TODAY’S S&P 500 SET-UP – January 2, 2014
As we look at today's setup for the S&P 500, the range is 28 points or 0.99% downside to 1830 and 0.52% upside to 1858.
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 19, 2013 for Hedgeye subscribers.
“The way I feel about music is that there is no right and wrong. Only true and false.”
I was dead wrong on the no-taper call yesterday, and (after covering my US Dollar short position within minutes of the decision) was somehow positioned right (8 LONGS, 0 SHORTS). Where I was brought up, being right for the wrong reasons is called luck.
True or False: Ben Bernanke did the right thing in tapering yesterday? True. Whether or not his obeying the US 2013 #GrowthAccelerating data on a lag (he’s 3 months late in making a decision he should have made in September) proves to be right is up to history.
I think that if most people were intellectually honest about it, they wouldn’t have told you that A) Bernanke was going to taper yesterday AND B) US stocks would rip to all-time highs on that. But they did. That is the only truth that matters this morning.
Back to the Global Macro Grind…
So what do we do now? Sticking with the process, that’s actually the easiest call to make. We simply go right back to where we were positioned from December 2012-September 2013:
That’s why my 1st three moves in #RealTimeAlerts after the taper decision yesterday were:
It’s one thing to make mistakes in this game. It’s entirely another to make mistake-upon-mistake after making that first mistake. In hockey terms, give away the puck once – feel shame. Give it away again – feel sitting on cold Canadian bench for rest of game.
I could have easily given away the puck post taper yesterday buying something like Gold because it was down. It’s down a lot more this morning (Silver -3.9%, Gold -1.1%) and testing its June 27th YTD closing low of $1200/oz.
True or false: Gold hates #RatesRising?
Another puck I could have given away would have been trying the long Yen “because everyone is short the Yen.”
True or false: Nikkei loves Burning Yen?
In other words, as soon as you saw the word “taper” yesterday, you got the Dollar right (up) and that helped you get a lot of other things Global Macro right.
True or false: Dollar Up = Emerging Markets Down?
Oh, and despite the epic US Equity market rip to all-time highs (SP500 1810 = +26.9% YTD), Emerging Equity markets in Asia were down overnight (India -0.72%, Philippines -0.64%). Turkeys’ stock market is -0.7% this morning too.
On the taper news yesterday, Argentina, Chile, and Peru all saw their stock markets close down on the day. “Emerging” commodity countries = #EmergingOutflows.
So is it the marketing messages of asset management firms that are perma long Gold, Bonds, and Emerging Markets that are right or wrong in a Dollar Up + #RatesRising environment? Or are the perceptions of their investors simply false?
The truth is always in the balance of your account. It’s there, each and every market day, whether you played lucky or not.
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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Takeaway: Hedgeye CEO Keith McCullough offers up his 13 favorite reads over the past year.
Here are (in no particular order) the baker's dozen books that the Hedgeye CEO/puckhead/nerd/market guru read this past year and highly recommends. Click on the book link to see more on Amazon.
By George Gilder
This is a thought leader’s book. With so many people whining about not having a “solution” to Washington’s economic policies, ask yourself if we’re asking the right leaders for new ideas. This book is the antichrist of broken western-academic-economic-policy group-think. -KM
By William L. Silber
An easy read that will educate people on how central planning has become so causal to American Purchasing Power (US Dollar) and inflation/growth expectations. -KM
By Nassim Nicholas Taleb
Buy the book. A must read as we continue to narrow the gap between Chaos Theory and Behavioral Finance. -KM
By Malcolm Gladwell
"The bestselling author behind the inventive Outliers, Blink, and The Tipping Point is back with another thought provoking theory that fascinates, entertains, and informs. He gives underdogs their due this time, challenging everything readers believe about facing-and conquering-life's stumbling blocks, using the 'real' story of David and Goliath and more to make his point." -Celeste Williams, Fort Worth Star-Telegram
By Doris Kearns Goodwin
“If you find the grubby spectacle of today’s Washington cause for shame and despair—and really, how could you not?—then I suggest you turn off the TV and board Doris Kearns Goodwin’s latest time machine. … [Goodwin puts] political intrigues and moral dilemmas and daily lives into rich and elegant language. Imagine ‘The West Wing’ scripted by Henry James.” –Bill Keller, NYT
By Henry Hazlitt
A million copy seller, Henry Hazlitt’s Economics in One Lesson is a classic economic primer.
By Charles P. Kindleberger
"Underneath the hilarious anecdotes, the elegant epigrams, and the graceful turns of phrase, Kindleberger is deadly serious. The manner in which humans beings earn their livings is no laughing matter to him, especially when they attempt to do so at the expense of one another. As he so effectively demonstrates, manias, panics, and crashes are the consequence of an economic environment that cultivates cupidity, chicanery, and rapaciousness rather than a devout belief in the Golden Rule." -Peter L. Bernstein
By Dan Ariely
“Through a remarkable series of experiments, Ariely presents a convincing case. . . . Required reading for politicians and Wall Street executives.” (Booklist)
By Jack Weatherford
"As entertaining as it is thoughtful....Few contemporary writers have Weatherford's talent for making the deep sweep of history seem vital and immediate." –The Washington Post
By Eric J. Chaisson
“Chaisson conducts an intriguing tour over vast realms of time and space. A lucid and sprightly guide, he brings forth original and provocative observations, while gathering a host of wonders in his cosmic embrace.” -Dudley Herschbach, 1986 Nobel Laureate in Chemistry
By Stephen Greenblatt
“The Swerve is one of those brilliant works of non-fiction that's so jam-packed with ideas and stories it literally boggles the mind.” -Maureen Corrigan - NPR/Fresh Air
By Jack Weatherford
“Weatherford brings a cultural anthropologist's wide-angled perspective to this illuminating investigation of money's role in shaping human affairs…Full of forgotten lore and provocative opinions (e.g., harmful inflation is identified as the dominant monetary theme of our century), and sprinkled with allusions to Voltaire, Goethe, L. Frank Baum and Gertrude Stein, this intriguing selective survey will captivate even readers with no particular yen for financial knowledge.” –Publisher’s Weekly
By Daniel Kahneman
“A tour de force. . . Kahneman’s book is a must read for anyone interested in either human behavior or investing. He clearly shows that while we like to think of ourselves as rational in our decision making, the truth is we are subject to many biases. At least being aware of them will give you a better chance of avoiding them, or at least making fewer of them.”—Larry Swedroe, CBS News
This note was originally published at 8am on December 18, 2013 for Hedgeye subscribers.
