prev

Riddle In An Enigma

This note was originally published at 8am on March 04, 2014 for Hedgeye subscribers.

“Russia is a riddle wrapped in a mystery inside an enigma.”

-Winston Churchill

 

In college, I wrote my senior essay on constitutionalism in post-Soviet Russia.  It was a great topic for an Ivy League kid and I had the privilege of being advised on the paper by General William Odom, a former head of the National Security Council under Ronald Reagan, and expert on Soviet affairs.  Despite my heroic efforts at primary research, the conclusion could have been shorter than a tweet.

 

Simply put, the rule of law was going to take time, perhaps generations, to take hold in Russia.  Unlike the United States and many Western nations, the history of Russia, even before Communism, was one of rule “by law” and not rule “of law”.  So, in effect, any new Constitution would simply be viewed by the people as an apparatus by which they were ruled, rather than a document that freed them.

 

Then, as now, it is impossible to analyze Russian action solely from the lens of the West.  Actions which may same outrageous to the West may actually be very subdued to the Kremlin.  

 

Riddle In An Enigma - poot

 

A quick review of any major Western media source is that there are two schools of thoughts in analyzing the current situation.  The first is that Putin is clearly violating the sovereignty of the Ukraine and will pay for it, likely economically.  The second is that Obama has largely been incompetent in dealing with Russia and is in a box because Putin has become his partner, of sorts, on Iran and Syria.

 

Stepping back though, it is worth viewing this from the Russian perspective.  For starters, Crimea, which is and has been recognized as a sovereign part of the Ukraine by Russia, is also the home to Russia’s Black Sea Fleet and will be until 2042 under an agreement between the two countries.  It is also a region that is almost 60% Russian speaking and ethnic Russian.  So, clearly, the Kremlin has vested interests in the Crimean peninsula.

 

Meanwhile, in overthrowing President Yanukovych, the Ukrainians overthrew a Russian ally who had been moving further away from the Europe and closer to Russian, including taking a recent $15 billion loan from Russia.  The current leadership in the Ukraine also does have some far right-wing elements.  Specifically, one of the three main leaders of the protest and the new deputy Prime Minister of the Ukraine, Oleh Tyahnybok, is the leader of the far-right ultranationalist Svoboda party that was allied with the Nazis in World War II.  (Tyahnybok has at times blamed the Ukraine’s problems on the “Jewish-Russian” mafia running the country.)

 

Back to the Global Macro Grind...

 

Clearly, from a Western perspective neither of the above factors, strategic interests in Crimea or extreme nationalists in the new Ukrainian government, justifies an invasion into sovereign Ukraine. Hence, the West is in uproar and among other things is threatening to pull out of the Sochi G-8 conference this summer and implement economic sanctions.  For his part, Putin has towed the line closely in Crimea; there have been no shots fired and little violence.  As well, so far, the Russians have not made a move into the mainland of Ukraine.

 

On some level, Putin also likely respects history.  Similar to Afghanistan, Crimea has been a thorn in Russia’s side historically. Russia also fought a war in the Crimea, against a British, French and Ottoman coalition, in the middle of the 19th century.  This war was an unmitigated disaster for the Russian Empire, then led by Nicholas I.  Not only did Nicholas I not live to see the end of the war, but his successor Alexander II signed the Treaty of Paris and initiated the biggest liberalization campaign in the history of Russia. 

 

Despite the fervor that was brewing on political TV this weekend, the perception based on a poll we took yesterday is that the situation in the Ukraine is actually favoring Putin vis-à-vis President Obama.  In fact, 78% of the respondents to our poll said Putin will come out stronger. Napoleon famously said:

 

“Never interrupt your enemy when he is making a mistake.”

 

Of course, it begs the question: who is making the mistake?

 

In all likelihood, the most significant reason that Russia is unlikely to escalate is an economic one.  Even as the Russian stock market is rallying this morning (perhaps an indication that the worst is behind us?), Russian asset prices have been decimated.  In the Chart of the Day, we show this with a chart of the Russian ruble, which is literally hitting all-time lows. Despite the Russian central bank aggressively raising interest rates by 150 basis points, the ruble continues to be better for sale.  Internally, a weak ruble is the worst economic outcome for Putin as it has the potential to drive inflation up dramatically. 

