“Ideas have consequences.”
-Richard M. Weaver
That’s the introductory quote from Hamilton’s Curse – How Jefferson’s Arch Enemy Betrayed The American Revolution, by Thomas Dilorenzo. And oh isn’t that an appropriate thought now that our central planning overlords have talked down at us from upon high from the Tetons in Jackson Hole.
“Big ideas, moreover, can have big consequences, and there are probably no ideas in American political history bigger than the ones debated by Alexander Hamilton and Thomas Jefferson at the time of the founding.” (pg 1)
Japan has had the same failed central economic planning ideas for decades. Now both the un-elected US and European monetary policy duo of Janet Yellen and Mario Draghi and are hell bent on executing on the same. It’s the economic curse of devalued currencies. And I don’t think it will end well.
Back to the Global Macro Grind…
The number one thing I have had wrong in 2014 is how dovish Draghi was going to get in the face of what was a decent European economic rate of change acceleration. Ever since he decided to devalue the Euro in May, the European economy has slowed, sequentially.
I thought Yellen was going to be more dovish than consensus thought at Jackson Hole (she was). But I didn’t think her headline impact was going to be trumped by Draghi. He said he “stands ready to adjust” his Euro devaluation policy stance further. Whatever that means… the currency market believes him.
“So”, following the bouncing macro ball:
And our macro playbook would call the alleviation of the #InflationAccelerating tax (on Americans) good, on the margin. But what’s good for the country with the consumption tax cut is bad for the economy who gets the devaluation tax.
The other thing that’s not good is what the US bond market thinks:
But, but, there are no buts…
I am bearish on both US and European growth, and both US equity futures and European stocks are up on whatever it is that Draghi is going to do next.
BREAKING: Draghi Pushes ECB Closer To QE As Deflation Risks Rise –Bloomberg
That’s one of the most read headlines of this morning. Alongside Germany’s IFO (business climate index) dropping to a fresh 4 month low of 106.3 (vs. 108.0 last month) and France’s Prime Minister resigning over the economy, that is…
“So” you just have to buyem when they are up on this, right? No thanks.
If the US Dollar and rates were rising alongside US growth expectations, I’d be right bullish on being long US growth right now. But that’s not happening. The #InflationAccelerating of the first half of 2014 is sticky. In other words, you aren’t getting a cheaper cup of coffee and a rent reduction this morning.
Over time, what we call a 4th Quadrant move in our GIP Model (Growth, Inflation, Policy = GIP) becomes a big idea. But going there (both Growth and Inflation slowing, at the same time) requires a big asset price reset. This happened in Q3/Q4 of 2008, don’t forget.
I don’t think it’s 2008. I think it’s Q3 of 2014. While every economic cycle rhymes with parts of others, we haven’t seen all three of the major Currency War central planners (Japan, USA, and Europe) try to devalue (print moneys, monetize debt, bend gravity, etc.) at the same time like this.
If US and European growth continues to slow, at the same time (and both Yellen and Draghi get easier and easier into that)… and it ends well… I’ll be wrong on that too. In the meantime, 200 years after Alexander Hamilton’s Euro style Central Planning Curse was imposed on the American people, Jefferson is rolling in his grave.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.34-2.46%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
Takeaway: The signals are now bullish in the short-term and mixed on an intermediate term basis.
Current Best Ideas:
The XLF put in a good showing last week, rising 2.4%, but that brings the month-over-month change to just +0.4%. Not much to get excited about. Much of the geopolitical risk that was pushing risk premia out last month is now in retreat. This is evident across the EU, Sovereign and US Financials CDS complex as well as in the move in high yield (tighter by 8 bps on the week).
On an intermediate term basis, there are now 5 measures that are positive while 4 are negative. One of the few areas that continues to retreat aggressively is the 2-10 spread, now tracking 10 bps tighter on the week at 191 bps.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Positive / 5 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged
1. U.S. Financial CDS - Swaps tightened for 25 out of 27 domestic financial institutions. Led by WFC (-6 bps) the large cap financials were tighter by an average of 4 bps. Specialty finance also saw big swings with Sallie Mae tightening by 20 bps on the week to 228 bps.
