TODAY’S S&P 500 SET-UP – December 26, 2013
As we look at today's setup for the S&P 500, the range is 43 points or 1.71% downside to 1802 and 0.64% upside to 1845.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This note was originally published at 8am on December 12, 2013 for Hedgeye subscribers.
“I’d rather be dumb and antifragile than extremely smart and fragile”
The hyperbole of that quote is that Taleb thinks he’s extremely smart. I’m definitely dumber than he is. So I guess he’d agree that I should never hire him to do what I can do better myself – manage real-time market risk. It’s a great job for a dumb hockey player.
Back to the Global Macro Grind…
The reason why I thought of Taleb this morning is that I was thinking about volatility. To his credit, he was one of the first to write about risk managing volatility from a market practitioner’s perspective. That doesn’t mean I agree with everything he wrote.
In terms of how we measure market entropy in real-time (multi-factor, multi-duration), yesterday was a one of the few critically bearish signal days for the US stock market.
To boil that down to 3 basic factors in our model (Price, Volume, and Volatility):
1. PRICE – SP500 A) failed to make a higher-high versus the 1808 all-time closing high and B) broke 1785 TRADE support
2. VOLUME – was +13% versus my immediate-term TRADE duration average (1st mini-volume spike on a down price move)
3. VOLATILITY – front-month VIX broke out above @Hedgeye intermediate-term TREND resistance of 14.91
This has never happened before (because the SP500 has never been at this all-time closing high before). But historically, countries, currencies, companies (anything with a ticker) do this frequently. And when they do, I respect Mr. Macro Market’s signal.
What is a bearish immediate-term signal @Hedgeye?
1. PRICE = down
2. VOLUME = up
3. VOLATILITY = up
1. PRICE = up
2. VOLUME = up
3. VOLATILITY = down
… is a bullish immediate-term signal @Hedgeye (especially when it’s happening within a bullish intermediate-term TREND).
Sure, I have been buying-the-damn-bubble #BTDB pretty much all year – but while I covered a couple of oversold shorts like CAT yesterday, I didn’t buyem on the long side. An intermediate-term TREND breakout in volatility is the #1 reason for that.
Are there tangible risk factors that could perpetuate an intermediate-term TREND move in US Equity Volatility back towards 20 on the VIX? Big time. Here are some behavioral ones that I discussed with clients in NYC yesterday:
1. VIX has been making a series of higher-lows since AUG as the Fed started to confuse with Taper-on/Taper-off in SEP
2. The average “net long” positioning of the hedge fund community is testing its all-time high zone of +60% again
3. The II Bull/Bear Spread just blew out to fresh 5 year highs of +4390 basis points to the BULL side
That last point is one of the more fascinating migrations I have seen in my career. To put a 44% spread between bulls and bears in context, that II Bull/Bear Spread was only +1710 basis points wide in the 1st week of September 2013.
Early September – that’s when people may have claimed to be “bullish” but they certainly weren’t positioned Bullish Enough. All this market needed to scare the hell out of the pretend bulls was a VIX rip to 17 in late August.
If the VIX goes to 17-18 tomorrow, people who are buying-the-damn-bubble #BTDB will get killed. So, if you have been in the habit of doing the buy on red, sell on green #GetActive thing, you want to be more careful buying now than you were last week.
How about fundamental research factors that could turn bearish in the next 1-3 months?
1. US Dollar being devalued and debauched (no-taper) towards its YTD lows
2. US GDP #GrowthSlowing from its cycle high of +3.6%
3. Down Dollar = Up Yen = Down Nikkei (another thing people didn’t enjoy in late AUG)
Rather than making up my own academic sounding word like antifragile, I’ll call managing real-time market risk this way what it is – being mentally flexible. If you can Embrace Uncertainty every market day, you might feel less dumb every once in a while too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr yield 2.76-2.91%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on December 11, 2013 for Hedgeye subscribers.
“Time destroys the speculation of men, but it confirms nature.”
Marcus Tullius Cicero was a Roman philosopher, politician, lawyer, orator, political theorist, and constitutionalist (no word on whether he played hockey). His impact on the Latin language was so deep that the history of prose in both Latin and European languages, up until the 19th century, is said to be either a reaction against or a return to his style. To use a sports analogy: he was an impact player.
Like many of you, I tend to tune out much of the main stream media, but I did catch myself watching a little bit of CNBC yesterday. Interestingly, it actually made me realize that the buy side, sell side, and media are arguing with many of the same platitudes on the topic of tapering. In short, no one has conviction or a strong insight. Or certainly, unlike Cicero, their views are not having an impact.
