“There is hardly a part of the United States where men are not aware that secret private purposes and interests have been running the government.” –Woodrow Wilson
I had a fantastic Real Conversation (HedgeyeTV video here: https://www.youtube.com/watch?v=hN7-u7Sd7Gk) with best-selling author Jim Rickards last week. Since he suggested we “quarantine the Princeton Economics Department”, I figured I’d quote the 28th US President (who was also President of Princeton).
Princeton is a cool place; especially if you go there wearing Blue and White and crush their Tigers at the Hobey Baker rink. While that may be easier for more recent Yale Hockey teams to do, back in my day Princeton was as tough as any team in the league.
There was tough love for the Keynesians in my conversation with Rickards. We talked about the broken Fed model and how the US government doesn’t think about financial market risk the right way. The feedback on this video has been tremendous. Evidently this taps into a new reality – The People Are Aware.
Back to the Global Macro Grind…
People in our profession are also very much aware of the real-time score on US Growth expectations falling, fast:
- Russell 2000 down another -1.9% last week to -4.8% YTD
- Nasdaq down another -1.3% last week to -2.5% YTD
- US Consumer Discretionary Stocks (XLY) down another -0.6% to -4.5% YTD
But, but, the Dow “hit an all-time high” on Friday (which puts it dead flat on the YTD #joy). So make sure you own everything in the Dow that is:
But you already have that on because that has been the strategy and asset allocation decision to make for the last 4.5 months. While that may not be trivial to someone who hasn’t evolved their process, in modern day markets real-time risk managers look at what we call Style Factors:
- Slow-growth stocks (Bottom 25% of the SP500’s EPS Growth is +5.2% YTD)
- Low-beta stocks are +6.1% vs High-beta up a paltry +0.4% YTD
- High-dividend-yielding stocks are +3.9% for 2014 YTD
“So”, what is driving slower-growth-hamster-on-the-wheel #YieldChasing? That’s too easy. It’s the Fed’s Policy to Inflate:
- So you buy inflation protections via TIPs
- Or you buy inflation by buying inflation itself (Oil, Food, Gold, etc.)
- Or you buy bonds and/or anything that looks like a bond as slower-growth-expectations drive down interest rates
Of course you’d have to let go of most academic ideologies that bonds don’t do well during #InflationAccelerating, and embrace that the Bernanke/Yellen Fed has 0% credibility on fighting inflation. I don’t know how many more times I can rant about this in print – that’s why I went to the video!
How about that stuff the Fed calls “non-core” (like ripping US rents and food) last week?
- CRB Foodstuffs Index up another +0.6% last week to +23.7% YTD
- Soybeans up another +1.1% to +11.6% YTD
- Corn up another +1.6% to +16.1% YTD
Yep. If you don’t like that definition of #InflationAccelerating, eat a REIT – and like it. Last week the MSCI REIT Index was up another +1.2% to +14.1% YTD, which means that you can bet your Madoff that rents are going higher in this country, not lower.
Oh, did I mention being long of US Housing in housing and/or related construction stocks terms (ITB) sucked wind again last week? For some reason this and most of the aforementioned market realities didn’t make it into Hyman’s weekly update. ITB (Housing) is down -6.4% YTD.
