“If we’re in a bubble, it’s the weirdest bubble I have ever seen, where everybody hates everything.”
From both a US economic growth and stock market perspective (not one and the same thing), there was a lot of truth in Andreesen’s general statement – if he said it precisely a year ago (he said it on May 1, 2012 with the SP500 at 1406).
A full year ago today, the US economy was tracking 0.14% in the 4th quarter of 2012, US Treasury Yields were a full 100 basis points lower (10yr = 1.70%, all-time lows), and the SP500 was at 1360. So if you bought what everyone hated (growth), and shorted what everyone was clinging too (Gold and Bonds), you crushed it.
Does that make today a bubble? Or was there a bubble back then in fear? Up +32.2% from November 16th, 2012 is the SP500 a bubble? Barrons says “Yes” (in a few names), but “No” (in most names)” and our new central planning diva, Janet Yellen, says “No” (anywhere)… So I’ll agree with Andreesen - there are plenty of weird bubbles; some of the weirdest markets have ever seen.
Back to the Global Macro Grind…
Most pundits and politicians who have never forewarned you of a bubble live in their own conflicted and compromised bubble. Most “market-equilibrium” people think bubbles are measured by “valuation.” And most market-practitioners call bubbles things that start to make lower-highs versus their all-time highs in price.
Well, maybe not most market-practitioners. But that’s how this one thinks. And yes, I’m perfectly happy to be in my own little bubble as a write about bubbles from my hotel room on the Santa Monica, California coastline this morning!
At the end of the day, calling something that’s up a “bubble” is about as useful as having another leg in a one-legged butt kicking contest. If you are going to run around trying to make news calling things bubbles, you better be short them, publicly, with timestamps.
To review what we have been calling the Bernanke Bubbles for the last year:
MLPs are master limited partnerships. If you don’t know what those are, don’t worry about it. We’ll boil it down for you – they are the sub-asset class of equities that look most like a bond that slow-growth Yield Chasing investors have found tax refuge in.
All 3 of these bubbles have 3 things in common:
- They had almost bullet proof storytelling narratives that lasted on the order of 1-3 decades
- Their asset prices confirmed the storytelling (making higher-highs) until they all topped in 2011-2012
- They’re now all making a series of lower-highs as interest rates make a series of higher-lows
Now, as you all know, all-time is a long time. So this concept of US 10yr Treasury Bond Yields making an all-time low when US Growth expectations were bottoming in November 2012 can make for some exciting causal relationships.
The relationship between interest rates and 0%-rates-forever-bubbles isn’t weird at all. It makes perfect sense. That’s why the upside down of repressed growth expectations (US Growth Stocks) have bubbled up to bring the US stock market to all-time highs:
From a US stock market “Style Factor” perspective, check out the score:
- LOW YIELD (i.e. GROWTH) stocks = +40.4% YTD
- Top 25% EPS GROWERS (by SP500 quartile) = +37.2% YTD
- HIGH BETA stocks = +35.8% YTD
As my boy Jesse Pinkman would say, that growth stuff is “awesome!”
At the same time, the slow-growth-end-of-the-world-fear trade score for 2013 YTD is:
- US Equity Volatility Fear Index (VIX) = crashing -32.4% YTD
- Gold = crashing -23.6% YTD
- UST 10yr Bonds Yields = +54% YTD
In other words, there was this Weird Bubble in fear-mongering that consensus got sucked into last year that popped as everyone trying to call the top in a said “US stock market bubble” ended up being a bubble themselves.
US stock market bears hate that. Another way to measure their “hate” is how well short-interest has performed in 2013. As a “Style Factor”, High Short Interest stocks in the SP500 are currently +31.8% YTD, outperforming the SP500 by +570 basis points.
And that’s why I’ve been so quick to cover “growth” shorts throughout October. Holding the bag on a bubble of fear isn’t exactly how I roll. Neither is holding onto the long side of bubbles (like Gold and Bonds) that are still very much in crash mode.
My holding period on Gold was 72 hours. And I’m not going to apologize for that. I had my catalyst (Yellen being who she is) and I booked that small gain on the event day. I cut my “crazy eights” exposure to both US stocks and bonds in half on that too.
