“Should we care about how new ideas begin?”
That’s a very basic question Jon Gertner asks at the beginning of a book I’ve been grinding through as of late – The Idea Factory: Bell Labs and the Great Age of American Innovation.
The story of innovation at Bell Labs is better than the book. It’s a uniquely American story that most entrepreneurs, innovators, and patriots can associate with. It’s all about the struggle, the wins, and the losses. The boys at Bell Labs (yes, they were all boys) shared a culture of learning and evolution. They weren’t afraid to make mistakes.
There was a little bit of everyone in their ranks. “Kelly, Fisk, Shockley, Shannon, Pierce, and Baker. Some of these names are notorious – Shockley won the Nobel Prize in Physics in 1956… in Shannon’s case, it was mathematics and artificial intelligence, while remaining largely unknown by the public…” (Gertner). A multi-factor approach perpetuated their growth.
Back to the Global Macro Grind…
We’re trying to build that culture of learning both internally (working as a team) and externally (collaborating with clients). We don’t have any Nobel laureates on staff, but we do allow the lowest level IQs (hockey players like me) to contribute.
Do we care how new ideas begin? Nope. Not at all. Mr. Macro Market decides that for us. Our research process is grounded in the uncertainty of it all. That’s what makes it so exciting. We are humble observers of time and space.
This, as I pointed out earlier, isn’t a new style of thinking. Per Gertner, to a degree Thomas Edison made it cool at Bell Labs too. On ideas, “…how they worked was to Edison less important… he read compulsively… he scorned talk about scientific theory…” (pg 12). Imagine Edison had to deal with Keynesian “economists”!
A few weeks ago (November 14th) I wrote an Early Look titled “A New Idea”, so I’m going to go back to milking that cow this morning (plural title) with my “everyone’s a winner” position at Mr. Macro Market’s centrally-infected casino.
To review, I have my market bets spread across the macro table:
1. CASH = 44% (need lots of cash in case this sucker implodes)
2. FX = 24% (lots of alpha to be generated on the other side of the USA Burning The Buck)
3. INTERNATIONAL EQUITIES = 8% (some of these markets love Down Dollar)
4. US EQUITIES = 8% (the variance of US Sector Returns is testing all-time lows)
5. COMMODITIES = 8% (we’re still rolling the bones on Gold)
6. FIXED INCOME = 8% (no-taper in DEC is a big Bond Bull Lobby @PIMCO wants)
And, again… to be clear, I realize that in some cases I am buying-the-damn-bubble #BTDB (both former ones like Gold and Bonds, and news ones like US stocks) here. But what do I care about the “why” on these new ideas anyway?
The #OldWall idea of trying to call tops has rendered itself useless. They are processes, not points.
Looking at the all-time-bubble-highs in US stocks, what is signaling caution?
1. VOLUME – vs its TREND, US Equity volumes have tracked down -11% and -14%, respectively, at the last 2 closing highs
2. VOLATILITY - front month VIX has been making higher-lows as SPX tracks higher-highs on falling volume
3. BREADTH – at the closing high (Russell2000 = 1124) yesterday’s breadth was negative (more decliners than gainers)
Does that mean we can all jump up and down @Hedgeye headquarters today and call “the top”? Nope. It means what it means. With “it” usually meaning something new.
On the other side of the caution signs, there are plenty green lights:
1. EQUITY FLOWS – US Equity fund INFLOWS are trending at fresh YTD highs
2. BOND FLOWS – US Bond Fund OUTFLOWS are trending at fresh YTD highs
3. TRADE and TREND SIGNALS – for SPX, RUT and NASDAQ remain bullish
So what matters more, internal market signals or external flows? I don’t know, yet. But I am certain that Mr. Macro Market will decide, and not me. That’s not a new idea either.
Neither is buying on red and selling on green. So in between now and whenever whatever this is ends, within our immediate-term risk ranges for stocks, bonds, commodities, and currencies, we’ll just keep doing more of that. Keep moving out there.
