prev

Tech Bubble?

“This is the real world, homie, school finished.”

-Kanye West

 

That’s the opening quote to the latest business book I have cracked open, The Hard Thing About Hard Things, by Ben Horowitz (of Andreessen Horowitz fame).

 

Unlike most of the #behavioral and #history books I’ve been citing throughout the year, this one has a much more #bubbly feel to it. I’m only four chapters in but, suffice it to say, I don’t agree with some of Horowitz’ business building and leadership principles.

 

Maybe it’s because his parents were communists. Maybe it’s because I’m a knucklehead athlete. I’m not sure. I’m just certain that all of the techie “valley” culture and the Keynesian Economics school stuff isn’t playing out according to plan, in the real world.

Tech Bubble? - Bubble bear cartoon 09.26.2014

 

Back to the Global Macro Grind

 

Another one of the 2014 Tech Bubble’s “he’s got mad dough, bro” darlings who is selling his book these days (Peter Thiel) made headlines yesterday in telling Fox Business anchor Deidre Bolton that it wasn’t, well, a Tech Bubble.

 

Thiel, who blew up his hedge fund, multiple times (buying stocks in 2008, shorting them in 2009, etc.) is as academically intelligent as I can be hockey-head dumb, went on to say that it’s not a bubble in stocks because there is a bubble in bonds.

 

To be specific, Thiel said “I’m investing in Tech stocks to hide from the government bond bubble.” “So”, I replied (in tweet terms to @peterthiel) “I’m hiding in the Long Bond so that I can be short the Tech Bubble.” #timestamped

 

Got #Bubbles?

 

We do. On our Q4 Macro Themes Call we have a whole slide deck full of these suckers. If you’d like to be educated on some #history and #context of the current components of the US stock market bubble, please join us this Thursday at 1PM EST.

 

While there is plenty of low-quality junk debt in this world that we would consider #bubbly, the upside to fully understanding how all of this might end (Japanese style) is that the mother of all bubbles (Japanese Government Bonds) has been inflating for decades.

 

While I’m not sure if Thiel joined the ranks of the many who have a higher IQ than I and shorted Japan’s debt because the country’s Keynesian Abenomics experiment was going to fail, the only failure in the real world was not being long those bonds.

 

Homies, here’s the point:

 

  1. In the face of failing economic policies, Japan, Europe, and USA have only one option – moarrr #cowbell
  2. As these central planners attempt to artificially inflate economies, they simply inflate asset prices
  3. As asset prices (Tech Bubbles) inflate, so does the cost of living associated with those assets (CA real estate)
  4. As the cost of living rises to pain thresholds consumers cannot overcome, the economy surprises on the downside
  5. Then, central planners respond with moarrr #cowbell

 

I’m sure Kanye West can come up with a song that’s more clever than what this really is. But I’m pretty sure that the 60% of Americans who have negative real wage growth (read: falling purchasing power) since the Fed engaged with its Policy To Inflate get it.

 

So do the Japanese. Here’s the latest on that Eastern front:

 

  1. Japanese Real Wages -2.6% year-over-year in August (vs. -1.6% y/y in July)
  2. Japanese Household Spending -4.7% year-over-year in August (vs. -5.9% in July)

 

In Mucker rapper terms, that is called getting train wrecked.

 

Oh, and if you aren’t into Burning Yens and Euros, there’s this other devaluation story to update you on this morning – Russia:

 

  1. The Russian Ruble dropped -14% in the last 3 months (versus a basket of Dollars and Euros)
  2. The Russian Trading System Index (its stock market) is crashing, -19.1% YTD
  3. And the Ruskies are going to now “defend” their currency by raising interest rates!

 

As it has, across centuries, this is how the Keynesian School of QE and/or Currency Devaluation ends – epically. I’ll have no problem shorting Treasuries (our call for all of last year) when our research and risk management signals tell me to do so.

 

But, in the meantime, I’ll stay long of Long-Term Treasuries (via TLT, which has a total return of +17.1% YTD) and short of small cap illiquidity and social tech bubbles via anything that is getting smoked in TAM terms right now.

