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WHY IS GOLD (AND GOLD MINERS) RIPPING?

Takeaway: Gold is one of the few absolute return outlets in Quad #3 of our proprietary GIP framework (i.e. growth slowing as inflation accelerates).

CONCLUSIONS:

 

  1. We’ve been calling for investors to get longer of inflation-oriented assets in lieu of consumption-oriented assets, at the margins, as it becomes increasingly likely the Fed stops tapering (or incrementally eases) over the intermediate term.
  2. Specifically, we continue to anticipate the pace of domestic economic growth will slow, at the margins, as reported inflation accelerates, at the margins. If anything, a marginally dovish Fed only insulates our non-consensus #InflationAccelerating view.
  3. This directionally stagflationary setup is otherwise referred to as Quad #3 in our proprietary GIP framework. As the historical backtest data below highlights, Gold is among the best performing asset classes in Quad #3, along with US Treasuries, Energy stocks and Utility stocks.
  4. All told, never forget that gold is an absolute return vehicle that competes with real yields and real yields are headed south because slowing growth is dragging down nominal yields and accelerating inflation is dragging up inflation expectations (see chart below). Don’t fight the tide; fight the Fed instead.

 

WHERE WE’VE BEEN

Over the years, we’ve been accused of being inflationistas (2010-11), deflationistas (2012-13), perma-bulls (2009-10; 2013) and perma-bears (2010-11). Ironically enough, however, we’ve yet to be labeled as perma-anything with respect to Gold – though I’m sure being overtly bearish on Gold heading into 2013 and then turning fundamentally bullish within three weeks of the bottom probably has something to do with that:

 

  • THINKING WAY OUTSIDE THE BOX ON GOLD (12/14/12): “All told, we think investors should consider reducing their allocation to this asset class. At a bare minimum, it would be prudent for gold bulls to confirm whether or not our TAIL support ($1,669) holds before increasing exposure to gold here. If $1,669 breaks, there’s no true support to the prior closing lows.”
  • GOLD: IS IT TIME TO GET BACK IN ON THE LONG SIDE? (11/26/13): “Right now may be a bit early, but gold is shaping up to be a compelling long idea heading into 2014.

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - GOLD

 

Flash forward to today, Gold is up a healthy +6.1% YTD and gold miners are up an even healthier +16.9% YTD; this compares with a -2.9% decline for the S&P 500 Index and a larger -4.4% decline for the XLY (Consumer Discretionary sector SPDR).

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - YTD Performance

 

While we are certain consensus has no idea how to interpret these price signals, the aforementioned performance divergences should come as no surprise to subscribers of Hedgeye Macro research. Specifically, we’ve been calling for investors to get longer of inflation-oriented assets in lieu of consumption-oriented assets, at the margins, as it becomes increasingly likely the Fed stops tapering (or incrementally eases) over the intermediate term. Refer to our 1Q14 Macro Themes (1/9/14) and our US Economy Update Call from last Wednesday for more details.

 

WHERE TO FROM HERE?

We continue to anticipate the pace of domestic economic growth will slow, at the margins, as reported inflation accelerates, at the margins.

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - UNITED STATES   HRM

 

The arithmetic is actually quite simple; if the GDP deflator increases, then you need a commensurate increase in GDP to maintain the same pace of inflation-adjusted growth. Unfortunately for both buy-side and sell-side consensus, which came into 2014 as bullish as it had been in well over a year, neither the reported economic data nor bottom-up operating trends at the company level bode well for “a commensurate increase in GDP”.

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - UST CoT

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - Sell side Consensus

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - Eco Table 021014

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - ES OP Table 020714

 

This directionally stagflationary setup is otherwise referred to as Quad #3 in our proprietary GIP framework. As the historical backtest data below highlights, Gold is among the best performing asset classes in Quad #3, along with US Treasuries, Energy stocks and Utility stocks. The recent quantitative breakout in Brent Crude Oil bodes well for the Energy sector and the confirmed breakdown in Treasury yields bodes well for Utes (+2.9% YTD) and other yield-chasing plays (the MSCI US REIT Index is up +5.1% YTD).

