Score: Long Bond (TLT) +17.2% vs. Russell 2000 0.0% YTD #timestamped (10yr yield = 2.34%). Incidentally, that’s pre-reinvesting dividends if you are long the 30yr UST Bond, the absolute return is even better.
“Because there is no effort without error and shortcoming.”
That’s one of the best quotes from one of the best leadership speeches in American history – President Teddy Roosevelt’s “The Man In The Arena” (more formally referred to by political types as his “Citizenship in a Republic” speech).
I’m not much of a political type. I’m more of a Mucker in the arena type. Perversely, I love getting smacked around once in a while. I love to fight against consensus. Yes, it can get messy. But working alongside those of you whose portfolios are “marred by dust and sweat and blood” drives me.
Those of you who didn’t get run over buying the tops of the 2000 and 2007 US stock market bubbles get where I am coming from. We are going to do this all over again. And while this time may be different, we know “the triumph of high achievement” … and if we fail, at least we’ll do so “while daring greatly.”
Back to the Global Macro Grind…
I obviously love that speech, but I don’t think our call for US #GrowthSlowing as inflation accelerated (from 3 year lows) in 2014 was much of a dare at all. It was a playbook modeling call. Amidst all of the storytelling out there, the easiest US Macro positions to take were:
Score: Long Bond (TLT) +17.2% vs. Russell 2000 0.0% YTD #timestamped (10yr yield = 2.34%)
*that’s pre-reinvesting dividends if you are long the 30yr UST Bond, the absolute return is even better
But you won’t hear that on Old Wall TV. You probably won’t read that in the paper either (I certainly haven’t – mainly because I don’t read newspapers!). Instead, you’ll hear something from the cheap seats like, “look at the Dow – its above its 50-day moving avg.”
The Dow, btw, is up less than 3% for 2014. Thanks for coming out.
If you’re a hard core perma growth bull, where you should really be long is India. Unlike the Russell 20000, India’s stock market (BSE Sensex) closed the month at its YTD highs, +27.7% YTD. Inflation is falling there – and real consumption growth is accelerating. Sound familiar?
It certainly doesn’t sound like Europe.
European central planning bureaucrats (who are just like the un-elected ones we have here at the Fed) live in perpetual fear of what the general population wants (hint: lower cost of living). Read their conflicted and compromised media headlines this morning:
This isn’t the arena of real life where real players have a real scoreboard. This is a joke.
For those of you who recall what the Keynesian finance newspaper (The Economist) was trumpeting last year (Abenomics), only 1-year after implementing 60-70 TRILLION Yen in incremental “easing”, here’s what Japan reported for July 2014:
In Hedgeye rate of change speak, “y/y” means year-over-year (or what it is now versus last year). And in Japan it’s just plain sad to watch. If you’re blowing up on the golf course this weekend, try it yourself – just keep doing the same things, over, and over, and over again. But don’t expect different results.
“So” Europe definitely needs to do that… definitely, right?
Right, right. And as US growth continues to slow from this fanciful Q2 headline Obama was trying to trumpet yesterday (newsflash: it’s Q3), guess what your central planning committee at the Fed is going to do in the face of that? Must do moarrr easing…
With a few Hedgeye Best Short Ideas going against us (like YELP) right now, I have plenty of issues of my own to deal with, but a broken process is not one of them. If I had a broken process, I would either get fired or mocked.
Where I grew up, they call the place where people who get paid to get mocked a circus. That’s the perfect place for a bunch of unaccountable people who are bought and paid for by governments policies to perform.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.32-2.39%
Shanghai Comp 2181-2280
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on August 15, 2014 for Hedgeye subscribers.
“You’ve got to know when to hold’em, know when to fold ‘em.
Know when to walk away, know when to run.
You never count your money when your sittin’ at the table,
There’ll be time enough for countin’ when the dealin’s done.”
It is hard to believe it, but the song “The Gambler," written by Don Schlitz and recorded by the legend Kenny Rogers is almost 36 years old. Some songs, poems, and books transcend time and this is certainly one of them.
In many ways, the song is also apropos for stock market operators like ourselves. Certainly, we don’t tell our clients that we are gambling, but some days it does feel like we are at the casino. And some days certain stock market operators go on unbelievable runs that seem to belie even the best of odds.
Take my colleague Howard Penney for example. Yesterday he introduced another Best Idea, which was to short HAIN. (If you’d like learn how to get access to his 70 page deck on the name, please email firstname.lastname@example.org.)
To say Howard has had a hot “hand” would be an understatement to say the least. His last five short ideas have had great returns on an absolute basis and versus the market. They are as follows:
So as it relates to the restaurant and consumer staples sectors, you can gamble or if you are going to go to the stock market casino you can listen to Penney and improve your odds versus the house.
Back to the Global Macro Grind...
Speaking of casinos and gambling, former Reagan budget director David Stockman recently had a great quote saying the markets were like a branch casino of the central bank. According to Stockman:
“The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today.”
Now, casinos are great when the odds are lined up in your favor, but when the odds shift or are not aligned with your bets, it doesn’t matter how many red bulls and vodka you drink, the casino is a very frustrating place to spend the evening.
This morning, by and large, the ball has landed on green across the global markets. This comes despite, particularly in Europe, some fairly despondent growth data points over the last couple of weeks.
