“I just lied to someone else, but you can trust me because I’d never lie to you.”
That was an excellent quote John Hamm used to discuss “implied distrust” in a solid chapter in Unusually Excellent titled “Being Trustworthy.” We are who we are – and, as a new Wall Street evolves, our goal is to be a 2.0 research source you can trust.
“Be honest… Be vulnerable… Be Fair… “ (Unusually Excellent, pg 36) – these are some of the simplest rules of relationship building, yet some of the most difficult to rinse and repeat each and every market day.
Trust isn’t allocated in this profession. It’s earned, daily.
Back to the Global Macro Grind…
With a polar vortex rolling through the USA and Florida State coming back from 21-10 at the half to win the championship (with 13 seconds left) last night, does anyone really care that the US stock market closed down 25 basis points yesterday?
Is this going to be another 1-2% correction in US stocks, or the beginning of yet another #EOW (end of the world)? I need to make some real-time asset allocation decisions around the answer to that question. So I’m not going to lie to you – I bought-the-damn-bubble #BTDB on red again yesterday.
I’ll go through the why on that in a minute, but first, here’s how I’ve re-positioned in the 1st three days of 2014:
1. Dropped CASH in the Hedgeye Asset Allocation Model from 50% to 30%
2. Raised my allocation to International FX from 27% to 30%
3. Raised my allocation to International Equities from 10% to 18%
4. Raised my allocation to US Equities from 10% to 16%
5. Raised my allocation to Commodities from 3% to 6%
6. Moved to 10 LONGS, 5 SHORTS in #RealTimeAlerts (vs 5 LONGS, 5 SHORTS on January 1)
Nope. I’m not going all wild and crazy, investing all the cash at the all-time highs in US Equities. That’s not how I roll. I’m a gradualist, of sorts. I like to work my way into a situation that appears to be developing. If it stops developing, I stop.
To be clear, buying into some spotty US #GrowthSlowing data doesn’t exactly fire me up. But buying at the low end of my SP500 risk range does. And I’ll do more of that, every time the process tells me to.
Unlike the ISM Manufacturing report for DEC (which was solid and did not slow), yesterday’s ISM Services (non-manufacturing) print was what it was, slowing on the margin versus its 2013 peak. Let’s break that down a little further:
1. ISM Services headline slowed to 53.0 in DEC vs 53.9 NOV (I know, the horror of it all)
2. New Orders in the ISM Services report slowed faster to 49.4 DEC vs 56.4 NOV (not good)
3. Business Employment in the report ACCELERATED to 55.8 DEC vs 52.5 NOV (good)
So… with the stock market red on the headline slowing (marginally – but that’s the point about what happens on the margin, it matters) I didn’t just start buying blindly. Instead, this is how I thought about it:
1. LEVELS: SP500 tested the low end of my immediate-term TRADE range (1) – that’s a buy/cover signal
2. TIMING: the next calendar catalyst is the US Employment Report on Friday
3. DATA: Friday’s employment data could easily rhyme with strength in the ISM (services and manufacturing) reports
Since I don’t just do US stocks, I also thought through how this could play out across multiple-factors:
1. BONDS: US 10yr Treasury Yield weakened on the ISM Services headline but held all lines of @Hedgeye support
2. GOLD: strengthened on weaker data + rates falling; that’s how Gold is trading now (but failed @Hedgeye resistance)
3. DIVERGENCES: Financials (XLF) made new highs (+0.23% for JAN) vs Utilities (XLU) down -1.69% JAN
That last point is a sneaky one. Stocks that look like bonds (slow-growth, high dividend yield) continue to act like dog breath (the smell of that doesn’t lie either!).
And while our model will score Friday’s employment for what it is (a lagging economic indicator), if it’s bullish I think it will be bearish for Gold, Bonds, Utilities, etc. relative to both growth and inflation expectations.
If I didn’t think that, I wouldn’t be re-positioning this way in real-time. That’s the beauty of the #timestamp. Whether it ultimately proves to be right or wrong, my positioning doesn’t lie to me.
UST 10yr Yield 2.96-3.05%
*all 12 macro ranges are in our Daily Trading Ranges product
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – January 7, 2014
As we look at today's setup for the S&P 500, the range is 26 points or 0.26% downside to 1822 and 1.16% upside to 1848.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.57 from 2.56
- VIX closed at 13.55 1 day percent change of -1.53%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am/8:55am: ICSC/Redbook weekly retail sales
- 8:30am: Trade Deficit, Nov., est. -$40.0b (prior -$40.6b)
- 8:30am: Fed’s Rosengren speaks in Hartford, Conn.