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.69-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – November 26, 2013
As we look at today's setup for the S&P 500, the range is 17 points or 0.58% downside to 1792 and 0.36% upside to 1809.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.43 from 2.45
- VIX closed at 12.79 1 day percent change of 4.32%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am/8:55am: ICSC/Redbook weekly retail sales
- 8:30am: Sept., Oct. building permits; Oct. est. 930k
- NOTE: Oct. housing starts delayed until Dec. 18
- 9am: S&P/Case-Shiller 20-City m/m, Sept., est. 0.9%
- 9am: S&P/CS Home Price Index, Sept., est. 165 (prior 164.53)
- 9am: FHFA House Price Index m/m, Sept., est. 0.4% (pr 0.3%)
- 10am: Conference Bd Consumer Conf Index, Nov., est. 72.5
- 10am: Richmond Fed Manuf. Index, Nov., est. 4 (prior 1)
- 10am FDIC announces 3Q bank, thrift industry earnings
- 4:30pm: API weekly oil inventories
- House, Senate aren’t in session
- Obama to discuss economy during California visit; to meet with film studio chiefs, says Hollywood Reporter
- Supreme Court to issue list of cases it plans to take up
- Washington State genetically modified food labeling vote count expected to be completed
- Obama seeks Iran deal support; Reid says Senate my act
WHAT TO WATCH:
- FDIC’s Hoenig to weigh easing bank leverage rule he championed
- Berkshire said to cut Energy Future bond stake by a third
- Bayer in talks to buy cancer partner Algeta for $2.4b
- Samsung bid to put Apple patent case on hold rejected by judge
- Einhorn’s Greenlight Capital has $402m stake in Micron
- Silver Lake technology unit said to plan new $1b fund
- Intel said to seek $500m in sale of web-based TV startup
- Bain said in talks to sell Applied Systems for $1b+: Reuters
- Citi loses bid to block Abu Dhabi investment arbitration
- Sony says entertainment target conservative amid cost cut push
- China said to plan crackdown on banks’ loan limit evasion
- Prologis to lift Japan rents, build warehouses on Abenomics
- SpaceX delays rocket launch as Musk cites being “careful”
- Online gambling begins today in NJ
- Alimentation Couche Tard (ATD/B CN) 8:37am, $1.23
- Barnes & Noble (BKS) 8:30am, ($0.03)
- Beacon Roofing Supply (BECN) 8am, $0.62
- Brown Shoe (BWS) 7am, $0.59
- Chico’s FAS (CHS) 7:15am, $0.25
- Children’s Place (PLCE) 6am, $1.85
- Cracker Barrel (CBRL) 7am, $1.15
- DSW (DSW US) 7am, $0.58
- Eaton Vance (EV) 8:35am, $0.60
- Hormel Foods (HRL) 6:30am, $0.54
- Laclede Group (LG) 8am, ($0.07)
- Movado Group (MOV) 7am, $0.87
- Pall (PLL) 7am, $0.68
- Signet Jewelers (SIG) 6:30am, $0.42
- Tiffany & Co. (TIF) 6:59am, $0.58
- Analog Devices (ADI) 4pm , $0.58
- Hewlett-Packard (HPQ) 4:04pm, $1.00 -- Preview
- Infoblox (BLOX) 4:05pm, $0.09
- TiVo (TIVO) 4:01pm, $0.06
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Gold Fix Drawing Scrutiny Amid Knowledge Tied to Daily Eruption
- Frozen-Turkey Pileup Signals Thanksgiving Discount: Commodities
- WTI-Brent Crude Oil Spread Narrows for First Time in Five Days
- Soybeans Drop From Two-Month High on South American Crop Outlook
- Japan Dismantles Rice Output Policy as Abe Targets Farming
- Gold Swings Above Four-Month Low as Investors Weigh Fed Stimulus
- Copper Swings as Investors Weigh Demand View Against Drop Bets
- Sugar Drops to 11-Week Low in New York on Ample Supply Outlook
- Iron Ore Seen Dropping From Westpac to Goldman as Supply Expands
- Canada Grain Exports From Vancouver Seen Rising to All-Time High
- Brazil Ethanol Losing Competitiveness to U.S.: Chart of the Day
- Marcellus Goliath Transforms Region to Gas Trade: Energy Markets
- Copper Market Tightens in 3Q on Demand Rise, Output Decline
- Tate & Lyle Urges EU to Abolish a Sugar Duty as Bloc Quotas End
The Hedgeye Macro Team
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THE MACAU METRO MONITOR, NOVEMBER 26, 2013
BOUYGUES TO BUILD FIFTH CITY OF DREAMS HOTEL Macau Business
Bouygues SA says subsidiary Dragages Macau Ltd has won a HK$3.68-billion (US$474 million) contract to build a luxury hotel in City of Dreams. Dragages Macau will put up a 39-storey building with about 151,000 square metres of floor space over the next three years. The hotel will have 783 rooms, including some in 10 villas, a casino, restaurants, conference rooms and a sky pool. MPEL has yet to say which chain will manage the hotel.
