“A vigilant and well-informed press, setting forth the truth…”
-Doris Kearns Goodwin, The Bully Pulpit
But what, precisely, is the truth? The truth is that Ray Dalio asks the same question in order to explain his investment process (minus the words ‘but’ and ‘precisely’). It’s the same question you need to be asking yourself every market day.
The 20th President of the United States, James A. Garfield, wasn’t talking about markets when he said that “the truth will set you free, but first it will make you miserable.” But for this morning, let’s lie to ourselves and pretend he did. For me at least, it’s the truth!
The truth is that for the 1st day of 2014, US stocks down (yesterday) has captured the top (most read) headline on Bloomberg.com: “SP500 Falls Most Since November Amid Valuation Concern.” Only one part of that headline story is true. The “valuation” part is just an #OldMedia editorial. Well-informed market practitioners can do better than that.
Back to the Global Macro Grind…
Fresh off a feeding of our new born baby Lucy Taylor McCullough yesterday (she’s a beauty!), I walked upstairs to my post and bought-the-damn-bubble #BTDB into the US stock market close. Whether I was right or wrong in doing so isn’t the point. #Timestamps are truth.
Before I get into the why, I’ll just rehash the step by step process in terms of what I actually did:
1. After coming into the open with my first net neutral position of 2014 (8 LONGS, 8 SHORTS), I covered shorts
2. I didn’t cover any of these shorts on “valuation” (RRGB, MCD, LINE, F); I covered them because they were oversold
3. Then I waited, watched, and finally bought SPY on my signal at 3:38PM EST at $181.60
Having made every single mistake you can make in this game in buying things too early (which is typically followed up with excuses like, “but it’s cheap”), this time I actually took my time. Getting net longer on red should be a process, not an emotional episode in your life.
At Hedgeye there are 3 big parts to how we try to probability weight where Mr. Macro Market might move next:
On the #history front, contextualizing the emotion of yesterday’s final selling moments is easy – that was only the 3rd one-day decline of over 1% for the SP500 in the last 3 months:
1. November 7th, 2013 = -1.32%
2. January 14th, 2014 = -1.26%
3. December 11th, 2013 = -1.13%
In other words, that’s why the first part of this morning’s Bloomberg headline is true. It was the biggest US stock market down day since November 7th, 2013 when the SP500 closed at 1747. If you bought SPY there, you could have sold it 101 handles higher (+6%) at the US stock market’s all-time closing high of 1848 on December 31, 2012. #truth
#History reminds us that past performance doesn’t predict future results. I have no illusions about that. Neither should you. So let’s dig into some of the math (levels, correlations, etc.) that got me to hit that SPY buy button yesterday:
1. PRICE: the SP500’s immediate-term TRADE oversold line of support = 1817 with TREND support well below that at 1771
2. VOLUME: my composite volume signal was in line with my TREND based average yesterday; nothing to freak out about
3. VOLATILITY: front-month VIX was obviously up on the day, but still well below @Hedgeye TREND resistance of 14.91
So that’s that. The #history and #math parts had nothing to do with “valuation” obviously.
How about the #behavioral side of the decision to buy SPY? I think about that in 2-big parts, levels and catalysts:
1. LEVELS: for a year now, performance chasers have been selling red and buying green; fade that consensus on the signal
2. CATALYSTS: A) Japanese Yen was signaling overbought and B) JPM was signaling immediate-term TRADE oversold
These are, of course, very immediate-term catalysts. But when making buy or sell decisions, what else would you use? Whether people admit it or not, without a tested and tried, real-time, decision making process, they’ll use emotion instead of high probability signal levels and catalysts - or at least I used to.
on A) and B):
A) The Global Macro Correlation Risk that is the YEN vs Nikkei relationship is crystal clear (Yen Down = Nikkei Up)
B) JP Morgan (JPM) beating earnings in this environment (fat Yield Spread) is research edge you either had or did not
On A) the Yen is -0.6% vs USD this morning and on B), thankfully I have a great Financials analyst in Josh Steiner (who has been The Bear on NSM as of late). But even if I didn’t have Steiner, I’d have had that JPM oversold signal alongside the Yen’s overbought one. Now the manic media can run headlines that “JPM Beat, Alleviating Valuation Concerns.”
You either have research and risk management signals that you trust, or you do not. They help keep me well informed.
Our immediate-term Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – January 14, 2014
As we look at today's setup for the S&P 500, the range is 34 points or 0.12% downside to 1817 and 1.75% upside to 1851.
