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Can’t Blame the Weather

Client Talking Points

CHINA

China’s 48.1 PMI in March versus 48.5 February is nothing new. It’s the fifth straight month of slowing. But what remains is the equity markets speculating on a Chinese stimulus as the Shanghai Comp and Hang Seng bounced +0.9% to +1.9% on the news.

DAX

In the last week, two #GrowthSlowing data points have come out of Germany (ZEW and PMI) with a 53.8 in March versus 54.8 in February. Since all that really matters in our model is rate of change, these bearish deltas are A) new and B) impacting DAX, which has gone bearish on our immediate-term TRADE duration with 9377 resistance. Both Chinese and European PMI’s slowed sequentially in March – it wasn’t the “weather”.

OIL

With Food Inflation (CRB Food Index) up another +1.8% last week, bringing it to +18.1% year-to-date, Oil needs to deflate to offset. And it needs to deflate a lot. It’s down -0.3% this morning and both Brent and WTIC remain bearish TREND Hedgeye.

Asset Allocation

CASH 22% US EQUITIES 8%
INTL EQUITIES 10% COMMODITIES 18%
FIXED INCOME 20% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

FXB

We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve), and strong underlying economic fundamentals. In follow-up BOE minutes, the asset purchase program was held flat by a vote of 9-0 and the interest rate was held unchanged by a vote of 9-0. This week the UK’s Office for Budget Responsibility updated its forecasts and sees 2014 GDP at +2.7% versus forecasts of +1.8% a year ago and +2.4% in December. It also increased the 2015 growth forecast to +2.3% from +2.2% previously. The OBR sees budget deficit at -6.6% of GDP in 2013-14 from -6.8% previously forecast, and sees debt peaking at 78.7% of GDP in 2015-16, and falling to 74.2% of GDP in 2018-2019. News out this week discussed Chancellor Osborne closing in on a deal that would see the City of London become an offshore center for trading the Chinese currency. The British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support.

Three for the Road

TWEET OF THE DAY

RUSSIA: bounces +1.3% on the RTSI, -20.2% YTD @KeithMcCullough

QUOTE OF THE DAY

"He who is not everyday conquering some fear has not learned the secret of life." - Ralph Waldo Emerson

STAT OF THE DAY

Put on auction as the only camera that made it to the moon and back, the Hasselblad 500 sold over the weekend at nearly $760,000. The camera is described by Vienna auctioneers Galerie Westlicht as part of the equipment carried by the 1971 Apollo 15 mission — and the only camera ever brought back from the moon. It says the others were left behind to make room for mineral samples. (New York Times)


Punishing Her Currency

This note was originally published at 8am on March 10, 2014 for Hedgeye subscribers.

“The punishment process is as important as the reward system.”

-John Allison

 

As I quote one of my favorite post-2008-crash books, The Financial Crisis and The Free Market Cure (pg 177), I’m thinking more about the full body ache I have from our old-man hockey semi-final yesterday than what’s going on in the market. That’s not good.

 

Neither was the US stock market’s reaction to Friday’s US jobs report that “beat” expectations (must have been the weather). Stocks raged to all-time highs on the open, then got pancaked by midday. Newsflash: the monthly jobs report is a lagging indicator.

 

I didn’t have a good week, but it could have been worse. With the CRB Commodities Index +9.6% YTD (vs. the Dow -0.7%), this year’s Burning Buck rally in some asset prices has a lot more to do with #InflationAccelerating than anything else.

 

Back to the Global Macro Grind

 

While I am certain that if they had @CNBC Kiev, Ukraine would look just fine (Ukrainian currency crash has its stock market +29.8% YTD in Burning Currency terms); it’s not. Especially when a country’s currency is in free fall, her stock market is not the economy.

 

In Russian terms, Putin’s Ruble is crashing (-10% YTD) and so is his stock market (-24% since OCT and -19.7% YTD). Meanwhile the Chinese just printed a -18.1% year-over-year export disaster for FEB. The Shanghai Composite dropped -2.9% on that to -5.5% YTD.

 

Argentina’s Burning Currency is -17.1% YTD, but there’s probably nothing to worry about there either. Unless you are an Argentine, that is… Oh, and after trying the whole debt-levered-currency-devaluation thing, Venezuela is about to default on its debt.

 

In other news last week…

 

  1. US Dollar Index remained on its YTD lows (below @Hedgeye TAIL risk line of $81.14)
  2. US 10yr Yield popped +14bps to 2.80%, but failed to overcome @Hedgeye TREND resistance of 2.81%
  3. Coffee Prices ripped another +9.2% on the week to +74.3% YTD

 

No that’s not a typo – up +74.3% is the number, so whatever you do – don’t call that #InflationAccelerating.

