“It will be said that we don’t propose to establish Kings.”
“But there is a natural inclination in mankind to Kingly Government. It sometimes relieves them from the Aristocratic domination. They had rather have one tyrant than five hundred.” –Benjamin Franklin (The Liberty Amendments, pg 25)
I just love that quote. And how appropriate for a fresh winter’s morning when our central planning overlords are going to speak down to us from upon high. It’s Federal Reserve day, baby! Just like your Founding Fathers planned it.
On tapering, our Kingly Government’s leaky-peaky-media-access-group seems a little confused as of late. Between the WSJ’s Hilsenrath and CNBC’s Liesman flip flopping on what the Fed is going to do today, at a bare minimum it makes for great TV, on mute.
Back to the Global Macro Grind…
Did King Bernanke cut these poor peons off? What is up with that by the way? Forcing these dudes to think for themselves during the holiday season is just mean.
In all seriousness, trying to front-run the Fed without inside information isn’t easy. Reading the tea leaves on what Mr. Macro Market expects in real-time is the best we can do. If Bernanke tapers today, he’ll certainly shock me. But that’s not new.
What is new is US equity market volatility. What’s driving an intermediate-term TREND breakout in front-month stock market volatility (VIX) above our 14.91 signaling line is very simple – monetary policy confusion.
And in markets (which trade on expectations, not academic theories), confusion breeds contempt. If you follow the bouncing ball of expectations:
1. MONETARY POLICY: what the Fed should have done in SEP (taper) wasn’t done, so confusion rules
2. CURRENCIES: confusion drives Global FX volatility; most markets are keying off what the US Dollar does
3. EQUITIES: since spoos like no-taper (but worry that there should be a taper) they whip around (on no volume)
One of our biggest subscribers (he runs $18B in equity assets) nailed it in an email to me yesterday. Effectively, he thinks he knows what to do, but he’s not sure – and he definitely doesn’t like the process of discovery:
“I need to take the pulse of the patient everyday and I would really like to take the pulse without a pacemaker attached!”
#Pacemakers. That’s what the Fed should get us Canadian catholic boys for Christmas – we can attach them to a Demark dongle on our Bloomberg machines and any time Hilsy or Liesman whispers another flip to their flopping Fed leaks, we get a little jolt.
In other news…
Economic data in the United Kingdom continues to improve at an accelerating rate. On the heels of a #StrongPound, strengthening purchasing power, and falling consumer prices, the UK unemployment rate just dropped to 7.4% from 7.6%.
This, of course, has the former Keynesian kings of the Bank of England all squirreled up.
After all, they cannot allow the only thing that perpetuates economic recoveries for sustainable periods of time (#StrongCurrency) to threaten their un-elected political power.
Or is that “threatening the recovery”?
I couldn’t make this up if I tried, but after one of the best British runs of positive (think rate of change) economic data since the early Thatcher years (oh did she #timespank those British Keynesian boys publicly!), this is the headline in Europe this morning:
“BOE WARNS FURTHER POUND APPRECIATION THREATENS THE RECOVERY”
All the while, the Swiss reported an awesome confidence reading for DEC (ZEW index 39.4 vs 31.6 in NOV) after the Germans did yesterday (Germany’s ZEW accelerated to 62 in DEC vs 54.6 NOV).
Damn that #StrongEuro!
How dare economic gravity take hold and the most coincident indicators of economic health (a country’s currency) perpetuate confidence amongst The People?
But there is a natural inclination amongst group-thinkers towards “certainty” in economic forecasting and policy making. It sometimes relieves people who are trying to cover their political bottoms because they don’t have to be accountable to the policies themselves.
They had rather have one central planning god than a free market.
