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Will They or Won't They?

Client Talking Points

THE FED

The trillion dollar question: When does the Fed taper? Probably not one week before Christmas (the FOMC meets DEC 17-18). In fact, we are increasingly of the view that the Fed is aware of the systemic risk present in the bond market and is potentially setting up to never commence tapering. They will likely accomplish this by setting far-too-aggressive targets for GDP growth and shifting their focus to combating a perceived risk of deflation, at the margins.

S&P 500

We continue to think the great rotation out of debt and back into stocks is: A) still on; and B) will provide a structural bid to the equity market. That said, we now think that bid could be from lower prices as proxy hedging activity from distressed fixed income investors (not to be confused with investors that invest in distressed debt) weighs on broader asset prices in the interim. Our immediate-term Risk Range for SPX is 1785 - 1805.

Asset Allocation

CASH 44% US EQUITIES 10%
INTL EQUITIES 10% COMMODITIES 6%
FIXED INCOME 6% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
FXB

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

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.

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

We're 1 Hilsenrath whisper of no-taper away from 1802 $SPY #TaperTalk @KeithMcCullough

QUOTE OF THE DAY

"Last night would have been a hell of a night to assassinate a President." -John F. Kennedy, two hours before his assassination

STAT OF THE DAY

Massive inflows into Equities this week... (+$7.2 billion versus -$7.5 billion outflows in Bond funds) This is the widest weekly spread between debt/equity of the year.


THE M3: JAPAN; VISITATION; FISHERMAN'S WHARF

THE MACAU METRO MONITOR, NOVEMBER 22, 2013

 

 

JAPAN RULING LDP PANEL APPROVES DRAFT OF CASINO GAMBLING BILL Bloomberg

A draft of a bill legalizing casinos was approved by a panel of lawmakers from Japan's ruling Liberal Democratic Party.   “We are now able to move forward,” said Ryosei Akazawa, head of the party’s transport panel, who said he had now been placed in charge of shepherding the legislation through the approval process.  The next step will be to take the bill to the party’s policy panel for official backing.


A cross-party group of lawmakers headed by LDP deputy Secretary General Hiroyuki Hosoda has said it’s preparing to submit the casino legalization bill to parliament in the current session, which ends Dec. 6.  It is unclear whether junior coalition partner New Komeito will agree to support the bill.  Generally legislation submitted under Abe’s administration has been backed by both parties.

 

“We just listened to the arguments today,” Komeito lawmaker Kiyohiko Toyama said after a meeting on the bill. “We haven’t decided anything as a party.”

 

MACAU VISITOR ARRIVALS FOR OCTOBER 2013 DSEC

Visitor arrivals increased by 2% YoY to 2,394,195 in October 2013.  In October 2013, visitors from Mainland China increased by 5% YoY to 1,514,373, coming primarily from Guangdong Province (708,375) and Fujian Province (64,801); Mainland visitors travelling under the Individual Visit Scheme totaled 677,292.  Moreover, visitors from Taiwan, (89,248) and the Republic of Korea (38,632) increased by 3% and 12%, while those from Hong Kong (543,580) registered a 4% decrease.  The average length of stay of visitors held stable from a year earlier, at 1.0 day in October 2013.

 

THE M3: JAPAN; VISITATION; FISHERMAN'S WHARF - macau

 

FISHERMAN'S WHARF REVAMP WORK TO END IN 2016 Macau Business

Macau Legend Development David Chow Kam Fai expects the redevelopment of Fisherman’s Wharf to be completed in 2016.  The work began in August.  Chow said the redevelopment will cost HK$6.8 billion (US$877 million).  The redeveloped Fisherman’s Wharf will have three new hotels, a dinosaur pavilion and a technologically advanced cinema.



THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 22, 2013


As we look at today's setup for the S&P 500, the range is 20 points or 0.60% downside to 1785 and 0.51% upside to 1805.                                                         

                                                                      

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: 2.50 from 2.51
  • VIX closed at 12.66 1 day percent change of -5.52%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:40am: Fed’s George speaks in Paris
  • 10am: JOLTs Job Openings, Sept., est. 3.840m (prior 3.883m)
  • 11am: Kansas City Fed Mfg Activity, Nov., est. 6 (prior 6)
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 12:15pm: Fed’s Tarullo speaks in Washington
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • President Obama hosts King Mohammed VI of Morocco at White House
    • 10:15am: Sec. of Defense Chuck Hagel meets with Canadian counterpart Rob Nicholson to discuss defense relations, sign Canada-U.S. Asia-Pacific Defense Policy Cooperation Framework

WHAT TO WATCH:

  • J&J said to narrow bidder list to 3 for diagnostics business
  • Robin Hood conf. continues today w/ Ackman, Druckenmiller
  • Paulson changes tone to say he won’t add more to gold fund
  • Apple recoups most Samsung damages cut from 2012 verdict
  • Gap’s profit forecast signals holiday quarter may disappoint
  • EMA monthly CHMP announcements today from 7am NY time
  • Novartis to buy back $5b in stock, add business segments
  • German business confidence rises in sign recovery on track
  • Apple supplier Foxconn to invest $40m in Pennsylvania
  • Party City readies for IPO in early 2014, Reuters says

EARNINGS:

    • Ann Inc. (ANN) 7:45am, $0.87
    • Foot Locker (FL) 7am, $0.66 - Preview
    • Hibbett Sports (HIBB) 6:30am, $0.65
    • PetSmart (PETM) 9:05am, $0.86 - Preview
    • Sirona Dental Systems (SIRO) 6:30am, $0.80

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Paulson Changing Tone Said to Say He Won’t Add More to Gold Fund
  • Gold Analysts Most Bearish Since June on Fed Taper: Commodities
  • Codelco ‘Optimistic’ on China Copper Demand on Middle Class
  • Gold Swings Near Four-Month Low as Investors Weigh Fed Tapering
  • WTI Crude Set for First Weekly Gain in Seven; Iran Deal Falters
  • Taylor, Jamison Outpace Commodity Hedge Funds Seeing Losses
  • Aluminum Fees in Japan Seen Near Record in First Quarter on Abe
  • Copper Poised for Weekly Gain on Stockpiles, China: LME Preview
  • Rebar Caps First Weekly Gain in Three on Mill Price, Inventory
  • Western Bulk Says China Minor-Bulks Rose 19%; Supramaxes to Gain
  • Shale Boom Pits U.S. LPG Against Mideast in Asia: Energy Markets
  • South African White Corn Climbs to Highest in More Than 7 Months
  • Gold Option Wagers on Surge to $3,000 Was Most-Active Yesterday
  • German Gold Assets Drop 0.1% in October in First Cut Since June
  • Copper Gains Amid Signs Recovery Picking Up as Stockpiles Shrink

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

 

 

 

 

 

 

 

 

 

 

 

 

 


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November 22, 2013

November 22, 2013 - Slide1

 

BULLISH TRENDS

November 22, 2013 - Slide2

November 22, 2013 - Slide3

November 22, 2013 - Slide4

November 22, 2013 - Slide5

November 22, 2013 - Slide6

November 22, 2013 - Slide7

 

BEARISH TRENDS

November 22, 2013 - Slide8

November 22, 2013 - Slide9

November 22, 2013 - Slide10

November 22, 2013 - Slide11

November 22, 2013 - Slide12

 

 



Tough Questions

“Computers are useless; they can only give you answers.”

-Pablo Picasso

 

Amen to that, Pablo. It’s amazing how much time and effort we all spent at school and currently spend at work learning strategies and techniques for finding the right answers compared to how little time we spend learning to ask the right questions.

 

Implicit in any commitment to discovering the truth is a commitment to systematically asking ourselves tough questions – the answers to which may not be derivable from reported data that is inherently backward-looking in nature.

 

Furthermore, such questions extend well beyond the typical, “Where can I be wrong?”, instead opting to traverse the realm of, “Where am I not even looking?”

 

With respect to the latter question, we are in a unique position to help. In meetings with clients, it’s clear that our commitment to remaining truly independent (no banking, trading or asset management) helps us foster a level of trust with our clients that does not appear to be abundant in this industry. Having a senior roster loaded with meaningful buyside experience doesn’t hurt either.

 

Getting right into it, Keith, Ryan Fodor and I spent much of this past week up-and-down the west coast visiting with clients and prospective clients from various strategies and disciplines.

