“In the real world, action and reward go together.”
Greg Berns is part of a stealth movement in America – he’s a neuroeconomist working in the Department of Psychiatry and Behavioral Sciences at Emory University in Atlanta, GA.
John Coates introduced me to Berns in a chapter called Thrill of The Search in The Hour Between Dog and Wolf. Coates went on to suggest that “when the Theory of Relativity dawned on Einstein, he must have had the mother of all dopamine rushes… dopamine, like noradrenaline, does a lot more than motivate the brain: it prepares the body for action” (pg 139).
Was your mind and body prepared for this selloff in US and Japanese equities? I can tell you one thing, my back is in spasm. But I think that has more to do with shoveling snow than being long Japan’s Mother’s Index (-18% in two days). Through action and reward, #History, #Math, and #Behavorial economics continue to be the three pillars of our learning process. Risk happens fast.
Back to the Global Macro Grind…
In addition to the crash in Japan’s widely held brokerage index, the Nikkei got crushed for another -4.2% lost last night, taking it to -14% for 2014 YTD. How many hedge funds were snowed into the short Yen, long Nikkei trade last year? Lots.
How many stayed long the Russell 2000 at the all-time high? That was only 9 trading days ago, don’t forget. And while I am certain that everyone on CNBC nailed it, for the rest of us a -7.4% nine day correction from an all-time peak provides a bit of a rush too!
The last time the US stock market had this sharp of a 9-day decline (Russell2000 = down -9.1% in 9 days in November of 2011), Ben Bernanke’s resolve was simple – print, print, print. So remind me why Janet Yellen won’t do the same?
If we get one more economic data point that crashes like yesterday’s New Orders component of the ISM did, remind me why the Mother of All Doves won’t:
A) Stop the tapering
B) Talk up more quantitative easing
Setting aside the eureka reality that commodity markets inflating and slowing real-consumption growth don’t give the Fed or the Bank of Japan what they are promising The People (sustainable growth), why won’t Yellen go back to the same old saw?
Maybe, just maybe, Mr. Macro Market is already front-running her on this. I know, while markets front-running our central planning overlords has been the only game in town now for the last half-decade, why would they be doing so again?
Humor Mr. Macro Market for another minute and play this probable (not to be confused with definite) scenario out:
- US #InflationAccelerating continues to slow real-inflation adjusted growth
- As US #GrowthSlowing freaks out the Fed, they whisper “no-more-taper” to Hilsenrath
- Whispers start to bury the Dollar again, Food and Gold prices continue higher yet again, and …
Growth slows even faster!
Oh, and by summer time they’ll be whining about “inequality” at Jackson Hole without accepting that Policies to Inflate only pay those who are long of coffee futures and mortgage-backed-securities, while they pulverize the poor.
Back to how bad that Institute for Supply Management’s (ISM) manufacturing report was yesterday:
- Headline ISM dropped -10% sequentially (month-over-month) to 51.3 JAN vs 57 DEC
- New Orders in the ISM crashed -20% month-over-month to 51.2 JAN vs 64.4 DEC
- Prices Paid in the ISM (inflation in costs) ripped +13% from 53.5 in DEC to 60.5 in JAN
Yes, since I’m so plugged in politically, I rigged the numbers to fit our Top Global Macro Theme of #InflationAccelerating like a glove. But don’t tell anyone I get this inside info or I’ll have to change the name of my firm.
Again, to review, this wasn’t all about the “weather”:
- Inflation (prices) rose, fast, month-over-month… and…
- Growth (orders) fell, even faster in kind
So enjoy the “green arrows” this morning. I am sure this market will bounce on no-volume again until we get the next US consumption #GrowthSlowing data point (tomorrow) in the ISM Services report for January.
With the CRB Commodities Index +1.4% vs. Consumer Discretionary (XLY) stocks -8.7% YTD, bulls can blame the weather. But that is the score. In the real world, if you don’t shovel your driveway and get to work, you probably won’t get paid that way either.