Bubble or no bubble. Weird or not weird. Mr. Macro Market couldn’t care less what we think about markets. He is designed to punish the largest amount of people (consensus) at the most inopportune time. So #GetActive out there, and keep moving.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.66-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Continuing our work in the MLP space, we will host an Expert Call TODAY at 1pm EST with Roger Burks, Founder and Managing Director of WG Consulting (WGC) and formerly the Lead Partner for Deloitte’s energy practice.
Toll Free Number:
Direct Dial Number:
Conference Code: 536617#
Given the importance of non-GAAP financial measures to MLPs (distributable cash flow, adjusted EBITDA, maintenance CapEx, etc.), we are looking to gain a better understanding of how and why MLPs use them. We also seek to understand how the use and calculation of non-GAAP measures is audited (independent auditors) and regulated (SEC), if at all.
A few questions on our mind…
- What is “maintenance CapEx”? What is this measure supposed to represent?
- Is “maintenance CapEx” a non-GAAP financial measure? Why isn’t “maintenance CapEx” reconciled back to its nearest GAAP financial measure?
- Why are recurring, non-cash expenses like stock-based compensation and non-cash interest expense added back to non-GAAP financial measures like adjusted EBITDA and distributable cash flow? What is the rationale for doing so?
- To what extent are non-GAAP financial measures audited?
- To what extent are non-GAAP financial measures regulated by the SEC?
- With the SEC’s renewed focus on accounting fraud, do you think that MLPs’ use of non-GAAP financial measures will come under increased scrutiny? Have you any indication of this already happening?
- And more...
About Roger Burks…
Roger Burks is Founder and Managing Director of WG Consulting (WGC). Mr. Burks is a CPA with over 30 years of experience, including over 20 years with Deloitte & Touche and 10 years as a senior executive in the energy industry. Prior to WGC, Mr. Burks led Deloitte’s energy practice. He served as Lead Partner for many of Deloitte’s energy clients, and led various transaction projects including external audits, acquisitions, divestitures, public and private stock, debt offerings, and merger integration, many involving early Master Limited Partnerships (MLPs). In 2012, Mr. Burks founded a financial advisory firm that was effectively merged into WGC. Today, Mr. Burks and his team at WGC serve as the Interim-CFO for a number of companies and provide all financial, operational, and transactional services to them. Additionally, Mr. Burks serves on the Board of STR Marketplace, The Houston Chapter of CPAs, and has previously served on the Board of Superior Offshore International as well as various other private company and non-profit boards.
If you have any questions for Mr. Burks, email them over to me.
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Client Talking Points
Stealing the central planning headlines from the Federal Reserve and European Central Bank bureaucrats this morning is a welcome change: the Shanghai Composite rips a +2.8% move back above its 2,162 TREND line as reform plans are applauded. Hang Seng up +2.7% on that as well.
Germany's DAX is up +0.5% to +21% year-to-date. Like the S&P 500, the German stock market is clocking another overbought all-time high. Since both Barron's and Yellen say no bubbles, they are officially developing bubbles. (Is there a better reference point than the all-time high?). Risk managing them from here will be our task. The DAX going up with the EURO as Yellen trumps the ECB cut.
Brent fails right at our Hedgeye TAIL risk line of $108.69. So we would be shorting that here. Right now, at +336,294 net long futures/options contracts, this is still by far the most consensus net long position to fade in all of Big Macro. Incidentally, we sold our Gold on the Yellen bounce last week. We're just trading that in a bearish 1260-1308 range for now.
|FIXED INCOME||0%||INTL CURRENCIES||22%|
Top Long Ideas
Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged. If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
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.
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
Last week was another friendly reminder that if you don't do macro, macro will do you. Hard, fast and often.@HedgeyeDDale
QUOTE OF THE DAY
Never bend your head. Always hold it high. Look the world straight in the eye. -Helen Keller
STAT OF THE DAY
Bitcoin was off to the races this morning, soaring to new highs above $600 — to $618.94 — and last at $610 in choppy trade on Mt. Gox. Washington D.C.’s blessing and a Chinese feeding-frenzy: What more could a virtual currency ask for?
