“The mass of the American people are most emphatically not in the deplorable condition of which you speak.”
That’s what a 28-yr old Teddy Roosevelt said to a fear-mongering-class-warfare-guy when he ran for mayor of New York City in 1886. In one of the first debates of his career, he went on to pummel the parasitic politician with positivity and resolve:
“… the states-men and patriots of today are no more responsible for some people being poorer than they are for some people being shorter… if you had any conception of the true American spirit you would know we do not have “classes” at all on this side of the water…” (The Bully Pulpit, pg 126-127)
While a lot of people spent a lot of time whining about the #EOW (end of the world), government spending cuts, and #RatesRising in 2013, many of us went on doing what American Doers do – grow. Relative to where consensus was, this country hasn’t seen a growth surprise to the upside like this in a long-time. I’d like to thank all of you who grew your businesses for contributing to that.
Back to the Global Macro Grind…
As 2013 comes to an end, the year’s growth score-card will be reported on a lag. Mr. Macro Market obviously didn’t miss making this call in real-time however. What a run US GDP growth went on into the highs of Q313. #Boom!
At +4.12% GDP growth in Q3, the 1st takeaway shouldn’t be someone who missed it whining about “inventories” (newsflash: businesses build inventories as growth in demand accelerates – it’s called a cycle); it should be that GDP of +4.12% was actually understated!
The US GDP Deflator (subtracts from nominal growth to get you real-inflation-adjusted GDP growth) for Q313 was overstated at +2% (that compares with the MIT billion prices project of +1.7% and the CRB Commodities Index which was tracking -6-7% year-over-year). Which means nominal US GDP growth was over +6% in Q3 and the real print could have been 4.5-5%!
The US stock market didn’t miss this. Neither did the Bond market (#RatesRising), nor Gold (crashing -29% YTD). The people who really missed this were actually the politicians. Who, like in 1886, were busy trying to tell stories about the economy they need you to believe rather than the one you had.
When we write about “growth” we’re talking about investment “style factors.” Here’s how the market prices those YTD:
- LOW YIELD STOCKS (i.e. growth stocks) = +44.2% YTD (vs slow-growth High Dividend Yield stocks +16.8%)
- TOP 25% EPS GROWTH STOCKS (by S&P quartile) = +40.4% YTD
- HIGH BETA STOCKS = +37.6% YTD
In other words, being long these GROWTH styles even beat the high flying US stock market indices:
- SP500 = +27.5% YTD
- Russell2000 = +35.0% YTD
- Nasdaq = +35.9% YTD
And obviously the major US Equities indices smoked being long things like:
- Fear (VIX) = -23.5% YTD
- Gold and Silver = -29.1% and -36.5% YTD
- Utilities (XLU) = +8.3% YTD
Utilities, MLPs, REITs got crushed relative to any domestic growth and/or cyclical sector of the US Stock market too:
- Consumer Discretionary (XLY) = +38.4% YTD
- Healthcare (XLV) = +37.7% YTD
- Industrials (XLI) = +35.3% YTD
And sure, some might quibble with Healthcare being called a US domestic “growth” sector, but that’s what we’ve called it since making it one of our favorite sectors in our Q113 Global Macro Themes, so they can quibble away.
Quibbling and whining might win people on your respective teams a few arguments, but these kinds of players (and class warfare dudes) don’t help you win championships. Those with open, objective, and flexible minds do.
The hardest thing to do in this business is having the humility to embrace that Mr. Macro Market might know something you don’t know. And clearly, whether by +4.12% GDP growth (old news now) and/or growth style factor performance in the marketplace, as the great behavioral philosopher Notorious B.I.G wrote, “if you don’t know, now you know.”
