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Ferocious Determination

This note was originally published at 8am on December 10, 2013 for Hedgeye subscribers.

“… self assured, guided by his own ferocious determination.”

-Doris Kearns Goodwin

 

No matter what your views are on how this epic market move ends, you have to find it within yourself to find a way to win. This has nothing to do with what you’d like your former free-markets to be; it has everything to do with risk managing what they have become.

 

The aforementioned quote is one that defined President Teddy Roosevelt’s character at a very young age. “Teedie (his nickname) held a distinct place among his siblings; the asthma that had weakened his body seemed to have inordinately sharpened his mind and sensibilities… he was always reading or writing with a most unusual power of concentration.” (The Bully Pulpit, pg 37)

 

So, in the spirit of what America’s “Strenuous Life” used to stand for, sharpen your mind this morning. Challenge yourself to learn. Evolve your investment process. And, above all else, tone down your emotional market response to whatever you may or may not have missed.

 

Back to the Global Macro Grind

 

Are you ferociously determined to beat beta? I am. And I’m not going to apologize for that. Why else would you wake up to play this game every morning unless you wanted to win?

 

After 382 points of price appreciation, the SP500 clocked yet another all-time closing high yesterday of 1808. That’s a +26.8% gain for 2013 YTD. And once again, it came on a no-taper (in December) market expectation day.

 

Whether you or I think the Fed should have tapered in September doesn’t actually matter at this stage of the game. Been there, argued about that. What matters is what decisions you make next.

 

Risk is always changing. Up until September 18th, Mr. Macro Market scored growth as the most relevant stock market risk (to the upside). Sure, some people were bullish – but consensus wasn’t positioned bullish. Here’s what worked from JAN-SEP:

  1. #StrongDollar
  2. #RatesRising (Gold and Bonds weren’t working)
  3. #GrowthAccelerating (as an Equity Style Factor)

Then, post the Fed’s unaccountable decision not to taper (as Q313 US Growth was tracking +3.6%), from mid-SEP to mid-OCT:

  1. Down Dollar
  2. Rates Falling
  3. #GrowthSlowing outperformed growth  

Then, in November, growth as an Equity Style Factor started to recover again:

  1. Rates Rose
  2. Gold fell
  3. But the US Dollar remained no bid (in spite of an ECB rate cut!)

Now, look at what we have – the return of our old un-elected friend: @FederalReserve’s Policy To Inflate:

  1. Down Dollar (for 5 straight weeks)
  2. CRB Commodities Index inflation (and Gold) arrested their YTD lows
  3. Oil prices and inflation oriented equities inflating again

Instead of debating this, look at the trivial matter that is Correlation Risk between the US Dollar and everything else (using a 6 week duration – these are inverse correlations; i.e. Down Dollar = Up X):

  1. SP500 vs USD = -0.63
  2. Brent Oil vs USD = -0.66
  3. CRB Commodities Index vs USD = -0.73
  4. Nasdaq vs USD = -0.79
  5. Natural Gas = -0.85

#Cool, eh?

 

For whom? The small percentage of us in America who understands it? Or to those who are the recipient of inflated prices at the pump and accelerating costs to heat their homes during today’s CT snowstorm?

 

Yes We Can, baby. We can re-flate Bernanke’s Bubble in commodity prices. Why not? Who cares if it slows everything that we haven’t had during this entire monetary policy experiment (sustained real-consumption growth). It’s time to buy some coal!

 

To be clear, this will end in tears. But, in the meantime, I will trade this market’s all-time highs with ferocious determination. Yes, that means that on pullbacks I will buy-the-damn-bubble #BTDB.  Then I’ll sell on green too. Keep moving out there; risk does.

 

Our immediate-term Risk Ranges are now:

 

10yr UST Yield 2.80-2.91%

SPX 1800-1815

USD 80.03-80.55

Brent 109.07-111.19

NatGas 4.04-4.26

Gold 1216-1259

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ferocious Determination - Chart of the Day

 

Ferocious Determination - Virtual Portfolio


Personal Income, Spending & Strategy Summary

Takeaway: Personal Income and Spending growth accelerated in November. Do equities still work if growth decelerates? Watch the $USD, VIX, & 10Y.

PERSONAL INCOME: Optically, personal income and personal disposable income growth decelerated in November. The reality is far more sanguine.  Collectively, November and December of 2012 were skewed significantly by individuals pulling compensation forward ahead of the impending fiscal cliff related tax law changes.  

