrials (XLI) +5.4% and Consumer Discretionary (XLY) +5.1%)
  2. US (slow growth) Bonds and Utility stocks hit their YTD lows (for SEP Utilities (XLU) only +0.18%)
  3. US Equity Volatility (VIX) hit YTD lows as well

Then, mid-September, along came Bernanke, Boehner, and Obama …. and:

  1. US Growth Stocks started making a series of lower highs (down for 7 of the last 8 days)
  2. US (slow growth) Bonds and Utilities outperformed everything growth
  3. US Equity Volatility (VIX) ripped a +26% move to the upside in less than 2 weeks

Congrats to the Fed, Democrat, and Republican parties. It’s a tie – you all get a Hedgeye sticker for America’s biggest losers!

 

Looking forward to the US employment report on Friday:

  1. US Growth Stocks may very well put in yet another higher-low (SP500 = 1660 TREND support)
  2. US Treasuries appear to be making another lower-high (10yr Yield = 2.55% TREND support)
  3. And front-month fear (VIX) is making yet another lower-YTD-high as well (VIX = 18.98 TREND resistance)

What say you Mr. Market about all of that?

 

I say it’s government versus gravity!

 

That would be economic gravity of course. As in the stuff that Bernanke has been trying to bend. And while bending gravity appears to be quite innovative to the Central-Market-Planner-in-Chief-of-anti-dog-eat-dog USA, that doesn’t mean it’s going to work.

 

So play this out – the US jobs report on Friday has a binary outcome:

  1. It’s a moon-shot to the upside and bond yields rip (again) to the upside
  2. It’s in line to a “miss” and Bernanke and his old-boys from anti-gravity-smoothing headquarters say “we nailed it”

Which of the two will it be?

 

I’m proud to say that I have absolutely no idea. That’s why the Hedgeye Asset Allocation Model has a 50% Cash position and in our #RealTimeAlerts I only have 5 LONGS, and 4 SHORTS. Getting out of the way of this political gong show was a risk managed decision.

 

I’m very comfortable grinding out another business building day. I’m uncomfortable with risking what’s been a great year for us on a government report that could go either way.

 

UST 10yr Yield 2.59-2.68%

SPX 1

Nikkei 142

VIX 14.64-16.99

USD 80.02-80.77

Brent 107.08-108.98

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Biggest Loser - Chart of the Day

 

The Biggest Loser - Virtual Portfolio


Is a U.S. Debt Default Imminent? A Discussion with Former Speaker of the House Newt Gingrich

Is a U.S. Debt Default Imminent? A Discussion with Former Speaker of the House Newt Gingrich - Newt.client

 

"You can't trust anybody with power."

-Newt Gingrich

 

On Thursday, October 3rd at 11:00am EDT, please join Hedgeye CEO Keith McCullough and Director of Research Daryl Jones for a discussion with former Speaker of the House Newt Gingrich, a key player in the last Federal Government shutdown, to discuss the current dysfunction in Washington, D.C. and implications for the markets.

 

Details for the call will be distributed on the morning of October 3rd.

 

 

TOPICS WILL INCLUDE:

  • What is the next strategic move for both the Democrats and Republicans?
  • How does this compare to the 1995 / 1996 government shutdowns?
  • Is Obama serious enough that he would risk a technical default? Will the Democrats in Congress support him?
  • Is the Tea Party influence on the Republican Party sustainable and, if so, what are the long term ramifications?
  • What are the implications of the current debate on the future of healthcare and the Affordable Care Act? 

 

ABOUT NEWT GINGRICH

Newt Gingrich is well-known as the architect of the "Contract with America" that led the Republican Party to victory in 1994 by capturing the majority in the U.S. House of Representatives for the first time in forty years. After he was elected Speaker, he disrupted the status quo by moving power out of Washington and back to the American people. Under his leadership, Congress passed welfare reform, the first balanced budget in a generation, and the first tax cut in sixteen years. In addition, the Congress restored funding to strengthen defense and intelligence capabilities, an action later lauded by the bipartisan 9/11 Commission.