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – December 23, 2013
As we look at today's setup for the S&P 500, the range is 33 points or 1.39% downside to 1793 and 0.42% upside to 1826.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.52 from 2.51
- VIX closed at 13.79 1 day percent change of -2.54%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Chicago Fed Natl Activity Index, Nov. (prior -0.18)
- 8:30am: Personal Income, Nov., est. 0.4% (prior -0.1%)
- 9:55am: UofMich. Conf., Dec. final, est. 82.7 (pr. 82.5)
- Deadline for Americans who want coverage effective Jan. 1 under ACA; hundreds of thousands whose health plans are being canceled as their coverage doesn’t meet rules are exempt next yr
WHAT TO WATCH:
- Apple strikes deal to sell iPhone through China Mobile
- U.S. eco growth to quicken next yr, IMF’s Lagarde says
- OPEC ministers see no ’14 glut amid signs of demand growth
- Tiffany ordered to pay Swatch $449m over venture dispute
- Shoppers get big discounts on last-minute holiday purchases
- Apple CEO Tim Cook sees “big plans” for 2014: 9to5Mac
- YRC said close to getting $250m in equity: WSJ
- Darden shrholder Starboard to push company reorganization: WSJ
- Elliott “irrevocably” rejects McKesson’s offer for Celesio
- “Hobbit” sequel leads N.A. weekend box office w/ $31.5m
- Goldman real-estate investment fund escapes Volcker rule: WSJ
- Paulson sells Washington Mutual debt amid FDIC lawsuit: WSJ
- No earnings expected from S&P 500
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Gas in New York Surges to Highest Intraday Price in Two Years
- Hedge Funds Cut Gold Bull Bets Amid Record Outflows: Commodities
- WTI Trades Near Two-Month High on U.S. Growth, Sudan Violence
- Nickel Reaches Seven-Week High as Indonesian Export Ban Nears
- Soybeans Advance as Dry Conditions in Argentina May Stress Crops
- Gold Resumes Decline in London on Less Haven Demand Speculation
- Rebar in Shanghai Falls to One-Month Low as Ore Price Declines
- Cocoa Climbs as Much as 0.5% to Highest Price Since Sept. 2011
- Gold Assets Post Biggest Weekly Drop Since July as Prices Slump
- Last U.S. Lead Smelter Closes Toxic History in Ore-Rich Missouri
- Speculators ‘Throwing Money’ at Natural Gas on Icy Blast: Energy
- Refiner EPS, Ebitda May Rebound on WTI-Brent: 2014 Outlook
- Qatar to Boost Europe LNG Sales as Gas Trades at 7-Year High
- Raw Sugar Falls as Traders Have First Net Short Since September
The Hedgeye Macro Team
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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.
THE MACAU METRO MONITOR, DECEMBER 23, 2013
SLEEPY ISLAND WANTS TO CASH IN ON CHINA'S GAMBLING ADDICTION CNBC
According to Kuang S. Yeh, Taiwan's deputy minister of transportation and communication, A bill to legalize gambling is now being reviewed by Taiwan's Legislature. Yeh said it has an 80-90% chance of approval. "If we can pass it by the end of this year or early next year, then I would say we start operating around 2019," Yeh said. "There are currently only 100,000 tourists visiting Matsu this year, but we don't know how much new tourism would come—at least 10 times more."
BILLIONAIRE ADELSON MULLS EUROPE'S BIG CITIES FOR CASINOS Bloomberg
LVS is considering building individual integrated resorts in major European cities, 10 days after abandoning a plan to construct a $30 billion mega-resort in Spain. “I’m looking at a different model of doing Singapore-like or Japan-like or Korea-like individual IRs in individual cities,” LVS CEO, Sheldon Adelson said. “We will just take the major cities in Europe and see whether or not there is a possibility to pursue that.” In Asia, it “looks like” Japan, Korea, possibly Vietnam, Taiwan, and Thailand will allow the establishment of integrated resorts, said Adelson.
EMPEROR INTERNATIONAL BUYS BEST WESTERN HOTEL Macau Business
Emperor International Holdings Ltd has bought the three-star Best Western Hotel on Taipa for HK$900 million, a 17-storey hotel in Taipa with 262 rooms. The Best Western has no gaming facilities, after Mocha Clubs shut its slot machine parlour there last month.
GOVT EXPECTS TOURIST ARRIVALS WILL SLOW NEXT YEAR Macau Business
According to Macau Government Tourist Office director Maria Helena de Senna Fernandes, tourist arrivals will grow by less than 5% in 2014. Senna Fernandes said the tourist office would focus on attracting big spenders.
This note was originally published at 8am on December 09, 2013 for Hedgeye subscribers.
