“All hockey players are bilingual. They know English and profanity.”
Yes, it can be a profane game. We aren’t exactly politically correct when we’re all fired up playing it either. Fans call it passion. Foes call it petulance. If you catch our emotions just right, you can watch us fight – and a hockey game might just break out in the meantime.
It’s 37 below in my hometown of Thunder Bay, Ontario this morning. But after the World Junior Hockey tilt between Canada and the USA today, lots of little boys and girls will be tugging at their Dad’s red and white jerseys to get them suited up to play on their outdoor rinks. There is no such thing as a PTA snow day. There’s always time to play hockey.
While the love of a childhood game can’t be replicated in this Canadian’s craw, I wanted to thank you all for putting up with how I play this one. I’m well aware that I can be an irritating player who likes to stir the pot and start fights. But I love the game and it’s all in good competitive fun. Best of luck and health to you, your families, and firms for a fantastic 2014 Macro season.
Back to the Global Macro Grind…
As Teddy Roosevelt was coming up through the US political ranks, the Boston Evening Times wrote that “he isn’t afraid of the newspapers, and he is always ready for a fight… his aggressiveness is a great factor in a good cause.” (Doris Kearns Goodwin’s The Bully Pulpit, page 141)
Calling it like it is isn’t for everyone. Neither are the principles of transparency, accountability, and trust. But, as you’ll see from the World Junior Hockey Championships in Sweden today, on NFL Playoff Sunday, or in any arena of competitive life, these are the foundations of leadership. And we intend to stand by your side upholding them.
As I wrote yesterday, I have no idea what is going to happen wire-to-wire across the 12-month period that will be 2014. That would be like hearing Randy Carlyle (Coach of the Toronto Maple Leafs) have the hubris to predict how each and every play of tomorrow’s NHL Winter Classic versus the Detroit Red Wings will go – oh, and then predict every other game of the season after that.
The best prediction we can make is to proactively prepare ourselves to Embrace The Uncertainty of the game.
You were either long growth (as an investment style) when you had opportunities to position yourself that way in 2013, or you were not. The game always lets you in – it’s your job to realize that, and play the game that’s in front of you.
We won’t “predict” 2014 – we will begin with our position and start playing the game from there. There will be wins. There will be losses. And god help me if I don’t get into any Twitter fights.
Here’s how we are positioned on the last day of 2013 in the Hedgeye Asset Allocation Model:
1. Cash = 37%
2. Foreign Currency (FX) = 30% (Pound, Euro, Kiwi, etc.)
3. International Equities = 15% (Germany, Italy, Japan, etc.)
4. US Equities = 15% (Growth Equities, not Utilities)
5. Commodities = 3% (Natural Gas)
6. Fixed Income = 0% (it was 0% for 184 trading days of 2013)
Lets sprinkle a little color on these “allocations.” For starters, I may be a Mucker but I am not yet brain dead. Buying-the-damn-bubble #BTDB in US and International stock markets that continue to hit all-time highs is not for the faint of heart. So I have a big pad of cash.
Cash is cool.
In fact, having a nice fat asset allocation to cash beats being in bonds or something commodities that continues to crash. Never forget that Rule #1 of Risk Management is “don’t lose money” (Buffett). That starts and ends with not allocating your assets to a Fisher Price looking pie chart that keeps you in bubbles (Gold and Bonds) that are in the midst of imploding.
On the FX side, remember that our Top Global Macro Theme for Q413 was called #Eurobulls. Pivoting from bullish to bearish on the US Dollar like we did from Q313 to Q4 means it’s a lot easier to have a big asset allocation to other currencies. The British Pound is popping to a fresh YTD high this morning of $1.652 versus USD. That and the Euro remain in Bullish Formations @Hedgeye.
When I think about asset allocation, I don’t ignore the concept of diversification. While allocating to cash is a risk managed choice, so is capping my max allocation to any asset class at 33% of my total net wealth. That’s precisely the number I invested into Hedgeye in 2008 and going to 30% international FX right here and now (i.e. 91% of my max conviction to an asset class) is the same.
Some people call going to 90-100% of your max “conviction.” And while it’s really important for me to communicate where my investment convictions are (and where they are changing), don’t confuse that with what I have the highest conviction in of all – our process.
Thank you again for providing me and my teammates an opportunity to play this game out loud and in front of you every day. Making mistakes out on the proverbial ice for all our fans and foes to see has helped expedite our learning and maturation process immensely. The day I stop learning how to get better at this game is the day I’ll realize it’s time to retire. God willing, I have a lot of years in me yet.
