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Pepé Le Pew

This note was originally published at 8am on June 27, 2014 for Hedgeye subscribers.

“Keep it simple. Tell the truth.  People can smell the truth.”

-Steve Wynn, Chairman & CEO of Wynn Resorts

 

I ran over a skunk on the way to work this morning.  Accidentally, of course. But regardless it still did not smell very good.  That’s the thing with skunks; they sort of surprise you with their malodorous nature. 

 

For those of you that don’t know him, Pepé Le Pew is a French cartoon character that was first introduced in 1945.  Pepé is a French skunk who strolls around Paris looking for love.  Unfortunately, he has two big things going against him.  First of all, he’s a skunk, so he smells.  Second, he’s a tad bit aggressive and reluctant to take no for an answer.

 

Pepé Le Pew - skunk2

 

Now if that sounds a little bit like the U.S. equity market right now, it probably should. As we’ve been flagging here at Hedgeye (somewhat “aggressively” at times) volatility in the U.S. is at a level that is signaling that all is well in the world. Between you and me, that kind of stinks.

 

I read an interesting article in the Wall Street Journal (Media 1.0) yesterday discussing the volatility and the VIX.  It quoted Robert E. Whaley, a professor at Vanderbilt University’s business school, who is credited with developing the VIX for the Chicago Board Options Exchange in 1993.  Here’s what he had to say about the VIX being literally at an all-time low:

 

“I wouldn’t be worried about it.”

 

Indeed.  And if an aggressive skunk happens to be pestering you in Paris, no need to worry about that either.

 

Back to the Global Macro Grind

 

While Professor Whaley, aka the “Father of the VIX,” isn’t worried, that’s not necessarily a reason for us not to be worried,  despite the fact that this morning, the global equity markets are decidedly not worried.  China is down -0.11%, Europe is up small, and the U.S. equity futures are down small.  Frankly, the only excitement overnight is that the Nikkei in Japan is down just over a -1%.

 

So, what gives in Japan? Are you sitting down? Inflation! Yup, Japan, the home of generational deflation, is actually experiencing inflation.  In fact, CPI in Japan accelerated +3.4% year-over-year.  This was the highest pace in 32-years for Japanese inflation. The Japanese bureaucrats wanted inflation. Now they've got it.

 

The fact of the matter is that the Japanese will tell you that once you factor out the sales tax impact, there was actually a slight drop in CPI.  That said, even the Japanese labor market is showing inflationary signs as the jobs-to-applicants hit a 22-year high at 1.09.  In theory, a tight labor market should lead to increased wages and eventually more purchasing power for the consumer. Translation? Organic inflation.

 

Ultimately, the challenge with either inflation driven by a tight economy or, conversely, driven by overly dovish monetary policy is that inflation slows growth.  In the U.S., the counter argument to our view that inflation will slow grow is that even though the CRB Commodities index is up double digits on the year, commodities are a relatively small portion of the consumer’s annual spend. In part this is true, although much less so in emerging economies.

 

In fact, the WSJ this morning referenced the “fragile five” economies of Turkey, India, Indonesia, South Africa, and Brazil as economies that are particularly subject to the negative impact of commodity inflation.  The challenge with trying to fight inflation for the central banks in these countries is that growth is not at abnormal levels, so any rate hikes would slow it even more. Yes, indeed, monetary inflation stinks!

 

Speaking of inflation, the Fed’s balance sheet continues inflating at an almost staggering rate:

 

  • Holdings of US Treasury securities were $2.4T on 25-Jun, +$5.5B w/w and +$469B y/y;
  • Holdings of mortgage-backed securities were $1.7T on 25-Jun, ($4.5B) w/w and +$456B y/y; and
  • Holdings of federal agency debt securities were $43.7B on 25-Jun, unch. w/w and ($27B) y/y.

In total, the Fed’s balance sheet is at an astounding $4.4 trillion.  Certainly, tapering is slowing the growth of these assets on the Fed’s balance sheet, but what, exactly, happens when the Fed starts to sell these assets?  At over 25% of GDP, it is worth sniffing around this question.