 

Externally, the most significant “river card” Russia has to play is its natural resources that much of Western Europe is dependent on.  Last year, Russia shipped 133 billion cubic meters of gas to Europe, including 40 billion to Germany, which was more than 1/3 of Germany’s supply.  Ultimately, Russia has become very economically integrated with the West and it is likely this integration that leads to resolution before escalation in the Ukraine. 

 

This all of course reminds me of the following joke:

 

A Ukrainian immigrant goes to the Department of Motor Vehicles to apply for a driver's license. 

He has to take an eye test. The clerk shows him a card with the letters: 

C Z W I X N O S T A C Z 

"Can you read this?" the clerk asks. 

“Read it?" the Ukrainian replies, "Heck, I know the guy!" 

 

Our immediate-term Risk Ranges are now as follows (our Top 12 macro ranges are in our Daily Trading Range product):

 

UST 10yr Yield 2.59-2.73%

SPX 1826-1861 

VIX 13.06-16.26 

USD 79.81-80.31 

Brent 108.78-111.21

Gold 1310-1353 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Riddle In An Enigma - RUB

 

Riddle In An Enigma - rta2



This Story Doesn't End Well

“Appreciate stories that do not come out well, for they are very much like a good deal of life.”

-James A. Garfield

 

According to Candice Millard in Destiny of The Republic (pg 19) , that’s what the 20th President of the United States, James A. Garfield, told his kids one night after reading them Shakespeare’s Othello.

 

Admittedly, I read my kids too many fairy tales. Maybe that’s my escape from the latest chapter of reality that is the US Federal Reserve un-officially Burning The Buck via its Policy To Inflate.

 

This morning you’ll see the initial outcrop of Dollar Devaluation – consumer price #InflationAccelerating again in the most recent made-up government CPI report. Tomorrow, you’ll see Janet Yellen officially abandon the Fed’s dual mandate and roll with “qualitative rate guidance” (i.e. price fixing interest rates, like Japan did).

 

This Story Doesn't End Well - usd1

 

Back to the Global Macro Grind

 

No, this story doesn’t end well for the US economy and at least 80% of its people. Yes, that is a forecast. And it’s aligned with at least the last years of economic #history.

 

But don’t worry, the Fed’s main leading indicator (the US stock market) can still go up on this. Venezuela’s was up +460% (in its burning currency) last year, and has since fallen to -5.6% in 2014 YTD. Germany’s stock market went parabolic in the 1920s too.

 

Dollar Down yesterday perpetuated another no-volume (-20% vs. @Hedgeye TREND) rip in US stocks. While @FederalReserve’s esteemed Ph.D. economists will lie to you and suggest that price fixing the long-end of the curve isn’t “causal” to currency devaluation, it is.

 

Moreover, what’s left of free-market pricing believes it is – check out these 30-day US Dollar Correlations:

 

1. SP500 -0.86 (inversely correlated with USD)

2. Commodities (CRB Index) -0.84

3. Gold -0.93

 

Yep, that’s that. The entire world is front-running Janet Yellen talking down interest rates in the face of #InflationAccelerating.

 

Since no one who calls the shots at either the White House or the Fed has ever traded macro market risk in their life, don’t expect them to get the most important aspect of risk managing markets – expectations.

 

If you want to look at the market’s most obvious expectations on US monetary and fiscal policy, look at futures and options positions in the CFTC (US Commodities Futures Trading Commission) data:

 

1. Gold = +123,007 net long contracts (vs. its 1yr avg of +60,763 contracts)

2. Crude Oil = +432,840 net long contracts (vs. its 1yr avg of +349,652 contracts)

3. US Dollar = -197 net short contracts (vs. its 1yr avg of +17,809 contracts)

 

In other words, front-running an un-elected cartel of Keynesian economists who make-up new policy rules as they go (the Fed) has turned into a big business on Wall Street. If you don’t believe that, tell yourself fairy tales too.

 

Like it did in Q1 of both 2008 and 2011, the market is expecting both Congress and the Fed to Devalue the Dollar in the face of slowing economic data. If you go back to the 2011 playbook, you can see that Gold, Bonds, and Utilities (XLU) were beating the Dow steadily.