Our immediate-term Global Macro Risk Ranges are now (with bullish or bearish TREND in parenthesis):
UST 10yr Yield 2.94-3.06% (bullish)
SPX 1 (bullish)
VIX 11.84-14.91 (bearish)
Best of luck out there today, and Happy New Year!
Keith R. McCullough
Chief Executive Officer
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
TODAY’S S&P 500 SET-UP – December 31, 2013
As we look at today's setup for the S&P 500, the range is 38 points or 0.98% downside to 1823 and 1.08% upside to 1861.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.61 from 2.60
- VIX closed at 13.56 1 day percent change of 8.83%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am/8:55am: Weekly retail sales from ICSC/Redbook
- 9am: S&P Case-Shiller 20 City M/m, Oct., est. 1% (pr 1.03%)
- 9:45am: Chicago Purchasing Mgr, Dec., est. 61.0 (pr 63.0)
- 10am: Consumer Confidence Index, Dec., est. 76.3 (pr 70.4)
- House, Senate not in session
WHAT TO WATCH:
- Last trading day of 2013; S&P 500 set for best yr since ’97
- Volcker rule court halt request withdrawn by bankers group
- BP asks court to block payments not directly linked to spill
- Netflix tests subscription fees based on no. of account users
- Apollo Tyres surges in Mumbai after Cooper drops merger plan
- Fisker creditors seek asset sale through bidding process
- UnitedHealth faces probe after dropping 2k doctors: N.Y. Post
- Berkshire to exchange $1.4b in Phillips 66 stock for unit
- Apple e-books monitor should be free to query Cook, U.S. argues
- Boeing to move 777x wing output on union rejection: Reuters
- China approves $353m of share sales as IPOs to resume
- Gold with silver heading for worst yr since ’81 on asset sales
- Corn set for worst drop since ’60 as crop prices slump
- Singapore economy grew 3.7% in 2013, Prime Minister Lee says
- No S&P 500 earnings reports scheduled for today
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Commodities Set for First Drop in 5 Years as Corn to Gold Tumble
- Corn Set for Worst Drop Since ’60 as Crop Prices Slump on Output
- Gold Bulls Retrench as Price Drops Most in 32 Years: Commodities
- WTI Set for Fourth Gain in Five Years as U.S. Stockpiles Decline
- Lead Falls as Some Investors Sell After Industrial-Metals Rally
- Gold With Silver Heading for Worst Year Since ’81 on Asset Sales
- Palm Oil Posts First Annual Gain Since 2010 as Demand Surges
- Rebar Posts Monthly Loss Amid Concern on Local Government Debt
- Sugar Futures Rebound, Narrowing Annual Decline; Cocoa Rises
- Europe Loses Out on 90% of Oil Use Growth Beyond OECD: Bear Case
- Hedge Fund Crude Wagers Climb to Highest Since September: Energy
- China Gold Imports From Hong Kong Slump as Price Declines
- Iron Ore Miners Seek to Restart Port, Rail as Cyclone Fades
- Gazprom’s Pipe Control May Hinder Independent Gas: Bear Case
The Hedgeye Macro Team
This note was originally published at 8am on December 17, 2013 for Hedgeye subscribers.
“I can only say: I’m sorry America.”
In the opening sentence to his recent WSJ op-Ed (which the NY Times wouldn’t publish), “Confessions of a Quantitative Easer”, that’s what Andrew Huszar wrote. Since he ran the biggest Fed bond buying program in US history, that was a big apology.
I had the pleasure of hosting Andy at our new Hedgeye headquarters in Stamford, CT yesterday for our 1st segment of a series @HedgeyeTV that we’re calling Real Conversations.
The short-term headline of our conversation is that Andy doesn’t think the Fed tapers tomorrow. The longer-term implication of our conversation is that Andy thinks the Fed has been politicized, allowing “QE to become Wall Street’s new Too Big To Fail policy.” So don’t look for an actual “taper” of consequence, any time soon.
Back to the Global Macro Grind…
Not to be confused with Ben Bernanke’s take on the whole thing, Huszar left “Fed-up” because he didn’t believe in how “the central bank continues to spin QE as a tool for helping Main Street.”
