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This note was originally published at 8am on March 19, 2014 for Hedgeye subscribers.

"I am sometimes a fox and sometimes a lion. The whole secret in government lies in knowing when to be one or the other."

-Napolean Bonaparte 

The old farm yard analogy of a fox licking its chops and entering the proverbial hen house can likely be applied to many current situations. On the global macro front the situation in the Ukraine and stand-off, of sorts, between the West and Vladmir Putin is likely the most relevant. 

Certainly, the foxes in the Kremlin are licking their chops since annexing the former Soviet territory of Crimea.  Is this the beginning of another Cold War? It is likely not. But the ineffectiveness in combating the Russian move certainly increases the likelihood of additional and more aggressive moves by the Russians. (By ineffectiveness, I read yesterday that the current, proposed sanctions by the U.S. would freeze the assets of a mere seven Russian citizens.)

The Fox In the Hen House - fox

Late yesterday, the first fatality occurred as a Ukrainian military base in Crimea was overtaken by Russian / Crimean troops. Albeit only one serviceman was shot, and reports are still conflicted as to how and by whom, the response by the leadership in the Ukraine is to now allow their military to use force as needed in Crimea. 

Perhaps most telling yesterday was Vladmir Putin’s hour long speech, specifically this excerpt:

“Our Western partners headed by the United States prefer not to be guided by international law in their practical policies, but by the rule of the gun.  They have come to believe in their exceptionalism and their sense of being the chosen ones.  That they can decide the destinies of the world, that it is only them that can be right.”

Clearly, the old Russian fox Putin is licking his lips.

Back to the Global Macro Grind . . .

Assuming hostilities don’t accelerate in Crimea, the most significant impact from the annexation of Crimea by Russia is likely to be on the upcoming midterm elections.  The media has been very clearly painting President Obama and his administration to have been ineffective in dealing with the Russians and Obama’s approval rating is starting to reflect as much.

According to the RealClearPolitics approval aggregate, Obama’s disapproval rating is now 52 and his approval rating is 43, for a spread of 9.  Gallup runs the longest running approval poll and the spread in that poll is even wider.  Currently, according to Gallup, Obama’s approval is at 41.  This is the worst approval rating of Obama’s Presidency and lower than President George W. Bush at the same time in his Presidency.

The fact that President Obama’s approval rating is in free fall is likely to be felt by the Democrats in the upcoming midterms.  In fact, the generic congressional poll aggregate, which effectively asks the respondent to say whether they would vote Republican or Democrat in congressional races, is basically tied (with the Republicans actually leading in some polls).  This is an inflection point as the Democrats have led in this generic poll very consistently since the last mid-term elections.

Speaking of polls, yesterday our daily Hedgeye poll asked, “Are you feeling the price pinch at the breakfast table?”  More than 75% of the respondents responded, yes.  This obviously shouldn’t be a surprise given the fact that coffee, orange juice and lean hog prices have had almost parabolic moves in the year-to-date.  Of course, for those consumers who don’t eat breakfast (or eat for that matter), they may yet be immune to food based inflation!

As my colleague Christian Drake highlighted yesterday in an intraday note, inflation is also percolating in other parts of the economy.  Specifically, CPI Services growth continues to hold above 2% and the growth trend looks similar even if you strip out the Shelter and Energy components of the Index.  

Even as most consumers are seeing inflation, the bigger question will be whether the Fed sees it. Fed Chair Janet Yellen will get a chance to address this in her first news conference today at 2:30 pm (following the Fed statement at 2:00 pm).  Certainly the stock market is seeing the consumer getting squeezed as well, as the consumer discretionary and consumer staples sectors are both down on the year.

Speaking of the stock market, despite the somewhat tepid return in the year-to-date, (the SP500 is only up just over 1% in the year-to-date and most major markets are down on the year), the latest US Investor's Intelligence poll shows that a predominance of investors remain bullish. 

According to the poll:

  • Bearish sentiment is unchanged at 17.4%;
  • Those expecting a market correction increases to 30.6% from 27.5%; and
  • Bullish sentiment decreases to 52.0% from 55.1%.

To be fair, it is likely difficult to envision much of a correction when the stock market is barely up on the year, but nonetheless investor complacency, at least based on this polls, seems noteworthy to say the least.

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

UST 10yr Yield 2.62-2.74% 

SPX 1848-1891 

VIX 12.79-17.34

USD 79.31-79.83 

Gold 1331-1385 

Keep your head up and stick on the ice,

Daryl G. Jones

Director of Research

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