 

With the CRB Foodstuffs Index +14.9% YTD, it’s not just coffee prices that are inflating:

 

  1. Corn was up another +5.5% last week to +13.7% YTD
  2. Soy was up another +3.1% last week to +14.2% YTD
  3. Lean Hogs were up another +5.8% last week to +24.6% YTD

 

Yes, basically you’re going to have to back everything out of your breakfast and call eating anything with pig in it “non-core” as the Fed tells you to consume a gluten-free Whatsapp for a buck a day instead.

 

Have you ever asked yourself why neither the Fed nor Bush/Obama ever talk about America’s currency?

 

As John Allison points out plainly on page 187 of the aforementioned book, “The fundamental issue underlying the boom-and-bust cycle in the financial industry is the lack of sound money. Unfortunately, the Fed is constantly manipulating the value of the dollar.”

 

And our profession gets that – or at least the machines do. It’s called Correlation Risk – and this is how it works:

 

  1. Down Dollar starts to trend as the Fed abandons anything that remotely resembles a two-way policy
  2. “Bad” economic news becomes good for asset price inflation, as the market front-runs the Fed easing
  3. Correlation Risk (asset price inflation trading inversely with US Dollars) starts to dominate

 

On that last point, here are the 30-day inverse correlations between US Dollar and the big stuff:

 

  1. Gold -0.88
  2. SPX -0.87
  3. CRB Index -0.75

 

In other words, the market calls what the Fed is signaling a Policy To Inflate (humans call it a tax). And yes, #InflationAccelerating will slow growth. That’s why you saw me buy bonds on Friday (and anything that looked like a bond, including Utilities, XLU).

 

Punishing The People with food, energy, rent, etc. inflation can only last for so long. Unless you think America has it in her to become Argentina, she has a tendency to rise up against these types of un-constitutional taxes. So stay tuned on that. History repeats.

 

The Unites States has already had two failed central banks. Between 1870 and 1913, the US experienced the greatest economic boom in history without a central bank.” –John Allison, pg 187

 

UST 10yr Yield 2.59-2.81%

SPX 1860-1889

Shanghai Comp 1969-2071

VIX 12.95-15.64

USD 79.46-80.16

Gold 1321-1355

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Punishing Her Currency - Chart of the Day

Punishing Her Currency - Virtual Portfolio


March 24, 2014

March 24, 2014 - Slide1

 

BULLISH TRENDS

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March 24, 2014 - Slide5

 

BEARISH TRENDS

March 24, 2014 - Slide6

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March 24, 2014 - Slide10

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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.


Quiet Is Not Safety

“Quiet is no certain pledge of permanence and safety.”

-James A. Garfield

 

From the innovation that flowed from the US Centennial Exhibition Fair in Philadelphia in 1876 to the uncertainty associated with the Republican Convention in Chicago in 1880, Destiny of The Republic (by Candice Millard) ranks at the top of my #history reading list YTD.

 

Garfield may be one of the lesser known US Presidents, but the prescience and leadership embedded in some of his quotes are quintessentially free-market American. #timeless

 

He embraced uncertainty; he encouraged winning and losing. He didn’t prey on the ignorance of The People; he encouraged its education. He was as progressive as any President before him. He was nothing like the politicians you have to endure today.

 

Back to the Global Macro Grind

 

Today you have to deal with a US government (both Republicans and Democrats) that is either lying to you about real-world economics (inflation) or isn’t market-literate enough to be able to tell you the truth if it tried. I’m not sure what’s worse.

 

However, I am sure that whatever is left of free-markets will front-run the government’s proactively predictable behavior. While they may not be acknowledged in D.C., Burning The Buck and never calling a devalued currency inflationary are core market beliefs.

 

For a few days last week (actually for a day and a half), the market suspended this belief and:

  1. Bought US Dollars
  2. Sold Gold
  3. Sold Bonds

#Cool

 

That’s what you should have done for literally all of Q1 of 2013 though. It’s Q1 of 2014, and the 2013 @Hedgeye TREND is over.

 

On Friday, everything reverted to the mean (towards the 3 month TREND):

  1. Dollar made another lower-YTD-high and went back down
  2. Gold made another higher-YTD-low and went back up
  3. Bonds had another great day, after v-bottoming from their Wednesday #RatesRising headfake

All the while, with the Dow Jones Industrials Index banging its head against the #OldWall to try to get itself to “up” for 2014 YTD (it’s -1.7%), food #InflationAccelerating continued with the CRB Foodstuffs Index up another +1.8% to +18.1% YTD.