Yesterday at the Federal Reserve’s 100 year birthday party (the one that no one in America cared to celebrate), Bernanke went on and on saying that the “Fed’s willingness, during its finest hours” … was to “stand up to political pressure.” Got-it.
Moving along… the entire global currency market, which has picked up some volatility as of late (JPM’s FX Volatility Index was +3.7% last wk to +8.1% YTD), awaits our central planning overlord’s decision tomorrow.
We’re short the US Dollar in our Q413 Global Macro Themes deck and we re-shorted the US Dollar (UUP) on its bounce to lower-highs last week in #RealTimeAlerts. Huszar’s take on it all simply confirmed what we were thinking.
From a risk signaling perspective, where do we stand on the FX War’s Big 3?
- US Dollar (Index) = Bearish Formation (bearish on all 3 of our core risk mgt durations – TRADE, TREND, and TAIL)
- The Euro (EUR/USD) = Bullish Formation (bullish on all 3 of our core risk management durations)
- Japanese Yen (USD/JPY) = Bearish Formation
The bearish intermediate-term TRENDs in both the US Dollar and Yen make sense as (relative to the ECB, whose balance sheet has shrunk) the Fed and BOJ have been the marginal debaucherers of their currencies as of late.
Japan has been doing this for over a year now, while the Fed re-engaged in Buck Burning with the no-taper decision in September. So that makes getting long the Yen versus the US Dollar here interesting. Warning: it’s early.
Looking at the leans in Global Macro consensus (net long or short positions in CFTC futures and options contracts), here’s where the game is currently at:
- USD = +6,730 net long contracts (versus +7,725 three months ago)
- EUR = +15,115 net long contracts (versus +39,803 three months ago)
- JPY = -129,614 net SHORT contracts (versus -90,060 three months ago)
In other words, consensus A) in US Dollar bulls isn’t as sure as it was 1yr ago (when the net long position in USD was +19,471), B) is more worried about another ECB rate cut (even though the European economic data continues to accelerate) and C) is wacky net short the Yen (now that it’s down -16% vs USD for 2013 YTD!).
So what do you do with that? Start yelling to the heavens that “it’s a bloody currency war and a race to burn everything; buy bitcoin!” Or do you buy Yen in early 2014 as consensus marks the bottom?
I’ll tell you how I used to think about stuff like this – dogmatically. I was certain that my research view was going to be right (until it would be very wrong) and had a complete disrespect for market timing.
Note to self (sponsored by Dan Och at OZM): if you disrespect Mr. Macro Market’s timing signals, he’s going to “do you” some humbling P&L exercises.
Our track record risk managing currencies is better than a moving monkey’s, primarily because we use risk controls:
- Buying a currency, I wait for an immediate-term TRADE oversold signal within a bullish TREND
- Shorting a currency, I wait for an immediate-term TRADE overbought signal within a bearish TREND
Those are the easiest calls to make. The toughest are the ones that eventually have the biggest TRENDING reversals (bearish to bullish reversals or vice versa). Buying the Yen versus the USD would be a potential example of that in early 2014. But, for me, I need to take my time and score the bottoming process (they are processes, not points).
In parallel to the quantitative signaling, what we do as a research team is try to play out scenarios and catalysts (preferably with tangible macro calendar catalysts). What if Huszar is right and the Fed’s Policy is To Big To Fail? What if the Fed doesn’t taper in DEC, then the US economic data continues to slow in JAN? What if you’re looking at no taper in 2014 and a Yellen Qe6?
If that were to play out, I’ll be really sorry for America too.
Our Financials team will be hosting a call on “Mortgage Mayhem” at 1pm today to discuss the coming January upheaval in the mortgage market from the new QM regulations. The speaker will be industry authority, Larry Platt, an attorney with the law firm of K&L Gates. If you’re an Institutional investor and would like access to the call, email firstname.lastname@example.org.
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
THE MACAU METRO MONITOR, DECEMBER 31, 2013
CHRISTMAS TOURIST ARRIVALS GROW BY 16.08% Macau Business
Macau Public Security Police say 920,872 tourists visited between December 20 and December 26, up 16.08% YoY.
SINGAPORE ECONOMY GREW 3.7% IN 2013, PRIME MINISTER LEE SAYS Washington Post
According to Singapore PM Lee, 2013 GDP rose 3.7%. This implies 4Q GDP grew between 4.1%-4.5% (Bloomberg survey: 4.8%). Lee reiterated a forecast for the economy to grow 2%-4% in 2014.
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