 

As it relates to GDP, my colleague Darius Dale wrote a very thoughtful note earlier this week that again emphasized that the Fed is “always wrong on growth.”  Specifically, since 2012 the Fed has been wrong on growth by an average of 113 basis points.  No small potatoes. The takeaway from the Fed (and virtually all of Wall Street) being wrong on growth is that Fed may actually surprise us with its dovish policy.  As Darius writes:

 

“As it relates to actual macroeconomic analysis, the doves are definitely starting to cry at the Fed. In a fantastic article today, Reuters journalist Howard Schneider walks though the current debate being held amongst members of the Federal Reserve and its regional banks. Specifically, the Yellen-led institution is openly debating pushing out their forecasts for labor market tightness, citing both new and old analyses in the process.

 

The key takeaway is that the FOMC is setting up to surprise both buy-side and sell-side consensus to the downside with respect to tightening monetary policy. A less-tight labor market in the interim means the Fed can remain “accommodative” for longer – which is exactly what is being priced into the interest rate markets. Expectations for a 2015 Fed Funds Rate hike are down -27% on average, across the curve, from when we correctly introduced this bold prediction back in JAN.”

 

Slowing U.S. growth… accelerating inflation… low volatility… Yup, it might make sense to your nose right now.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.46-2.60% (bearish)

SPX 1934-1971 (bullish)

VIX 10.61-12.94 (neutral)

USD 80.01-80.45 (bearish)

Brent Oil 112.38-115.49 (bullish)

Gold 1289-1345 (bullish)

 

Keep Your Head Up,

 

Daryl G. Jones

Director of Research

 

Pepé Le Pew - Chart of the Day


CHART OF THE DAY: Long Big Government Via the Slammer

CHART OF THE DAY: Long Big Government Via the Slammer - Chart of the Day

 

Long Big Government via the slammer? It’s actually an epic growth chart if you look at it from 1920-2014. If you don’t want to be long what’s born out of central-planning-policies-to-inflate (Slow-growth bonds, utilities, REITS, etc.), it’s just another way of being downright bullish on the bearish realities of America.

 


Incarcerating Investors

“Who wouldn’t invest in that?”

-Matt Taibbi

 

That’s what Matt Taibbi (of Rolling Stone fame) asked about incarcerated Americans. I read his recent rant of a book, The Divide, while I was on vaca last week and he made an interesting point: “the very brokest people in America, Hispanic immigrants, are one of America’s last great cash crops” (pg 217).

 

Incarcerating Investors - taibbi thedivide c10a7d26a1bcacd568ecc9eec422a64d3df77b32

 

Long Big Government via the slammer? It’s actually an epic growth chart if you look at it from 1. If you don’t want to be long what’s born out of central-planning-policies-to-inflate (Slow-growth bonds, utilities, REITS, etc.), it’s just another way of being downright bullish on the bearish realities of America.

 

On that score, alongside my six man Jedi Macro Team, I’ll be presenting our Q314 Macro Themes of #Q3Slowing, #DollarDevaluation, and #Volatility’sAsymmetry at 11AM EST today. Ping our team if you’d like access to the slide deck and conference call. I’m inviting Ed & Nancy.

 

Back to the Global Macro Grind…

 

With Utilities (XLU) up to +13.7% YTD in a sea of mo bro red yesterday, those who are long of US domestic consumption growth (from an investment style factoring perspective) have been incarcerated by beta again. After dropping -4% this week, the Russell 2000 is down YTD. Not a bull market.

 

In all seriousness, I should probably have Christian Drake write the Early Looks for the rest of the year, because I’m running out of both Fed jokes and investment ideas. If I couldn’t get you to buy Gold Bond on any of its down days for the last 6 months, I’m probably not going to get you to buy it this morning.

 

Actually, you shouldn’t buy Gold or Bonds or anything equities that looks like a slow-growth #YieldChasing bond this morning anyway. On a relative basis to both beta (Russell 2000) and volatility (front month-VIX), the Gold Bond trade is as immediate-term TRADE overbought as the VIX is.