CREDIT/ECONOMIC MARKET LOOK:
YIELD CURVE: 2.49 from 2.47
VIX closed at 13.28 1 day percent change of 9.39%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:30am: NFIB Small Bus Optimism, Dec., est. 93.1 (pr 92.5)
- 7:45am/8:55am: ICSC/Redbook weekly retail sales
- 8:30am: Retail Sales Advance m/m, Dec., est. 0.1% (pr 0.7%)
- 8:30am: Import Price Index m/m, Dec., est. 0.4% (pr -0.6%)
- 10am: Business Inventories, Nov., est. 0.3% (prior 0.7%)
- 12:45pm: Fed’s Plosser speaks in Philadelphia on eco outlook
- 1:20pm: Fed’s Fisher speaks in Dallas on regional economy
- 4:30pm: API weekly oil inventories
- 8:30am: World Bank President Jim Yong Kim attends CSIS discussion on universal health care cvge
- 9:15am: Economic Policy Inst discussion on raising federal minimum wage to $10.10/hr;
- Tom Harkin, D-Iowa, Rep. George Miller, White House CEA Chairman Jason Furman
- 10am: House Transportation and Infrastructure Cmte holds hearing on Surface Transportation reauthorization
- 10am: House Financial Services panel meets on CFPB’s qualified mortgage rule; witnesses incl Quicken Loans CEO Bill Emerson
- 2:30pm: Senate Homeland Security panel holds hearing on air traffic controller training contract mgmt
- 4pm House Budget Chairman Paul Ryan, R-Wis., speaks
- NJ Gov. Chris Christie conducts state of state speech
WHAT TO WATCH:
- Time Warner Cable rejects Charter’s $132.50/shr takeover offer
- Congress unveils $1.1t measure to fund U.S. government
- Rabobank ex-traders charged by U.S. with yen Libor rigging
- Google acquiring Nest for $3.2b to expand in devices
- Carlyle readying $3.7b in financing for J&J unit bid: Reuters
- Square said to hold secondary offering at $5b valuation
- Tesla to present at Detroit Auto Show
- DirecTV loses Weather Channel over subscriber-fee dispute
- McKesson may now bid for Celesio rival Phoenix: UBS
- Rockefeller’s firm plans $2.5b Vietnam development
- EDF sells 100-yr bonds in biggest U.S. corporate issue of 2014
- China provinces set lower 2014 growth goals as expansion slows
- U.K. inflation slows to BOE target for first time since 2009
EARNINGS (all times ET, times are approximate):
- Commerce Bancshares (CBSH) 7am, $0.71
- Corus Entertainment (CJR/B CN) 7am, C$0.62
- JPMorgan Chase (JPM) 6:58am, $1.37 - Preview
- Linear Technology (LLTC) 5pm, $0.48
- Shaw Communications (SJR/B CN) 8:15am, C$0.49 - Preview
- Wells Fargo (WFC) 8am, $0.98 - Preview - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Fed Said to Release Plan to Limit Banks’ Commodities Activities
- Nickel Touches Three-Week High Amid Speculation About Scarcity
- Shivering Cattle Signal Higher McDonald’s Beef Cost: Commodities
- WTI Set for Worst Start to Year Since 2009 Before Supply Data
- Gold Falls From One-Month High as Investors Weigh Demand Outlook
- Soybeans Rise for Fourth Day on Chinese Demand for U.S. Supplies
- EU Sees Rising Food Output by 2023 on Export and Biofuel Demand
- Natural Gas Rises a Third Day on Forecast for Falling Stockpiles
- China Rebar Rises as Iron Ore Gains With Baosteel Raising Prices
- Oil Price Forecasts Cut by Deutsche Bank on U.S. Supply Growth
- Silver-Coin Premiums Poised to Climb as U.S. Mint Supplies Ease
- England’s Clouds Part for Solar as Panels Carpet Fields: Energy
- Shale May Secure Future Oil & Gas Supply for Decades, Total Says
- EU Sweetener Demand Set to Triple as Quotas-End Damps Sugar Use
The Hedgeye Macro Team
This note was originally published at 8am on December 31, 2013 for Hedgeye subscribers.
“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 1823-1861 (bullish)
VIX 11.84-14.91 (bearish)
Best of luck out there today, and Happy New Year!
Keith R. McCullough
Chief Executive Officer
THE MACAU METRO MONITOR, JANUARY 14, 2014
NEPTUNE BUYS INTO CITY OF DREAMS JUNKET OPERATOR Macau Business
VIP gaming investor Neptune Group Ltd says it is buying the right to 5% of the earnings of junket operator Ocean Star Entertainment Co Ltd. Neptune will pay HK$208.3 million (US$26.9 million) for its portion. Ocean Star Entertainment runs a VIP gaming club at CoD. The club has at least 11 tables and average rolling chip turnover of HK$6.43 billion a month. The deal is part of Neptune’s expansion of its presence in the junket business in Cotai.
ROCKEFELLER'S FIRM PLANS $2.5 BILLION VIETNAM DEVELOPMENT Bloomberg
Rose Rock Group, a Rockefeller family-backed alternative investment management firm, will help develop a $2.5 billion residential and hotel project in Vung Ro Bay. The project will include 350 marina berths, hotels with more than 760 rooms, 4,300 residential apartments, 100 townhouses and retail shops.
Vietnam’s VinaCapital Group, the country’s largest fund manager, is planning to build a $4 billion casino-resort complex in Quang Nam province on the south-central coast after developing a beach resort in Danang about six years ago, Chief Executive Officer Don Lam said.
LOUIS XIII BORROWS HK$3 BN TO BUILD COLOANE HOTEL Macau Business
Louis XIII Holdings Ltd says it has arranged a HK$3.05 billion (US$393 million) loan and will spend the money on building its casino-hotel on Coloane. Its subsidiary New Concordia Hotel Ltd agreed on a six-year loan facility with the Hong Kong branch of a mainland bank, which it did not identify. Louis XIII expects its Coloane casino-hotel to open in 2016. The government has yet to formally approve any gaming facilities in the hotel.
PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR NOVEMBER 2013 DSEC
Macau visitor arrivals in package tour totaled 769,447 in November 2013, down -9.9% YoY. Visitors from Mainland China (567,931) decreased by 11.7% YoY, with 276,156 from Guangdong Province, which was followed by Taiwan (58,163); the Republic of Korea (35,726); and Hong Kong (35,190). The average length of stay of guests held stable as November 2012, at 1.4 nights.
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.