“In 1893, the most serious depression the nation had yet experienced settled over the land.”
-Doris Kearns Goodwin (The Bully Pulpit)
Today is not 1893.
While they let some of the 2013 US stock market bears out of their caves yesterday (BREAKING NEWS: “SP500 Falls To Start Year Lower For 1st Time Since 2008” –Bloomberg), I suspect the blizzard will send them right back to where they came from.
This is not 2008 either.
Sure, there’s plenty to concern yourself with (like a market that got pinned up at an all-time high at year-end) in terms of this raging bull market being overbought and both sentiment and flows chasing it, but let’s get real here and get on with our risk managed day.
Back to the Global Macro Grind…
Oh, and by the way, in 1893 we didn’t need a bunch of bureaucrats at the Fed to save us from themselves either. The bear depression of the late 19th century was one born out of this thing we call a cycle. Companies back then overbuilt rail capacity and over-extended themselves with bank loan leverage (sound familiar?). This is what happens at cycle tops (like 2007).
Globally (especially in Europe) we aren’t in the area code of a peaking 1893 or 2007 piggy cycle either. In the US we don’t think we’ll be seeing consecutive 4% handles on GDP, but that certainly doesn’t mean fear and panic is going to break-out across the land. With so many still whining about the last war, I say you get yourself a shovel and a smile this morning - move forward.
Back to the business cycle (where companies build inventories, shhh), lets dig through some fresh US economic data:
1. USA’s ISM Manufacturing PMI for DEC was reported yesterday at 57.0 vs 57.3 in NOV
2. The ISM’s New Orders component of the report accelerated to 64.2 DEC vs 63.6 NOV
3. The ISM’s Employment component of the report was steady at 56.9 DEC vs 56.5 NOV
For me, this was a surprisingly strong read-through on the US economy as the data was almost as good as it could get (sequentially) in Q3 of 2013. So to see follow-through in December was a good thing for growth (as an investment style) and bad for bonds.
Employment is a fun one to watch people complain about because:
1. The monthly BLS data is a lagging economic indicator (the one CNBC has dudes guessing on every month)
2. The only coincident to leading indicators (ISM’s, weekly Jobless Claims, etc) are poorly understood
3. NSA rolling 4-wk jobless claims (see Chart of The Day) fit the 10yr US Treasury Yield’s 12 month TREND like a glove
I’ll give you 5:1 odds that if you ask your run-of-the-mill TV pundit what the consequence is of using the NSA # to probability weight the direction of the bond market that they think you are talking about the National Security Agency.
*NSA = non-seasonally adjusted. And the reason why we use the NSA rolling-claims data series on a year-over-year basis is simply because that’s what Josh Steiner (Managing Director of our Financials team) found that Mr. Macro Market cares about.
Who seriously cares that, on very light volume (-14% vs @Hedgeye TREND), it was the 1st market down day “since 2008” when it has no back-test or relevance to the market we have in front of us in 2014? Here are 3 more things to think about:
1. US Initial Jobless Claims of 443,513 (NSA) were down -9.5% y/y yesterday (vs. down -8.2% in the wk prior)
2. US 10yr Treasury Yield held my most immediate-term TRADE line of 2.96% support yesterday; 3.07% = resistance
3. Gold is signaling immediate-term TRADE overbought this morning within a bearish @Hedgeye TREND
So, rather than try to get cute with some Hedgeye panic and depression propaganda yesterday, here’s what I did:
1. Took our Cash positions down from 50% to 40% in the Hedgeye Asset Allocation Model
2. Moved from 5 LONGS, 5 SHORTS on 12/31’s close to 8 LONGS, 4 SHORTS (bought and covered on red)
3. Shorted Gold (GLD) and bought some US Equity Beta (TSLA)
That doesn’t mean I am going to be right. It simply means there’s a process behind every sequence of macro market timing decisions my team and I make. There’s nothing depressing about that.
Our immediate-term Risk Ranges are now as follows (all 12 of my Big Macro Ranges are in our Daily Trading Range product):
UST 10yr Yield 2.97-3.07%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Client Talking Points
Whoever is long South Korea’s stock market is not a happy camper this morning. The KOSPI is down hard for the first two days of the year (-3.3%). It is now bearish on both Hedgeye TRADE and TREND durations. Global Inflation Expectations Rising hurt real-growth assumptions.
Across the pond, the #StrongPound and #StrongEuro continue to be the economic glue holding together rising purchasing power and confidence across the continent. Both the UK's FTSE and Germany's DAX held TRADE and TREND lines of support yesterday. Meanwhile, UK Construction PMI came in at 62.1 for December. As you may recall, #EuroBulls was a Q4 Macro Theme here at Hedgeye.
After crashing throughout 2013, Gold, Yen, VIX (volatility) were all up yesterday. Yes, I will be fading that counter TREND move (shorting Gold and buying US and European equity beta) on that. Sorry, but Gold is nowhere near confirming anything at all except a dead cat bounce. Incidentally, the upside in the 10-year Treasury yield is 3.07%.
