TODAY’S S&P 500 SET-UP – December 17, 2013
As we look at today's setup for the S&P 500, the range is 50 points or 1.21% downside to 1765 and 1.59% upside to 1815.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
THE MACAU METRO MONITOR, DECEMBER 17, 2013
TOURISM CHIEF FORECASTS SLIGHT RISE IN CHRISTMAS VISITORS Macau News
Macau Government Tourist Office (MGTO) Director Maria Helena de Senna Fernandes says she expects Macau’s number of visitor arrivals around Christmas to increase slightly. Senna Fernandes said that with the mainland’s new tourism law that took effect on October 1 i.e. ban of zero fee tours, many travel agencies in the mainland had adopted a “wait-and-see attitude”, which may reduce the number of mainland visitors who would usually visit Macau as part of a tour group. She said that as a result she still expected the number of total visitors to increase slightly around Christmas, with the rise being in the number of tourists traveling independently.
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This note was originally published at 8am on December 03, 2013 for Hedgeye subscribers.
“We had invested very heavily over a very long period of time in the education of quality leaders.”
John Allison retired in 2010 after building one of the best banks in US history. “BB&T made it through the sub-prime crisis without a single quarterly loss… In Allison’s 19 years as CEO, BB&T grew from a statewide bank… to a $152B bank operating in 11 southern states and the District of Columbia.”
“We had really strong presidents … they had a much higher level of authority than our competitors… they were held responsible – they owned the process.” –Allison (Knowledge and Power, pg 172)
Sounds like our central bank, right? Ha! Especially the crony boys from mediocre-land (downtown at the New York Federal Reserve Bank). That’s where you’ll find below-average-at-best Bill Dudley and his whipping boy Simon Potter. These guys aren’t leaders. They are academic group-thinkers. And one day, all of their conflicted “smoothing” decisions will come home to roost. Mark my tweets.
Back to the Global Macro Grind…
If you want to get into the holiday anti-Fed mood, pick up a copy of the book John Allison published this year – The Financial Crisis and the Free Market Cure. It contains 0% of the Fed-access-propaganda you see paraded around with CNBC’s Keynesian peacocks every day. They are real thoughts from a real-time risk manager of banking and non-linear market risk.
“In my career, the Fed has a 100% error rate in predicting and reacting to important economic turns… because it is trying to arbitrarily set the single most important price of the economy – the price of money… setting wage and price controls from the time of Diocletian to Nixon, has proven in every case a disaster for economies and the people entrapped by them.” (Knowledge and Power, pg 175)
In other news this morning, after stuffing the New York financial media with crab cakes and vino last night, the Fed’s anti-dog-eat-dog-price-controller-of gravity, currency, and rates (Simon Potter) proclaimed his mystery of faith that “operationally, market participants generally characterize the exercise as smooth, with minimal disruptions.”
Potter, of course, is talking about what Thomas Jefferson surely had in mind - a reverse-repo-facility from the Fed that will look over Americans while they sleep. Chartreuse for everyone in NYC. This is the new America we all believe in, baby! (I’ll have a Bud Light pls)
Meanwhile, US stocks are pinned by a vacuum of Fed stimulated performance chasing all-time bubble highs, on no volume, and rising implied volatility signals.
By “minimal disruptions” what the NY Fed means is that @PIMCO doesn’t have to worry about economic information surprises being market-to-market on the long-end of the yield curve.
As evidenced by June and August spikes in US #RatesRising, there is nothing “smooth” about US currency and/or rate markets trading freely anymore. Oh, and The Fed needs to find a way to get people out of an MBS market bubble that doesn’t trade, don’t forget.
That’s why yesterday’s story within Mr. Macro Market’s score was so revealing. Follow the bouncing ball of events in the order that they appeared:
4:00PM EST – US stocks close on their lows of the day; US Equity Volatility (VIX) closes at the high of the day
In other words, to John Allison’s point, the Fed continues to look silly whenever it hinges policy on its forecasts. Its 2013 forecast on US consumption and employment growth were dead wrong. So now the Fed is behind the curve, making stuff up, in a Sisyphean fight for its academic dogma.