 

To review what the market is front-running:

 

1. FISCAL policy – moar government deficit spending

2. MONETARY policy – talking down the long-end of the curve (rates)

 

On both of those currency vectors (yes, decisions your elected or un-elected bureaucrats make are causal), unlike last year (when both were Dollar Bullish with sequestration + tapering), Mr. Macro Market is taking the US Dollar to its YTD lows.

 

In other Global Macro news, Germany appears to be finally slowing. While it’s been a good run for the German economy off its European Crisis lows, here’s the real-time market update:

 

1. Germany’s stock market (the DAX) broke @Hedgeye TREND support of 9273 last week

2. Germany’s bond market has ramped in the last month with 10yr Bund Yield -10bps m/m to 1.56%

3. Germany’s ZEW (confidence reading) just dropped in March to 46.6 vs 55.7 in February

 

I know. If China, Japan, USA, and now Germany see the slopes of their economic growth curves roll over (all at the same time) what could possibly go wrong? Oh, and Russia (stock market -23% YTD) is still crashing. This story only ends well in some sadistic dream.

 

Our immediate-term Global Macro Risk Ranges are now (we have 12 ranges in our Daily Trading Range product):

 

SPX 1

DAX 8

VIX 14.72-17.56
USD 79.21-79.79

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

This Story Doesn't End Well - Chart of the Day

 

This Story Doesn't End Well - Virtual Portfolio


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

March 18, 2014

March 18, 2014 - Slide1

BULLISH TRENDS

March 18, 2014 - Slide2

March 18, 2014 - Slide3

March 18, 2014 - Slide4

March 18, 2014 - Slide5

March 18, 2014 - Slide6

BEARISH TRENDS

March 18, 2014 - Slide7

March 18, 2014 - Slide8

March 18, 2014 - Slide9

March 18, 2014 - Slide10

March 18, 2014 - Slide11
March 18, 2014 - Slide12

March 18, 2014 - Slide13


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 18, 2014


As we look at today's setup for the S&P 500, the range is 20 points or 0.69% downside to 1846 and 0.39% upside to 1866.                       

                                                                                                        

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.32 from 2.33
  • VIX closed at 15.64 1 day percent change of -12.23%

MACRO DATA POINTS (Bloomberg Estimates):

  • Federal Open Market Cmte begins 2-day mtg
  • 7:45am: ICSC weekly sales
  • 8:30am: CPI m/m, Feb., est. 0.1% (prior 0.1%)
  • CPI Ex Food and Energy m/m, Feb., est. 0.1% (prior 0.1%)
  • 8:30am: Housing Starts, Feb., est. 910k (prior 880k)
  • 8:30am:  Building Permits, Feb., est. 960k (prior 937k, revised 945k)
  • 8:55am: Redbook weekly sales
  • 9am: Net Long-term TIC Flows, Jan., est. $40.0b (pr -$45.9b)
  • 4:30pm: API weekly oil inventories

GOVERNMENT:

    • 8am: SEC Chief Economist Craig Lewis speaks at ICI
    • 8:30am: David S. Cohen, U.S. Treasury undersecretary for terrorism & financial intelligence speaks on virtual currencies at Bloomberg event
    • 9am: RNC Chairman Reince Priebus at Christian Science Monitor
    • 10am: DNC Chairwoman Rep. Debbie Wasserman Schultz at Natl Press Club
    • US. Election Wrap:  Illinois Race; Ads by Billionaires

WHAT TO WATCH:

  • Federal Open Market Cmte begins 2-day mtg
  • High-speed trading said to face New York probe over fairness
  • Russia creeps towards economic crisis as sanctions near
  • Malaysia Air disappearance among longest in modern aviation
  • Obamacare reshuffles insurance market share, report says
  • Wal-Mart plans video-game trade-in service March 26
  • Amazon to start selling video-streaming device in April: WSJ
  • Microsoft said to unveil Office for IPad on March 27
  • Target to sell products simultaneously with TV shows: NYT
  • Rep. Camp’s bank tax plan under attack from Wall St.: WSJ
  • Shell, Phillips 66 purchase majority of SPR oil sale
  • Italy may cut F-35 JSF order to 45 vs 90, Corriere says

