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Global Macro Doesn't Sleep

Client Talking Points

EUROPE

While the day after Thanksgiving is historically the lowest volume trading day of the year, there has actually been some important data out over the last 24 hours including: 1) Euro-area unemployment dropping to 12.1% from 12.2% in October and Eurozone flash CPI coming in at a anemic 0.9% (but higher versus last month’s 0.7%). Also, German retail sales came in at -0.8% month-over-month versus and estimate of +0.5%. These big macro data points don't point to any reason for European policy makers to change their views. If anything, there's only increased support for the current extremely dovish policies that are in place.

JAPAN

Last week we encouraged investors to consider taking off the Abenomics trade. As our analyst Darius Dale pointed out, there are a number of reasons to consider booking gains. 

  1. The Fed will likely dominate headlines with surprising levels of dovish monetary policy amid a 3-6 month monetary and fiscal policy vacuum in Japan;
  2. Sentiment towards Japanese equities amongst foreign speculators has reached euphoric levels; and
  3. Speculators have recently adopted an overwhelmingly bearish position on the yen. Historically, the USD/JPY cross has faded hard from such asymmetric setups in the futures and options market. Moreover, what’s bullish for the yen has been almost perfectly bearish for Japanese stocks.

Asset Allocation

CASH 42% US EQUITIES 8%
INTL EQUITIES 8% COMMODITIES 8%
FIXED INCOME 8% INTL CURRENCIES 26%

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

Just keep moving out there and take what these bubbles are going to give you. Don't get piggy. @KeithMcCullough

QUOTE OF THE DAY

"Everyone thinks of changing the world, but no one thinks of changing himself." - Leo Tolstoy

STAT OF THE DAY

Americans consume approximately 46 million turkeys on Thanksgiving Day compared to 22 million at Christmas and 19 million at Easter. 88% of Americans ate turkey this year. (Benzinga)



November 29, 2013

November 29, 2013 - Slide1

 

BULLISH TRENDS

November 29, 2013 - Slide2

November 29, 2013 - Slide3

November 29, 2013 - Slide4

November 29, 2013 - Slide5

November 29, 2013 - Slide6

November 29, 2013 - Slide7

November 29, 2013 - Slide8

November 29, 2013 - Slide9

 

BEARISH TRENDS

November 29, 2013 - Slide10

November 29, 2013 - Slide11
November 29, 2013 - Slide12

November 29, 2013 - Slide13


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The Veil of Ignorance

“Whenever you feel like criticizing any one . . . just remember that all people in this world haven’t had the advantages you’ve had.”

-F. Scott Fitzgerald

 

Yesterday, I read a great column in the New York Times by Nicholas Kristof about compassion and empathy.  The point of the article was to look at the distinction between asking someone to be personally accountable versus recognizing in a civil society that it is our responsibility to help others.

 

The origin of the article was based on some comments Kristof had received from a number of recent columns he’d written on the federal food stamps program. The gist of the feedback was that we shouldn’t be subsidizing families that are “too lazy” to take care of themselves.  As Kristof writes:

 

“Let’s acknowledge one point made by these modern social Darwinists: It’s true that some people in poverty do suffer in part because of irresponsible behavior, from abuse of narcotics to criminality to laziness at school or jobs. But remember also that many of today’s poor are small children who have done nothing wrong.

 

Some 45 percent of food stamp recipients are children, for example. Do we really think that kids should go hungry if they have criminal parents?”

 

The current public debate over healthcare personifies this dilemma we face when trying to emphasize with those that were given less in life.  (Unfortunately, the inability of the government to execute on the implementation of Obamacare has somewhat tainted this debate.)

 

In “A Theory of Justice” the philosopher John Rawls proposed the veil of ignorance to help us in determining our role in helping others and as a way to find morality in many situations.   According to Rawls, under the veil of ignorance:

 

“No one knows his place in society, his class position, or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength, and the like.”

 

As a result, since a person may occupy any position in society after the veil is lifted, the person must then evaluate any position from all perspectives of society.  

 

Certainly, the idea that I could wake up one day and not be preparing for a festive thanksgiving with friends and family, but rather be a homeless person wandering the icy streets of New York provides a different perspective as to how to treat those that are less fortunate.   

 

Back to the global macro grind...

 

As it relates to the U.S. equity markets, today is a day that is a bit of a market veil of ignorance as it is historically is the lowest volume trading day of the year.  As a result, there probably won’t be a lot of read through from the market action today.  Internationally, there has actually been a slew of data out over the last 24 hours and some key points to highlight include:

  1. Euro-area unemployment dropping to 12.1% from 12.2% in October and Eurozone flash CPI coming in at a anemic 0.9% (but higher versus last month’s 0.7%);
  2. German retail sales came in at -0.8% month-over-month versus and estimate of +0.5%; and
  3. Japanese unemployment came in at 4.0%, CPI inline at 1.1%, and industrial production disappointed versus growing 0.5% month-over-month versus an estimate of 2.0%.