“It will be said that we don’t propose to establish Kings.”
“But there is a natural inclination in mankind to Kingly Government. It sometimes relieves them from the Aristocratic domination. They had rather have one tyrant than five hundred.” –Benjamin Franklin (The Liberty Amendments, pg 25)
I just love that quote. And how appropriate for a fresh winter’s morning when our central planning overlords are going to speak down to us from upon high. It’s Federal Reserve day, baby! Just like your Founding Fathers planned it.
On tapering, our Kingly Government’s leaky-peaky-media-access-group seems a little confused as of late. Between the WSJ’s Hilsenrath and CNBC’s Liesman flip flopping on what the Fed is going to do today, at a bare minimum it makes for great TV, on mute.
Back to the Global Macro Grind…
Did King Bernanke cut these poor peons off? What is up with that by the way? Forcing these dudes to think for themselves during the holiday season is just mean.
In all seriousness, trying to front-run the Fed without inside information isn’t easy. Reading the tea leaves on what Mr. Macro Market expects in real-time is the best we can do. If Bernanke tapers today, he’ll certainly shock me. But that’s not new.
What is new is US equity market volatility. What’s driving an intermediate-term TREND breakout in front-month stock market volatility (VIX) above our 14.91 signaling line is very simple – monetary policy confusion.
And in markets (which trade on expectations, not academic theories), confusion breeds contempt. If you follow the bouncing ball of expectations:
1. MONETARY POLICY: what the Fed should have done in SEP (taper) wasn’t done, so confusion rules
2. CURRENCIES: confusion drives Global FX volatility; most markets are keying off what the US Dollar does
3. EQUITIES: since spoos like no-taper (but worry that there should be a taper) they whip around (on no volume)
One of our biggest subscribers (he runs $18B in equity assets) nailed it in an email to me yesterday. Effectively, he thinks he knows what to do, but he’s not sure – and he definitely doesn’t like the process of discovery:
“I need to take the pulse of the patient everyday and I would really like to take the pulse without a pacemaker attached!”
#Pacemakers. That’s what the Fed should get us Canadian catholic boys for Christmas – we can attach them to a Demark dongle on our Bloomberg machines and any time Hilsy or Liesman whispers another flip to their flopping Fed leaks, we get a little jolt.
In other news…
Economic data in the United Kingdom continues to improve at an accelerating rate. On the heels of a #StrongPound, strengthening purchasing power, and falling consumer prices, the UK unemployment rate just dropped to 7.4% from 7.6%.
This, of course, has the former Keynesian kings of the Bank of England all squirreled up.
After all, they cannot allow the only thing that perpetuates economic recoveries for sustainable periods of time (#StrongCurrency) to threaten their un-elected political power.
Or is that “threatening the recovery”?
I couldn’t make this up if I tried, but after one of the best British runs of positive (think rate of change) economic data since the early Thatcher years (oh did she #timespank those British Keynesian boys publicly!), this is the headline in Europe this morning:
“BOE WARNS FURTHER POUND APPRECIATION THREATENS THE RECOVERY”
All the while, the Swiss reported an awesome confidence reading for DEC (ZEW index 39.4 vs 31.6 in NOV) after the Germans did yesterday (Germany’s ZEW accelerated to 62 in DEC vs 54.6 NOV).
Damn that #StrongEuro!
How dare economic gravity take hold and the most coincident indicators of economic health (a country’s currency) perpetuate confidence amongst The People?
But there is a natural inclination amongst group-thinkers towards “certainty” in economic forecasting and policy making. It sometimes relieves people who are trying to cover their political bottoms because they don’t have to be accountable to the policies themselves.
They had rather have one central planning god than a free market.
Our immediate-term Risk Ranges are (my Top 12 Daily Macro Risk Ranges are its own product now):
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: The Queen Mary of macro trends has turned.
As Hedgeye's Macro Team prepares to release its highly anticipated quarterly Macro Themes for Q1 in early January, we take a brief look back at #RatesRising as detailed by CEO Keith McCullough. This theme was one of our top macro calls of 2013. It seems only fitting as the 10-year note nestles in north of 3.00%.
As we wrote back in August, the "Queen Mary" analogy is appropriate for interest rates as they have literally been in decline for the last 30 years since peaking in the early 1980s. This long term decline has enabled any business that depends on borrowing money to fund its business to have a steadily declining cost of capital. In addition, this has made bonds a compelling asset class with a long term underlying bid to price.
In our models in Q2, yields inflected notably and broke out above our TRADE, TREND and TAIL levels. In fact, 10-year yields had their largest percentage increase quarter-over-quarter in more than a decade. Even though 10-year yields have broken out, they remain well below the mean yield since 1989 of 5.21%.
The seismic shift in interest rates will certainly be one of the most critical factors over the coming quarters and years. As money flows from the bond market to avoid losses, equities will be awaiting with open arms.
After all, while gentleman may prefer bonds, they don’t prefer losses.
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.