Our immediate-term Global Macro Risk Ranges are as follows:
Nat Gas 4.91-5.41
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – February 4, 2014
As we look at today's setup for the S&P 500, the range is 48 points or 0.40% downside to 1735 and 2.36% upside to 1783.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.30 from 2.28
- VIX closed at 21.44 1 day percent change of 16.46%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45/8:55am: ICSC/Redbook weekly retail sales
- 9:45am: ISM New York, Jan. (prior 63.8)
- 10am: Factory Orders, Dec., est. -1.8% (prior 1.8%)
- 10am: IBD/TIPP Economic Optimism, Feb., est. 44.5 (pr 45.2)
- 10am: CBO releases U.S. economic outlook
- 8:30am: Fed’s Lacker speaks in Winchester, Va.
- 12:30pm: Fed’s Evans speaks in Detroit
- 4:30pm: API weekly oil inventories
- 10am: CBO releases U.S. economic outlook
- 10am: Sen. Homeland Security Army recruiting contract hearing
- 10am: Senate environmental panel on water supply safety post-W. Va. contamination
- 10:15am TGT CFO John Mulligan at Senate Judiciary Cmte
- 10:30am: Moody’s Chief Economist Mark Zandi on 2014 outlook at Senate Budget Cmte
- 1:30pm: House Oversight and Govt Reform Cmte hearing on Obama admin marijuana policy
WHAT TO WATCH:
- Yum profit beats ests. on growth in international division
- Intel changes pay rules in seeking closer ties to performance
- Symantec says facing $145m in damages in U.S. probe
- TV shared ownership led by Sinclair said to get U.S. scrutiny
- Second storm of week bound for U.S. Northeast with icy snowfall
- BP 4Q profit drops as disposals hurt oil output
- UBS 4Q net beats estimates on wealth management, tax gain
- Toyota forecasts record annual profit as yen boosts exports
- BofA bonuses for rates traders are said to drop at least 15%
- Genfit seeks U.S. alliance for non-alcoholic liver ailment
- Drug cos. join NIH in study of Alzheimer’s, other diseases: WSJ
- House GOP said to finalize debt-limit strategy: WPost
- Lockheed Martin to begin production of civilian Hercules: WSJ
- Anadarko fails to find viable oil at first N.Z. well: TV3
- Affiliated Managers Group (AMG) 7:10am, $3.09
- AGCO (AGCO) 8am, $1.34
- AGL Resources (GAS) 8am, $0.91
- Arch Coal (ACI) 7:30am, ($0.38) - Preview
- Archer-Daniels-Midland Co (ADM) 7am, $0.84
- Becton Dickinson (BDX) 6am, $1.29
- Bell Aliant (BA CN) 6am, $0.35
- Boston Scientific (BSX) 7am, $0.13 - Preview
- Clorox (CLX) 830am, $0.91 - Preview
- CME Group (CME) 7am, $0.67
- Delphi Automotive PLC (DLPH) 7am, $1.04
- Eaton (ETN) 6:30am, $1.06
- Emerson Electric (EMR) 6:30am, $0.67 - Preview
- Fidelity National Information (FIS) 7am, $0.78
- Gannett Co (GCI) 830am, $0.65
- HCA Holdings (HCA) 8:29am, $0.86 - Preview
- IDEXX Laboratories (IDXX) 7am, $0.81
- International Paper Co (IP) 7am, $0.86
- McGraw Hill Financial (MHFI) 7:10am, $0.79
- Michael Kors Holdings (KORS) 7am, $0.86 - Preview
- Ryder System (R) 7:55am, $1.29
- Sensata Technologies (ST) 6am, $0.55
- Sirius XM Holdings (SIRI) 7am, $0.02
- Spectra Energy (SE) 6:30am, $0.38
- UDR (UDR) 8am, ($0.01)
- Vishay Intertechnology (VSH) 7:30am, $0.19
- Westjet Airlines (WJA CN) 6:30am, $0.52 - Preview
- Xylem (XYL) 7am, $0.52
- Aflac (AFL) 4:15pm, $1.39
- Ameriprise Financial (AMP) 4:05pm, $1.81
- Axis Capital Holdings (AXS) 4:05pm, $1.47
- Cerner (CERN) 4:01pm, $0.39 - Preview
- CH Robinson Worldwide (CHRW) 4:15pm, $0.68
- Covance (CVD) 4:01pm, $0.84