 

On a 2Y basis, private sector salaries and wages are still accelerating and the drag on government sourced income stemming from federal austerity will improve against easy comps, the spending friendly budget deal, and the annualization of last year’ s tax increases.  

 

Personal Income, Spending & Strategy Summary - PI

 

PERSONAL SPENDING:  Real personal consumption growth saw its largest MoM acceleration since February of last year as service consumption (the recent laggard) was resurgent, growth in durables was flat with trend, and Durables accelerated on a MoM, 1Y and 2Y basis.  Spending grew at a premium to incomes for a second months as the savings rate dipped another 30bps to 4.2%.  

 

While the spending numbers were strong, the MoM and YoY growth figures for November may be modestly overstated given the noisy comp dynamics – namely, any government shutdown related impact depressing October consumption and the Hurricane Sandy distortion in November of 2012.

 

Personal Income, Spending & Strategy Summary - Personal Income   Spending Table Nov

 

 

INFLATION: Core PCE inflation came in at +1.1% YoY, still well below target.  Incremental central bank hawkishness may be mildly deflationary and both food & energy cost growth is running negative in the latest CPI reading (we’d argue that’s a good thing), but labor market trends are strong, wage inflation is beginning to percolate, household credit growth went positive for the 1st time in 18 quarters in 3Q13, corporate productivity is flagging and business investment/capex spending is somewhat of a ball under water here.  

 

Personal Income, Spending & Strategy Summary - Net invesment

 

Personal Income, Spending & Strategy Summary - HH Debt QoQ   YoY

 

SEASONALITY REMINDER:  Seasonal adjustments act as a tailwind from September – February, then reverse to a headwind over the March-August period. 

 

Shifting seasonality is perhaps most visible in the initial claims and NFP numbers but the impacts have been pervasive with the reported macro data, equity market performance, investor sentiment and analyst estimates all following a similar annual, temporal pattern. Seasonality will continue to build as a positive support through 1Q14.

 

Personal Income, Spending & Strategy Summary - JS 1

 

Personal Income, Spending & Strategy Summary - NFP Seasonality Nov

 

FLOWS:  “Great Rotation” talk is annoyingly trite but the year-to-date tallies are hard to dismiss and existent trends look set to continue.  Below we highlight the latest fund flow analysis from Jonathan Casteleyn and the Hedgeye Financials team: 

  • Bonds:  Within mutual funds, the $1 trillion that has come into bond funds since 2008 (or the start of the Fed's quantitative easing program) has started to unwind with the first outflow in fixed income funds within the ICI data since 2007. The fixed income outflow of $63 billion through the first 49 weeks of 2013 still pales in comparison to the $303 billion inflow that came into fixed income last year in 2012 (can you say blow off top?) and also the record year of 2009 when the Great Rotation from stocks into bonds started and $379 billion came into fixed income funds. While the over $155 billion outflow in the back half of 2013 has been the sharpest bond outflow in history (most significant 27 week ouflow sequence), the first half of 2013 experienced nearly $100 billion of inflow into fixed income to net to the fairly insignificant outflow year-to-date of $63 billion so there is a case to be made that bond outflows have only just started. 
  • Stocks: Conversely, the nascent production in stock funds (while consistently dismissed) has been historically quite impressive being double that of the $74 billion that came into equity mutual funds in 2007. While the $159 billion running inflow into stock funds thus far in 2013 has had an international fund bend ($131 billion has gone into international stock funds versus just $28 billion into domestic equity funds), there is still ample reason to think that U.S. stocks can continue this turn in redemptions that has plagued them for all 6 years of ICI data before '13 (still record amount of cash on U.S. corporate balance sheets, generally low yields can allow stocks higher multiples, and the unwinding of the commodity super cycle and U.S. bond fund outflows needing to be invested somewhere).

(Source: Hedgeye Financials)

Personal Income, Spending & Strategy Summary - ICI chart 10 

 

 

$USD/Yields/VIX/Equities:  The Hedgeye Macro Manifesto (if there was one) posits that everything that matters in macro happens on the margin.  In other words, the forecasting goal centers on divining better/worse not good/bad.   In other other words, it’s all about the slope of the line. 

 

From a GDP accounting and slope-of-the-line perspective, 3Q13 should mark the short-cycle peak in reported domestic growth.  The recurrent question we’ve received over the last few weeks has been some form of “can domestic equities still work if growth slows from great to good”

 

As always, our immediate/intermediate term allocation strategy will anchor on the price signal.

 

In short, if the dollar can break out above Trend Resistance at 81.13, the VIX holds below TREND resistance at 14.91, and 10Y yields can breach 2.99% (September highs) on the upside, on balance, we’ll stay on the long side of both U.S. equities and pro-growth style factor exposure. 