 

Along with then President Bill Clinton, former Speaker of the House Gingrich was a key player in the United States federal government shutdowns of 1995 and 1996.  The conflicts between Democratic President Bill Clinton and the Republican Congress were over funding for Medicare, education, the environment, and public health in the 1996 federal budget. The government shut down after Clinton vetoed the spending bill the Republican Party-controlled Congress sent him. The federal government of the United States put non-essential government workers on furlough and suspended non-essential services from November 14 through November 19, 1995 and from December 16, 1995 to January 6, 1996, for a total of 28 days.

From May 2011 to May 2012, Newt Gingrich was a candidate for the Republican nomination for President of the United States, winning the South Carolina and the Georgia primaries. The campaign was especially notable for its innovative policy agenda, its effort to bring new coalitions into the Republican fold, and for Newt's debate performances. His $2.50 a gallon energy plan set off a nationwide discussion about the use of America's energy resources.

 

Newt Gingrich is also the host of CNN's political show Crossfire, which was restarted in the fall of 2013 after an eight-year hiatus. He hosts the show alongside conservative commentator S.E. Cupp, former Obama campaign spokeswoman Stephanie Cutter, and green advocate Van Jones. As an author, Newt has published twenty-four books including 14 fiction and nonfiction New York Times best-sellers.

 

Newt was first elected to Congress in 1978 where he served the Sixth District of Georgia for twenty years. In 1995, he was elected Speaker of the U.S. House of Representatives where he served until 1999. The Washington Times has called him "the indispensable leader" and Time magazine, in naming him Man of the Year for 1995, said, "Leaders make things possible. Exceptional leaders make them inevitable. Newt Gingrich belongs in the category of the exceptional."

 



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Summer's End

This note was originally published at 8am on September 16, 2013 for Hedgeye subscribers.

“Ah, summer, what power you have to make us suffer and like it.”

-Russell Baker

 

In more ways than one, summer ends this week. And, oh, what a summer it was. My wife, kids, and I spent our last summer Saturday up at West Point watching the Army vs Stanford football game. By Sunday morning I was back on the ice, coaching the kids.

 

With summer’s end I get football, hockey, and another US stock market rip. The SP500 is already +3.4% for September. We’ll test the 2013 YTD highs again this morning, right as consensus got too bearish (again).

 

Indeed. With American growth prospects trading at their highest premium to #EOW (end of the world) in half a decade, Larry Summer’s chances to run the Fed are over this morning too.

 

Back to the Global Macro Grind

 

While I was surprised to see Summer’s prospects end so quickly, I was more shocked to see Gold go down on that. In anticipation of ultra-dove, Janet Yellen, getting the nod as un-elected central-market-planner-in-Chief, we’re going to have a Dollar Down day.

 

Dollar Down equates to what? Well, that depends on what risk management duration you are using. If you are using a longer-term duration (say our TREND duration, 180 days) here’s what  the US Dollar’s correlation matrix looks like:

  1. SP500 = +0.49
  2. Gold = -0.54
  3. Oil = -0.60

In other words, from an intermediate-term TREND perspective, Summer’s End should = Dollar Down, Stocks Down, Gold/Oil Up. But the exact opposite of that is happening this morning. Why?

 

Well, let’s get all wild and multi-duration here, and see what USD correlations look like on a shorter term duration (30 days):

  1. SP500 = -0.16
  2. Gold = +0.26
  3. Oil = +0.63

In other words, from an immediate-term TRADE perspective, Summer’s End = Dollar Down, Stocks Up, Gold/Oil Down.

 

#cool

 

We call this Duration Mismatch – and I absolutely love it, because it drives the machines right squirrel. You see, nothing in Global Macro risk management happens in a linear 1-factor, 1-duration, box. That’s because markets are non-linear.