 

To review this week’s slammer move:

 

  1. VIX crashed to the upside (+24% in a straight line) after holding a line (10) that it’s never held below, sustainably
  2. Russell 2000 backed off like Brazilian ballers from its all-time-bubble-high of 1208 (March 4th, 2014)
  3. Gold broke out above our long-term TAIL risk line of $1324 (intermediate-term TREND support = $1272)
  4. Bond Yields resumed their bearish TAIL risk (for a US growth breakdown) after failing at 2.81% TREND resistance
  5. US Consumer (XLY) stocks moved back to flat YTD; Financials (XLF) and Industrials (XLI) broke my TRADE support lines

 

Sure, away from US momentum stocks getting put back in jail on Mon-Tue (i.e. the days Portugal wasn’t the latest weather excuse) there were some other things going on in the world. Japan, which has incarcerated its people with centrally-planned stagflation, was down every day this week.

 

But this sounds way too bearish for a man in a room who wants you to be right bullish on the bearishness of it all. Remember, if I am right, and US growth slows from Q2 throughout Q3, there is a ton to do on the long side:

 

  1. Buy Fixed Income
  2. Buy Foreign Currencies vs Burning Bucks
  3. Buy #InflationAccelerating via Gold, Oil, Energy Stocks, etc.

 

Heck, you can even probably think about buying Malaysian Equities (EWM) at this point! (*Emerging Markets do wonderfully when America is burning its currency credibility at the global stake – see 2011 for details)

 

Instead of putting me in commission jail (we don’t have a trading desk) for being bullish on bearishness, let me cherry pick some good news for you this morning instead of poking Portugal (pathetic bounce for the Portuguese PSI 20 this morning btw, still bearish TREND @Hedgeye):

 

  1. Malaysia was the 1st country in Southeast Asia to RAISE rates in 2014
  2. Malaysia hasn’t raised rates for their hard working Savers in 3yrs, so this is #cool for consumers
  3. Malaysia’s stock market only pulled back 0.5% on that, which looks like a buying opportunity

 

Newsflash to the US politicians who have incarcerated your savings and paid themselves in size with your tax dollars: when a country has the spine to raise rates, it gets ole school Ben Franklin frugality savers paid. And when we Can-Am ole school guys get paid on our savings, we can do crazy stuff like invest, hire, etc.

 

Yep. If you want me to get downright bearish on Gold, Bonds, etc. like I was last year – get your unelected gravity bending agency to raise rates. Dollar Up, Rates Up, Hiring Up, Capex Up – 1980s and 1990s style America. Who wouldn’t invest in that?

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.49-2.59%

SPX 1

RUT 1155-1173

BSE Sensex 25034-26170

VIX 10.32-12.67

Pound 1.70-1.72

WTI Crude 101.76-104.31

Gold 1

 

Best of luck out there today – and go #Argentina!

KM

 

Keith R. McCullough
Chief Executive Officer

 

Incarcerating Investors - Chart of the Day


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 HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 11, 2014


As we look at today's setup for the S&P 500, the range is 32 points or 0.59% downside to 1953 and 1.03% upside to 1985.                                           

                                                                                    

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: 2.08 from 2.08
  • VIX closed at 12.59 1 day percent change of 8.07%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 1pm: Baker Hughes rig count
  • 2:00pm: Monthly Budget Stmt, June, est. $79.0b

 

GOVERNMENT:

    • House will vote on H.R. 4718, legislation to make bonus depreciation permanent; White House said it would veto the bill
    • Commerce Dept releases final decision on anti-dumping, countervailing duties on oil country tubular goods from 9 countries including Korea
    • U.S. ELECTION WRAP: Poll Accuracy; Attack Ads; Fundraising

 

WHAT TO WATCH:

  • Reynolds said near deal to buy Lorillard with BAT blessing
  • Whirlpool to buy $1b Indesit stake in European expansion
  • AbbVie said to nudge top Shire investors to urge deal talks
  • Farnborough air show to focus on existing models
  • Espirito Santo discloses EU1.2b exposure to GES
  • Alibaba nears SEC assent as biggest IPO causes few U.S. ripples
  • Gap falls after posting unexpected drop in June comp sales
  • Caesars said to tap Kirkland & Ellis to lead restructuring talks
  • Nowotny says no ECB action needed now as stimulus takes hold
  • Oil demand seen by IEA rising fastest since ’10 on China growth
  • July WASDE for corn, soybean, cotton, wheat released at noon
  • SoundCloud music service said to near deals with record labels
  • Apple bid for Samsung U.S. sales ban pitched as more modest
  • China, U.S. highlight steps on yuan, investment pact post talks
  • VW outsells GM in China to remain on track for repeat sales win
  • Google to send executives to Europe to discuss privacy: NYT
  • German, French business lobbies criticize U.S. bank fines: FAZ
  • Yellen Testimony, China GDP, GM, JPMorgan: Wk Ahead July 12-19

 

EARNINGS:

    • Fastenal (FAST) 6:50am, $0.44 - Preview
    • Wells Fargo (WFC) 8am, $1.01 - Preview

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • CME/Thomson Reuters to Run Replacement for Silver Fix in August
  • Grain Prices Seen Falling in OECD-FAO Outlook as Supply Rises
  • Palm Oil Imports by India Sliding as Buyers Like Sunflowers
  • Milk Output Gain Poised to Spur 5-Year Global Glut: Commodities
  • WTI Set for Third Weekly Drop as Supply Risks Ease; Brent Falls
  • Sugar Output in India to Rise First Time in Three Years on Yield
  • MORE: Shanghai Exchange Copper Inventory Rises to 5-Week High
  • Record U.S. Soybean Crop Spurs Storage Crunch as Prices Drop
  • Tin Losing to Nickel as Indonesia Calls Shots: Chart of the Day
  • Prepare for Oil to Keep Falling on Libya to U.S. Supply: Energy
  • Gold Heads for Longest Weekly Rally Since March on Haven Demand
  • Rapeseed Prices Seen Extending Decline on Ample European Supply
  • Gold Traders Resume Bullish Outlook as Haven Demand Increases
  • Pollution Permits to Gain 28% as EU Cuts Glut: Carbon & Climate

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


July 11, 2014

July 11, 2014 - Slide1

 

BULLISH TRENDS

July 11, 2014 - Slide2

July 11, 2014 - Slide3

July 11, 2014 - Slide4

July 11, 2014 - Slide5

July 11, 2014 - Slide6

July 11, 2014 - Slide7

July 11, 2014 - Slide8

 

BEARISH TRENDS

 

July 11, 2014 - Slide9

July 11, 2014 - Slide10

July 11, 2014 - Slide11
July 11, 2014 - Slide12


Poll of the Day Recap: 77% Bullish on Gold Through 2014

Gold futures jumped sharply today to their highest settlement in nearly four months amid a pullback in U.S. stocks. Gold for August delivery climbed $14.90, or 1.1%, to settle at $1,339.20 an ounce on the Comex division of the New York Mercantile Exchange. The most-active contract hasn’t settled this high since March 19.

 

Gold is up over 10% YTD and is on Hedgeye’s Investing Ideas via GLD.

 

When growth surprises to the downside, and a run-up in prices for everyday necessities people actually consume increases, individuals obviously have less money to spend. Accordingly, Gold’s breakaway from the broader commodity complex and stronger linkage to the dollar and forward looking monetary policy makes intuitive sense.

 

In today’s poll we asked: Are you bullish or bearish on Gold through 2014?

 

77% of respondents voted they are BULLISH on Gold, while 23% voted BEARISH.

 

In the one-minute video below, macro analyst Ben Ryan briefly discusses some of the reasons we became bullish on Gold and added it to Investing Ideas.

 

 

As one respondent commented, “Jim Rickards' snowpack grows every day. Avalanche not an if but a when. “

 

More to be revealed.

 


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