HK$24.6-MLN PAYDAY MACAU'S BIGGEST JACKPOT Macau Business
An unidentified Hong Kong gambler has claimed a HK$24.6 million (US$3.17 million) jackpot at Sands Cotai Central, which Sands China says is the biggest single jackpot won in Macau. The company says the player won a Fa Fa Fa Grand Jackpot while playing a Fortune King slot machine on November 17. Sands China says slot players have won more than HK$1 billion in its casinos since last month.
This note was originally published at 8am on November 12, 2013 for Hedgeye subscribers.
“Ignorance more frequently begets confidence than does knowledge; it is those who know little, not those who know much, who so positively assert that this or that…”
Having fun out there yet?
If like us, your conviction on what an appropriate gross and/or net exposure should be has wavered in recent weeks, Darwin’s quote probably resonates with you. With respect to financial markets, I, for one, don’t understand how anyone could’ve had enough conviction to positively assert anything beyond a simple “I don’t know” in recent weeks, but that’s just me. What do I know?
Without speculating on the level of ignorance (or lack thereof) implied by the views of any market participant(s), we continue to tip our hat to the “QE is effective; see, I nailed it all along” community – if for nothing other than their unwavering confidence.
Does QE actually “work”, however? Moreover, how does one go about determining its effectiveness? This debate really centers on the question we asked in the video we published earlier last week:
“Does the price of money determine the pace of economic activity or does the pace of economic activity determine the price of money?”
Without getting all philosophical before breakfast, our answer to that question was simply, “It’s reflexive.”
Considering, it would seem that trying to determine the causality behind the demonstrable acceleration in economic growth we’ve witnessed in the YTD is little more than a fool’s errand. Was QE responsible for producing economic growth or were expectations of QE’s eventual demise the stimulus the economy needed?
Sourcing the data, the reflexive relationship between the US dollar, US interest rates and the slope & magnitude of real GDP growth is almost impossible to disregard without being completely subjective or grossly qualitative. Whether you’re looking at the current economic cycle or the past three decades of economic cycles, the data speaks for itself:
- 2013: In calculating monthly averages for the DXY and UST 10Y Yields, we see that the USD and US rates were most strong (on a YTD percentile basis) in the JUL/AUG/SEP periods. Coincidentally, that’s precisely when the ISM Non-Manufacturing and Manufacturing surveys, Conference Board Conference Board Consumer Confidence Index readings and the NFIB Small Business Confidence Index readings were also recording their strongest levels in the YTD (on a percentile basis). Moreover, the slope of the DXY and UST 10Y has tracked the slope of the aforementioned high-frequency growth data nearly perfectly in the YTD.
- 1983-2013 (trailing 30Y): In calculating quarterly averages for the DXY and UST 10Y Yields, we see that concomitant QoQ appreciations in both indicators are closely associated with both relatively rapid economic growth and periods of #GrowthAccelerating. Specifically, Real GDP growth has averaged +4.2% on a QoQ SAAR basis in #StrongDollar + #RatesRising periods; that compares to +2.4% for #WeakDollar + #RatesFalling periods. From a 2nd derivative perspective, GDP growth tends to accelerate +23bps on average in the former environment and decelerate -23bps on average in the latter environment.
To our knowledge, qualitative assertions have yet to trump basic arithmetic in any debate.
The more we reflect and debate internally as a team, the more we find ourselves squarely in the camp of: “Who cares about causality anyway?” As investors, all we really want to do is isolate the signals – be they quantitative or fundamental – that give us the best probability of being right on the slope of growth, inflation and/or policy.
From there, we can begin to speculate in financial markets using reasonably accurate assumptions for what we believe to be the three most important factors in determining asset prices.
With respect to financial markets, what matters most is what everyone thinks everyone else thinks about QE and the only way to record any consistency or accuracy in attempts to measure that is to set aside our own dogmas.
