prev

What Do You Care?

“If a science has an adjective, it probably isn’t a science.”

-Richard Feynman

 

As far as American physics goes, California’s Richard Feynman was as cool as cool gets. Above and beyond his brilliant contributions to the field, Feynman was a great communicator. His ability to teach reminded us how well he understood the subject matter.

 

Just before he passed away in 1988, Feynman left us with some behavioral thoughts and life lessons. One of the two books he published during the year of his death was titled What Do You Care What Other People Think?

 

“The book’s title is taken from a question his first wife, Arline, often put to him when he seemed preoccupied with his colleague’s opinions about his work.” (Wikipedia) Is there a better question for how your portfolio is positioned, every day?

 

Back to the Global Macro Grind

 

I certainly hope you don’t care what most “economists”  think about your portfolio. But I highly suggest you respect what Mr. Macro Market thinks. He can save you from missing the big obvious stuff.

 

One of the glaringly obvious things you should have cared about in 2013 was Mr. Macro Market’s phase transition to bucking up for GROWTH as an investment Style Factor. With the SP500 closing up another +2.8% in November, here are the YTD growth scores:

  1. LOW YIELD (Higher Growth) Stocks +41.3% YTD (vs High Yield, Slower Growth, Stocks +15.8%)
  2. TOP 25% EPS GROWTH Stocks (by SP500 quartile) +39.2% YTD
  3. HIGH BETA Stocks +37.9% YTD (vs Low Beta +23.3%)
  4. NASDAQ and Russell2000 +34.5% and +34.6%, respectively, YTD
  5. GOLD -25.9% YTD

In other words, being long the Gold Bond thing didn’t work like it did during the pervasively SLOW GROWTH 2010-2012 period of A) Interest Rate Repression B) Dollar Debauchery and C) Bernanke’s Policy To Inflate.

 

All it took to get growth expectations up (i.e. priced by Mr. Macro Market) were: 

  1. US Dollar that didn’t go down (US Dollar Index peaked at +6% YTD in July)
  2. Tapering Expectations = #RatesRising
  3. US GDP #GrowthAccelerating 

Oh, and you needed all 3 of those things to happen, all at the same time. In the absence of central planners trying to get in gravity’s way, even Keynesian “economists” call these pro-growth cycle moves “coincident” indicators.

 

No matter what the #EOW (end of the world) consensus view on US growth was 1 year ago today (when consensus “economists” expected +1.6% US GDP Growth and SP500 of 1528 for 2013), here we are – tracking closer to +3% US GDP growth and SP500 = 1800.

 

What did you care if #OldWall was off on GDP by almost 50% and the SP500 by 272 points? And what do you care about where consensus is today? Do you all of a sudden “buy growth”? Or is now precisely the time you should start to get out?

 

Using the same Hedgeye playbook (our GIP Model: Growth, Inflation, Policy):

  1. US GROWTH: odds that the slope of US Growth’s acceleration peaking in Q313 are rising
  2. US DOLLAR: whatever was left of USD strength continues to erode (down for 3 consecutive weeks)
  3. US RATES: 10yr Yield is signaling a lower-high vs the YTD high in US growth expectations (SEP 10yr of 2.97%)

All the while, from a purely quantitative modeling perspective, the SP500:

  1. PRICE is making higher-highs now on decelerating VOLUME (not good)
  2. VOLUME is trending down -9-14% versus our TREND based average into the “all-time highs” (not good)
  3. VOLATILITY (VIX) front month VIX continues to make a series of higher-lows (not good)

Up PRICE on down VOLUME and rising implied VOLATILITY as lagging GDP and employment data jams people into chasing the highs? Isn’t that just peachy.

 

But what do the central planners perpetuating Down Dollar and Rate Repression from here care? What do you care? Sadly, US currency and rate markets were only allowed to trade “freely” until the said “scientists” at the Fed said no-taper (SEP 18th), after all.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr Yield 2.70-2.81%

SPX 1

VIX 13.01-14.19

USD 80.46-80.91

Pound 1.62-1.64

Gold 1

 

Best of luck out there today,

KM

 

What Do You Care? - Chart of the Day

 

What Do You Care? - Virtual Portfolio


THE M3: NOV GGR; PACKAGE TOURS; S'PORE I-GAMING

THE MACAU METRO MONITOR, DECEMBER 2, 2013

 

 

MACAU GGR DICJ

Macau November GGR rose 21.3% YoY to 30.179 MOP BN (29.299 HKD BN, 3.779 USD BN).