Tightened the most WoW: TRV, CB, ACE
Widened the most/ tightened the least WoW: AXP, GNW, GS
Tightened the most WoW: RDN, AGO, WFC
Widened the most MoM: GNW, AXP, MET
2. European Financial CDS - Swaps mostly tightened in Europe last week, dropping by an average of 6 bps on the week. Swaps are now tighter by 5 bps on a m/m basis. Even Sberbank, a proxy for the geopolitical turmoil of the Russia/Ukraine situation, tightened by 11 bps on the week, but remains over 300 bps at 316 bps.
3. Asian Financial CDS - Default swaps across the Asian financials complex were generally tighter with the most improvement coming from India, where they tightened by an average of 8 bps.
4. Sovereign CDS – Sovereign swaps tightened around the world last week, except in the US, where they widened by 1 bp to 18 bps. Portuguese sovereign swaps tightened by -10.9% (-20 bps to 161 bps).
5. High Yield (YTM) Monitor – High Yield rates fell 8.3 bps last week, ending the week at 5.61% versus 5.69% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6.0 points last week, ending at 1878.
7. TED Spread Monitor – The TED spread rose 1.1 basis points last week, ending the week at 21.5 bps this week versus last week’s print of 20.41 bps.
8. CRB Commodity Price Index – The CRB index fell -0.9%, ending the week at 289 versus 291 the prior week. As compared with the prior month, commodity prices have decreased -3.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
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 was unchanged at 15 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 4 basis points last week, ending the week at 2.85% versus last week’s print of 2.89%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China fell 0.8% last week, or 26 yuan/ton, to 3092 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread tightened to 191 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
TODAY’S S&P 500 SET-UP – August 25, 2014
As we look at today's setup for the S&P 500, the range is 30 points or 1.08% downside to 1967 and 0.43% upside to 1997.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Takeaway: Current Investing Ideas: BOBE, FXB, GLD, HCA, HOLX, OC, OZM, RH and TLT.
Below are Hedgeye analysts’ latest updates on our nine current high-conviction long investing ideas. We also feature three recent institutional research notes that offer valuable insight into the markets and the global economy.
*Note: Please keep an eye on your inbox as we will send out CEO Keith McCullough’s updated levels for each idea at the beginning of this coming week.
BOBE: Great news this week…After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Earlier this week, Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.We will go into more granular detail next week on what Sandell's victory portends for shareholders.
FXB: We continue to believe that a more dovish monetary policy from the European Central Bank and Federal Reserve versus the Bank of England should be supportive of the British Pound versus the US Dollar and Euro.
As we wrote in our original research note, essential to our thesis on FXB is expectations on economic growth and the policy stance of central bankers. If and when these expectations shift, so will we. Under the current set-up, we expect the Pound to be a relative winner, especially versus the USD and EUR and will remain on the long side here.
GLD: Janet Yellen’s comments on Wednesday were either taken as 1) marginally more hawkish all else being equal or 2) RELATIVELY less dovish than the forward-looking anticipation of the ECB’s next chess move. Taken in isolation, we definitely did not interpret her comments as suggesting any change to what we’ve believed all year.
Her follow-up in Jackson Hole on Friday provided confirmation. Frustrated that her comments on Wednesday were received as more hawkish, she emphasized that the unemployment rate was not a good indicator for the health of the labor market. While this tone doesn’t deviate drastically from what she has said previously, she emphasized the committee’s need to “remain cautious” about raising rates:
· Gold bounced +38 bps Friday (not attributing any causality here) down -2.0% on the week
· The ten-year yield ticked up 6 bps on the week after selling off from the post-speech Wednesday highs
· The dollar moved higher up 1.11% on the week
Monetary policy from the Fed, and globally for that matter, is predictable and easily anticipated. One of the components in our internal GIP Model (Growth, Inflation, Policy) has been pretty accurate in just front-running this predictability. With both the United States and Europe entering the scenario where growth and inflation are slowing simultaneously, which central bank president will bring more #cowbell? We’re not sure.
All else being equal, we expect Yellen to be more dovish than the market currently expects. On this confirming event we would expect the interaction between Gold, Treasuries, and the U.S. dollar to remain the same. The move in the EUR/USD down below 1.33 and the sell-off in gold suggest consensus expects some kind of easing measure from the ECB's Mario Draghi. We’ll stick long of gold here until we receive more confirmation on the outlook for the dollar in the next several weeks.
HCA & HOLX: We continue to monitor the impact of the Affordable Care Act on HCA and Hologic. One of the biggest drivers has been the expansion of Medicaid. Not all states have expanded coverage, but the list keeps getting longer.