- Genworth Financial (GNW) 4:30pm, $0.30
- Gilead Sciences (GILD) 4:05pm, $0.51 - Preview
- Hain Celestial (HAIN) 4pm, $0.87
- Macerich (MAC) 4:30pm, $0.23
- Mueller Water Products (MWA) 4:20pm, $0.00
- Myriad Genetics (MYGN) 4:05pm, $0.46 - Preview
- RenaissanceRe Holdings (RNR) 4:16pm, $2.78
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Crude Rises From One-Week Low Amid Cushing Pipeline Start
- Gold Declines in London on Signs Physical Demand Is Slowing
- Arabica Coffee Posts Biggest Gain Since 2004 on Brazil Drought
- Cotton Crop Expanding After Corn Slump Spurs Switch: Commodities
- Lead Paces Gains by Metals Amid Speculation Decline Was Overdone
- Soybeans Extend Gain on Concerns Brazil Dryness May Curb Yields
- Natural Gas Rebounds as Winter Storm Spreads in U.S. Northeast
- Rubber Declines to 17-Month Low as U.S. Factory Growth Slows
- Krung Thai Bank Won’t Lend to Government Rice Program: President
- Platinum Mine Strike Costs $36 Million a Day as Talks Resume
- Commodity Volatility Drops as Equities Swing: Chart of the Day
- Fukushima Wash-Up Fears in U.S. Belie Radiation Risks: Energy
- Senators to Vote on Farm Law That Keeps Their Benefits Secret
- Robusta Coffee Rises to 5-Month High on Lack of Vietnam Selling
The Hedgeye Macro Team
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.
THE MACAU METRO MONITOR, FEBRUARY 4, 2014
LUNAR NEW YEAR VISITATION MGTO
As of February 3, cumulative visitation had reached 1.15MM, +15% YoY.
SJM OFF STARTING BLOCK IN COTAI 'IN WEEKS': SO Macau Business
SJM will start work on its first Cotai casino-resort soon and intends to open it within three years. “In the next few weeks we will launch construction of our integrated casino-resort in Cotai,” SJM CEO Ambrose So Shu Fai said.
MGM CHINA READY TO MOVE ON HENGQIN OPPORTUNITIES Macau Business
MGM China Holdings Ltd CEO Grant Bowie says the casino operator will be involved in developing Hengqin Island. “There is a lot more interest in Hengqin and MGM will be an active participant there,” Mr Bowie said. Given the chance, the company would help small and medium enterprises gain a foothold on the island, he said.
This note was originally published at 8am on January 21, 2014 for Hedgeye subscribers.
“Conquering of fear produces exhilaration.”
I don’t know about yours, but in my life the aforementioned statement definitely holds true. My fellow Canuck, Malcolm Gladwell, cited MacCurdy’s psychological work in David and Goliath (pg 148) to explain the resilience of the British during the London Blitz.
Do you need a psychiatrist? How many days after 2008 did it take you to conquer your fear about growth? The earlier in 2009 (or 2013) the better, obviously. But some of the savants sipping on Champagne in Davos this week are just starting to get bullish now. #Exhilarating
While Gladwell’s latest book is a little too thick on sociology for me, I loved a few of his stories simply because they spoke to me personally. Unfortunately, Mr. Macro Market couldn’t care less about me as a person. Whatever speaks to me this morning has very little place in my risk management process. The easiest way for me to conquer my market fears is to grind through the process and get on with my day.
Back to the Global Macro Grind …
With a day off here in the US, it’s a good time to take a step back and review what the score is for 2014. From a performance divergence perspective, it’s been an exhilarating start to the year!
