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MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING?

Takeaway: The ongoing compression in the yield curve is the main risk factor we're highlighting this week.

Key Callouts:

The main risk callout this morning is the ongoing compression in the yield spread. The 2-10 yield spread ended 2013 at 265 bps. As of Friday's close it stood at 223 bps, a decline of 42 bps. In the latest week, we saw a further 9 bps of decline. The compression of the yield curve is seemingly at odds with the generally strong labor market data we've seen recently. So, what's causing this? There are two possible explanations.

 

  • First, investors should look back historically at the correlation between the Fed's holdings of treasury and mortgage securities and the level of the 10-year treasury yield. What they will find is that QE1 and QE2 did effectively reduce long-term yields. However, interestingly, rates dropped MORE at the end of QE1 and QE2. Why would yields drop when Fed purchasing ends? The simple answer is concerns around growth slowing. It's possible that the market is following the same playbook, although in slow motion.
  • Second, banks have stepped up their purchases of treasury securities since the start of this year. This is partly a natural response to decelerating loan growth, but also partly driven by liquidity requirements. Interestingly, as per a Bloomberg article out this morning, bank holdings of treasury securities are near their late-2012 highs. In late 2012 the 10-year was at or near its all time low of 150 - 170 bps.

Aside from what's happening in rates, it's generally quiet across the Financials landscape. The following are a few of the key callouts from this week's RM.

 

*2-10 Spread – Last week the 2-10 spread tightened to 223 bps, -9 bps tighter than a week ago. 

 

*U.S. Financial CDS -  Swaps tightened for 25 out of 27 domestic financial institutions. The Global US banks (with the exception of BAC, which saw no change) were tighter, by an average of 2 bps w/w, and 6 bps on a m/m basis. The specialty finance companies we track were tighter on the week and on the month with the biggest moves coming from the mortgage insurers, MTG & RDN and Sallie Mae. 

 

*Chinese Steel – Steel prices in China fell 1.3% last week, or 45 yuan/ton, to 3,332 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged

 • Intermediate-term(WoW): Positive / 7 of 12 improved / 1 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Positive / 4 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 15

 

1. U.S. Financial CDS -  Swaps tightened for 25 out of 27 domestic financial institutions. The Global US banks (with the exception of BAC, which saw no change) were tighter, by an average of 2 bps w/w, and 6 bps on a m/m basis. The specialty finance companies we track were tighter on the week and on the month with the biggest moves coming from the mortgage insurers, MTG & RDN and Sallie Mae. The bond guarantors saw large w/w improvements. Notably improved were AGO, whose swaps tightened by 44 bps w/w, and MBI, whose swaps tightened by 31 bps w/w. 

 

Tightened the most WoW: AGO, MTG, PRU

Tightened the least WoW: HIG, BAC, C

Tightened the most WoW: AIG, GNW, MS

Widened the most MoM: MBI, AGO, JPM

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 1

 

2. European Financial CDS - It was a mixed bag for European swaps this past week. 25 swaps widened and 13 swaps tightened. The Greek banks continue to tighten notably, dropping an average of 33 bps in the past week and 185 bps in the past month. Belgian banks also tightened considerably, dropping an average of 9 bps w/w. Russia’s Sberbank, Germany's IKB, and France's Societe Generale all widened w/w, by 25, 15, and 11 bps, respectively. 

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 2

 

3. Asian Financial CDS – Last week Chinese and Indian banks widened nominally, while Japanese financials tightened by an average of 1.3 bps w/w.

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 17

 

4. Sovereign CDS – European Sovereign Swaps mostly tightened over last week. French sovereign swaps tightened by -3.9% (-2 bps to 46 ) and Portuguese sovereign swaps widened by 1.8% (3 bps to 173).

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 18

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 3

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 0.8 bps last week, ending the week at 5.62% versus 5.63% the prior week.

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1854.

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 6

 

7. TED Spread Monitor – The TED spread rose 1.3 basis points last week, ending the week at 21.4 bps this week versus last week’s print of 20.09 bps.

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.3%, ending the week at 311 versus 310 the prior week. As compared with the prior month, commodity prices have increased 2.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 8

 

9. Euribor-OIS Spread – 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. The Euribor-OIS spread did not change from the previous week, remaining at 15 bps.