TODAY’S S&P 500 SET-UP – November 18, 2013
As we look at today's setup for the S&P 500, the range is 30 points or 1.40% downside to 1773 and 0.27% upside to 1803.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.41 from 2.40
- VIX closed at 12.19 1 day percent change of -1.46%
MACRO DATA POINTS (Bloomberg Estimates):
- 9am: Total Net TIC Flows, Sept. (prior -$2.9b)
- 10am: NAHB Housing Market Index, Nov., est. 56 (prior 55)
- 12:15pm: Fed’s Dudley speaks in New York
- 1:30pm: Fed’s Plosser speaks in Philadelphia
- 3:45pm: Fed’s Dudley tours factory in Long Island City, N.Y.
- 7:45pm: Fed’s Kocherlakota speaks in Minneapolis
- House, Senate in session
- Senate cmte holds hearing on Bitcoin, virtual currencies
- Office of the Comptroller of the Currency’s Mutual Savings Association Advisory Cmte holds a public meeting on current condition, regulatory changes of mutual savings, 2pm
- Washington Space Business Roundtable meets to discuss International Traffic in Arms Regulations, with Asst Commerce Secretary for Export Administration Kevin Wolf, 12:30pm
WHAT TO WATCH:
- Google opens showrooms in 6 U.S. cities taking page from Apple
- Xi’s China reform plan sets scene for local govt clampdown
- Xi expands power as China leaders pledge major changes
- Chinese stocks jump as H shrs gain most since 2011 on reforms
- Salesforce revamps software for mobile as users move to tablets
- Microsoft board said to refine CEO choices at Nov. 18 meeting
- Democrats downplay lawmaker defections over Affordable Care Act
- Prokhorov’s Onexim agrees to buy Kerimov’s stake in Uralkali
- Sony monitors PlayStation “issues” as sales top 1m
- Lloyds sells Scottish Widows fund-management arm to Aberdeen
- Advent to buy Dutch software maker Unit4 for $1.6b
- “Thor” tops N.A. box office for a second weekend
- Volcker rule compliance may be postponed by 1 yr: FT
- Disney seeing hurdles in shifting market for games: NYT
- Sheldon Adelson readies push to oppose Internet gambling: WPost
- AmeriGas Partners (APU) Aft-mkt, $(0.48)
- Brocade (BRCD) 4:05pm, $0.18
- Jacobs Engineering (JEC) Aft-mkt, $0.87
- JinkoSolar (JKS) 6am, $2.74
- Salesforce.com (CRM) 4:05pm, $0.09 - Preview
- Semtech (SMTC) 4:30pm, $0.34
- Tyson Foods (TSN) 7:30am, $0.70
- UGI (UGI) 4:45pm, $(0.08)
- Urban Outfitters (URBN) 4pm, $0.45 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Brent Crude Declines for a Second Day; Citigroup Lowers Forecast
- Gold Bears Return Before Yellen Signals More Easing: Commodities
- Norway Prime Minister Says Time Has Come to Cut Oil Reliance
- Gold-Laden Brides in India Defying Singh as Culture Triumphs
- Jiangxi Copper Agrees on 31% Increase in Fees With Freeport
- Gold Falls as Investors Sell After Advance on Stimulus Outlook
- CME Hack Reawakens Electronic Threat to Financial Services Firms
- Hedge Funds Cut WTI Crude Bets to Five-Month Low: Energy Markets
- Prokhorov Agrees to Buy Stake in Uralkali Valued at $3.5 Billion
- Rain Slowing French Corn Harvest Widens Premium to U.S. Prices
- Qatar Readies Food Contingency Plan on Regional Trade Disruption
- Copper Falls After Funds Turn Bearish and Investors Favor Stocks
- Libyans Begin Strike in Tripoli to Protest Militia Violence
- Vietnam Coffee Harvesting Disrupted as Rains Lash Main Region
The Hedgeye Macro Team
This note was originally published at 8am on November 04, 2013 for Hedgeye subscribers.
“The silver of Potosi helped to destroy Spain.”
I bought Gold for the first time in over a year on Friday. Gold’s perverse, but modern, silver lining is what it’s always been – an un-elected body of central planners (the US Federal Reserve) having the unlimited and un-checked power to interrupt this thing called gravity (also known as the economic cycle) via A) currency devaluation and B) rate repression.