 

PACKAGE TOUR NUMBER REACHED 80% AGAIN Macau Daily News

After the China's new Tourism Law (i.e.  ban of "zero-fee" package tours) came into effect for two months, tourism insiders said that arrivals in package tours in November started to pick up.  The number of package tourists from Mainland returned to 80%, a level prior to the National Day holiday.

 

They believed that industry and tourists adapted to the new law faster than expected.  Wu Keng Kuong, Director-General of Travel Industry Council of Macau, said in the first month after the implementation of the Tourism Law, number of package tourists dropped by a few % points, however, Mainland tour groups now have better understanding of the Tourism Law and tourists got used to new measures, the number of package tourists began to pick up.

 

SINGAPORE TO RESTRICT REMOTE GAMBLING ACTIVITIES Channel News Asia

Singapore authorities are moving to restrict remote gambling activities.  Remote gambling refers to gambling via the Internet or any communication device, such as a smart phone.  There are currently no specific laws to deal with remote gambling here, and there are concerns over its social impact.  Authorities said remote gambling operations can also become a source or conduit of funds for illegal activities and syndicated crime.

 

It is estimated that the remote gambling market in Singapore could be worth some US$300 million, and it is expected to grow by 6-7% annually.  There will be a public consultation exercise over the next few weeks to get stakeholders to weigh in on the issue.  The new laws are expected to be in place by early next year. 


MONDAY MORNING RISK MONITOR: THE GREAT MODERATION

Takeaway: It's important sometimes to take a step back and see the forest for the trees. Rising capital = falling systemic risk = upside.

Risk Monitor / Key Takeaways:

Financials remain full speed ahead. Rising rates, widening spreads, credit tailwinds, excess capital and falling global systemic risk profiles are all encouraging investors to take greater advantage of still attractive valuations across the Financials sector. 

 

* U.S. Financial CDS -  Overall, swaps tightened for 25 out of 27 domestic financial institutions. Risk perception within the US banking space continues to dwindle as we're now well into our 8th consecutive quarter of averaging sub-20 VIX. This is not by chance. It's our contention that the higher capital levels across the US banking system are creating a stronger, more stable risk environment for both for the country and the banking system. Moreover, a similar path in Europe is adding to the stability on a global scale.

 

* Asian Financial CDS - Indian banks again widen out. Two out of three Indian banks were notably wider last week (+33-35 bps). On a month-over-month basis, India's banks look worrisome with increases ranging from 40-78 bps. Elsewhere in Asia, however, there's less cause for concern. China's banks were mixed, but generally tighter. Across Japan there was mostly tightening though with a few unchanged. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged

 • Intermediate-term(WoW): Positive / 9 of 13 improved / 0 out of 13 worsened / 4 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 15

 

1. U.S. Financial CDS -  Overall, swaps tightened for 25 out of 27 domestic financial institutions. Risk perception within the US banking space continues to dwindle as we're now well into our 8th consecutive quarter of averaging sub-20 VIX. This is not by chance. It's our contention that the higher capital levels across the US banking system are creating a stronger, more stable risk environment for both for the country and the banking system. Moreover, a similar path in Europe is adding to the stability on a global scale.

 

Tightened the most WoW: MBI, UNM, C

Widened the most/ tightened the least WoW: XL, AON, COF

Tightened the most WoW: MBI, AGO, JPM

Widened the most/ tightened the least MoM: XL, TRV, MMC

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 1

 

2. European Financial CDS - Swaps were almost universally tighter across European Financials last week with the sole exception of Greece, where swaps rose across the board. While the most recent week of tightening was somewhat modest, the past month of change has been remarkable. On average, European Financials have tightened up by 46 bps or roughly 21%. #EuroBulls

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 2

 

3. Asian Financial CDS - Indian banks again widen out. Two out of three Indian banks were notably wider last week (+33-35 bps). On a month-over-month basis, India's banks look worrisome with increases ranging from 40-78 bps. Elsewhere in Asia, however, there's less cause for concern. China's banks were mixed, but generally tighter. Across Japan there was mostly tightening though with a few unchanged. 