On the good news front, the U.K. continues to outperform as evidenced by its GDP report last night. On a year-over-year basis, GDP in the U.K. expanded by +3.2% and was up +0.8% sequentially. Interestingly, U.K. policy makers seem to get that a strong currency helps. Even the manic media is getting the point, as Reuters wrote this morning:
“The strong Pound policy from Carney seems to be a tailwind for the U.K. economy.” (Note that we bought the British Pound (via the etf FXB) on 8/13 in our Real-Time alert products.)
Hopefully, Dr. Yellen gets the memo!
Ironically, Dr. Yellen and her colleagues will actually have decent cover to become incrementally dovish (read: push out the dots) given the anemic situation in the U.S. housing market. In the Chart of the Day today, we’ve included a table from our housing team that summarizes the recent data points in housing. Of the 22 housing data points we track regularly, 18 of them are worse in the most recent period.
As my colleague Christian Drake wrote yesterday:
“The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended August 8th.
The Composite index fell -2.7% WoW as refi activity was weaker by -4.0% on the week and purchase demand slid -1.0% sequentially.
The anemia extends to August as purchase apps hold the 160 level for a 5th consecutive week and are now running -5.3% QoQ and at the lowest quarterly ave reading since 2Q 1995.
Summarily, the high frequency housing data continues to corroborate the sea of red currently blanketing our housing compendium. As we’ve highlighted repeatedly, we’re inclined to remain bearish on the housing complex until the slope of HPI deceleration inflects.”
Not surprisingly then, we recently shorted Toll Brothers (TOL) in our real-time alert products. There is nothing like fundamentals to put the odds on your favor!
Good “luck” out there today.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.38-2.48%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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TODAY’S S&P 500 SET-UP – August 29, 2014
As we look at today's setup for the S&P 500, the range is 37 points or 1.24% downside to 1972 and 0.61% upside to 2009.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Indonesia moved to ban the exporting of unprocessed minerals in January bringing the expectation of a -$3Bn decrease in annual exports:
Nickel: +36% YTD
Copper: -8% YTD
Recent developments concerning Indonesia’s largest copper producers, Freeport McMoRan and Newmont Mining, suggest that the two companies may be at the negotiating table with the Indonesian government. This apparent optimism, coupled with China’s move to seek additional sources of production, suggest the market needs to continue absorbing a multi-year supply increase.
By the end of June, talks between Freeport McMoRan and the Indonesian government appeared to breakdown, fueling speculation over whether the country’s biggest miner even had a future in Indonesia.
Simultaneously, Newmont also reached an impasse as the U.S. miner decided to file for international arbitration. Jakarta retaliated by threatening to terminate Newmont's contract if the company did not withdraw its legal challenge.
Freeport chose to continue negotiations…
The government agreed to a framework valid for at least six months that could be used to renegotiate the contract under the next administration.
Now Newmont appears to be following suit to begin friendly negotiations…
Newmont announced Tuesday it has withdrawn an international arbitration claim against the government after a breakthrough in negotiations with the government.
Just how important is Indonesian mineral production?
Without a doubt, more important for nickel than copper…
Nickel +36% YTD (ETF: JJN)
Government officials have emphasized they have no plans to lift the ban on unprocessed nickel ore….
Defending his case, chief economic minister, Chairul Tanjung said that producing and refining and smelting within Indonesia is much more productive and lucrative than doing the same for unprocessed copper.
A recent report from Indonesia’s Investment Coordinating Board showed that they are in fact investing in the second-leg of the production process:
Indonesia’s share of global copper production is smaller but still significant…
Copper -8% YTD (ETF: JJC) Bullish TREND ($3.16 Spot Resistance)
According to the Copper Development Association the 2012 global production rankings are as follows:
Chile: 5.37MM tons (36% global total)
Reserves: 190MM tonnes
China: 1.5MM tons
Reserves: 30MM tons
Peru: 1.2MM tons
Reserves: 76MM tons
United States: 1.1MM tonnes
Reserves: 39MM tonnes
Australia: 970K tonnes
Reserves: 86MM tonnes
China is one of the largest producers, but it doesn’t have nearly the reserves compared to the rest of the top 5 which explains their sense of urgency in moving to secure supply lines elsewhere:
Copper Quant Set-UP --> Testing the Trend line On Heavy Selling
WHY WE NEED TO TURN TO THE QUANT:
Copper continues to trade on the outlook for the Chinese economy, and for good reason based on their share of global copper consumption. We published a note on July 28th, outlining the uncertainty behind the China catalyst.
An excerpt from that note is included below along with the link:
“Consensus macro leans on the strength of the Chinese economy as a leading indicator for base metal demand (as it should). China consumes over 40% of the world’s industrial metals (up from 5% in 1980).
2013 Consumption (% global demand):
An equally weighted index of Chinese GDP and industrial production to industrial metals prices (CRB metals index) is running an r-squared of 0.50 currently, down from a December 2011 peak. Although diverging from the 2011 highs, the relationship cannot be ignored as a market catalyst.”
We will be watching the following factors in the coming weeks for a read-through on the supply outlook:
1) Chinese economic outlook takes a more definitive turn positive or negative
2) The Indonesian copper bauxite export picture reaches a long-term resolution
3) Continued confirmation in a late-cycle mining cap-ex push from the largest miners
4) A continued positive Trend for the USD
With these fundamental factors in play, copper may be interesting on the short-side if our @Hedgeye $3.16 TREND line breaks and confirms.
Please feel free to ping us with comments or questions.
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