In short, we do not think it is helpful to engage in the debate surrounding the causal impact of QE upon the economy. In our view, it is impossible to determine causality without being qualitative or subjective because we don’t have accurate data about the expectations and intentions of all the agents that make up an economy.
As such, all we can really do as investors is interpret the signals as they come and play the ball as it lies. Focusing our attention on anything else is a clear deviation from the task at hand (i.e. making money).
Regarding the task at hand, we do know that QE and its associated expectations are causal to the prices of many assets globally. As such, the name of the game remains isolating the signals that give us the best forward-looking read on growth, inflation and/or policy – or the eventual tapering of said policy:
- Quantitative: Solid comeback for the US Dollar Index right to our TREND line of 81.39 resistance this morning; will it hold? US Treasury rates (10Y Yields) – which are now trading demonstrably above their 2.63% TREND line – are suggesting a DXY breakout has become an increasingly probable event.
- Fundamental: Analyzing economic data like a Fed Head would imply tapering is a spring of 2014 event at the earliest. Moreover, the lack of liquidity in the bond market should take a mid-to-late-DEC tapering squarely off of the table: primary dealer inventory is -73% off its 2007 highs and equivalent to a mere 0.8% of outstanding US corporate credit vs. a peak of ~4% in 2007. Please note our emphasis on the word “should”, as what we think the Fed should do and what the Fed does are quite often two very different things.
- Correlation Risk: While three days does not a trend make, very immediate term correlations are signaling what may be a return to the pro-growth trade of #StrongDollar + #RatesRising = positive US equity beta amid decidedly negative EM beta that has: A) dominated much of the past year; and B) was interrupted by a return to the post-crisis playbook of “QE = short US dollars; buy everything else” in the weeks since SEP 18 (i.e. the day of the Fed’s “no taper” surprise). See the Chart of the Day for more details.
So what do investors do with all of these convoluted signals? In a phrase: #GetActive. If you’re not yet familiar with our call for active mangers to outperform over the both the intermediate term and long term, please ping us for a review of our 4Q13 Macro Themes.
Indeed, it would seem that stock-picking will become increasingly important as we start to move away from what has been an elongated period of minimal return dispersion at the sector level – likely due to the strong performance of typically low-beta, high-yielding sectors in an era of institutionalized yield chasing.
For those of you who are keen to add new techniques to your analytical toolkit, we’ve built a model that backtests exceptionally well in screening for prospective alpha at the single security level. For more on that, please CLICK HERE for the data and CLICK HERE for the accompanying manual. Email us if this is something you’d like to discuss further.
Our immediate-term Risk Ranges are now:
UST 10Y Yield 2.64-2.79% (bullish)
SPX 1748-1778 (bullish)
VIX 12.29-14.55 (bearish)
USD 80.93-81.53 (neutral)
Pound 1.58-1.60 (bullish)
Gold 1271-1312 (bearish)
Keep your head on a swivel,
Associate: Macro Team
As outlined at the recent analyst meeting, McDonald’s will rely on beverages to drive top line sales in 2014. As we’ve said before, we believe that allocating resources to selling more beverages, particularly hot espresso beverages, will not generate the incremental sales needed to achieve the current estimate of +1.7% same-store sales growth in the U.S. in 2014.
In our opinion, McDonald’s is a food first destination and whenever management shifts their focus away from food and to selling beverages, the core business suffers. The shift in the marketing calendar for the remainder of 2013 is an early indication of where management plans to go.
It was recently reported that, after selling the highly successful McRib nationally for three years, McDonald’s is switching back to offering the sandwich on a regional basis. Rather, McDonald’s will focus the balance of 2013 on selling Mighty Wings (a disaster), the Southwest Premium McWrap (hasn’t driven incremental traffic), and now White Chocolate and Peppermint Mocha specialty beverages.
This implies that management believes adding a premium espresso-based beverage to the menu will generate more incremental traffic than nationally promoting the McRib. Although the McRib will be promoted locally, it will not have the full force of the McDonald’s marketing machine behind it in 2013.
We don’t expect MCD to report strong same-store sales for the balance of the year and well into 2014. Looking back on 2013, MCD was forced to shift its strategy mid-year because new products and the promotional calendar were not resonating with consumers and, as it stands, all indications are for 2014 to be a repeat of 2013.
McDonald’s will report November same-store sales on 12/09. We will post on anything incremental after the release.
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