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 17

 

4. Sovereign CDS – Sovereign swaps were mixed last week with notable improvements coming from Europe while the ROW was modestly wider. Portugal and Italy tightened by 8 and 9 bps, respectively. This trend of ongoing tightening among the PIIGS countries is reflective of our 4Q13 macro theme #EuroBulls. On a month-over-month basis, the only country in our monitor not to show improvement is the US.

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 18

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 3

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 6.3 bps last week, ending the week at 5.94% versus 6.00% the prior week.

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index was unchanged last week at 1829.

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 6

 

7. TED Spread Monitor – The TED spread rose 1.8 basis points last week, ending the week at 18.1 bps this week versus last week’s print of 16.3 bps.

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 275 versus 273 the prior week. As compared with the prior month, commodity prices have decreased -1.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 11 bps. As the chart below shows, however, the increase put the measure back in-line with its past month average and is not an indication of rising risk in Europe's banking system. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 15 basis points last week, ending the week at 3.75% versus last week’s print of 3.90%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 3 bps, ending the week at 81 bps versus 84 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 11

 

12. Chinese Steel – Steel prices in China rose 0.1% last week, or 5 yuan/ton, to 3,537 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 12

 

13. 2-10 Spread – Last week the 2-10 spread was unchanged at 246 bps, but remains 21 bps wider month-over-month. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and 1.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: THE GREAT MODERATION - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Short BWP – New Best Idea

We are adding SHORT Boardwalk Pipeline Partners (BWP) to our Best Ideas list.

 

BWP is a $6.4 billion market cap MLP primarily engaged in the transportation and storage of natural gas in the south/central US.  The diversified holding company Loews Corp. (L) owns the 2% GP interest in BWP, all IDRs (currently in the 50/50 split), and 52% of the BWP’s outstanding common units.

 

BWP is a high-conviction short idea given the Company’s deteriorating base business, aggressive accounting, high leverage, unsustainable distribution, valuation, and more...

 

Our full report on BWP will be published Thursday morning, 12/5; later, at 11am EST, we will host a brief call to discuss the key points of our thesis and field questions.  Hedgeye Energy clients will receive both the report and conference call dial-in information on Thursday morning.

 

Kevin Kaiser

Managing Director

 


December 2, 2013

December 2, 2013 - Slide1

 

BULLISH TRENDS

December 2, 2013 - Slide2

December 2, 2013 - Slide3

December 2, 2013 - Slide4

December 2, 2013 - Slide5

December 2, 2013 - Slide6

December 2, 2013 - Slide7

December 2, 2013 - Slide8

December 2, 2013 - Slide9

 

BEARISH TRENDS

December 2, 2013 - Slide10

December 2, 2013 - Slide11
December 2, 2013 - Slide12

December 2, 2013 - Slide13


Weird Bubbles

This note was originally published at 8am on November 18, 2013 for Hedgeye subscribers.

“If we’re in a bubble, it’s the weirdest bubble I have ever seen, where everybody hates everything.”

-Mark Andreesen

 

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:

  1. Gold
  2. Bonds
  3. MLPs

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:

  1. They had almost bullet proof storytelling narratives that lasted on the order of 1-3 decades
  2. Their asset prices confirmed the storytelling (making higher-highs) until they all topped in 2011-2012
  3. 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:

  1. LOW YIELD (i.e. GROWTH) stocks = +40.4% YTD
  2. Top 25% EPS GROWERS (by SP500 quartile) = +37.2% YTD
  3. 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:

  1. US Equity Volatility Fear Index (VIX) = crashing -32.4% YTD
  2. Gold = crashing -23.6% YTD
  3. 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%

SPX 1773-1803

VIX 11.91-14.35

USD 80.54-81.39

Brent 106.04-108.69

Gold 1260-1308

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Weird Bubbles - Chart of the Day

 

Weird Bubbles - Virtual Portfolio


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next