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 9

 

10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 30 basis points last week, ending the week at 2.3% versus last week’s print of 2.0%. 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: WHY ARE LONG-TERM RATES FALLING? - 10

 

11. Chinese Steel – Steel prices in China fell 1.3% last week, or 45 yuan/ton, to 3332 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 223 bps, -9 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance.

 

MONDAY MORNING RISK MONITOR: WHY ARE LONG-TERM RATES FALLING? - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


LEISURE LETTER (04/28/2014)

Tickers:  PENN, PNK, MGM, WYNN, OEH, 200.HK

EVENTS TO WATCH

Monday, April 28

  • CHH Q1 EPS – 10am , Passcode: 70683172

Tuesday, April 29

  • Las Vegas March revenues out
  • NCLH Q1 EPS – 10am , Passcode: 22334128
  • VAC Q1 earnings – 10am , Passcode: 4679876
  • MGM Q1 earnings – 11am , Passcode: 20455736

Wednesday, April 30

  • PNK Q1 earnings – 8am , Passcode: 27759612
  • GLPI Q1 earnings – 9am
  • MAR Q1 earnings – 10am , Passcode: 10575194
  • H Q1 earnings – 11:30am , Passcode:  11561402
  • BYD Q1 earnings – 5pm , Passcode:  44440004

Thursday, May 1

  • GENTING Q1 earnings  
  • HST Q1 earnings – 10 a.m.
  • OEH Q1 earnings – 10 a.m. , Passcode: 22074904
  • FCH Q1 earnings – 12 p.m. , Passcode: 28469900
  • BYI FQ3 earnings – 4:30 p.m.
  • EXPE Q1 earnings – 4:30 p.m .

Friday, May 2

  • April Employment Report
  • HT Q1 earnings – 9 a.m. , Passcode: 1398938

COMPANY NEWS

200.HK – signed a memorandum of understanding with Veremonte Espana S.L. of Spain to hold talks for the management of at least one casino to be developed as part of the BCN Dream resort being developed by Veremonte near Barcelona.

Takeaway:  Given the press releases during 2013, we believed this had already occurred - so we don't consider this "new" news.

 

PENN – filed an appeal with the Iowa Racing & Gaming Decision regarding the IRGC's April 17 decision to close the Argosy Casino.  The IRGC has 20 calendar days from the April 22 appeal filing date or Monday, May 12.  The IRGC has three options: deny the appeal; accept the appeal and proceed to another hearing (similar to the hearing held at the end of March); or do nothing (in which case the appeal would be considered denied). 

Takeaway:  We give 3:2 odds the IRGC either denies or does nothing. Given the events at the March hearing, it seems unlikely the IRGC would opt for another hearing - especially given PENN's commentary last week on the Company's Q1 2014 earnings call. 


PNK - the $300 million Belterra Park will open Thursday, May 1 with 1,500 slot machines, a rebuilt thoroughbred race track, three sit-down restaurants, another three snack or beverage outlets and space for events.

Takeaway:  100 less slots than previously guided.  Increased competition for gaming dollars around Cincinnati.


MGM & WYNN – have indicated they want Massachusetts to repeal a provision requiring gambling facilities to report and withhold 5 percent for state income tax on certain winnings over $600.

Takeaway:  MA may prove to be a tough place to do business... 

 

OEH - the iconic Belmond Hotel Cipriani in Venice, Italy has reopened for the 2014 season with a stylish new restaurant, called Oro.  Oro seats 40 patrons and overlooks the the lagoon.  Summer 2014 rates at the Hotel Cipriani start from US$1,025, including taxes and breakfast, based on two sharing a Double Garden View Room with Balcony

Takeaway:  What is old is new, how about a new ticker symbol for the new brand name? May we suggest NYSE "BMD" or "BHG" 


MSC - Agents can earn more selling MSC Divina in the Med next summer Seatrade Insider 

The decision to send Miami-based MSC Divina back to the Mediterranean during summer 2015 will help US travel agents entice their clients to Europe for higher-ticket cruises while taking ship out of the competitive Caribbean, said Rick Sasso, president and CEO of MSC Cruises USA.  The move is a change from the line's original deployment plan, which would have seen Divina based in Miami year-round during 2015.  "Travel agents can make much more money in the Mediterranean than the Caribbean in June and July," Sasso said.