Here is a good briefing on the topic from Kaiser Family Foundation.
For Hologic, approximately 15% of patients in an OB/GYN office are covered through Medicaid. For those newly covered by the Affordable Care Act and a state expansion of Medicaid we would expect to see increased patient volume and consumption Hologic diagnostic tests including HPV and Pap, as well as Hologic surgical equipment, both of which performed well in the most recent quarter. For HCA and other hospitals we have witnessed even more significant gains.
But how much more improvement is still in front of us? Could it already be over? So far, we don’t think so, and we have a high frequency data series to track to tell us if we’re wrong.
We think we are beginning to see the impact from these Medicaid expansions on a monthly data series we follow, a sub-component of the Producer Price Index for Hospitals among for Medicaid patients. The index itself is created from receipts collected from hospitals each month. What are data analysis shows is the very close relationship between a measure of pricing (PPI) and admissions volume at HCA. As the pace of patient volume quickens it has typically coincided with an increase in the Medicaid pricing metrics.
Click to enlarge image.
OC: As we have mentioned in previous notes, a more favorable environment stemming from economic indicators and an industry-wide roofing price increase may be a tailwind in the back half of 2014 for Owens Corning. We are now seeing some encouraging signs from some recent economic data. Demand indices are pointing to increasing momentum within the nonresidential construction industry. The Architecture Billings Index (ABI) Index for July hit 55.8, a 5% increase year-over-year. The July number ranks in the 93rd percentile. The Dodge Index recorded a 9 month high in July, increasing ~23% year-over-year to 125. The ABI and Dodge Construction indices are reinforced by strong ISM and Industrial Production prints for the summer – a more favorable environment compared to 1H 2014.
OZM: Shares of Och Ziff succumbed to some panic selling on Friday on issues that have been in the market for some time. Shares were down over 6% on the last day of trading on a Business Week article released the night prior on a topic that had already been disclosed by management in its financials and already released into the public domain by the Wall Street Journal in April.
The topic surrounds investments made by OZM in Africa in 2001 whereby Och invested in several mining loans. These loans made by OZM have become news fodder because they were invested in the African region during the time of an unpopular regime. Several other major Financial Services firms also made these loans and despite the unpopular timing and parties associated with these investments, OZM and their fund holders were completely paid back with appropriate interest.
The market fears that there may be reputational risk for OZM and other firms if regulators actually charge these companies with formal infractions. While it is tough at this juncture to decipher this impact, we point to the fact that outside this issue that Och has the fastest growth in the asset management industry and also a sector leading dividend, which allows for shareholders to gather returns while this discount burns off.
OZM shares are now again trading with no multiple on its incentive fees which are 40% of its annual net income. The last time OZM shares traded at no incentive fee multiple was 2011, when the stock was a $7 per share. So with the stock up over 70% since that time and a current dividend over 5% (with an opportunity for an additional 4% yield in the 4th quarter), we see a compelling entry point currently.
RH: We have spent a lot of time on the road discussing Restoration Hardware over the past four weeks, in particular, our recent 45-page deep dive on RH’s real estate. The distillation of our analysis is as follows:
This analysis supports our $11 earnings power in five years (double the consensus), as well as our view that that this stock is headed well above $200.
TLT: Staying Long the Long Bond...In an holiday shortened week (at least as far as investor participation was concerned) which saw a decent pop in domestic high-frequency growth data, hawkish FOMC minutes, a huge move in the DXY (+1.1%) and gold (-1.9%), we were delighted to see that our #1 investment idea of 2014 (i.e. long-term Treasuries) did, well, nothing.
Okay, well a -34 basis point week-over-week pullback might not feel like “nothing” if you’re long the TLT in size, but it’s got to feel like a victory in the context the aforementioned hawkish signals. That the long bond did not sell-off in what was arguably the most conducive week for that occurrence since early-JUN is telling in and of itself.
In fact, we’d argue the +1.2% two-day rally to close out the week into and through what we foresaw as dovish testimony out of Janet Yellen at Jackson Hole is a decent come-from-behind “win” for the home team.
Be it #GrowthSlowing on a prospective basis domestically or concurrently in the Eurozone – which weighs on rates across the region and increases the relative attractiveness of US Treasuries (see: a 3M chart of the EUR/USD) – we continue to see favorable catalysts for long-term Treasuries, at the margins.
As such, we are staying long the long bond!
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