 

While what we call Correlation Risks can (and have) “blown out” across durations from time to time, assuming that’s going to trend as a constant is a really bad assumption. Correlations aren’t perpetual.

 

#OldWall’s media doesn’t completely get the Chaos Theory of it all, so they tend to write about markets that are correlating across durations as “risk on or off.” Whereas the only risk that’s really on here is assuming that risk trades that way.

 

Back to Yellen over Summers… I have more questions than answers this morning:

  1. What if Janet Yellen completely loses control of the bond market in 2014?
  2. What if Gold’s #bff (Bernanke) being gone for good is the point that matters most?
  3. What if Yellen doesn’t get the job altogether?

While the answer to that last question is improbable, with the US Dollar trading higher for 4 of the last 5 weeks I think the market would have considered Summer’s End improbable this morning too. Embrace the improbable.

 

While some apologists who have missed the entire rally in US growth stocks in 2013 would have you believe that the entire Global Macro market moves as a monolith, what Mr. Market is reminding you this morning is that that’s a dumb belief.

 

Alongside the Fed, there are plenty of major Global Macro risks moving Equities, Gold and Oil this morning - not the least of which are expectations in the Middle East being recalibrated.

 

Looking at last week’s drops in commodity prices, it’s also instructive to look at expectations in the futures and options market on a week over week basis:

  1. The total net long position in CFTC futures and options contracts declined -4.1% wk-over-wk
  2. Gold’s net long position dropped -16% wk-over-wk to +84,929 net longs (after hitting its highest net long position since JAN)
  3. Crude Oil’s net long position dropped another -5% wk-over-wk to +290,058 net longs after hitting an all-time high in AUG

All-time is a long time, and don’t forget to contextualize that point for the price of Oil as it’s making a lower-high versus one of the many Bernanke Bubble highs in asset classes (Oil’s all-time high = 2008).

 

Don’t get me wrong, Down Dollar probably gets me to take down our US Equity exposure again into this tidal wave of performance chasing this morning. But that would probably just mean selling more of what we bought when consensus pundits were telling you “this is it” for the umpteenth time in August as they were selling stocks 4% lower.

 

I say probably because I am not sure yet. I rarely am. How could you be if the President of the United States isn’t in the area code of certain on big decisions like Syria and Summers? As a result, my baseline strategy is to keep moving out there, because risk does.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr Yield 2.80-2.99%

SPX 1669-1704

VIX 13.33-14.88

USD 81.05-81.81

Brent 110.33-113.96

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Summer's End - Chart of the Day

 

Summer's End - Virtual Portfolio


MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD

Takeaway: US sovereign swaps blew out 38% last week while high yield reversed its intermediate-term yield decline. JPMorgan was the large cap laggard.

Key Takeaways:

 

* Sovereign CDS – U.S. sovereign swaps rose 9 bps last week, rising from 22 bps to 31 bps (a 38% increase). This week will be an interesting one. We think the dual probabilities of a protracted impasse coupled with a better than expected Friday employment report could reverse the recent QE-led downdraft in long-term yields. 

 

* 2-10 Spread – Last week the 2-10 spread tightened to 229 bps, -11 bps tighter than a week ago. Spreads have come in notably since their mid/late August highs of 252 bps.

 

* Chinese Steel – Steel prices in China fell 1.0% last week, or 34 yuan/ton, to 3494 yuan/ton. Chinese steel prices have been in steady retreat since August.

 

* High Yield – High Yield rates rose 10.9 bps last week, ending the week at 6.30% versus 6.19% the prior week. This marks a reversal of the trend in place since mid/late August.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 13 improved / 6 out of 13 worsened / 6 of 13 unchanged

 • Intermediate-term(WoW): Positive / 6 of 13 improved / 3 out of 13 worsened / 4 of 13 unchanged

 • Long-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 15

 

1. U.S. Financial CDS -  JPMorgan led large caps higher, rising by 10 bps as reports of a settlement amount ballooned. BAC and C rose by approximately half as much. Mortgage Insurers saw 27 and 24 bps increases last week, casting a bit of a pall over the housing outlook. Overall, swaps widened for 23 out of 27 domestic financial institutions.