 

#NotCool

 

Sure, oil remained under pressure (Brent Oil -1.2% last week) and that remains a bearish TREND signal @Hedgeye this morning (don’t be long oil with +406,967 net long futures/options contracts outstanding!), but that didn’t offset more of the same in terms of what components of the US equity market are delivering you the absolute return bacon YTD.

 

Mmm, #bacon (lean hog prices +31% YTD)…

 

From a sub-sector perspective in the SP500 YTD, this is what I mean by that:

  1. US Consumer Discretionary Stocks (XLY) -0.3% last wk (with the SP500 +1.4%) to -1.7% YTD
  2. Slow-growth-yield-chasing Utilities (XLU) +0.1% last wk to +6.7% YTD

In other words, whether your government calls it inflation or not, inflation slows real-consumption growth in America. So don’t get frustrated by it – just own it. #InflationAccelerating is a position that at least 10-20% of Americans can profit from.

 

No, that’s not a US political leadership message. It’s the winning market message – and, sadly, that is a losing one for at least 80% of America. The quiet and safety of the world buying US Dollars last year is ending. The 1-year average net long position in the USD (CFTC futures and options contracts) is +16,540 contracts, but:

  1. 3 months ago, the net long position went to flat
  2. 2 weeks ago, it moved to modestly net short
  3. Last week it dropped to a 1yr low of -12,167 net short

Yep, as Hemingway would say, at first the risk of your currency losing credibility happens slowly, then it happens all at once. The pledge of permanence of a #StrongCurrency advocated by Presidents like Garfield may be as worn out as (pre-1913 Fed Act days) free-market capitalism itself.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.62-2.82%

SPX 1

VIX 13.38-17.42

USD 79.11-80.49

EUR/USD 1.37-1.39

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Quiet Is Not Safety - Chart of the Day

 

Quiet Is Not Safety - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 24, 2014


As we look at today's setup for the S&P 500, the range is 27 points or 0.83% downside to 1851 and 0.62% upside to 1878.                                      

                                                                                         

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: 2.31 from 2.32
  • VIX closed at 15 1 day percent change of 3.31%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed Natl Activity, Feb., est. 0.10 (pr. -0.39)
  • 9am: Fed’s Stein speaks in Washington
  • 9:45am: Markit U.S. PMI Prelim., March, est. 56.5 (prior 57.1)

GOVERNMENT:

    • President Obama attends Nuclear Security Summit in The Hague, meets with G-7 leaders to discuss Ukraine
    • Senate meets to consider S.2124, its Ukraine aid bill, at 2pm, votes expected 5:30pm
    • 9:30am: Supreme Court lists cases it plans to consider
    • U.S. ELECTION WRAP: Chemical Group Is Third-Biggest in 2014 Ads

WHAT TO WATCH:

  • Advent, Bain to buy Nordic payment firm Nets for $3.1b
  • Apple said in talks with Comcast on streaming-TV service: WSJ
  • Nokia says completion of Microsoft deal is delayed until April
  • China manufacturing gauge unexpectedly falls in March
  • Chinese jet spots objects in search area as weather worsens
  • JPMorgan’s China investment banking CEO Fang Fang to leave
  • CFTC issues warning of possible legal action in swaps probe: FT
  • U.S., EU free trade deal to limit investor protection: FAZ
  • Euro-area March PMI falls to 53.2 vs 53.3, matches est.
  • Obama in Europe, Stress Tests, Microsoft: Wk Ahead March 22-29

EARNINGS:

    • Sonic (SONC) 4:01pm, $0.06

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Declines on Fed as Palladium Reaches Highest Since 2011
  • Korea Seeks Cut of $3 Billion Illegal Gold Trade With New Market
  • Hedge Funds Defy Goldman as Gold Bears Thank Yellen: Commodities
  • China to Restart Copper Recycling Tax Rebate, Metals Group Says
  • Copper Drops in London as China’s Slowdown Seen Curbing Demand
  • Brent Oil Slips for First Time in Three Days on China; WTI Holds
  • Silver Vault for 600 Tons Starting in Singapore as Demand Climbs
  • Rubber Drops to 2-Week Low as China’s Slowdown May Weaken Demand
  • Corn Climbs as Demand Growing for U.S. Supplies; Soybeans Drop
  • Japan’s Copper-Alloy Demand Seen Little Changed as Tax Increases
  • Houston Channel Closed to Contain 4,000-Barrel Oil Spill
  • Ukraine Billionaire Sought by U.S. Has Key to Putin Gas Cash
  • Indonesia Commando Turns Rancher in Would-Be Path to Leader
  • Tin at $24,000 Is Seen as ‘Ideal Level’ for Indonesia’s ICDX

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

 

 

 

 

 

 

 

 

 

 

 

 

 


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