prev

The Strong Hand

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

“The odds are six to five that the light in the end of the tunnel is the headlight of an oncoming train.”

-Paul Dickson

 

Whether it be hockey (which no doubt many of you are tired of us writing about!), card games, or chess, it's critical to put yourself in the best position possible to win.  In effect, you want to play the strong hand.   Most games involve some level of probability in which playing the odds can improve your chance of success meaningfully.

 

For example, in chess there are few basic rules of thumb that even the novice chess player should know and follow, such as:

 

  1. Use the center pawns to gain space on the opening
  2. Control the center of the board
  3. Secure your king early
  4. When ahead in material, force exchanges
  5. And perhaps the most important . . . never fight a land war in Asia.

 

Obviously, the last rule of thumb is not for chess, but was reputedly advice given by General MacCarthur to President Kennedy and then popularized in the 1987 movie, “The Princess Bride”.   As rules of thumb go, given America's lack of success in the four Asian land wars post World War II, Korea, Vietnam, Afghanistan, and Iraq, the last point may be the most accurate rule of thumb.

 

The Strong Hand - mac

 

As it relates to global macro investing and asset allocation, a couple of rules of thumb we have recently been reminded of are: 1) be on the right side of liquidity (It’s all about the flows, bro!) and 2) it’s the fundamental changes on the margin that matter.

 

Back to the Global Macro Grind...

 

In the Chart of the Day, we highlight a point that many asset allocators have been focused on over the past few weeks, which is that high yield bonds, even despite the recent rally, have sold off sharply from the highs of the year.   As a result, the spread between high yield and comparable duration treasuries is at its widest of the year.

 

Some strategists have been flagging this as an opportunity to wade back into the high yield market, an entry point if you will.  One point that gives us pause on this line of thinking is the risk of illiquidity in the high yield market.  In some ways, this time IS different on the liquidity front.

 

According to Lipper, fund flows in high yield bond funds have experienced outflows of some $13 billion over the past four weeks.  Rightfully, you might push back and say that is a smidgen of the size of the entire high yield market, which according to recent data from Barclay’s is north of $1.2 trillion in the U.S. alone.  So based on those rough numbers, we are looking at only about 1% of the entire market in outflows, but the kicker, again, is liquidity.

 

Since April 2013, the New York Fed has started to break out dealer inventories of high yield bonds and they currently stand at about $8.2 billion.  So even as the high yield market has ballooned from $660 billion in 2007 to almost double that now, liquidity, as facilitated by the dealers, has been shrinking.   This then is the unintended consequence of government regulation and tighter capital rules: dealers have a more limited ability to facilitate an orderly rush for the exit.

 

The other rule of thumb we noted above is that fundamental changes on the margin matter.   Europe is on the sell side in our current macro themes deck and that position is seeing the benefit of more slowing economic data from Europe this morning.  A few points to highlight from this morning’s data:

 

  • Eurozone GDP slows to +0.7% year-over-year in Q2 2014;
  • German GDP contracted sequentially by -0.2%; and
  • France cut their GDP forecast in half again to +0.5% for 2014.

 

For Germany, this is the first sequential contraction since 2012.  Given this, it no surprise then that the German Bund hit a record low of 1.0% this morning and has also been front running this slow down.  Clearly, low reported inflation is leaving the door open (some might say wide open!) for incremental easing in Europe (a point the German bund market is front running).

 

Incidentally for those that have been watching, the U.S. 10-year yield is ticking lower again this morning.  The contrarian Hedgeye call that 10-year yields may touch 2.3%/2.2% may happen sooner than even we anticipate!

 

And conversely in a sign today that this time truly isn’t different, Reuters is reporting that mortgage lenders are again offering stated income mortgages in an attempt to facilitate mortgage activity.  When combined with excesses in the auto loan market and a spike in subprime credit card issuances, perhaps there is more than just liquidity that is making the credit markets shake.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.39-2.48%

RUT 1109-1148

DAX 8980-9272

VIX 11.84-15.55

WTIC Oil 96.60-98.26

Gold 1301-1323

Copper 3.09-3.15 

 

Keep your head up and pawns in the middle,

 

Daryl G. Jones

Director of Research

 

The Strong Hand - 08.14.14 COD


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 28, 2014


As we look at today's setup for the S&P 500, the range is 28 points or 0.76% downside to 1985 and 0.64% upside to 2013.                                                           

                                                                    

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: 1.83 from 1.85
  • VIX closed at 11.78 1 day percent change of 1.29%

 

MACRO DATA POINTS (Bloomberg Estimates) 