Takeaway:   This is cruisetalk for an exec telling folks we made a mistake to overcrowd the Caribbean market.  Cruise companies seem to a step behind in gauging where strong demand lies - this year's Europe, last year's North America. 

INDUSTRY NEWS

Macau Unemployment Rate Jan 2014 - Mar 2014 DSEC

Macau's unemployment rate (1.7%) for Jan-Mar 2014 was unchanged from the December 2013-February 2014 period.  Gaming employment fell 2.6% from the previous period to 85,600. 

Takeaway:  We're more worried about labor supply and labor inflation when the new Cotai properties add to the table supply.

 

Large junkets credit - According to a UBS report, a junket operator is reporting some larger junkets may be running tight in issuing credit because of a rise in the cost of capital.  Credit VIP volume is not growing, but cash VIP play is, said a junket operator.  Cash VIP, meaning agents lending cash to players vs. players using credit from a junket operator, now accounts for 50% of VIP business.  


A junket operator added that because of collection concerns, agents are being tighter with credit extension, so that while the number of players is up, they are gambling less.

Takeaway: Whether this is an isolated comment from a junket, we don't know.  We haven't heard this from any of our contacts.  May might provide an indication as we are expecting a very strong month.

 

G2E Asia - May 20-22, 2014 at the Venetian Macau announced the Keynote Address speaker will be Pansy Ho.  Other high profile speakers include: Gamal Aziz, president, Wynn Macau Ltd.; Edward Bowers, senior vice president, Global Gaming Development, MGM Resorts International; Grant Bowie, chief executive officer, MGM Resorts China Holdings Limited; Grant Chum, senior vice president, Global Gaming Strategy, Sands Corporation; Mike Mecca, president and CEO, Galaxy Entertainment Group Limited; Jorge Sarmiento, president and COO, The Philippine Amusement and Gaming Corporation; Kelvin Tan, chief of international marketing and executive vice president, Melco Crown Entertainment Ltd.; Will Shen, Vice President of Asia Development, Caesars Entertainment.

 

Florida Gaming Expansion - Gov. Rick Scott and the Seminole Tribe of Florida are close to reaching a new deal that could force legislators to once again consider the future of gambling in Florida.  The Scott administration is considering a May special session (beginning May 19) to consider a new compact with the tribe.  Florida legislators are scheduled to end their annual session on May 2.  The Seminoles and Florida reached a deal in 2010 to give the Seminole exclusive rights to have blackjack and other table games at three Broward County casinos and others in Immokalee and Tampa. Part of that deal expires in 2015. 

Takeway:  Expect more commentary from LVS, WYNN and Genting Singapore in the days ahead.  We all agree that Florida has destination type potential.

 

Saipan Gaming Expansion - the Lottery Commission must review applications from two investor groups looking to develop an integrated casino resort on the island country. Marianas Stars Entertainment Inc. and Best Sunshine International Ltd. each have until May 5 to deposit $30 million in an escrow to be further considered for a grant of an exclusive casino license. 

Takeaway:  As we highlighted in our March 3 and March 25 Leisure Letters, we remain very skeptical and doubt such integrated resorts will get buitd because the current annual visitation of approximately 450,000 (comprised of 40% from Japan and 20% from China), would only fill a small percentage of the total 730,000 room nights at a 2,000 room hotel. Thus, we remain skeptical of the casinos profitability and viability given the isolated location.  Additional airlift is required to ensure casino visitation.

 

Sri Lanka rejects gaming bill - the Sri Lankan government refused to allow casinos at three super-luxury resorts planned in the capital after opponents said they would lead to prostitution.

Takeaway:  Prostitution at casinos? Say it isn't so...

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


Just Charts: The Slow Grind Continues

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

Just Charts: The Slow Grind Continues - 1

 

Consumer Staples outperformed the broader market last week, rising 0.4% versus the S&P500 at -0.1%. XLP is up 1.9% year-to-date vs the SPX at 0.8%. The coming week is marked by a number of earnings releases.