 

The bond market has been been front-running the Fed all year, as have flows, and while the reallocation from credit to equities may oscillate between trickle and deluge, the broader bond outflow trend should continue alongside the northward march in rates.  Further, with china stable, the  Abenomics trade in full effect, and  Europe following our growth path on a lag, developed markets/economies broadly should remain supportive of risk appetite in the near term.  

 

Personal Income, Spending & Strategy Summary - VIX

 

Personal Income, Spending & Strategy Summary -  USD Levels

 

Higher highs in equities on accelerating volume – with “flows” support, domestic and global macro fundamental support, and the lack of discrete negative, near-term catalyst - are bullish until they aren’t.

 

To enjoying the holiday and (still) buying the bubble,

 

Christian Drake

Associate

 


European Banking Monitor: Europe's Momentum

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Swaps were sharply tighter last week across Europe. In fact, just 2 of 30 European banks were wider on the week. The biggest improvements came from the Spanish, Italian, German and Greek banks. It's safe to say that the recovery in Europe and Europe's banking system more generally remains alive and well.

 

European Banking Monitor: Europe's Momentum - zbanks

 

Sovereign CDS – Sovereign swaps mixed last week, but overall saw little movement. The average and median changes were zero. The largest positive and negative moves came from Spain (+4 bps) and Portugal (-5 bps).

 

European Banking Monitor: Europe's Momentum - z. sov1

 

European Banking Monitor: Europe's Momentum - z sov 2

 

European Banking Monitor: Europe's Momentum - z sov3

 

Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 13 bps. 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. 

 

European Banking Monitor: Europe's Momentum - z. euribor

 


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MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM

Takeaway: The last "real" week of the year saw a continuation of the generally positive trends we've been seeing for a while now.

Europe's banks remain on a roll. Last week we saw further improvement in risk across the board. Our macro #EuroBulls theme continues to dovetail with what we're seeing on the banking side. On the negative side, the only notable risk change this week is the Chinese interbank rate, the Shifon Index, which rose 41 bps week-over-week to 3.85%. That being said, the Shifon remains roughly in-line with its level from a month earlier.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

 • Intermediate-term(WoW): Negative / 3 of 13 improved / 4 out of 13 worsened / 6 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 15

 

1. U.S. Financial CDS -  Swaps tightened for 24 out of 27 domestic financial institutions and the largest improvements came from the large cap banks, where Citi, Goldman and Morgan tightened by 7-8 bps apiece. Radian (RDN) also posted a notable improvement at -18 bps.

 

Tightened the most WoW: WFC, AXP, C

Widened the most WoW: TRV, AGO, MBI

Tightened the most WoW: WFC, RDN, C

Widened the most/ tightened the least MoM: AGO, MBI, TRV

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 1

 

2. European Financial CDS - Swaps were sharply tighter last week across Europe. In fact, just 2 of 30 European banks were wider on the week. The biggest improvements came from the Spanish, Italian, German and Greek banks. It's safe to say that the recovery in Europe and Europe's banking system more generally remains alive and well.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 2

 

3. Asian Financial CDS - China and Japan were uneventful last week, but Indian bank swaps tightened dramatically once again. The month-over-month change in Indian Bank swaps is now 33-48 bps.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 17

 

4. Sovereign CDS – Sovereign swaps mixed last week, but overall saw little movement. The average and median changes were zero. The largest postive and negative moves came from Spain (+4 bps) and Portugal (-5 bps).

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 18

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 3

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 4

 

5. High Yield (YTM) Monitor – High yield rates fell 1.3 bps last week, ending the week at 6.02% versus 6.03% the prior week.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1834.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 6

 

7. TED Spread Monitor – The TED spread rose 0.9 basis points last week, ending the week at 19 bps this week versus last week’s print of 18.1 bps.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.7%, ending the week at 283 versus 281 the prior week. As compared with the prior month, commodity prices have increased 2.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 13 bps. 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: EUROPE'S MOMENTUM - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 41 basis points last week, ending the week at 3.84% versus last week’s print of 3.43%. 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: EUROPE'S MOMENTUM - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 1 bp ending the week at 91 bps versus 90 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: EUROPE'S MOMENTUM - 11

 

12. Chinese Steel – Steel prices in China fell 0.7% last week, or 24 yuan/ton, to 3544 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: EUROPE'S MOMENTUM - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 251 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 3.0% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: EUROPE'S MOMENTUM - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 




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