EARNINGS:

    • Adobe Systems (ADBE) 4:05pm, $0.25 - Preview
    • Alimentation Couche Tard (ATD/B CN) 8:40am, $0.92
    • DSW (DSW) 7am, $0.29
    • FactSet Research Systems (FDS) 7am, $1.22
    • Hertz Global Holdings (HTZ) 6am, $0.32
    • Oracle (ORCL) 4:01pm, $0.70 - Preview
    • Pacific Sunwear of California (PSUN) 4pm, ($0.19)
    • Renren (RENN) 6pm, ($0.12)
    • Yingli Green Energy Holding Co (YGE) 6am, ($0.18)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Extends Retreat From Highest in Six Months Before Fed Meets
  • Gold-Mining ETF Outshines Bullion Fund as Haven Bet: Commodities
  • Brent Trades Near Six-Week Low as Crimea Risk Fades; WTI Steady
  • Nickel Heads for Bull Market as Russia Clouds Supply Outlook
  • Corn Rebounds in Chicago Trading, Erasing Earlier Declines
  • StanChart Sees Global Sugar Deficit in 2014-15 of 1 Mln Tons
  • Ukraine Tackling Gas Corruption Means Potatoes for Poor: Energy
  • Default Risk for China Copper Financing Seen Low: StanChart
  • European LNG Imports Fell to 9-Yr Low in 2013 as Prices Rose: BG
  • French Flour Miller Vivescia Sees Market for Sustainable Wheat
  • April Jet Fuel Swaps Drop to Eight-Month Low: Asia Distillates
  • EU Mulls Renewables-Linked Aid to 62 Industries, Draft Shows
  • Thai Rice Crops Damaged as Drought Spreads Across 28 Provinces
  • Rebar Rises 1st Time in 3 Days on China Seasonal Demand Outlook
  • Agricultural Commodities Could Be “Next Big Story,” HSBC Says

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


LULU: Survey Results Prequel #1

Takeaway: In advance of Round 2 of our LULU Consumer Survey, we’ll be revisiting some of the themes that caused us to turn bearish last fall

In advance of the release of Round 2 of our LULU Consumer Survey on Monday March 24th at 11:00am, we’ll be revisiting some of the themes that caused us to turn bearish last Fall.

 

 

As a reminder, we ran our first iteration of the LULU consumer survey in January. The impetus behind the study was to get a better understanding of how badly LULU's 2013 PR gaffes had damaged the brand. Our surveys are run through a third party vendor to ensure that the results are valid both statistically and methodologically, but we are always looking for data points to challenge our findings.

 

POINT 1:


As background regarding our methodology, we should point out that LULU ran a survey similar to our own soon after Chip's comments and were pretty tight lipped about the findings. At ICR the company flashed one image about brand desirability that we poached and compared to our data set (see both charts below). We won't claim that our data set is a carbon copy to LULU's, but the similarities are telling and lead us to believe that LULU must have been looking at the same troubling trends we called out in January prior to the company's 4Q guide-down.

 

LULU: Survey Results Prequel #1 - LULU data

LULU: Survey Results Prequel #1 - hedgeye data

 

POINT 2:


We’ll be calling out several items throughout this week. But one that we found particularly noteworthy is that there’s a gross disparity in pricing for LULU vs its’ competitors. Specifically, we asked consumers how much a pair of Yoga pants for each of the 17 brands that we used in our survey. The average price for LULU was $67, versus $45 for the rest of the industry. As you can see in the chart below, no other brand comes close. But when we charted the ACTUAL price of Yoga pants for each brand, we see that LULU is not even the highest, and several brands are within $10 of LULU’s $96 average price. The read-through is that the other pants are not materially more expensive, but consumers just think they are. That’s largely a function of discounting. At other stores, a shopper can find a pair of $90 pants, but get 2 for 1. But LULU has no real discounting strategy. Our sense is that in 2014, we’ll see that happen. Let’s see if the next round of our survey shows any improvement in the perceived value proposition.

 

LULU: Survey Results Prequel #1 - customer price

LULU: Survey Results Prequel #1 - ACTUAL PRICE

 

More analysis to come tomorrow. 


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.

next