In aggregate the big macro data points this morning do not point to any reason for the policy makers in Japan or Europe to change their views.  If anything, there is only increased support for the current extremely dovish policies that are in place.

 

As it relates to Japan, though, late last week we actually encouraged investors to consider taking off the Abenomics trade, as my colleague Darius Dale wrote there are a number of reasons to consider booking gains, namely:

  1. The Fed will likely dominate headlines with surprising levels of dovish monetary policy amid a 3-6M monetary and fiscal policy vacuum in Japan;
  2. Sentiment towards Japanese equities amongst foreign speculators has reached euphoric levels; and
  3. Speculators have recently adopted an overwhelmingly bearish position on the yen. Historically, the USD/JPY cross has faded hard from such asymmetric setups in the futures and options market. Moreover, what’s bullish for the yen has been almost perfectly bearish for Japanese stocks.

In my purview the point on sentiment may be the most compelling reason to take a break on the long Japan equity trade.  Specifically, in the YTD, foreigners have purchased a net ¥13-plus trillion of Japanese shares – the highest total on record. This contrasts with a net ¥6T of net sales amongst Japanese institutional investors.

 

Moreover, the aforementioned foreign/domestic bifurcation has intensified in recent weeks. The most recent weekly data shows a net purchase of ¥1.3T by foreign investors, which represents a 7M-high.  Conversely, net sales of domestic assets by Japanese retail inventors hit ¥174B last week – the largest weekly divestment since 2008. 

 

I think we can all agree, buying when the locals are selling is rarely a good thing!

 

Switching gears, in the chart of the day today we highlight a key point from our expert call last week with Dr. Tancred Lidderdale from the Energy Information Administration.  As the chart shows, for the first time in more than twenty years, U.S. production of crude oil has surpassed imports.  Arguably, even the environmentalists when wearing the veil of ignorance would agree that increased U.S. oil independence is a good thing.

 

I’ll be heading to my first Apple Cup later today, which is the annual match-up between Washington University and Washington State in Seattle.   Wherever you spend the rest of the holiday weekend, I hope it is a great one.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.69 - 2.82%

SPX 1

DAX 9

VIX  11.91 - 13.31
USD 80.35 - 81.15

Gold 1

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Veil of Ignorance - US Oil Production

 

The Veil of Ignorance - rta


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 29, 2013


As we look at today's setup for the S&P 500, the range is 19 points or 0.68% downside to 1795 and 0.37% upside to 1814.                                                    

                                                                           

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1B

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.47 from 2.45
  • VIX closed at 12.98 1 day percent change of 1.33%

MACRO DATA POINTS (Bloomberg Estimates):

  • No U.S. economic reports expected

 GOVERNMENT:

    • House, Senate not in session
    • Washington weekly agenda for Dec. 2-6

WHAT TO WATCH:

  • Australia rejects ADM’s $2b takeover of GrainCorp
  • Microsoft said to lean to Mulally, Nadella in CEO search
  • Basel said to target bundled debt in hunt for capital holes
  • Holiday Sales: Extended Hours, Deeper Discounts
  • Thanksgiving e-commerce sales rose 9% as of noon yday: IBM
  • H-P said to bump Verizon as Obamacare website host
  • Dish holders can’t exclude Ergen from Lightsquared bid
  • Charter said to raise $25b to acquire Time Warner Cable
  • Apple wins bid to dismiss privacy suit over data collection
  • Apple won 76% of Japan Oct. smartphone sales, Kantar says
  • France denies Hess energy exploration permits in Paris basin
  • Obamacare website still frustrates some as deadline looms
  • Obamacare’s small-business health exchange site delayed 1 yr
  • Euro-area inflation climbs more than est.; jobless rate drops
  • China’s neighbors test defense zone oversight
  • Japan, U.S. to boost air surveillance in E. China Sea: Yomiuri
  • NOTE: U.S. equity markets close at 1pm; bond markets at 2pm

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Palm Bull Market Extending for Mistry as Indonesian Output Drops
  • Gold Bears Persist as Prices Near Year’s Low on Fed: Commodities
  • Rubber Jumps Most in Six Months as Japanese Inflation Advances
  • WTI Set for Longest Monthly Slide in Almost Five Years on Supply
  • Gold Gains in London to Narrow Biggest Monthly Drop Since June
  • Copper Rises Before Report Seen Showing Chinese Factory Growth
  • Palm Oil Posts Second Monthly Gain as Indonesia Output Declines
  • Rebar Posts First Monthly Gain Since August as Inventory Falls
  • EU Power Network Integration Seen Delayed Again: Energy Markets
  • China 2013 Total Grain Output Rises 2.1% Y/y to 601.9m Tons
  • LNG New-Build Choices Loom Amid Low Usage Rates: 2014 Outlook
  • Rio Suspends Gove Alumina Refinery Amid Low Prices, High Aussie
  • Philippines to Decide in January if More Rice Imports Needed
  • SHFE Copper Stockpiles Fall to 17-Month Low as Aluminum Climbs

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

 

 

 

 

 

 

 

 

 

 

 

 

 


Empirically Bankrupt

This note was originally published at 8am on November 15, 2013 for Hedgeye subscribers.