Our immediate-term Risk Ranges are (my Top 12 Daily Macro Risk Ranges are its own product now):
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – December 18, 2013
As we look at today's setup for the S&P 500, the range is 51 points or 0.95% downside to 1764 and 1.91% upside to 1815.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.51 from 2.52
- VIX closed at 16.21 1 day percent change of 1.12%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, Dec. 13 (prior 1%)
- 8:30am: Housing Starts, Nov., est. 954K
- 10:30am: DOE Energy Inventories
- 2pm: FOMC seen maintaining federal funds target of 0% to 0.25%; releases summary of economic projection
- 2:30pm: Fed’s Bernanke holds news conference
- Senate in session, House not in session
- 10am: Senate Foreign Relations panel meets on “Economic Engagement in the Asia-Pacific”
- 2:30pm: Senate Commerce Cmte holds hearing on data brokers’ use of personal information about consumers
WHAT TO WATCH:
- FOMC to issue policy statement, new forecasts at 2pm today
- JPMorgan sues FDIC over >$1b Washington Mutual liabilities
- JPM sued by Mississippi on credit card conduct: Reuters
- Silver Lake said in $2.4b deal for Forstmann Little’s IMG
- GE seen raising margins on demand for industrial goods
- Facebook acquires startup SportStream, AllThingsD says
- Wal-Mart to open 2 Sam’s Clubs in China in 2014
- Nintendo experimenting with smartphones, tablets: KING-TV
- Blackstone buys 3 Texas power plants from Centrica for $685m
- China Mobile plans smartphone sales of 220m in 2014
- Chipotle testing pizza as next possible fast food: WSJ
- ResCap sues UBS, SunTrust, Capital One over CMBS buybacks
- EU set to fine Goldman PE unit over cable maker price fixing
- Novartis’s cancer therapy faces question of logistics
- Pentagon says dependence on China rare earths has lessened
- Cantor to get $135m from American Airlines over 9/11 attacks
- Israel wants Google royalties for local content, Globes says
- Apogee Enterprises (APOG) 4:30pm, $0.35
- FedEx (FDX) 7:30am, $1.64 - Preview
- General Mills (GIS) 6:58am, $0.87 - Preview
- Herman Miller (MLHR) 4pm, $0.40
- Lennar (LEN) 6am, $0.62 - Preview
- Oracle (ORCL) 4:01pm, $0.67
- Paychex (PAYX) 4:01pm, $0.42
- Quanex Building Products (NX) 7am, $0.14
- Steelcase (SCS) 4:01pm, $0.26
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- EU Proposes Ban on Cloning Farm Animals and Sale of Clone Meat
- Goldman Sachs Said to Name New Global Commodities, Metals Heads
- Rio Tinto CEO Sees Iron-Ore Price Decline Next Year: Commodities
- Brent Trades Near One-Month Low Before Federal Reserve Decision
- Copper Falls a Second Day Before Fed Policy Meeting’s Outcome
- Gold Climbs in London Before Fed’s Decision: Palladium Advances
- Wheat Reaches 18-Month Low on Outlook for Rising Global Supply
- White Sugar Extends Drop to 2010-Low on Supply; Coffee Advances
- Australia Seen Boosting Bauxite Exports on Indonesia Ore Ban
- U.S. Pump Prices Seen Setting 2013 Low as Supply Swells: Energy
- U.S. Refiners Have Steep, Sustainable Advantage: 2014 Outlook
- Silver Proving No Store of Stability in Flight: Riskless Return
- U.S. Auto Revival Boosts Shipping as Jeeps Go to China: Freight
- Australia to Boost Iron Ore Exports as Rio to BHP Expand Output
The Hedgeye Macro Team
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THE MACAU METRO MONITOR, DECEMBER 18, 2013
MOCHA OPENS TWO SLOT PARLOURS IN NEW LOCATIONS Macau Business
The government has permitted Mocha Clubs to open two slot machine parlours, replacing others forced to close last month. The slot machine division of MPEL has permission to open a parlour next to Ponte 16 and another in Centro Commercial Kuong Fat in Rua de Pequim. Mocha Clubs president Constance Hsu Ching Hui said a third parlour would open once the company had found a suitable hotel to put it in. They replace parlours closed on November 26 because the law forbids gaming establishments in residential areas.
PACKER WINS GOVT APPROVAL FOR SRI LANKAN RESORT Macau Business
Sri Lanka has approved Crown Resorts Ltd’s US$400-million (MOP3.2 billion) development in Colombo. While Crown does not have explicit permission to operate casinos at the lakeside resort, gaming operations are likely to be part of the project. Chairman James Packer, who is co-chairman of MPEL, has partnered with Rank Entertainment Holdings Pvt Ltd on the project.
