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Embrace Uncertainty

Client Talking Points

CHINA

Most of Asia is closed. But Chinese stocks closed up +0.88% to close out the year in the bottom portion of our Global Equities League table at down -3.9% year-to-date. Why? Simple. #GrowthSlowing. That was the call there. Get the slope of growth correct, and it's easier to get country asset allocations correct.

UST 10YR

Here we are at 2013 year end and US 10 year yield will go out at its year-to-date highs. So much for the whole #RatesRising is going to "kill the stock market" thing. Instead, the growth expectations embedded in a +4.12% GDP print perpetuated all-time highs for growth investing (to be sure - US growth stocks, not Gold or bonds).

POUND

The British Pound is still our favorite currency in the world. It is tracking to new highs here this morning at $1.652 versus the US Dollar. And while it is immediate-term TRADE overbought within its $1.63-1.65 risk range, this is breaking out of a 65 year base, don’t forget! Keep calm, carry on...

Asset Allocation

CASH 37% US EQUITIES 15%
INTL EQUITIES 15% COMMODITIES 3%
FIXED INCOME 0% INTL CURRENCIES 30%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Its been a great year – thanks for putting up with me and best of luck and health to u, your families, and firms in 2014 @KeithMcCullough

QUOTE OF THE DAY

"When the fight begins within himself, a man's worth something." -Robert Browning

STAT OF THE DAY

Gold futures retreated 28% this year to $1,201.60 an ounce, poised for the first loss since 2000 and the biggest since 1981. Meanwhile, investors pulled $38.6 billion from gold funds this year, the most in data going back through 2000, according to EPFR Global, a research company.



Our New Year's Fight

“All hockey players are bilingual. They know English and profanity.”

-Gordie Howe

 

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!

KM

 

Keith R. McCullough
Chief Executive Officer

 

Our New Year's Fight - cod

 

Our New Year's Fight - ruff


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December 31, 2013

December 31, 2013 - Slide1

 

BULLISH TRENDS

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BEARISH TRENDS

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December 31, 2013 - Slide13


THE HEDGEYE DAILY OUTLOOK

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.      

                                                                                                                         

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

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)

GOVERNMENT:

    • 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

EARNINGS:

    • 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 DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


I'm Sorry America

This note was originally published at 8am on December 17, 2013 for Hedgeye subscribers.

“I can only say: I’m sorry America.”

-Andrew Huszar

 

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?

  1. US Dollar (Index) = Bearish Formation (bearish on all 3 of our core risk mgt durations – TRADE, TREND, and TAIL)
  2. The Euro (EUR/USD) = Bullish Formation (bullish on all 3 of our core risk management durations)
  3. 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:

  1. USD = +6,730 net long contracts (versus +7,725 three months ago)
  2. EUR = +15,115 net long contracts (versus +39,803 three months ago)
  3. 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:

  1. Buying a currency, I wait for an immediate-term TRADE oversold signal within a bullish TREND
  2. 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 sales@hedgeye.com.

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1765-1815

VIX 14.26-16.84

USD 79.79-80.44

EUR/USD 1.37-1.38

USD/JPY 101.72-103.84

Gold 1216-1255

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

I'm Sorry America - Chart of the Day

 

I'm Sorry America - Virtual Portfolio


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