But never mind what Old Wall economists who missed calling the Q1 08’ and Q1 11’ slowdowns in US consumption growth think. As the early response to my un-plugged video with Rickards reminds us, The People Are Aware now. And that’s progress.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.56-2.67%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP – May 12, 2014
As we look at today's setup for the S&P 500, the range is 20 points or 0.50% downside to 1869 and 0.56% upside to 1889.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.25 from 2.24
- VIX closed at 12.92 1 day percent change of -3.80%
MACRO DATA POINTS (Bloomberg Estimates):
- 11:30am: U.S. to sell $25b 3M bills, $23b 6M bills
- 12pm: Fed’s Plosser speaks in Philadelphia
- 2pm: Monthly Budget Statement, April, est. $114b (prior $113b)
- Senate in session, House out
- President Barack Obama to discuss economic ties with Uruguay President Jose Mujica Cordano
- 8:30am: U.S. Chamber of Commerce, Natl Assn of Manufacturers, Council on Competitiveness, Organization for Intl Investment hold discussion on “Now Serving: Economy,’
- WASHINGTON WEEKLY AGENDA: Nebraska, W. Virginia Hold Primaries
- U.S. ELECTION WRAP: Increased Koch Spending; Primaries Tuesday
WHAT TO WATCH:
- Lockhart expects Fed to use reverse repos during stimulus exit
- BSkyB in talks to buy Fox’s pay-TV assets in Germany, Italy
- Eastern Ukrainian separatists say referendums back independence
- Dubai to sell Mauser for $1.7b to Clayton, Dubilier
- Microsoft group guards patent secrets in $7b Nortel trial
- Xi says China must adapt to “new normal” of Slower Expansion
- BNP Paribas, Credit Suisse seek leniency in U.S., NYT says
- Apple, Beats deal may be announced this wk
- Ex-Treasury Sec. Tim Geithner book “Stress Test” released
- Nissan leapfrogs Ford behind Toyota, Honda in supplier survey
- Russia’s Severstal said to get offers for U.S. steel plants
- Samsung Chairman stable after surgery following heart attack
- NBC shifts ’Blacklist’; other networks to release this wk
- Nasdaq hires Adena Friedman as co-president
- CME Clearing Europe agrees to offer collateral system with SIX
- Siemens CEO sees many open questions in Alstom talks: Spiegel
- Qualcomm said to acquire Wilocity for $300m: Globes
- Concho Resources (CXO) Pre-Mkt, $0.98
- DiamondRock Hospitality (DRH) 6am, ($0.01)
- Elizabeth Arden (RDEN) 6:59am, $0.00
- Gogo (GOGO) 7:30am, ($0.25)
- Inter Pipeline (IPL CN) 11:16am, C$0.29
- Arena Pharmaceuticals (ARNA) 4:03pm, ($0.10)
- Babcock & Wilcox (BWC) 4:20pm, $0.42
- Halozyme Therapeutics (HALO) 4:15pm, ($0.14)
- MannKind (MNKD) 4pm, ($0.13)
- MBIA (MBI) 4:05pm, $0.14
- McKesson (MCK) 4:10pm, $2.40
- Parkervision (PRKR) 4:01pm, ($0.04)
- PDL BioPharma (PDLI) 4:02pm, $0.51
- Pengrowth Energy (PGF CN) 4:30pm, $0.02
- Penn Virginia (PVA) 4:05pm, ($0.06)
- Rackspace (RAX) 4:01pm, $0.11
- Towerstream (TWER) 4pm, ($0.10)
- Vector Group (VGR) 4:05pm, N/A
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Nickel Extends Gains on Supply View Amid Vale Plant Suspension
- Brent Gains for First Time in Three Days on Ukraine; WTI Rises
- Gold Bulls Bet Wrong for Second Week on Fed Easing: Commodities
- Iron Ore Trade at Risk as Port Hedland Tugs Approve Stoppage
- Gold Trades Above One-Week Low as Ukraine Weighed Against Dollar
- Wheat Falls to Two-Week Low as Global Supply Outweighs U.S. Woes
- Cocoa Extends Longest Slump Since June in London; Sugar Declines
- MORE: Aluminum Wait at Pacorini Depots in Vlissingen Is 748 Days
- Coffee Sales Set to Slow in Vietnam as Reserves Drop From Record
- Russia to Discuss Gas Price Cut With Ukraine Only If Debt Paid
- Probe Breakthrough Elusive a Year After EU Raids Big Oil, Platts
- Hedge Funds Cut Gasoline Wagers by Most in Three Months: Energy
- Cocoa Net Long of Money Managers in London Was 53,071 Lots
- Nine Nickel Smelters Seen in Indonesia This Year After Ban
The Hedgeye Macro Team
Takeaway: Pollyannaish, back-end loaded estimates for growth and poor hedge fund performance are meaningful risks to the equity market.
First and foremost, Happy Mother’s Day to all the mothers out there and to the husbands, daughters and sons who support them.
Secondly, please go outside and add something to 2Q14 GDP if you haven’t already. The weather is amazing!