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - GIP Backtest

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - Gold Backtest

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - Brent Crude Oil Levels

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - UST 10Y

 

While it’s early (for EM assets and commodity currencies in particular), other price signals are starting to confirm our view that the Fed is most likely to back away from tapering over the intermediate term (3-6M); in fact incremental monetary easing is not out of the question.

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - CRB Index

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - Commodities

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - EM

 

The WoW deltas in commodity currencies and EM asset plays suggest investors might want to start digging around for tactical opportunities on the long side of these asset classes. With respect to our #EmergingOutflows thesis, we’re not quite there yet on the latter, but if I can front-run my own thought process in the context of incremental confirming evidence, we’ll likely be there in another month or so.

 

All told, never forget that gold is an absolute return vehicle that competes with real yields and real yields are headed south because slowing growth is dragging down nominal yields and accelerating inflation is dragging up inflation expectations (see chart below). Don’t fight the tide; fight the Fed instead.

 

DD

 

Darius Dale

Associate: Macro Team

 

WHY IS GOLD (AND GOLD MINERS) RIPPING? - Breakevens


Just Charts: The Stinky Start Remains

Last week Consumer Staples underperformed the broader market, with the XLP +0.4% versus S&P500 +0.8%, continuing a weak start for the sector in 2014, down -4.8% YTD.   

 

The Hedgeye U.S. Consumption Model is flashing predominantly red, as only 4 of the 12 metrics are flashing green.

 

Just Charts: The Stinky Start Remains - economic indicator

 

From a quantitative set-up the sector remains broken across the immediate term TRADE and intermediate term TREND durations, our language for a bearish medium term sector outlook. You’ll see a similar bearish setup for most of the largest names in Consumer Staples.

 

Just Charts: The Stinky Start Remains - 1

 

We continue to believe that the group is generally way over-owned and loaded with premium valuations, despite a healthy moderation in the P/E week-over-week, declining 120bps to 17.7x. Headwinds we see for the group include:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating
  • The economies and currencies of emerging markets – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • Less sector Yield Chasing as Fed continues its tapering program
  • In the U.S., the most recent data on ISM Manufacturing and Prices Paid disappointed month-over-month
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months and declined week-over-week

Just Charts: The Stinky Start Remains - 2

 

Just Charts: The Stinky Start Remains - consumer comfort

 

 

Top 5 Week-over-Week Divergent Performances:


Negative Divergence: NUS -15.6%; FLO -9.8%; HAIN -6.0%; DF -4.6%; HRL -3.7%

Positive Divergence: HLF +4.7%; BNNY +4.6%; CCE +2.6%; DPS +2.1%; BF/B +2.1%

 

 

The “Newsy” News Flow:


Coca-Cola and Green Mountain Partnership - last week KO announced it will purchase a 10% minority equity position in GMCR. Under the terms of the equity agreement, KO will acquire 16.7M of newly issued shares in GMCR for approximately $1.25B. KO also revealed a new Keurig cold machine to dispense liquid syrup with built-in carbonation, which it has been working on for 5 years! 

  • We note that Soda Steam (SODA) has struggled with sales of its non-branded syrups — can branded Coke change the consumer's tide towards syrups?  Also, we suspect the need for KO and GMCR to combine their hot and cold systems into one as customers desire the innovation but lack the kitchen cabinet space for two units. Could PEP partner with SODA, or just buy the company outright? 

 

CVS Cuts Tobacco - CVS Caremark announced last week that it will stop selling tobacco products at its more than 7,600 drugstores nationwide by October 1. The Company estimates that it will lose approximately $2 billion in revenues on an annual basis from the tobacco shopper.