“History tells us that the threat to prosperity is not debt but socialism.”
After a +3.6% US GDP print and back to back bullish monthly surprises on the US employment front, you’d think that America’s currency would get a bid. Nope. Why?
Irrespective of December-taper “odds” doubling last week (34% of “economists” in the Bloomberg survey think DEC-taper = #on versus 17% prior), Mr. Macro Market is still telling you that Ben Bernanke will devalue the Dollar for as long as he can.
Since the Fed is both un-elected and unaccountable, would you call this socialism? Whatever you want to call it, not letting free-market prices clear is a threat to the long-term economic prosperity of this country. So make sure to sell some stuff high on that.
Back to the Global Macro Grind…
After 5 consecutive down days, the 2013 US stock market bears got ripped for a +1.12% move on Friday. You either bought-the-damn-bubble #BTDB on red during the -1.2% five-day correction, or you did not. We call this managing the risk of the range.
If @FederalReserve continues to debauch the Dollar, the makeup of what works on US stock market up days will start to change. This is what happened in 2011 in particular. It’s also what happened last week:
- Utilities (XLU) = +1.1% on the week
- Consumer Discretionary (XLY) = -0.7% on the week
In other words, Policies to Inflate slow the expectations of future real-inflation-adjusted-economic-growth. This is not new to anyone who lives in the real world – it just annoys the Keynesians.
Here’s another way to look at inflation expectations rising in the face of US purchasing power falling:
- US Dollar Index down another -0.5% last week (down 4 straight weeks) to +0.7% YTD
- CRB Commodities Index (19 commodities) +1.4% last week to -5.5% YTD
In other words, if the market expects the Fed to devalue the value of money, it will start to bid up the prices of things you buy with those moneys. Venezuela burned its currency at the stake. Its stock market index is now 2,597,592.25 (+451% YTD). #Cool, eh?
Obviously the USA going back to where we were in 2011-2012 (weak currency and nothing sustainable to speak of from a real-economic growth perspective), would be bad. I don’t doubt, for one second, that the Fed can perpetuate that.
To review why we were bullish on US #GrowthAccelerating in 2013:
- PURCHASING POWER: US Dollar was baking in A) fiscal sequestration and B) tapering well into Q313
- INFLATION: #StrongCurrency + #RatesRising would Deflate The Inflation (CPI surprised consensus on the downside)
- GROWTH: from 0.14% in Q412 to +3.6% in Q313, and business expectations cycle took hold
And yes, as business and consumer confidence rose in Q3, fixed investment and inventories rose. It’s called a cycle. So did the Savings Rate (5.0% in Q3 vs 4.7% in the prior report). When people have more money, they have more to save too!
The other thing that happened in Q313 that got zero attention from the disingenuous (whining) 2013 perma bears last week was that the DEFLATOR in the US GDP report actually understated GDP growth by almost 0.3%.
After almost hitting a 40-yr low in Q2 (yes that was stimulative for US consumption growth, like it was in Q109), the US GDP Deflator was 1.96%. That was more than a double, sequentially, and +24 basis points higher than MIT’s Billion Prices Project inflation rate of 1.72%.
*higher deflator (i.e. more inflation) subtracts from reported GDP growth
Put another way, in our GIP (GROWTH, INFLATION, POLICY) model, provided that the Fed doesn’t taper in December, you can pretty much bake the opposite call we’ve had in the last year into the cake:
- US DOLLAR could start to see more downward pressure into Q114
- INFLATION (both CPI and PPI headline) should bottom, sequentially, in Q413 (rise in Q1)
- GROWTH should slow, sequentially, in Q413-Q114, in kind
So what do you do with that? That’s easy. Buy “slower-growth” assets and some inflation protection.
We also like the prospects for European #GrowthAccelerating (see our Q413 #EuroBulls Macro Theme) if EUR/USD continues to strengthen like it did again last week (+0.8% to +3.9% YTD).
You might call some Europeans socialists; but they might just call Americans that now too.
Our immediate-term Risk Ranges are now (we have 12 Big Macro Ranges in our Daily Trading Range product):
UST 10yr yield 2.79-2.91%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.