- 11am: Fed to purchase $2.25b-$3b in 2021-2023 sector
- 11:30am: U.S. to sell 4W bills, $23b 52W bills
- Noon: DOE short-term energy outlook
- 1pm: U.S. to sell $30b 3Y notes
- 2:10pm: Fed’s Williams speaks in Phoenix
- 4:30pm: API inventories
- Senate in session; House returns from holiday recess
- Senate poised for test vote on unemployment benefits
- CFPB Director Richard Cordray takes questions on Ability-to-Repay rule; National Assn of Realtors, 10am
- FTC Bureau of Consumer Protection Director Jessica Rich announces program against deceptive advertising of weight-loss products, 11am
WHAT TO WATCH:
- Consumer Electronics Show officially begins in Las Vegas
- China-linked DuPont spying trial begins today
- China Telecom cuts iPhone price ahead of China Mobile release
- Goodyear refuses French union talks as managers held hostage
- Combined shipments of devices set to grow 7.6% in ’14: Gartner
- Yellen wins Senate support to lead Fed w/ record-low backing
- BlackBerry returns to physical-keyboard roots under new CEO
- Samsung posts 1st profit decline since 2011 amid Apple battle
- Plans to release bendable TVs this year
- U.S. exchange-traded products garner record $191b in 2013
- Sony, Nintendo mull China’s console market as ban lifted
- FTC to hold press conf. on deceptive weight-loss advertising
- Invesco said to pay $291m for San Francisco office tower
- U.S. apartment rent gains to be tempered by more construction
- Credit Suisse speeds non-strategic business leverage cutting
- German unemployment falls as confidence in recovery struggles
- Apollo Education (APOL) 4:01pm, $0.90
- Commercial Metals (CMC) 7am, $0.24
- Container Store Group (TCS) Aft-Mkt $0.08
- IHS (IHS) 6am, $1.31
- Micron Technology (MU) 4:04pm, $0.42
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Brent Crude Halts Longest Decline Since August Amid Iraq Clashes
- Coldest Day in 20 Years Threatens U.S. After Transport Snarled
- Hedge Funds Raise Gold Wagers as Yamada Sees $1,000: Commodities
- Soybeans Decline as USDA May Lift Outlook for National Harvest
- BofA Exits Power, Natural Gas in Europe as Trading Shrinks
- Gold Holds Below Three-Week High as Investors Weigh Demand, Fed
- Copper Fluctuates as China Banking Curbs Spark Demand Concern
- Palm Oil Inventories Seen Dropping for First Time in Four Months
- U.S. Exchange-Traded Products Garner Record $191 Billion in 2013
- Shanghai Rubber Hits Four-Year Low Dragging Down Tokyo Benchmark
- Rebar Retreats as China Imposes New Controls on Shadow Banking
- Barrick Leads Multibillion Dollar Stock Sales: Corporate Canada
- U.S. Crude Output Highest Since 1988 Yet Growth Is Flat
- Iron Ore Exports to China From Port Hedland Increase in December
The Hedgeye Macro Team
real edge in real-time
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.
This note was originally published at 8am on December 24, 2013 for Hedgeye subscribers.
“There is nothing in the world so irresistibly contagious as laughter.”
Charles Dickens started writing A Christmas Carol in 1843 as a progressive economic answer to the fear-mongering of the politicians of his age. Negativity, after all, is a long-standing and regressive (but effective) political strategy.
Sylvia Nasar quotes Dickens in Grand Pursuit - he called his story “a tale capable of twenty times the force - twenty thousand times the force of a political pamphlet.” The narrative “argues the economic historian James Henderson, is an attack on Malthus… an England characterized by New world abundance rather than Old World scarcity.” (Nasar, pg 7)
New versus old. Rich versus poor. These are timeless realities of life. But they don’t always have to oppose one another. Leaders, across centuries, have found a positive alternative to perdition’s path. This time was not “different.” There was no “new normal” either. Like laughter, the truth is contagious. And the truth is that patterns of human behavior and business cycles repeat.
Back to the Global Macro Grind…
The SP500 and Gold are up 401 points (+28.1%) and down $475 (-28.3%), respectively for 2013 YTD. Depending on who you are talking to, that reality will either make them laugh or cry!
As Dickens wrote in A Christmas Carol, “no space of regret can make amends for one life’s opportunity misused.” And oh boy was investing in growth (and shorting fear) quite the opportunity.
Since my kids are giving me an opportunity to laugh and smile this morning, I’ll keep the rest of my Christmas Eve note to just levels. It’s Daddy’s day off, allegedly.