  • While Big Tobacco is beginning to forecast cigarette volumes down 2-3% in 2014, a moderation from 2013 of ~ -4%, CVS’ decision is a bold one that could be very impactful – namely will Walgreen’s, Duane Reade, and Rite Aid follow along?  CVS does not sell electronic cigarettes and said it was waiting for guidance on the devices from the FDA.

 

Last Week’s Research Notes

 

Earnings Calls This Week (in EST):

 

Monday (2/10): BNNY 5pm

Tuesday (2/11): RAI 9am; DF 9am

Wednesday (2/12): LO 9am; DPS 11am; MDLZ 5pm

Thursday (2/13): PEP 8am; JAH 8:30am; AVP 9am; THS 9am; IFF 10am; BG 10am; TAP 11am; KRFT 5pm

Friday (2/14): SJM 8am; CPB 9:30am

 

 

Quantitative Setup

 

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

Alcohol


BUD – no-volume (no conviction) beta bounce last week doesn’t do anything to change this bearish TREND ($100.89 resistance)

Just Charts: The Stinky Start Remains - 3

 

DEO – one of the new worst looking big cap charts listed in America; never mind the TREND remaining bearish, now the TAIL risk is on here w/ resistance of $123.97

Just Charts: The Stinky Start Remains - 4

 

 

Beverage


KO – outdone by a hair in the downhill crash competition at #Sochi by DEO; bearish TREND resistance remains overhead at 39.74; TAIL risk = #on

Just Charts: The Stinky Start Remains - 5

 

PEP – is it the chips? Don’t know but it couldn’t look worse than KO and it doesn’t; bearish TREND remains but holding long-term TAIL risk line of 79.42, barely

Just Charts: The Stinky Start Remains - 6

 

 

Food


GIS – Cheerios are cool, but the stock still isn’t; bearish TREND resistance as intact as a bowl without milk up at $49.98

Just Charts: The Stinky Start Remains - 7

 

MDLZ - the name of the company is turning out to be as unimpressive as the stock sans Peltz renaming it; TREND support now resistance at $33.67

Just Charts: The Stinky Start Remains - 8

 

 

Household Products


KMB – don’t cry for me Argentina – your KLEENEX is the only signal on our screen that absorbs the bullish TREND support of $103.43

Just Charts: The Stinky Start Remains - 9

 

PG – good Mom commercials at the Olympics, bad stock; bearish TREND @Hedgeye firmly intact up at $79.99

Just Charts: The Stinky Start Remains - 10

 

 

Tobacco


MO – dogs bounce too, eh? Altria is earning its newfound bearish TREND with resistance up at 36.29

Just Charts: The Stinky Start Remains - 11

 

PM – dog breath.com remains – bouncing big last week on no-volume gets this puppy a biscuit too; TREND resistance firmly intact up at 85.16

Just Charts: The Stinky Start Remains - 12

 

 

 

Matt Hedrick

Food, Beverage, Tobacco, and Alcohol

 

Howard Penney

Household Products

 

(o)

 


European Banking Monitor: Calmer Than A Week Ago But Still Uncertain

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Outside of Greece, most of Europe's banking system saw swaps tighten last week. Spanish, Italian and French banks led the charge lower, followed closely by Germany's banks. Greek banks were wider by ~30 bps on a w/w basis.

 

European Banking Monitor: Calmer Than A Week Ago But Still Uncertain - v.banks

 

Sovereign CDS – Sovereign swaps were tighter across the globe last week with the exception of Germany, where they widened by one basis point. 

 

European Banking Monitor: Calmer Than A Week Ago But Still Uncertain - v.sov1

 

European Banking Monitor: Calmer Than A Week Ago But Still Uncertain - v.sov2

 

European Banking Monitor: Calmer Than A Week Ago But Still Uncertain - v.sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 3 bps to 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Calmer Than A Week Ago But Still Uncertain - v.euribor

 

 

Matthew Hedrick 

Associate


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN

Takeaway: Waiting and watching for now while the EM situation shows greater signs of clarity.