 

While the over 40% of IPO’s that are crashing (down 20% or more from peak) aren’t all techie related, both in # of issues and in market cap terms, the froth of this #Bubble in US growth expectations is as big as when Horowitz’s first company almost went bankrupt.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.46-2.56%

SPX 1

RUT 1097-1132

VIX 13.81-16.75

EUR/USD 1.26-1.29

WTI Oil 91.69-94.98

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Tech Bubble? - 09.30.14 10Yr vs. case shiller san fran


Barking Cats

This note was originally published at 8am on September 16, 2014 for Hedgeye subscribers.

“A government institution that is not dominated by politics is as likely as a barking cat.”

-Milton Friedman

 

To be balanced, I like to fact check what high profile economists have stated as fact. And while Friedman’s statement was more of a probability-based one, there’s a YouTube video (click here to watch) that shows a cat that was (allegedly) barking, but resumed meowing. There are 19,624,067 views of this thing. #Riveting

 

There was an article in the Wall Street Journal yesterday that suggested that the Mother of All Doves (Janet Yellen) attacks like a hawk. While everything in the Currency War is relative (when Draghi devalued the EUR/USD, she looked relatively hawkish), in the face of slowing US and European economies, Yellen raising rates is as likely as my dog purring.

 

Oh, and I don’t have a dog.

 

Barking Cats - cat1

 

Back to the Global Macro Grind…

 

So what do you do if Janet reverts to meowing like a dove?

 

1. Buy the Long Bond (TLT)

2. Buy stocks that look like bonds (XLU)

3. Buy Gold (GLD)

 

That’s what Mr. Market told you to do yesterday. That’s what he told you to do in 2011 (when Europe slowed last time) too. Here are your timestamps in what was a big time diverging US equity tape yesterday:

 

1. Utilities (XLU) up +0.3%

2. US IPO Bubble (IPO) -2.1%

3. Russell 2000 (IWM) -1.1%

 

To be fair, away from the 40% of IPOs that have blown up already (-20% from peak in the last 12 months), 60% of these puppies have been barking alpha to the upside. If you’ve played lucky on that front (or are just a supreme stock picker), congrats!

 

The Nasdaq got tagged for a -1.1% drop yesterday too. The beta-chasing there (and in small/mid cap stocks) has been epic this year, if only because you could have been neutered (dogs don’t like that either) on the long side 40-50% of the time.

 

Pardon? Mucker, I thought the “market doesn’t go down.” If you call the SP500 (+7% YTD) or the long end of the Bond market (TLT is +12% YTD), the “market”, I guess that is accurate. Unfortunately, most of us don’t get paid to buy the index.

 

Here are some more US stock market #bubble stats for you:

 

1. 47% of stocks in the Nasdaq are crashing from their 12-month peak

2. 41% of stocks in the Russell 2000 are crashing from their 12-month peak

3. 6% of stocks in the SP500 are crashing from their 12 month-peak

 

*note: crash = a decline in price of -20% or more

 

That’s why I am overly comfortable calling the momentum and small cap side of the US stock market a #bubble these days – it’s easier to do when they are already popping!

 

It’s also why this year you will see who can really pick stocks. There’s a huge difference between a PM who is up +10-15% YTD with 5-10 positions that have been really right than ones who are -10% to +5%, with 50-100 positions that are trying to not blow up.

 

As all of you who run money and/or manage your own know, the key to compounding your net wealth is not losing money. Warren Buffett called it rule #1. Believe him. He’ll do anything these days to make his preferred investment a guaranteed win.

 

In other IPO #bubble news (in both market cap and names that have come public, we are beyond 1999-2000 now):

 

1. The Ali-bubble (BABA) has raised the top-end of its IPO price range to $68

2. Dave and Buster’s is trying to come back from the dead with a $100M IPO

3. Freshpet is going to try to get $100M of other people’s money through GS and Credit Suisse

 

Don’t get me wrong. If you are long all of this stuff at a lower-cost basis (pre-IPO) before the Old Wall jams it into the indexes, you are crushing it. That is capitalism and I am a big fan of your being early.

 

But as I watch this damn Freshpet website shuffle between slides this morning (“Healthy meals, so tasty, dogs and cats might just beg for more!” – is that a CS line for eat this IPO and I’ll give you more BABA?), I can’t say I support coming to this IPO bubble late.