Rank holds two casino licences in Sri Lanka.
This note was originally published at 8am on December 04, 2013 for Hedgeye subscribers.
“My reading of history convinces me that most bad government results from too much government.” -Thomas Jefferson
Over the Thanksgiving break, I started reading “Thomas Jefferson: The Art of Power” by Jon Meacham. For many of you Americans (like Keith I’m Canadian), undoubtedly studying the founding fathers is old hat, but for me the book has a number of revealing insights.
The key insight relates to the quote at the outset. Specifically, this idea that too much government may, in fact, be too much government. No doubt there are some pensioners in Detroit who are thinking just that as they are beginning to realize that the “government guarantee” of their pension is not as solid as they believed it to be.
Like most great men, Jefferson had his faults. Regardless, the author of the Declaration of Independence was a stalwart protector of individual liberty, especially in the face of the threat of government. Compared to the Jeffersonian era, the individual American certainly has much broader freedoms than he, and especially she, would have had in the early 1800s.
The one caveat to this of course is in the area of economic freedom, specifically taxation. From the Jeffersonian period to the early 20th century, the government was both a small percentage of the economy and direct taxation was originally very limited. On the last point, as recently as 1895 the Supreme Court of the United States actually ruled that federal income tax was unconstitutional.
Today as we “gladly” hand over 1/3+ of our incomes to the federal government and the government comprises 20%+ of the economy, it certainly begs the question of whether we have the personal economic freedoms that our Founding Fathers envisioned.
Back to the global macro grind . . .
Related to the topic above, one sneaky macro positive that has been emerging domestically is a shrinking of the federal budget deficit. Over the past four years, the federal budget deficit has been cut in half from the peak level of $1.4 trillion. Certainly, a $700-ish billion budget deficit is still too large, but in this regard the trend is definitely our friend, especially as it relates to U.S. dollar tailwinds.
Sadly, none of today’s current politicians have the political acumen of Thomas Jefferson, so the primary method to halt federal government spending growth has been for the Tea Party to effectively hijack the government, which most recently led to a government shutdown.
In 2014, we may have déjà vu all over again. Consider the federal government catalysts we have in front of us in the next three months:
- December 13th – The bipartisan budget committee is supposed to report back on budget / compromise progress;
- January 15th – The Current Continuing Resolution runs out; and
- February 7th – The next debt ceiling deadline. . .
The threat of more negative government catalysts is actually coming at a really complacent and inopportune time for the U.S. equity markets. Specifically, the VIX’s monthly average price was just under 13 in November and at the lowest level we’ve seen in over two years. As many of you well know, there is an inverse correlation between the VIX, a measure of volatility, and the price of the SP500. Suffice it to say, the equity volatility ball is sufficiently under water . . .
In the Chart of the Day, we highlight the SKEW Index compared to the VIX index. As the chart shows, SKEW is spiking and historically SKEW has been a decent leading indicator of volatility. Intuitively this makes sense as investors are becoming more compelled to hedge exposure given the highs in the market and the fact that year-end is fast approaching.
A potential spike in volatility and decline in equities also makes sense given a number of other signs of a near term top.
Consider a couple of headlines from the Wall Street Journal and Reuters from yesterday:
- “More Hedge Funds Turn to Long-only Strategies”
- “Short Sellers Trying to Cope”
No doubt, this has been a challenging year for short sellers as stocks with high short interest have outperformed meaningfully, but when more than half of hedge funds launch or plan to launch long only strategies it does reek of capitulation. (And no, the Hedgeye Long Only ETF won’t be launching anytime soon!)
Before signing off, I also wanted to remind you of Hedgeye’s Energy Best Idea call on Boardwalk Partners (BWP) this Thursday at 11am. 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. If this thesis sounds a little like our calls on Kinder Morgan (KMP) and Linn Energy (LINE), it should. We think the valuation of the MLP sector is grossly overstating the intrinsic value of the underlying businesses held in these structures. If you’d like to get access to the call, email email@example.com.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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