Summary:

Last week we flagged the rising Euribor-OIS and TED spread as areas of concern. Historically these have been solid indicators that the market is moving from a risk on to risk off mentality and it's our view that it's best to stand aside when these gauges of interbank systemic risk are rising. It would appear for now that that widening may have proved short-lived as both gauges have this week returned to generally benign levels. That said, we're not quite comfortable sounding the "all clear" signal just yet. For one thing, VIX levels remain elevated and for another, we think the EM scare that initially prompted the nervousness is unlikely to have blown over just as quickly as it emerged. With our Macro team’s quantitative setup in the XLF showing just 1.9% upside to TRADE resistance and 4.1% downside to TRADE support, we think it makes sense to wait and watch at this juncture.

 

Key Points:

2-10 Spread – Last week the 2-10 spread widened to 238 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* Euribor-OIS Spread – The Euribor-OIS spread tightened by 3 bps to 13 bps. 

 

CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 290 versus 284 the prior week. As compared with the prior month, commodity prices have increased 6.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

 

TED Spread – The TED spread fell 6.4 basis points last week, ending the week at 15 bps this week versus last week’s print of 21.36 bps.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 7 of 13 improved / 2 out of 13 worsened / 4 of 13 unchanged

 • Intermediate-term(WoW): Negative / 2 of 13 improved / 9 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Positive / 5 of 13 improved / 0 out of 13 worsened / 8 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 15

 

1. U.S. Financial CDS -  US Banks and non-bank Financials were almost universally tighter last week with the modest exceptions of Sallie Mae (+2 bps) and Travelers (+5 bps). The large cap US banks were all tighter, with MS, C and BAC tightening by 10-11 bps while GS and JPM tightened by 9 and 8 bps, respectively. 

 

Tightened the most WoW: C, BAC, GNW

Widened the most WoW: TRV, SLM, MET

Tightened the most WoW: AGO, MBI, MTG

Widened the most MoM: TRV, MET, AIG

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 1

 

 

 

2. European Financial CDS - Outside of Greece, most of Europe's banking system saw swaps tighten last week. Spanish, Italian and French banks led the charge lower, followed closely by Germany's banks. Greek banks were wider by ~30 bps on a w/w basis.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 2

 

3. Asian Financial CDS - Chinese and Indian banks posted modest w/w tightening in swaps, while Japanese Financials were essentially unchanged. 

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 17

 

4. Sovereign CDS – Sovereign swaps were tighter across the globe last week with the exception of Germany, where they widened by one basis point. 

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 18

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 3

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 4

 

5. High Yield (YTM) Monitor – High Yield rates were unchanged last week at 6.02%, but are up 7 bps vs the previous month. 

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1848.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 6

 

7. TED Spread – The TED spread fell 6.4 basis points last week, ending the week at 15 bps this week versus last week’s print of 21.36 bps.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 7

 

8. CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 290 versus 284 the prior week. As compared with the prior month, commodity prices have increased 6.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 3 bps to 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index ended the week at 4.44%, up 164 bps month-over-month. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -3 bps, ending the week at 87 bps versus 90 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 11

 

12. Chinese Steel – Steel prices in China ended the week at 3,393 yuan/ton, which is down 57 yuan/ton on a month-over-month basis (-1.7%). We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 238 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance and 4.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Reality Burns: Kevin Kaiser Keeps $BWP as a Hedgeye Best Idea Short

Takeaway: Kevin Kaiser nails it on the short side. Again.

In case you were wondering what that terrible, smoky smell is this morning, shares of Boardwalk Pipeline Partners (BWP) are getting incinerated. They are down over 38% as of this writing.

 

Hedgeye Energy Analyst Kevin Kaiser added BWP as a SHORT to our Best Ideas list on December 2, 2013.

 

The stock is down over 42% since then.

 

It pays to listen to Kaiser.

 

Reality Burns: Kevin Kaiser Keeps $BWP as a Hedgeye Best Idea Short - kk8

Join the Hedgeye Revolution.



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