  • 8:30am: GDP Annualized, 2Q revised, est. 3.9% (prior 4%)
  • 8:30am: Initial Jobless Claims, Aug. 23, est. 300k (pr 298k)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 24 (prior 36.6)
  • 10am: Pending Home Sales m/m, July, est. 0.5% (prior -1.1%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Kansas City Fed Mfg Activity, Aug., est. 7 (prior 9)
  • 11am: U.S. to announce plans for auction of 3M/6M bills

 

GOVERNMENT:

    • Senate, House out on August recess
    • Federal Deposit Insurance Corp releases quarterly report on bank earnings
    • 12pm House Dem. Leader Nancy Pelosi press conf. call on women’s agenda, including equal pay legislation

         

WHAT TO WATCH:

  • Russian hackers said to attack 5 banks seeking customer data
  • U.S. sees Russia directing rebel counteroffensive in Ukraine
  • Lagarde to explain her role in French legal case to IMF board
  • Boeing, Airbus vying for $2b order from India’s Air One
  • Goldman cedes NYSE post as speed traders seize stock floor
  • Telefonica lifts GVT bid to $9.8b to rival Telecom Italia
  • Dollar General reports earns; Family Dollar deal a focus
  • Paramount said to plan $2.5b IPO in biggest REIT offering
  • Google extends local advertisements on smartphones to desktops
  • Ford begins production of first Mustang to be sold worldwide
  • Glaxo’s Ebola vaccine set to begin tests in humans next week
  • Sands sues brother of trader in Chinese probe over casino debt
  • Wal-Mart’s Massmart profit plunges on weaker S. Africa spend
  • CSR rejects Microchip approach; says is considering options
  • Spain growth picks up as consumer prices drop most since 2009
  • TripAdvisor to begin trading on Nasdaq today under TRIP
  • Tel Aviv switch to Mon.-Fri. trading backed by TASE brokers

 

AM EARNS:

    • Abercrombie & Fitch (ANF) 7:30am, $0.11 - Preview
    • CIBC (CM CN) 6am, C$2.21 - Preview
    • Coty (COTY) 6:30am, $0.05
    • Dollar General (DG) 7am, $0.83 - Preview
    • Genesco (GCO) 7:28am, $0.55
    • Hanwha SolarOne (HSOL) 6am, no est.
    • Laurentian Bank of Canada (LB CN) 8:33am, C$1.40 - Preview
    • Pall (PLL) 7am, $1.06
    • Signet Jewelers (SIG) 7am, $0.98
    • Toronto-Dominion Bank (TD CN) 6:30am, C$1.09 - Preview

 

PM EARNS:

    • Avago Technologies (AVGO) 4:05pm, $1.05
    • OmniVision Technologies (OVTI) 4:18pm, $0.53
    • Pacific Sunwear (PSUN) 4pm, $(0.03)
    • Splunk (SPLK) 4:02pm, $(0.02)
    • Veeva Systems (VEEV) 4:02pm, $0.07

               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Declines as Crude Stockpiles Expand at Cushing; Brent Steady
  • Gold-Price Indicator Fades as ETPs Lose $71 Billion: Commodities
  • Commodity Income at Top 10 Banks Seen Climbing 21% in First Half
  • New Ship Rules Come Amid Worst Barge Spills Since 2008: Freight
  • Aluminum Advances for Fourth Day as LME Stockpiles Decline
  • Sugar Rises in New York on Brazil Supply Outlook; Coffee Falls
  • China Commodity Buyer Changhua Says Banks Resume Credit Line
  • Congo Copper Shipments Halt as Botswana Bars Entry to Stem Ebola
  • Rubber in Tokyo Falls on Yen as Thai Price Slumps to 5-Year Low
  • Palm Oil Climbs From Five-Year Low on Chinese Demand Outlook
  • Cotton Seen Dropping to Lowest Since ’09 by Gap’s Indian Partner
  • Drier Sept.-Nov. Seen for Parts of Southeast Australia: Bureau
  • Glencore Says Company is Preferred Proponent for Bauxite Project
  • Modi’s Faster Green Permits Seen Fueling Growth: Corporate India

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


August 28, 2014

August 28, 2014 - Slide1

 

BULLISH TRENDS

August 28, 2014 - Slide2

August 28, 2014 - Slide3

August 28, 2014 - Slide4

August 28, 2014 - Slide5

August 28, 2014 - Slide6

August 28, 2014 - Slide7

 

BEARISH TRENDS

August 28, 2014 - Slide8

August 28, 2014 - Slide9

August 28, 2014 - Slide10

August 28, 2014 - Slide11
August 28, 2014 - Slide12

August 28, 2014 - Slide13


the macro show

what smart investors watch to win

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.

Cartoon of the Day: All Time SPY-Highs

Cartoon of the Day: All Time SPY-Highs - Waiting bear 08.27.2014

 

Keith McCullough wrote in today's Morning Newsletter, "While the stock, bond, and commodity market bubbles have all had different narratives, one thing is not different – prices go up, then down, a lot."

