This note was originally published at 8am on September 23, 2013 for Hedgeye subscribers.
“If personality is an unbroken series of successful gestures, then there was something gorgeous about him, some heightened sensitivity to the promise of life, as if he were related to one of those intricate machines that register earthquakes ten thousand miles away.”
- F. Scott Fitzgerald, “The Great Gatsby”
Sunday is the day that many of us spend the evening relaxing in front of the T.V. and, if the advertisers are lucky, watching live sports. If the advertisers are not so lucky, we are likely catching up on TIVOed or Netflixed T.V. shows (that lack live and targeted commercials). A fan favorite around the Hedgeye office is Breaking Bad, which coincidentally was awarded the Emmy for Best Drama last night.
For those that haven’t watched this Emmy award winning T.V. show, it is about a high school science teacher who, after discovering he has cancer, turns to cooking methamphetamine to pay for his cancer treatments and provide a level of comfort for his family. No surprise, the protagonist Walter White begins to struggle with returning back to the somewhat simple life of being a high school teacher and ultimately decides to create his own methamphetamine empire.
As Walt pursues broadening his drug empire, he becomes increasingly morally corrupt and as the title insinuates, truly begins to “break” bad and make decisions that benefit his short-term gain at the expense of almost all else. While it would be a stretch to compare the FOMC to drug dealers, even if much of the country is addicted to low interest rates, in the Chart of the Day we’ve taken a look at the 10-year yield over the last three weeks and titled it, “Breaking Bad Rates.”
To be fair, lower interest rates aren’t all bad. For those of us who want to refinance our mortgage or buy a new home, it is actually quite a good thing. From a more macro perspective though, loose monetary policy leads to a weak dollar, which sustains high commodity costs. Low interest rates also incentive more speculative type investing, which create amplified business cycles.
As the market showed us last week, even if Chairman Bernanke is not suffering from the same internal conflicts as Walter White, the world is definitely addicted to the cheap American dollars that his policy has propagated. As Bernanke said in his press conference last week:
“We want to be sure that the economy has adequate support until we can be comfortable that it is, in fact, growing the way we want it to be growing.”
Rationally, if the Chairman of the Federal Reserve comes out and questions the underlying strength of the economy, one would expect more economically sensitive asset classes to sell off, or at least be weak. That, though, is not the reality in our current centrally planned world in which addiction to low interest rates is spreading faster than Walter White’s blue meth across New Mexico.
Back to the global macro grind . . .
Speaking of breaking economic data, the news out of China this weekend is largely breaking to the positive. Septembers HSBC flash purchasing managers index came in at a better than expected and expansionary 51.2. This was also a sequential improvement from August of 50.1 and the highest reading since March. As a result, the Shanghai Composite is up more than 1.3% this morning leading most of the major Asian indices. Imagine that a stock market that actually trades on the underlying growth prospects of its economy!
Our quantitative model, actually front ran this positive data point, which my colleague Darius Dale published in a note on September 6th titled, “China Goes Bullish Trend the Only Positive Data Point That Actually Matters.” At the time, we were struggling with the myriad of data points out of China, which were still more negative than positive, but the equity market, being the sneaking leading indicator it is, ultimately signaled to us more good news was to come. And so it has.
The set up for China gets increasingly interesting if the HSBC survey is correct and Chinese GDP is set to accelerate sequentially and exceed current consensus estimates. While we are not quite ready to get aggressive on the long side of China just yet, we do like those economies with accelerating growth and benign inflation. In fact, we’d call that breaking good and at a minimum we would not short China.
To be fair, none of the structural headwinds that we’ve been researching and writing about have gone away, but on the margin things do appear to be getting less bad at a time when the majority remains overly cautious on China. According to a Bloomberg poll from last week, which surveys Bloomberg Professional users, more than 32% cited a slowing China as the #1 risk to the global economy and only 17% indicated they believe that China’s economic outlook is improving. Didn’t know the consensus view on China? Now you know.
Speaking of breaking good, the economic data out of Europe this morning is also largely positive. While the Eurozone flash manufacturing PMI edged down to 51.1 in September from 51.4 in August, both the Services and Composite PMI hit 27-month highs. Now this is just one data series, but the potential for a sustained European recovery is a theme that you will likely see us highlight more and more often heading into year-end.
Our immediate-term Macro Risk Ranges are now as follows:
UST 10yr 2.58-2.81%
Good luck out there this week.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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“The greatest obstacle to pleasure is not pain; it is delusion.”
That’s one of the best quotes from one of my favorite books this year, The Swerve. “Nature ceaselessly experiments… the swerve is the source of free will…” (pg 189). But your boys Bernanke, Boehner, and Obama will have none of that.
Nope. No more nature, gravity, or truth – it’s all about partisan fear-mongering for political gain. And if you don’t like it, too bad – even buying Gold won’t save you now.
The cover of The Economist this week says “No Way to Run A Country”, the US stock market says US Equity Futures down 17 handles this morning, and the bond market? Well, it doesn’t care about this whole “default” thing. Delusion reigns in D.C. instead.
Back to the Global Macro Grind…
This remains the 1st US stock market correction of 2013 that I haven’t been buying on red. Friday was only the 3rd up day for US equities in the last 12 (when Bernanke wrongly decided to Burn The Buck by not tapering).
Down Dollar + Rates Down = US Stocks Down - that’s precisely what you’ll see again this morning. From a US growth expectations perspective, that’s not good.
Some might argue that US futures down 17 is a “capitulation” signal – but context, when considering the emotion of it all, is always critical. At 1671 (my next line of immediate-term TRADE support), this will only be a -3% correction from the SP500’s all-time closing high. That’s hardly a capitulation. That’s a start.
Moreover, it’s important to realize that growth “Style Factors” in our model have barely corrected at all:
Then you have all the 2013 US Growth Pain Trades:
In other words, given Bernanke re-established his Policy To Inflate (via Down Dollar) and D.C. has gone full gong show at the same time, the US #GrowthAccelerating style factor embedded in Friday’s closing prices is almost absurdly high!
Then there’s Institutional Investor sentiment:
That’s right. By my scorecard, US institutional sentiment just got completely whipsawed again. At the late AUG lows, there were only 37% of investors in the Bull/Bear survey who admitted they were “bullish”, then the SP500 proceeded to rip them a +100 handle move to an all-time closing high in SEP. #wonderful
Now, after chasing growth expectations into the SEP highs, Wall Street is caught off-sides again this morning – too long = wrong. So watch the relationship between US Equity performance and US Equity volatility (VIX) from here. I’m already net short in our #RealTimeAlerts signaling product (6 LONGS, 7 SHORTS), but I’d get really net short on a VIX breakout > 18.98.
For front-month fear (VIX), 18.98 is our TREND line of resistance. The corollary to that line = SP500 TREND support of 1660. We haven’t seen either of those lines violated (the wrong way, respectively) since November of last year. And I have no delusions that the #1 risk to growth has always been what’s on your screen this morning – government.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.60-2.68%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – October 7, 2013
As we look at today's setup for the S&P 500, the range is 33 points or 1.15% downside to 1671 and 0.80% upside to 1704.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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