 

Tightened the most WoW: TRV, CB, XL

Widened the most WoW: MBI, JPM, COF

Tightened the most WoW: AXP, TRV, GS

Widened the most MoM: MBI, AGO, SLM

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 1

 

2. European Financial CDS - Swaps were wider throughout Europe's banking system last week with the exception of Spanish banks. Interestingly, Euribor-OIS was unchanged suggesting perceptions of systemic risk have not moved.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 2

 

3. Asian Financial CDS - Indian banks resumed their losing ways with State Bank of India posting a 47 bps W/W increase to 309 bps. The other two major Indian banks were up 25 and 19 bps as well. Chinese banks were wider by 8-10 bps, while Japan's banks were flat to tighter by single digit bps.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 17

 

4. Sovereign CDS – U.S. sovereign swaps rose 9 bps last week, rising from 22 bps to 31 bps (a 38% increase). This week will be an interesting one. We think the dual probabilities of a protracted impasse coupled with a better than expected Friday employment report could reverse the recent QE-led downdraft in long-term yields. Elsewhere, Italian spreads rose by 19 bps while Portuguese spreads fell by 32 bps.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 18

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 3

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 10.9 bps last week, ending the week at 6.30% versus 6.19% the prior week.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6.0 points last week, ending at 1806.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 6

 

7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 23.3 bps this week versus last week’s print of 23.7 bps.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 7

 

8. CRB Commodity Price Index – The CRB index fell -0.9%, ending the week at 287 versus 290 the prior week. As compared with the prior month, commodity prices have decreased -2.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was again unchanged at 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 45 basis points last week, ending the week at 3.112% versus last week’s print of 3.557%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 3 bps, ending the week at 86 bps versus 83 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 11

 

12. Chinese Steel – Steel prices in China fell 1.0% last week, or 34 yuan/ton, to 3494 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 229 bps, -11 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.3% upside to TRADE resistance and 0.6% downside to TREND support.

 

MONDAY MORNING RISK MONITOR: KEEP AN EYE ON U.S. SOVEREIGN SWAPS & HIGH YIELD - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


Buy the Dip? Nope

Client Talking Points

YEN

Pay close attention tho this relationship. Versus the Burning Buck, a breakout in the Yen from here would matter to global correlation risk. Big time. Our intermediate-term TREND line for the YEN vs US Dollar is 97.88. The market is trading right at it here. As I have said many time before, the Nikkei "no likey" the #StrongYen. The Nikkei was down -2.1% overnight. It broke my immediate-term TRADE support line of 14,616. Blame Bernanke and Congress for my not buying this dip.

ITALY

From Rome to Washington D.C., the political class is raging, globally, this morning. Don’t you just love it? A "no confidence" vote is now scheduled in Italy for Wednesday and the Italian MIB Index leads European losers. It's down -1.6% to start the week after breaking TRADE support of 17,493. Congress clearly has major problems, but we're keeping a close eye on this one too.

OIL

Phew. A bright spot. One of the few positives in global macro markets this morning is of course the price of Brent Oil. It snapped our long-term TAIL risk line of $108.57. It's down -0.8% last to $107.72. Guess what? A strong US employment report later this week could wreak total havoc on Oil bulls (and the bond market).

Asset Allocation

CASH 51% US EQUITIES 16%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Yield Spread (and US growth expectations embedded therein) continues to compress thanks to Bernanke + Congress

@KeithMcCullough

QUOTE OF THE DAY

We are continually faced by great opportunities brilliantly disguised as insoluble problems. -Lee Iacocca

STAT OF THE DAY

800,000: The number of federal workers who would be sent home tomorrow if Congress fails to pass a stopgap spending bill before funding expires tonight. 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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