 

 

Earnings Calls (in EST):

 

Tuesday (4/29):  ADM (9am); HLF (11am)

 

Wednesday (4/30):  ENR (9am); SAM (5am)

 

Thursday (5/1):  JAH (8:30am); AVP (9am); K (9:30am); CHD (10am); CLX (1:30pm); KRFT (5pm)

 

Friday (5/2):  NWL (8am); EL (9:30am)

 

 

For the last two months, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

Just Charts: The Slow Grind Continues - 2

 

The Hedgeye U.S. Consumption Model shows a muted outlook over recent weeks, with only 5 of the 12 metrics flashing green (up from only 3 last week). 

Just Charts: The Slow Grind Continues - 3

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

 

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.1x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, but improved to -25.4 versus -29.1 in the prior week

Just Charts: The Slow Grind Continues - 4

Just Charts: The Slow Grind Continues - 5

Just Charts: The Slow Grind Continues - 6

 

 

Top 5 Week-over-Week Divergent Performances:


Positive Divergence:  SODA 8.3%; HLF 4.9%; MJN 3.1%; AVP 2.3%; MDLZ 2.0%

Negative Divergence:  HSY -4.2%; POST -3.2%; KMB -2.9%; BNNY -2.7%; HAIN -2.7%

 

 

Last Week’s Research Notes

 

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).

 

BUD – bullish beta chasing in low-beta-slow-growth (as a style factor) continues; TREND support = $104.79

Just Charts: The Slow Grind Continues - 7

 

 

DEO – someone forgot to tell DEO about the style factor party; still bearish TREND w/ resistance = $124.76

Just Charts: The Slow Grind Continues - 8

 

 

KO – big league bearish to bullish TREND reversal w/ TREND support now = $39.17

Just Charts: The Slow Grind Continues - 9

 

 

PEP – bullish TREND remains intact = $83.63 support

Just Charts: The Slow Grind Continues - 10

 

 

GIS – still one of the best looking bullish intermediate-term TRENDs on our quantitative signal = $50.11 support

Just Charts: The Slow Grind Continues - 11

 

 

MDLZ – finally showing some separation (to the upside) from our TREND support line of $34.15

Just Charts: The Slow Grind Continues - 12

 

 

KMB – in spite of this week’s correction, our intermediate-term TREND support line of $107.24 holds

Just Charts: The Slow Grind Continues - 13

 

 

PG - bullish beta chasing in low-beta-slow-growth (as a style factor) continues; TREND support = $79.71

Just Charts: The Slow Grind Continues - 14

 

 

MO – textbook bearish to bullish TREND reversal (in FEB 2014); TREND support = $36.97

Just Charts: The Slow Grind Continues - 15

 

 

PM – grinding hard to earn the style factors the market is bucking up for – TREND line = $83.84

Just Charts: The Slow Grind Continues - 16

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


The Era of The Common Man?

“One man with courage makes a majority.”

-Andrew Jackson

 

The broad based economic progress of the 1 period in American free-market-capitalist #history remains unrivaled. In the thick of it, many called Andrew Jackson’s 1828 sweep to become the 7th President of the United States, “the era of the common man…”

 

Jackson represented the victory of an expanded electorate, a rebuke of the old elite… To many Americans, the president embodied the energy, mobility, and enterprise that they believed defined their nation.” (The First Tycoon, pg 84)

 

Shocking, I know. The People didn’t need the Federal Reserve to believe. In fact, leaders with courage ran against it; shutting down initial iterations of a US central bank, twice! On Friday, Janet Yellen said there “may be a flaw in how the Federal Reserve forecasts inflation.” Believe her. Until we abandon this un-elected US Policy to Inflate, the common man, woman, and child in America is going to eat it.

The Era of The Common Man? - Yellen03.20.2014

 

Back to the Global Macro Grind

 

Eat it? Yep. Chow down, rinse it back with some coffee and OJ, and like it.