In the land of Global Equities, here are the world’s Top 3:
- Greece +9.2%
- Argentina +8.7%
- Portugal +8.5%
In other words, the markets that some of the fear-based advertising blogs talked most about for the last 3 years are your portfolio’s top money-makers. After all, who in Davos didn’t tell you to buy Greece?
And here are the world’s 3 dogs (YTD):
- China -5.3%
- Brazil -4.5%
- Japan -3.4%
Yep, remember the ole “BRICs” long-term investment theme from Davos before they had Davos? #Mint, that was. Brazil in particular has been just sad to watch – and who isn’t long Japan, after it being one of the world’s best performers in 2013 btw?
To summarize what we think will be a glaringly different year for asset allocation in 2014, we called one of our Top 3 Global Macro Themes for Q114 #GrowthDivergences. This theme should not only make for winners and losers in what we call Country Picking, but sector and stock picking within those countries too.
Speaking of #GrowthDivergences, check out the Sector Divergences in the US Equity market for both last week and 2014 YTD:
- Consumer Discretionary (XLY) -1.9% w/w to -2.60% YTD
- Healthcare (XLV) +0.5% w/w to +2.85% YTD
Yep, that’s a +545 basis point performance spread between two of the most widely held US stock market sectors. So much for Sector Variance (see our Q413 Macro Themes deck and Chart of The Day) hitting all-time lows. Mean reversion is #exhilarating, indeed.
And what’s driving that? In our GIP (Growth, Inflation Policy) model, the traverse from:
A) Quadrant #1 in our GIP Model (Growth Accelerating as Inflation Decelerates), to
B) Quadrant #2 in the same model (Inflation Accelerating alongside Growth Accelerating),
… shows you that Consumer Sectors are two of the worst sectors you can be in (makes sense because, on the margin, #InflationAccelerating (another Q114 Macro Theme), slows real consumption growth), while Healthcare and Tech are two of the best.
Technology (XLK) and the Nasdaq (QQQ) are up +0.03% and +0.5%, respectively, for 2014 YTD (versus the Dow and SP500 -0.7% and -0.5%, respectively).
Looking beyond US Equities, you can see the same performance divergence taking hold in Global Equities that you are already seeing in the world’s top and bottom 3:
- EuroStoxx600 = +1.8% last week to +2.3% YTD
- MSCI Latin American Index = -1.5% last week to -4.6% YTD
So, maybe this year at Davos they put Captain Pie-Chart on “global emerging market equity diversification” in one of the breakout rooms. He’ll have plenty of time and space to hear himself talk. Maybe his government will pay for his psychiatrist and post meeting masseuse too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.79-2.89%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
Takeaway: If my SPY TREND line wasn't broken, I'd buy the damn-bubble. But it is. And bubbles pop.
Deep breaths, people.
Today’s ISM report was a total train wreck … on both growth and inflation. It was the biggest one-month drop in new orders since 1980. I review that and much more in the 5 minute video below.
With #InflationAccelerating on the margin, US #GrowthSlowing mattered.
Now we have a bearish Hedgeye TREND setup in SPY. The bullish breakout in volatility is killing levered long momentum monkeys. That's why we fell so fast; monkeys on Old Wall 2.0 die real fast. Bullish monkeys taking "green arrows" to the head.
It was ugly out there today.
The Russell 2000 was smacked in the face for a -3.1% loss leading today's decline – nasty.
Got Consumer Discretionary (XLY)? It was down another -2.6% to -8.6% YTD! Eek.
If my SPY TREND line wasn't broken, I'd buy the damn-bubble. But it is.
And bubbles pop.
Right now there’s simply no long-term TAIL support on the S&P 500 to 1683.
The writing was on the wall. Financials (XLF) -2.5% snapping our @Hedgeye TREND (in our Risk Manager product) last week was a huge signal.
Bearish TRENDs are to be traded as aggressively as bullish ones.
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