We’re going to get a 3% handle on US GDP this week (Thursday) and all the Fed’s open-market-storytelling communications will be able to do is make up more reasons why you should think this is still 2008. Fear, forever.
And guess what – if you let them, they might just perpetuate their own reality this time. The next crisis is going to be a central planning one. America hasn’t invested in Paul Volcker type leadership at the Fed. We are hostage to un-elected NYC banking group-thinkers.
10yr Yield 2.71-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
You can’t expect the Fed to spell out what it’s going to do. Why? Because it doesn’t know. - Stanley Fischer
It’s been a busy week. Which do you want first, the Good News, or the Bad News?
The US stock market made an all-time high, then backed off hard. New York’s own Joe Torre was named to the Baseball Hall of Fame. In Washington, five warring regulatory agencies reconciled for an hour to sign off on the Volcker Rule. In Butner, North Carolina, Bernie Madoff observed the fifth anniversary of the day he turned himself in to the feds, while in Ottawa, Canada’s national postal service announced the end of home mail delivery because of budgetary constraints. From Jerusalem came word that former Israeli central banker Stanley Fischer is the likely candidate to be Fed vice-chairman under Janet Yellen, and from Vatican City comes the announcement that Pope Francis has been named Time Magazine’s Person of the Year, narrowly beating Edward Snowden and Miley Cyrus. No puff of white smoke was released.
Stanley Fischer’s resume includes years as chief economist at the World Bank, and his time as a professor at MIT where he mentored European central banker Mario Draghi, as well as our very own Ben Bernanke. Lest you think this makes him unsuited to oversee US monetary policy, we offer a few items from his years as Israel’s central banker.
At the Bank of Israel, Fischer created a policy committee whose purpose was to act as a brake on the power of the chairman. Fischer, who was born in Zambia, won praise from his colleagues by taking the trouble to learn Hebrew, despite the fact that all his colleagues at the bank were comfortable in English – and despite the fact that he was the boss. His stewardship of the Israeli economy included policies requiring Israeli home buyers to make 25%-30% down payments in cash. No exceptions. Fischer may not exactly duplicate these successes here – his English is probably good enough to get by in Washington, but we suspect he will have a tough time going head to head with Mel Watt on the subject of mandatory down payments for homebuyers.
Thanks to the new radioactive Congress, Mel Watt has been put in charge of the Federal Housing Finance Agency, the body that oversees Fannie Mae and Freddie Mac. Watt replaces acting director Edward DeMarco who doggedly refused to implement reductions in mortgage principal for borrowers who are underwater on their mortgages. Observers expect Watt to move forward with a program of underwater principal reduction for GSE borrowers (loans held at Fannie and Freddie). Current stepped-up restrictions on loan servicing have already made it difficult to foreclose on delinquent borrowers. New rules coming into effect in January will add to these restrictions, raising the question: Is there still such a thing as a Secured Loan?
Aside from its impact on real estate market pricing, there’s a risk that mortgage principal reduction could become a Last Straw, convincing investors that it’s dangerous to do business with the federal government. Yellen and Fischer could be boxed into a corner and be forced to actuallyincrease the Fed’s buying in order to absorb panic selling of mortgage-backed securities that are suddenly seen as riskier than the mortgage-backed issues the Fed is currently buying. In short, turbulence in the housing market could return to center stage as a major factor in the markets next year. Shades of 2007?
As far as the Volcker Rule is concerned, there will be legal challenges. But the immediate challenge is that the regulatory agencies charged with implementing it are barely equipped to keep their bathrooms stocked with toilet paper, much less to launch a major industry surveillance initiative.
The SEC and CFTC are cash starved, and Congress does not appear disposed to help (Financial Times, 11 December, “Cash-Strapped Regulators Face Heavy Volcker Workload”). The CFTC is in such dire straits they may have to furlough employees for two weeks in 2014. They have already said they may have to outsource, or completely forego certain key inspections. The SEC is better off financially, but only just. It remains to be seen how much clout Chairman White will wield with Congress.