 

If you back out your rent, food, gas, education, etc. (cost of living), you may not have noticed the following last week:

  1. Corn prices up another +2.4% last week to +17.3% YTD
  2. Nickel prices up another +2.4% last week to +31.5% YTD
  3. Coffee prices up another +1.4% last week to +79.8% YTD
  4. Orange Juice up another +1.3% last week to +16.1% YTD

If you want to call that cherry picking, fine. Eat some of those too. But inflation continues to slow US consumption growth. And all 3 major US market intermediate-term TREND signals (currencies, stocks, and bonds) continue to agree with the same. On that score:

  1. US Dollar Index was down -0.1% to -0.4% YTD (and remains well below our long-term TAIL risk line of $81.17 resistance)
  2. US Consumer Discretionary (XLY) and Growth (Russell 2000) stocks were -0.5% and -1.3% last wk to -5.1% and -3.5% YTD, respectively
  3. US 10yr Treasury Bond Yield dropped another 6 basis points on the week to 2.66% (down -37 bps YTD)

Meanwhile everyone and their brother from the #OldWall in NYC to Washington and now California (PIMCO calling for “high 2% US Growth”) continue to confuse nominal growth (inflation) with real (inflation adjusted) growth.

 

On Wednesday the US will release GDP for the 1st quarter, and it will likely:

  1. Have a 1% handle on it (down hard from the sequential peak of +4.1% in Q413)
  2. See the Deflator (yes, you have to subtract it from nominal GDP) continue to rise from its sequential Q213 low

In other words, on the 2 core factors that matter in our GIP (Growth, inflation, Policy) model:

  1. INFLATION = will be accelerating
  2. GROWTH = will be slowing

More commonly called stagflation, the common man’s wallet gets squeezed when this starts to happen. That’s not my opinion, that’s US economic history in the post Greenspan era (Bernanke and Yellen).

 

This is the 3rd time Hedgeye has made a big directional call that #InflationAccelerating will slow US consumption growth, with the other two being:

  1. Q1 of 2008
  2. Q1 of 2011

Yep, it’s cyclical. And the ways to measure it in real-time are manifest. But if you want to throw a little Putin on top of your inflated corn flakes this morning (Oil prices accelerating), here are moarrr of them:

  1. US Treasury 5yr breakevens (Bernanke used these until they went against his ideology) +5bps last week and +17bps YTD
  2. CRB Foodstuffs index = +21.5% YTD and Treasury Inflation Protection (TIPs) testing YTD highs
  3. Slow-Growth #YieldChasing sub-sector styles of the US stock market like Utilities +13.5% YTD

What’s really impressive about the inflation-slows-growth trade is how obvious it is at this point. With the biotech and #SocialBubble stocks (FB, TWTR, YELP, etc.) getting pounded again on Friday (Nasdaq down -0.5% on the wk to -2.4% YTD), Utilities (XLU) closed the week up another +1.9%!

 

Sure, if you’re long Gold (up +0.5% last week to +8.1% YTD), Bonds, or any stock that looks like a bond, you’re having a great year. As you should be. You are in the 20% of America that A) has savings to invest into #InflationAccelerating and B) doesn’t have to eat it like the common man does.

 

In other news, not only is Bill Gross way late in getting bullish on US Growth, but consensus bear hedge fund bets in the bond market are. Last week’s net short position (CFTC non-commercial net futures/options contracts) in the 10yr Treasury Bond ramped to -93,722 contracts. If you have courage, you’ve been long consensus being wrong on #RatesRising all year long.

 

Our immediate-term Global Macro Risk Ranges are now as follows:

 

UST 10yr Yield 2.59-2.71%

SPX 1

Nasdaq 3

WTIC oil 99.98-105.61

Gold 1

Corn 4.98-5.18

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Era of The Common Man? - Chart of the Day


Pucks To The Head

This note was originally published at 8am on April 14, 2014 for Hedgeye subscribers.

“When you are stuck down a well, someone is bound to throw a rock on your head.”

-Chinese Proverb

 

So don’t get stuck down a performance well. Rocks to the head hurt. Technically, I’m on vaca with my family this week. But, since I don’t really see what I do (read and write) as a job, I do more of the reading part while I’m watching my kids cannonball one another at the pool.

 

The aforementioned quote comes from a fantastic Chinese/British economic #history book titled The Opium War. It was describing how English Naval Officer, Charles Elliott, felt after Lin Zexu dumped 20,000 chests of opium into the sea.