I’m sure every consensus economist, journalist and corporate executive will give 100% of the credit to awesome weather for what should be a marked acceleration in economic and operational performance this quarter. For what it’s worth, the top of our range for 2Q14E GDP is +3.1% on QoQ SAAR basis, so we’ll side with consensus in expecting a short-term recovery for now. If you blamed the weather on the way down, it’s only fair that you caveat any and all good data with better weather on the way up, right? Right.
At any rate, where we continue to be divergent from both consensus and the Fed (have been all year, btw) is that we expect accelerating inflation to slow growth, at the margins, through the balance of the year.
Be it sector variance (XLU +9.7% YTD vs. XLY -6.1% YTD) or style factor variance, the market definitely agrees with our call. The rotation out of the growth style factor(s) is now trending and, at least in macro, the trend is your friend.
The key issue here is that market participants are increasingly back-end loading growth estimates. Not only is equity volatility protection being priced cheaply on an absolute basis across the curve relative to recent years, the spread between VIX futures ~3 quarters out and front-month contracts is rather narrow – effectively implying considerable confidence that conditions for investors will remain more-or-less fine for the foreseaale future.
Source: Bloomberg LP
This move has caught a lot of investors offsides in the YTD. Per StreetAccount:
- The WSJ cited data from researcher HFR Inc, which showed hedge funds just experienced back-to-back monthly declines for the first time in two years. The firm said hedge funds on average dropped -0.17% in April, following a -0.33% decline in March – the first time funds have turned in consecutive monthly declines since April-May of 2012.
- StreetAccount notes data from Preqin showed the average hedge fund returned 1.23% in Q1 – the worst start to the year since 2008.
Obviously, we have number of hedge fund customers, so we don’t write this to be trite or disrespectful. We only call this to your attention because if this trend of poor performance continues, there will likely be an industry-wide lowering of gross exposures and tightening of net exposures, with outflows as a key tail risk. Don’t forget how correlated equity hedge funds are to market beta (+0.75 on a DoD % change basis and +0.96 on an index value basis over the TTM).
Source: Bloomberg LP
What’s even worse is that our TACRM™ global macro weathervane is signaling a breakdown in hedged equity exposure. This is likely because many funds are still long of growth (which is also breaking down) and short things like bonds and emerging markets (which happen to be among the best looking asset classes, along with inflation proxies and REITs).
We’ll explain these signals in far greater detail and how to apply TACRM™ to your investment process in the coming days and weeks. For now, just accept the simple conclusion that there are thousands of hedge funds suffering from the ol’ “Texas Hedge” right now and that is a meaningful risk to the stock market if prevailing market trends continue to do just that (i.e. trend).
Enjoy the rest of your weekend,
Associate: Macro Team
Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Controversial best-selling author James Rickards sits down with Hedgeye CEO Keith McCullough to discuss a number of important subjects in this wide ranging interview.
Here's a short excerpt from an institutional conference call that restaurants analyst Howard Penney held with YUM CFO Pat Grismer earlier this week.
Hedgeye CEO Keith McCullough takes a look at key market and economic issues investors should be focusing on right now but aren't.
Buy in May and pray or just go away?
The next crisis will be a crisis of confidence in central planning.
Twitter shares got royally shellacked on Tuesday falling almost 18% after its IPO lock-up period ended. Shares finished trading around $32. Click here to view the poll and results.
Penney Nails Another 'Best Idea' Short | $BLMN
A couple of weeks ago, we highlighted how Hedgeye restaurants analyst Howard Penney nailed his short call on Panera Bread. He did it again with Bloomin' Brands (BLMN) which he added as a Best Ideas SHORT back on 11/27/13. Click here to continue reading.
Did the 10-Year U.S. Treasury Go Over The Waterfall?
In a research note CEO Keith McCullough originally wrote before the market opened on Monday, he asked, "So, did the 10-year US Treasury Yield just go over the waterfall of interconnected risk?" Click here to read more.
When It Comes To Twitter, We Tried To Warn You | $TWTR
Twitter stock tumbled over -14% on Tuesday as the lock-up period for early investors has expired, but that doesn’t surprise Hedgeye Internet & Media analyst Hesham Shaaban. He has been the bear on $TWTR. Click here for more.
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