 

As usual, the topics of discussion ranged far and wide, but if there was one central theme throughout all of the meetings it would’ve been the general lack of conviction and/or answers with respect to the three most important factors in macro risk management. Below we introduce the relevant debates and where we currently stand, recognizing that we need to and will do more work on certain topics:

 

Growth:

  1. Where does domestic economic growth go from here? We think the trend in US growth data will be negative (2nd derivative) over at least the next 3-6M.
  2. What are the catalysts for #GrowthSlowing? Fundamentally speaking, we think monetary and fiscal policy uncertainty (mostly monetary policy uncertainty) will weigh on consumer and business confidence. Furthermore, GDP comps get difficult as CPI/GDP deflator comps get easier, at the margins.
  3. Regarding the equity market, will growth-related style factors continue to work? Not likely. We would sell/underweight over-exposed names.

Inflation:

  1. Where does inflation go from here? We think domestic disinflation is now a rear-view phenomenon as easy comps and a weak dollar provide upward pressure on CPI and PPI readings. We would expect both TIPS and Gold to make higher-lows (to all-time lower-highs) in this scenario.
  2. What about declining energy prices? That’s a major offset to our Growth Slowing as Inflation Accelerates (i.e. Quad #3) call and a primary reason we’re not more explicitly negative on so-called “risk assets” more broadly. We’re not wed to the aforementioned fundamental view and would happily change our minds if we saw material declines in the crude oil market – something we do not expect to see as long as the USD remains bearish from a TREND perspective.

Policy:

  1. When does the Fed taper? Probably not one week before Christmas (the FOMC meets DEC 17-18). In fact, we are increasingly of the view that the Fed is aware of the systemic risk present in the bond market and is potentially setting up to never commence tapering. They will likely accomplish this by setting far-too-aggressive targets for GDP growth and shifting their focus to combating a perceived risk of deflation, at the margins.
  2. What happens if the Fed does taper? If Janet Yellen isn’t as smart as we’re giving her credit for and she thinks the bond market can withstand a shock to the system, we think tapering will be short-lived (think: $85B per month down to $75B per month back up to ~$100B per month). Credit markets need two-way flows to function property and QE is really the only source of meaningful liquidity amid bond mutual fund and ETF outflows (-$7.3B in the most recent week). The Street’s inability to take on meaningful inventory means: A) most of the risk has been transferred to buy-side balance sheets; and B) buy-siders are ultimately forced to sell to each other during market routs. That invariably leads to gaps down in prices when macro fundamentals (i.e. the flows) change. Think about what happens to bond prices when levered-long bond fund A tries to unwind its illiquid positions at the same time Bill Gross (MBS) and Michael Hasenstab (EM) are trying to unwind theirs…
  3. How will tapering – if any – affect the stock market? We continue to think the great rotation out of debt and back into stocks is: A) still on; and B) will provide a structural bid to the equity market. That said, however, we now think that bid could be from lower prices as proxy hedging activity from distressed fixed income investors (not to be confused with investors that invest in distressed debt) weighs on broader asset prices in the interim.
  4. What happens if the Fed is still engaged in LSAP when we slip into the next recession? To be clear, we aren’t calling for an “R-word” here, but that’s definitely something to think about. Implicit in the current prices of many so-called “risk assets” is the assumption that the Fed can “smooth” the economic cycle and/or do away with credit risk altogether. What happens to those asset prices when everyone figures out they (i.e. the Fed) can’t – all at the same time? Next year will mark the fifth year since our last recession ended; the average length of time between the 12 recessions since WWII has been just that.

We’ll obviously be focused on answering these questions in greater detail in our research notes and presentations in the coming weeks and months; please feel free reach out to us in the interim if you’d like to discuss anything in real-time.

 

Going back to our opening discussion, there’s really only two ways we can add value with a business model like ours:

  1. Making you money
  2. Making you think

Hopefully today we did our job with respect to the latter category.

 

On an unrelated note, if any of you plan to be in New Haven this Saturday for The Game, shoot us a quick email and we can meet up for a beer at the tailgate.

 

Our immediate-term Risk Ranges are now as follows:

 

UST 10yr Yield 2.63-2.83%

SPX 1

VIX 11.85-13.61

USD 80.42-81.39

Brent 105.88-110.29

Gold 1

 

Keep your head on a swivel,

DD

 

Darius Dale

Associate: Macro Team

 

Tough Questions - Chart of the Day

 

Tough Questions - Virtual Portfolio


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