 

This happened in 1839 and became “one of the most celebrated moments in 19th century Chinese history” (pg 69). But it also gave birth to a major economic phase transition. The British found a new island to anchor their opium vessels. It’s called Hong Kong. Changing their position worked.

 

Back to the Global Macro Grind

 

The Russell 2000, Nasdaq, and SP500 were down -3.6%, -3.1%, and -2.6% last week to -4.5%, -4.2%, and -1.8% for 2014 YTD. The current “corrections” for the Russell, Nasdaq, and SP500 are -8.0%, -8.2%, and -4.0%. If you are levered long high-multiple growth, those are rocks to the head.

 

Thankfully, the feedback from our battle tested long-only customers is that they didn’t do that. Instead, they are long of inflation in inflation terms (Food, TIPs, Gold, etc.) and they are long of US #ConsumerSlowing in slow-growth-yield-chasing terms (Utilities, Bonds, etc.).

 

Feedback from our most astute macro hedge fund subscribers couldn’t be better. Not only can they be long inflation slowing growth, but they can be short of who is taking the brunt of all this (US consumers) in one of the deepest and most liquid markets in the world (US Equities).

 

Here’s the US Equity Sector Return Score for the YTD:

 

  1. US Consumer Discretionary Stocks (XLY) down another -3.7% last week to -6.9% YTD
  2. S&P Utilities Sector ETF (XLU) UP another +0.6% in a down tape last week to +9.8% YTD

In other words, as the social media bubbles crash (single stocks down -30-50% from their early March peaks - and we remain The Bears on names like Twitter (TWTR) and YELP), there have been plenty of places to make money, never mind “hide” from US growth beta.

 

In the face of the US centric bubble popping, check out last week’s top Global Macro performers:

 

  1. Gold up another +0.6% to +9.6% YTD
  2. Emerging Market Equities (MSCI Index) +1.3% to +1.3% YTD
  3. Emerging Markets LATAM (MSCI) +2.2% to +2.9% YTD

Emerging what?

 

Yep, lots of our Global Macro value buyers were simply waiting for the rockstar of all Emerging Market Equity catalysts to re-emerge – a Down Dollar. Last week, the US Dollar Index was down another -1.2% to re-test her YTD lows; in kind, Emerging Market Equities hit YTD highs.

 

I know, so easy a Mucker can do it.

 

Back to who gets pulverized by an un-elected US Policy To Inflate (courtesy of the Federal Reserve), don’t forget that there are winners who emerge versus US #ConsumerSlowing losers à the countries who get the purchasing power of their people (stronger currencies) back.

 

To a Keynesian central planner, all of this sounds so 16th century solar system, I am sure. But  reality is that reality is priced in local currency terms – and YTD, for the US consumer at least, reality bites.

 

Here’s how some commodities (priced in Burning Bucks) did last week:

 

  1. Coffee up another +8.8% to +76.8% YTD
  2. Natural Gas up another +4.1% to +12.8% YTD
  3. Oil (WTIC) up +2.6% last week to +5.9 YTD

Sure, if you back all that out – and blame the weather (which last I checked is fantabulous)… there is no inflation.

 

But there is some serious YTD absolute and relative return performance!

 

Which, at the end of the day is what we are all after, is it not? Why would you pay 20x revenues for anything when 2 of the biggest Macro Risk Factors that matter to any economy (GROWTH and INFLATION) are going the wrong way?

 

Remember, it’s not about absolutes. It’s about rate of change, and:

 

  1. US inflation is accelerating
  2. US growth is slowing

Our competition can blame YTD lows in the 10yr bond yield (2.63% = down -39bps YTD) on anything but the most obvious. They can blame me, the weather – or whatever… but they’re stuck in a proverbial well of YTD macro market scores that disagree.

 

And unless they want to keep taking pucks to the head from a bunch of hockey players, they better find a new narrative come summer time…

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.60-2.72%

SPX 1786-1832

Nasdaq 3953-4158

VIX 14.52-17.99

USD 79.11-80.01

WTIC Oil 101.73-104.99

Gold 1300-1329

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pucks To The Head - Chart of the Day


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