The one agency that appears to be sufficiently funded to take on the additional burden of Volcker Rule inspections is the Office of the Controller of the Currency. You will recall that the OCC was the agency that performed multiple routine audits of HSBC’s Mexican accounts but failed to detect the bank laundering nearly a billion dollars of Mexican drug cartel money. And as overseer of America’s banking industry, the OCC didn’t bother to dig down and figure out what JPMorgan’s “London Whale” was really doing. No wonder they have so much money; they never do anything.
And speaking of regulators doing nothing, the fifth anniversary of the Bernie Madoff story is a reminder that America’s regulators – with the apparent exception of Ms. White at the SEC – continue to be incapable of sustaining the integrity of our markets. The collective regulatory failure to catch Madoff in the act – SEC, FINRA, the various exchanges, brokers and fund managers where Madoff executed transactions (or didn’t) and managed assets (or didn’t) – is the financial regulatory equivalent of the intelligence failure in the run-up to 9/11. From where we sit, it doesn’t look any better today. Oh well… at least we got Congress to pass another 1000 pages of legislation…
Pope Francis incurred the wrath of the Right – Rush Limbaugh called him a “communist” – with his apostolic exhortation Evangelii Gaudium, the “Joy of the Gospels,” a document that opens with the words “The great danger in today’s world, pervaded as it is by consumerism, is the desolation and anguish born of a complacent yet covetous heart, the feverish pursuit of frivolous pleasures, and a blunted conscience.” Admonishing the faithful to turn their attention to the poor, Pope Francis blasts today’s “idolatry of money and the dictatorship of an impersonal economy” as a reincarnation of the Golden Calf. “One cause of this situation is found in our relationship with money,” he writes, “since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person!”
Who does this guy think he is, Jesus Christ’s personal representative?
Meanwhile, the stock market has turned very suddenly and very decidedly bearish. You might have missed it if you are following market technicians looking at 200 day moving averages, but Hedgeye’s macro work uses its own unique toolkit. This week Hedgeye CEO Keith McCullough appears on Hedgeye TV explaining his warning to “Beware This Big New Market Risk Signal.”
The mechanics of the stock market tell a story – one that you can read, once you figure out the grammar. In this case, says McCullough, they’re practically screaming. Keith developed his market models over nearly a decade as a hedge fund portfolio manager. He uses a simple three-component snapshot to derive a near-term market signal. The model looks at Price, Volume, and Volatility. When Price and Volume are rising, and Volatility falling, that’s an ideal near-term bullish set-up. It means more participants are entering the market, and are confidently adding money, happily paying higher and higher prices. It signals building confidence in the immediate term which, simply put, means you will be able to find someone else to sell your stock to when it goes up.
The obverse of that coin is declining prices, increasing volume, andincreasing volatility, signaling that investors are agitated, nervous, and possibly on the verge of panic. Says McCullough, this is precisely the signal the markets are flashing now, and it’s a new one. If you have followed our Macro work you know that we have been in favor of buying this bubble. Now, says McCullough, it is signaling that it may be ready to pop.
Prices are declining, meaning more selling coming into the market. Volume is declining, signaling a mismatch between the need to sell and the appetite to buy. And volatility is rising, indicting uncertainty. Sellers want to wait until they get their price. Rising volatility gets people upset, and people who are upset make less rational decisions. You don’t want to be the last person trying to sell your stock when volatility hits a critical point.
This negative near-term signal flashed on our screens this week, the first meaningful bearish signal we’ve had in a long time. Investors sitting on profits should consider taking them, while traders looking to ride the momentum of this bubble shouldn’t be surprised if trades go against them in a big way. In a market atmosphere characterized by gloom and uncertainty, a spike in volatility could trigger a rush for the exits. Imagine a crowded dance club. Imagine four hundred people in a space designed to hold no more than 250. Imagine a single exit door just wide enough for two people to pass through. Imagine a fire. Imagine you’re at the back of the room.
Happy Friday the Thirteenth.
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Editor's note: The piece was written by Managing Director Moshe Silver in this weekend's Investing Ideas. Hedgeye's Investing Ideas is for the savvy, longer-term investor looking for excellent long-only opportunities. With your subscription, you'll know immediately when one of our award-winning analysts uncovers a new idea or changes a current one. Additionally, every Saturday morning, you'll receive our newsletter with stock updates, Trend Levels and all the important investing information of the week. Click here to subscribe.
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