 

SUBSCRIBE TO CARTOON OF THE DAY


Shorting France (EWQ)

Investment Recommendations:  short France (EWQ),  EUR/USD (FXE) and Eurozone equities (EZU);   Long GBP/USD (FXB)

 

This morning Keith added a short signal in France (via the etf EWQ) to our Real-Time Alerts.  We’ve been waiting for an entry point on European equities, with major indices broken TREND for nearly two months in our model. We were afforded the opportunity today with ~ 50bp bounce in the EWQ as the CAC remains broken TREND and fundamentals support economic weakness ahead.

Shorting France (EWQ) - vv. cac

 

As Keith notes in the Real-Time Alert update:

 

“I make a lot of mistakes. One of them that I didn't make was re-shorting European Equities too early on the no-volume bounce. One big mistake I think the European Equity bulls are about to make is thesis drift. I don't know one PM who got long Europe because they thought European growth would slow and that the market would need another QE.  Time to sell the most socialist of European economies, France.”

 

While we are closely following the Draghi Card, namely the pull-forward expectations of QE that he sent to the market in his Jackson Hole commentary (for more see Draghi Trumps Yellen’s Dovishness – Sticking with the Playbook), our call is simply that we do not see growth accelerating in Europe, and right here and now are not getting long equities simply on the prospect of QE.  Instead we’re getting short a weak horse in the region, France. 

 

Here’s our near term set-up on the region:

  • Process:  our TREND lines across major European indices remain broken = we’ll maintain a bearish bias on the equities
  • Friday’s CPI Print:  we expect Eurozone CPI (released at 5am EST this Friday) to tick down 10bps to 0.3% -- expect heightened investor expectations that Draghi needs more “powder” to revert falling inflation, however we do not see Friday’s print as the catalyst to issue QE at the September 4th ECB meeting
  • September 4th ECB Meeting:  we expect updated ECB staff projections to show downward revisions to growth and inflation. Draghi will “push” the growth and inflation prospects from TLTROs and QE-lite (ABS buying) programs in his commentary (although we are not buying it), and will leave QE in his back pocket

Weak Growth And Weakening. Last week’s Eurozone Q2 GDP print confirmed massive slowing for the region to 0.0% Q/Q (vs 0.2% prior) and 0.7% Y/Y (vs 0.9% prior) – and while both France and Germany slowed, our call is that France will underperform its main peer in the quarters ahead. Here’s the Q2 divergence:

 

France  0.0% Q/Q (0.1% est.) vs. 0.0% prior

France  0.1% Y/Y (0.3% est.) vs. 0.7% prior (0.8% revised)

 

Germany  -0.2% Q/Q (-0.1% est.) vs. 0.8% prior

Germany  1.3% Y/Y (1.4% est.) vs. 2.2% prior

 

Supportive of today’s call is also survey data out that showed France Business Confidence declining in the August figure, its 4th straight month of declines; PMI Services and Manufacturing data that has shown France squarely underperforming the region since 2012 (largely below the 50 line indicating contraction); record-high jobless numbers; a 16-year low in housing starts; weak industrial production; low inflation (+0.5% Y/Y); and government bond yields falling steadily (down -1.2% Y/Y).

Shorting France (EWQ) - vv. businss conf france

Shorting France (EWQ) - vv pmis

Shorting France (EWQ) - vv. yields

 

Politically Weak.  Just two weeks ago France’s government cut its GDP forecast in half (again) to 0.5% (from 1.0%) for 2014 and it will likely miss its FY deficit target of 4%.  News this week of President Hollande reshuffling his government (after Economy Minister Arnaud Montebourg stepped down on Monday), is confirming evidence to us that the policies of Hollande’s government are not on track to return growth to the economy over the medium term. That Hollande himself is wildly unpopular, with a paltry approval rating of 17%, furthers the outlook that the government’s pledge that the “recovery is there” is grossly disingenuous. 

 

Matthew Hedrick
Associate

 


Stay Far Away From Burger King, BK Looking to Tim Hortons to Bail Them Out Via 'Enrichment Scheme'

Takeaway: 5 words from Hedgeye's Howard Penney: Stay away from Burger King.

Hedgeye managing director and restaurants analyst Howard Penney was interviewed by BNN earlier today and explained why he believes owning Burger King is a big mistake for investors. Penney says 'Burger King is looking to Tim Hortons to bail them out of a bad situation.

 

Stay Far Away From Burger King, BK Looking to Tim Hortons to Bail Them Out Via 'Enrichment Scheme' - hp3

Click here to watch the full interview.

 

 


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.

next