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Top Long Ideas
Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.
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 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.
Three for the Road
QUOTE OF THE DAY
"Go confidently in the direction of your dreams. Live the life you have imagined." -Henry David Thoreau
STAT OF THE DAY
Pimco had record redemptions last year in the $244 billion Total Return Fund, which trailed 64% of peers and fell 1.9% in 2013 for the biggest loss since 1994 as the S&P 500 surged 30%, prompting investors to flee traditional bond funds.(Bloomberg)
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TODAY’S S&P 500 SET-UP – January 3, 2014
As we look at today's setup for the S&P 500, the range is 47 points or 1.25% downside to 1809 and 1.31% upside to 1856.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.61 from 2.61
- VIX closed at 14.23 1 day percent change of 3.72%
MACRO DATA POINTS (Bloomberg Estimates):
- 9:45am: ISM New York, Dec., prior 69.5
- 10:30am: EIA natural-gas storage change
- 11am: DOE Energy Inventories
- 12:45pm: Fed’s Plosser speaks in Philadelphia
- 1pm: Baker Hughes rig count
- 1:15pm: Fed’s Stein speaks in Philadelphia
- 1:30pm: Fed’s Lacker speaks in Baltimore
- 2:30pm: Fed’s Bernanke speaks in Philadelphia
- House, Senate not in session
WHAT TO WATCH:
- Dec. Auto Sales: SAAR May Be 15.8m vs 16.4m rate in Nov.
- U.S. East Coast facing blizzard as snow, wind ground flights
- Cox agrees to buy back AutoTrader stake at $7b valuation: WSJ
- Rupert Murdoch’s Fox sells Star China stake to management group
- Goldman raised 2012 pay for top U.K. bankers as rivals cut
- BP bid to stop Gulf oil spill payments to get fast court review
- Manhattan home sales rise to yr-end record in buyer deal rush
- Cisco’s video chief De Beer takes leave to tend ailing relative
- USDA pares rules targeting healthier school meals: Reuters
- Lindsay (LNN) 7am, $0.92 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Copper Falls Most in Two Weeks as China Services Measure Slumps
- Brent Crude Rises Most in Two Weeks as Libyan Ports Remain Shut
- Gold Extends Rally From Biggest Loss Since ’81; Platinum Gains
- Wheat Recovers From 19-Month Low as Arctic Freeze May Hurt Crops
- Rebar Declines in Shanghai After Biggest Producers Lower Prices
- Robusta Coffee Declines to One-Month Low as Cocoa Rebounds
- Natural Gas Set for Second Weekly Decline Before Inventory Data
- Rubber Output From Key Producers Rises 4.7% in 2013, Group Says
- WTI Oil May Decline Next Week on Fed Outlook, Survey Shows
- U.S. East Coast Facing Blizzard as Snow, Wind Ground Flights
- German Power Costs Seen Dropping for Fourth Year on Glut: Energy
- U.K.’s Warmest December in 10 Years Hinders Gas Demand in Europe
- China Thermal Coal Prices May Climb on Japan Demand: Bear Case
- India 2013-14 Coffee Output Estimate Cut to 311,500 Tons
The Hedgeye Macro Team
THE MACAU METRO MONITOR, JANUARY 3, 2014
SJM HAS BIGGEST SLICE OF CASINO MARKET IN 2013 Macau Business
2013 GGR share: SJM (25%), Sands China (21.5%), Galaxy (19%), MPEL (14%), WYNN (11%), and MGM (10%). The market share pecking order was the same last year as the year before.
DRAFT GAMING BILL FAILS TO PASS LEGISLATIVE REVIEW Focus Taiwan News Channel
The Legislature's Transportation Committee approved a measure Thursday to restrict casinos to Taiwan's offshore islands, though a lack of consensus along lawmakers struck down nearly three-fourths of the items on the same bill. The committee conducted an article-by-article review of the Tourist Casino Management Act draft bill, in which 83 of the 114 articles failed to pass. Among the 31 approved articles were regulations for licensing and, notably, a measure that restricts the establishment of casinos only to offshore islands, provided they have the approval of local residents.
The Transportation Committee also passed a proposal to block government investment in casino operations in accordance with related regulations.
SJM RAISES PAY, ANNOUNCES LIVING ALLOWANCES Macau Business
Effective 2014, SJM has raised the pay of all its employees by 5%. It also announced that it would pay all its employees a living allowance this year. Those paid MOP17,000 (US$2,129) a month or less will get an allowance of 175% of a month’s salary and the rest will get 125% of a month’s salary or at least MOP29,750.
NEW YEAR BRINGS FEWER VISITORS TO MACAU THIS YEAR Macau Business
Macau had 114,250 visitors on New Year’s Day, -1.89% YoY. Gongbei was the busiest point of entry with 138,428 people having entered the city through the Border Gate.
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