In the land of bonds, of course, Bill Gross from PIMCO is widely considered to be the impact player. And rightfully so, as PIMCO manages over $2 trillion in assets and is the world’s largest bond investor. Even if we don’t agree with PIMCO’s research or views, there can be no debate that the firm has the ability to impact asset prices in a meaningful reallocation.
So, what is the latest from the big bond boys on the taper? Well, this is what Gross wrote in his most recent monthly letter (which is usually a fun read by the way!):
“The taper will lead to the elimination of QE at some point in 2014, but the 25 basis point policy rate will continue until 6.5% unemployment and 2.0% inflation at a minimum have been achieved. If so, front-end Treasury, corporate and mortgage positions should provide low but attractively defensive returns.
We have positioned our bond wars portfolio – heavily front-end maturity loaded along with credit, volatility and curve steepening positions, with the aim of outperforming Vanguard as well as many other active managers.”
In part, especially given PIMCO’s sizeable position, Gross’s job is to influence and ensure the bond market doesn’t shake, rattle, or roll in any direction that isn’t beneficial to PIMCO. If you are Gross, you certainly want the incremental buyer to be focused on mortgage backed securities.
Currently, $40 billion of the Fed’s monthly purchases are in the MBS market. In aggregate, this is more than half a trillion in annual purchases of mortgage backed securities. The impact of multiple rounds of QE has been that the premium of Agency MBS over Treasuries has narrowed by some ~50 basis points from pre-QE to post-QE.
Given that 34% of PIMCO’s Total Return Fund are in agency MBS, there is some serious interest rate risk in that position. By our estimation, a 50 basis point move in the spread of Agency MBS has the potential to lead to 5% downside in price. To the extent that 34% of PIMCO’s “book” has the potential to be marked down 5%, that is a big deal for PIMCO and the associated market.
Reflexively, if PIMCO were to underperform, they would then be forced to liquidate MBS positions as investors exited their funds. In turn, this would amplify any move in price. A mass exit of PIMCO would be an “Aye Carumba” moment in the MBS market to be sure.
Back to the Global Macro Grind…
On the longer end of the curve, specifically 10-year yields, tapering is getting somewhat priced in. In the Chart of the Day, we show this graphically by comparing 10-year yields, to the Fed Funds rate, to the Federal Reserve balance sheet. As the chart below shows, 10-year yields are now back at a level not seen since early 2011, which pre-dated QE Infinity (i.e. the open ended purchases that began in September 2012).
In the hypothetical world where 10-year rates actually get priced based on economic fundamentals, the current spread of 2.6% between the 10-year yield and the Fed’s discount rate may not be far off reality. For context, the average spread between the two over the last decade was about 1.7% and since 1954 0.54%. Certainly, the 100 basis points widening of this spread over the last year is indicative of some level of tapering being priced in.
This all leads to an interesting question: will tapering be a ‘sell the news’ moment for 10-year yields? That’s a question I’ll leave to the speculators and those that need to protect their book to answer...
One point that many pundits don’t seem to be talking about is that a decline in tapering will be positive for the U.S. dollar. This is further supported by a point we have been highlighting consistently, which is that the Federal deficit has been narrowing. In the fiscal year ending 2013, the federal deficit was below $1 trillion for the first time since 2008.
This improvement continued into this fiscal year as the deficit in October was -$91.6 billion, an improvement of 24% year-over-year. The Treasury will release November’s budget numbers at 2pm and we would expect similar improvement. In addition to this budget improvement, the fact that Congress seems to actually be functioning should also bode well for the U.S. dollar.
In fact, last night the House and Senate announced a two year budget deal. Even if the deal isn’t ideal, thankfully our elected officials are at least getting out of the way and signaling to the world that they can functionally manage the country. From a deficit perspective, there will be $63 billion in increased spending (sequester relief) over the next two years, but that shouldn’t impact the continued narrowing of federal budgets. It’s amazing what our elected officials can accomplish when they get out of the way.
Just imagine what would happen if the un-elected officials at the Fed got out of the way, the strong dollar American growth story would be fully in play!
Our immediate-term Risk Ranges are now:
UST 10yr Yield 2.75-2.82%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Takeaway: Buying-The-Damn-Bubble #BTDB may not sound polite, but it's been working like a charm.
The S&P 500 is up 401 points (+28%) 2013 year-to-date.
Gold is down $475 (-28%).
How's that for a macro market mirror image?
Buying-The-Damn-Bubble #BTDB may not sound polite, but it's been working like a charm. A stronger US Dollar and #RatesRising can perpetuate both of these moves further.
Editor's note: This is an excerpt from Hedgeye CEO Keith McCullough's morning research. For more information on how you can become part of the Hedgeye Revolution click here.
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