“Much of the profession is empirically bankrupt because it is no longer taught economic history.”

-Charles Kindleberger

 

That quote comes from Chapter 12 “The Scandal of Money” (pg 115) in one of the only forward thinking economics books of 2013 (George Gilder’s Knowledge and Power).  It’s market practitioners like me vs the government PH.Ds. And it’s on.

 

The reason why Gilder gets it is that he combines the weaponry of A) economic history and B) math (chaos theory). The late Charles Kindleberger, of course, wrote one of the most important market history books ever (Manias, Panics, and Crashes) in 1978.

 

Keynesian economists (who Kindleberger alluded to as “the profession”) don’t do non-linearity, entropy, etc. They are all about “smoothing” cycles, and “equilibrium” (or something like that) which are designed to promise the end-user (Big Government Interventionists) certainty. NEWSFLASH: markets, bubbles, and economies are grounded in uncertainty. Embrace it.

 

Back to the Global Macro Grind

 

If you don’t get what I am talking about, take a few minutes to watch and listen to Janet Yellen’s confirmation hearing yesterday. Watching a human being’s body language is always as important as attempting to listen to what it is they are trying to say.

 

If you don’t want to study the kinesics of it all (the study of lying) or read economic history, read my friendly competitor’s (Zervos) rant yesterday about how he loves Yellen. There’s no math or history in his analysis; it’s all about the storytelling.

 

Critical to #KeynesianCrack storytelling is the fear-mongering and the emotion of it all. Just so you know the difference between our perspectives, David Zervos is a Ph.D. who worked for the Federal Reserve in Washington, D.C.  I’d boil down his backslapping of his groupthink tank’s (The Fed’s) anti-dog-eat-dog-economic-cycle-gravity-banning-central-planning idea as follows:

  1. “Optimal Control Policy”
  2. “Rule evolution”
  3. “Equilibrium risk-free”

Like many in Washington, he’s entertaining – and he gets markets right too. But how he thinks this all ends for America, her former “free” markets, and economy is about as far off on another planet as I’ll ever be. To him, I’ll sound crazy this morning.

 

Calling our kings and queens crazy? People often ask me what I’d do differently if I was at the Fed. Since I’m not the central planning type, I’d either do what Volcker did (end the madness of stagflation policy), or just shut the place down.

 

People also ask me what I’d ask our almighty Federal Reserve Ph.D.’s if I was in Congress. Well, since I have never voted for a politician in my life, I doubt being in Congress is in the cards, but here are some questions for my friends sipping the Keynesian chartreuse:

  1. What the hell is an “optimal control” policy model and why use any model when every model the Fed has used has failed?
  2. Does “rule evolution” mean that when the prior optimal policy doesn’t work, you just change the rules?
  3. How do you think keeping the “risk free rate” at 0% ends when the bond market turns on your expected “equilibrium”?

Traditional anti-Marxists would call trying to mark markets to some damn “optimal” model and/or price floors just plain dumb. But I won’t do that this morning. I am Mucker. How dare I challenge a Ph.D. “science” of charlatans?

 

Yes I called them charlatans. If you don’t think I’m crazy yet – watch this video I made for my Washington friends yesterday titled #Yellen: Tools, Crickets, and Crack: http://app.hedgeye.com/media/697-yellen-tools-crickets-crack?media=all&page=1

 

Yep, too many pucks to the head. But before these Ph.D.’s bubble (and blow) up markets for the umpteenth time in world history, I’ll be standing on the front lines against their academic dogmas. Yes, Mr. Zervos – I’m the one who knocks.

 

Back to how we risk managed the event risk of Yellen being who she is (The Mother of All Doves), we made the playbook move of buying slow-growth Yield Chasing assets that drive what Jefco calls the “spooooz” higher.

 

But do not mistake Gold, Bonds, and Utilities leading yesterday’s short squeeze to another all-time US stock market (SPY) high for rising growth expectations (the Russell Growth Index was down). Remember, a Policy To Inflate nominal is not real economic growth.

 

Oh, and I sold all my Gold and Bonds by 11AM EST. Yellen’s darting eyes toward Nero Corker (the Keynesian overlord from Tennessee) did me in. I just couldn’t stomach being long their empirical bankruptcy for more than a few more hours. Keep moving out there!

 

Our immediate-term Risk Ranges (its math – we have 12 Big Macros in our Daily Risk Range product) are now:

 

UST 10yr Yield 2.66-2.81%

SPX 1770-1794

VIX 11.99-14.41

USD 80.53-81.41

Pound 1.59-1.61

Gold 1261-1294

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Empirically Bankrupt - Chart of the Day

 

Empirically Bankrupt - Virtual Portfolio


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