Top 10 Bullish TRENDS @Hedgeye (and their immediate-term TRADE risk ranges)
1. UST 10yr Yield 2.88-2.95% (bullish)
2. SP500 1796-1835 (bullish)
3. Nasdaq 4047-4158 (bullish)
4. Germany’s DAX 9197-9533 (bullish)
5. UK’s FTSE 6539-6719 (bullish)
6. Japan’s Nikkei 15503-15989 (bullish)
7. British Pound 1.62-1.64 (bullish)
8. Euro (EUR/USD) 1.36-1.38 (bullish)
9. Brent Oil 109.89-112.12 (bullish)
10. Natural Gas 4.36-4.51 (bullish)
Top 10 Bearish TRENDS @Hedgeye (and their immediate-term TRADE risk ranges)
1. BOND (PIMCO Total Return Fund) 104.31-105.32 (bearish)
2. Long-term Treasuries (TLT) 102.08-104.77 (bearish)
3. Short-term Treasuries (SHY) 84.09-84.57 (bearish)
4. Emerging Markets (MSCI EM Index) 977-1009 (bearish)
5. Brazil’s Bovespa 49,308-52,172 (bearish)
6. US Equity Volatility (VIX) 12.56-14.91 (bearish)
7. Gold 1179-1221 (bearish)
8. Silver 19.01-19.97 (bearish)
9. Wheat 5.89-6.38 (bearish)
10. Japanese Yen (vs USD) 102.48-104.92
Most of these intermediate-term bullish and bearish TRENDs aren’t new as of this morning. With sporadic ramps in fear, they’ve been trending for the better part of a year now. What a year it’s been.
From our family and firm to yours, we’d like to thank you for your business and wish you both a very Merry Christmas and a Happy Holiday season,
Keith R. McCullough
Chief Executive Officer
We will be hosting our Quarterly Macro Themes conference call on Thursday, January 9th at 11:00am EST. The accompanying presentation will detail the three most important macro trends that our team has identified for the quarter, as well as the associated investment opportunities.
Q1 2014 THEMES OVERVIEW
#InflationAccelerating: Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. Moreover, the reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.
#GrowthDivergences: Looking to the U.S., Europe, China and Japan, we see the heavyweights of the world economy diverging from an economic growth perspective as some countries and/or regions are much further along in the economic cycle than others. We highlight those divergences and identify which countries and/or regions you want to be allocating assets to at the start of the year.
#FlowShows: in Q1 we expect a continuation of fund flows out of fixed income and into equities: the “Queen Mary” has indeed turned, aided by the Fed’s decision to begin tapering.
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 897866#
- Materials: CLICK HERE
Takeaway: Stay with the “New China” vs. “Old China” trade as economic growth looks to stabilize then accelerate in 1Q14.
- We continue to think Chinese growth is slowing and we think it is likely continue to slow for the next 1-2M.
- From there, Chinese growth should stabilize and then accelerate throughout the balance of 1H14. It’s tough to have a strong view beyond that given the continued lack of clarity on the economic reform implementation front.
- That said, however, all signs continue point to a dramatically reduced threat of the banking sector’s structural liquidity constraints spilling over into the real economy in a meaningful way – for now at least.
- Recent reforms centered on curbing explosive growth in shadow banking activity will act as a marginal headwind to growth over the intermediate-to-long term, but will introduce-much needed disclosure and regulation to an otherwise opaque segment of the Chinese financial system.
- We continue to think the best way to play China is via a “New China” vs. “Old China” pair trade. In effect, this amounts to being overweight Chinese Information Technology and Consumer Staples names, while being underweight or short Industrials and Financials names.
1) Chinese growth is currently slowing and may continue to slow into FEB. In fact, all four of China’s main PMI indicators (NBS and HSBC) slowed in DEC, the first such occurrence since APR ’13.
2) Extremely easy growth comps, easing money market conditions and seasonality are all supportive of an acceleration in Chinese GDP growth in 1H14.
3) For now at least, it would appear that the PBoC has been successful in convincing the market that there is adequate liquidity in the marketplace assuming financial institutions are broadly compliant with regulatory quotas for credit growth, etc. Additionally, their persistence in marking the CNY higher is supportive of capital flows into China at the expense of other emerging markets.
4) Shadow banking activity has been a key source of credit for the most marginal borrowers according to existing regulations (i.e. LGFVs and property developers) and standard industry practices of only extending credit to the largest, safest SOE borrowers (i.e. SMEs). That said, shadow banking does not represent an overly material source of credit for the broader Chinese economy, nor is it being curbed excessively at the current juncture.
5) We continue to think that investors should overweight Chinese Information Technology and Consumer Staples names, while underweighting/shorting Industrials and Financials names as economic rebalancing continues, at the margins. It’s worth noting that this trade has returned a cumulative +1,576bps (assuming equal weighted allocations) since we first outlined it back on 12/4. Given China’s structural GIP fundamentals, we think there is plenty of room for this strategy to continue working from here.
Associate: Macro Team
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.52%
SHORT SIGNALS 78.67%