Down Dollar, Down Rates = Gold Up. And the precise opposite of that has been occurring for the better part of a year now (so we were shorting Gold on all bounces because expectations of getting the Fed out of the way (tapering) was perpetuating the always progressive two-stroke engine of US #GrowthAccelerating: #StrongDollar + #Rates Rising.
Like the fall of the hoped-to-be “New Spanish World Empire” of the 16th century, most government expectations tend to fall on Shakespeare’s sword of un-planned heartache. “Spain, the greatest beneficiary of the Potosi silver soon bankrupted itself. By 1700, Spain was reduced to a minor power of neither economic nor political importance.” (Indian Givers, pg 25)
Back to the Global Macro Grind…
“Potosi was the first city of capitalism, for it supplied the primary ingredient of capitalism – money.” –Jack Weatherford
You won’t read that every day. And you won’t see me take my asset allocation off of 0% to both Commodities and Fixed Income every day either:
- COMMODITIES: 0% asset allocation for 165 days
- FIXED INCOME: 0% asset allocation for 100 days
Many did and did not agree with my risk managed decision to not lose money in each of those major investing styles. That’s why there are many different YTD performance numbers for Global Macro hedge funds in 2013. Not losing money in Gold was a choice.
Today, drum roll, I’m going to get all wild and crazy and take up my asset allocations to COMMODITIES and FIXED to 6% each:
- Cash = 34%
- Foreign Currency = 26% (or 79% of my max to an asset class)
- International Equities = 21% (2/3 of my max)
- US Equities = 6% (21% of my max)
- Commodities = 6% (21% of my max)
- Fixed Income = 6% (21% of my max)
“Of my max” means % of the max allocation I’d ever make to any asset class as a % of my total capital (which is 33%)
Why 33%? Why 60/40 equity/fixed %’s? Why have a rules based system that locks you into losing money for the sake of being “diversified” in a nice little pie chart that got blasted in June of 2013 when Gold and Fixed Income allocations were going haywire?
My Mom taught me to think for myself. My Dad taught me to not eat yellow snow. And when I wrote my senior thesis at Yale about Buffett, he taught me Rule #1 about investing – “don’t lose money.”
Despite all my faults as an investor, that’s the one thing I have somehow figured out since going to the buy-side at a hedge fund at the end of the internet bubble in the year 2000 - don’t lose money.
The other thing we’re better than bad at here @Hedgeye is risk managing the direction of the US Dollar (35 for 39 all-time on long/short USD position timestamps = +89.7% batting avg). And to get Gold right, you need to get the US Dollar right.
Currently, on our immediate-term TRADE duration, the US Dollar has an inverse correlation to Gold of -0.78. In other words:
- If US Dollar Index fails at intermediate-term TREND resistance of $80.98
- And Gold can hang in here and make another higher-low of 2013
Then I think I’ll have made the right move from an immediate-term TRADE perspective.
Another lesson I have learned the hard way in this business is to keep a TRADE a trade. That said, all great investments start somewhere and buying Gold on the first signal is what it is. For being long Gold to be an investment TREND, I need two things:
- Gold to breakout of this bombed out base > $1342/oz (it’s still crashing at -22.1% YTD)
- US 10yr Bond Yield to remain below this newly established TREND line of 2.63% resistance
I still think the odds of Bernanke and Yellen having my back on this at the December meeting are high (no tapering). Therefore I think the odds of this mini-cycle high of 2.5% US GDP being an intermediate-term top are heightening as well.
Again, to review what our GIP (Growth, Inflation, Policy) model is currently signaling:
- #StrongDollar + #RatesRising = US GDP accelerating to 2.5-3%
- Devalued Dollar + #RatesFalling = US GDP #GrowthSlowing back to 2%, then 1-1.5%
So, if you want the USA to become like Spain in 1700, beg for more Bernanke, Down Dollar, and Rate Repression. It’s a really cool and coy thing to do, provided that you don’t explain it to anyone that this is really why you want to be long Gold’s Silver Lining.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.55-2.63%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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