 

While I am sure there’s another dog you can find purring somewhere on YouTube, I’m not in the risk management business of telling you that everything I learned during the 2000 and 2007 stock market bubbles is different this time.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.34-2.62%

SPX 1977-1995

RUT 1144-1161

VIX 12.86-14.69

EUR/USD 1.28-1.30

Gold 1224-1276

 

Best of luck out there today,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Barking Cats - Chart of the Day


THE HEDGEYE MACRO PLAYBOOK

Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document. In today’s edition, we highlight:

 

  1.  Why investors should be raising cash
  2. The risk of broad-based weakness across global macro spilling over into US equity performance
  3. Our preference for shorting domestic small-cap stocks (IWM) over the euro (FXE) going forward

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


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.

September 30, 2014

September 30, 2014 - Slide1

 

BULLISH TRENDS

September 30, 2014 - Slide2

September 30, 2014 - Slide3

September 30, 2014 - Slide4

September 30, 2014 - Slide5

September 30, 2014 - Slide6

 

BEARISH TRENDS

September 30, 2014 - Slide7

September 30, 2014 - Slide8

September 30, 2014 - Slide9

September 30, 2014 - Slide10

September 30, 2014 - Slide11


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 30, 2014


As we look at today's setup for the S&P 500, the range is 25 points or 0.80% downside to 1962 and 0.47% upside to 1987.                                                       

                                                                        

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: 1.93 from 1.91
  • VIX closed at 15.98 1 day percent change of 7.61%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 9am: ISM Milwaukee, Sept., est. 61 (prior 59.63)
  • 9am: S&P/Case-Shiller Home Prices m/m July est 0.0% (pr -0.2%)
  • 9:45am: Chicago Purchasing Mgr, Sept., est. 62 (prior 64.3)
  • 10am: Consumer Confidence Index, Sept., est. 92.5 (pr 92.4)
  • 10:45am: Fed’s Powell speaks in Washington
  • 11:30am: U.S. to sell $30b 4W bills
  • 3pm: Fed issues QE schedule for Oct.
  • 4:30pm: API weekly oil inventories

 

GOVERNMENT:

    • Senate, House out of session
    • Obama, Modi hold bilateral meetings at White House
    • 10am: House Oversight and Govt. Reform Cmte  hearing on Secret Service security protocols w/agency director Pierson
    • 10:30am: FCC open meeting; subjects incl. sports blackouts
    • 12:30pm-2:15pm: Hillary Clinton speaks at Congressional Hispanic Caucus Institute conference
    • 2pm: Attorney General Eric Holder delivers remarks at Global Alliance Conf. against child sexual abuse
    • 3:45pm: Speaker Boehner, Democratic leader Pelosi, Modi media availablity after meeting
    • U.S. ELECTION WRAP: Ballot Law Key in Kan. Race; Sen. Outlook

 

WHAT TO WATCH:

  • iPhone 6, 6 Plus to be available in China from Oct. 17
  • Apple’s Irish tax deal doesn’t comply with EU standards
  • U.S. seeks to reverse locks on Apple, Google smartphone data
  • Iron Mountain said to consider more than $2b Recall bid
  • FCC said to consider rules to help web TV svcs. access shows
  • Netflix to co-produce ‘Crouching Tiger’ sequel
  • Computer Sciences said to approach Blackstone, Bain on LBO
  • AMC said close to $200m deal for stake in BCC America
  • Argentina found in contempt of court on bond payment fight
  • Euro-region inflation slows as ECB prepares for policy meeting
  • Pimco talks to Morgan Stanley, BofAML on strategy: WSJ
  • Total Return fund cut to bronze by Morningstar
  • GM CEO Barra to give detailed plan for cash, WSJ says
  • Schlumberger said to remove U.S., EU staff from Russia
  • Supervalu, Albertson’s discover new holes in card networks
  • AIG bailout by U.S. was ‘extortion,’ Greenberg lawyer says
  • Lawmakers to quiz Secret Service chief on White House breaches
  • Venezuela’s Maduro says on TV that Clorox abandoned country

 

EARNINGS:

    • Walgreen (WAG) 7:30am, $0.74 - Preview

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Falls to Lowest Since January as Metal Set for Monthly Drop
  • Oil Heads for Biggest Quarterly Drop Since 2012 on Ample Supply
  • Gluts Spur Investor Exit Signaling Prolonged Slump: Commodities
  • European Coal Set for 10th Quarterly Drop as Power Demand Wanes
  • Iron Ore Heads for Record Run of Losses as Global Surplus Builds
  • Freeport Says Grasberg Copper Shipments Continue Amid Suspension
  • Rubber in Tokyo Trims Third Quarterly Loss as Thai Exports Fall
  • U.K.’s Wheat Farmers May Delay Planting After Driest September
  • Soybeans Head for Quarterly Slide Before USDA on Harvest Outlook
  • Nasdaq OMX Plans First German Renewable Power Futures in 2015
  • Rebar Pares Record Quarterly Loss as Recent Drop Seen Excessive
  • Corn Price Rout Seen Nearly Complete by UBS as U.S. to Cut Area
  • Dubai Gold & Commodities Exchange Pushes Back New Gold Contract

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA

Takeaway: Consistent w/ our outlook for EM asset prices, we see 15-20% downside in the EZA amid a myriad of idiosyncratic structural & cyclical risks.

Our Dour Outlook for EM Asset Prices Remains Firmly Intact

At Hedgeye, we like to go both ways – particularly when it comes to emerging markets. Recall that we authored the 2013 bear thesis back in April of last year, as well as the 2014 bull thesis in February/March of this year.

 

We are now overtly negative on the EM space going forward,  a research view we outlined in great detail in our September 23rd note titled, “EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER”. In that note, we closed all of our active long ideas across EM, as well as introduced the Vanguard FTSE Emerging Market ETF (VWO) on the short side. We highly encourage you to review that note to the extent you haven’t already.

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - Idea Flow Monitor

 

Since then:

 

  • The WisdomTree India Earnings Fund (EPI) – a former long idea – has dropped another -2%
  • The iShares China Large-Cap ETF (FXI) – a former long idea – has dropped another -2.1%
  • The iShares MSCI Indonesia ETF (EIDO) – a former long idea – has dropped another -3.1%
  • The Vanguard FTSE Emerging Market ETF (VWO) – a former long idea – has dropped another -3.3%
  • The iShares JPMorgan USD Emerging Markets Bond ETF (EMB) – a former long idea – has dropped -0.8%

 

Those equity ETF declines compare to a -1.3% decline in the MSCI All-Country World Index over that time frame and the near one percent drop in the EMB ETF compares to a +0.1% increase in the Barclays Aggregate Bond Index since then.

 

As you can probably tell, booking gains at the appropriate juncture and minimizing losses remains a core focus of our fundamental research efforts, as most recently highlighted by our decision to book gains on the long side of Brazil (EWZ), which has dropped -5.6% since we booked an +11.2% gain in this bullish research recommendation on June 3rd and on the short side of Japan (DXJ), which has risen +10.9% since we booked a +0.1% gain in this bearish research recommendation on May 28th. Moreover, we’ve been implicitly negative on the former since our July 14th note titled, “SELL BRAZIL?”; the EWZ ETF has plunged -12.2% since then.

 

#ResearchAlpha…

 

As part of our nascent quest to populate our idea list with emerging market short ideas, we walk through why we think South Africa is a prime candidate in the sections below.

 

Our Model Suggests South Africa Has the Greatest Degree of Structural Economic Risk Among Emerging Market Economies

Unfortunately, we continue to lack a crystal ball, magic wand or rabbit’s foot with respect to making calls on emerging markets. That being said, however, we do possess what we continue to believe is the most robust model for quantifying risk across emerging market economies (i.e. our EM Crisis Risk Index).

 

And on this model, South Africa scores most poorly at the current juncture:

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - EXPLANATION TABLE

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - AGGREGATED RISK

 

South Africa’s key risks are concentrated in Pillar I (i.e. external sector risks) and Pillar IV (i.e. political and regulatory risks):

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - SUMMARY TABLE

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - PILLAR I

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - PILLAR IV

 

One of South Africa’s key issues is the fact that policymakers have failed to respond to ~18M of consensus expectations for [and actual] US monetary and fiscal policy tightening with credible tightening of their own. The current account deficit is actually wider now as a percentage of GDP versus its TTM average (-6.2% and -5.6%, respectively), while the sovereign budget deficit is little changed as a percentage of GDP versus its TTM average (-4.9% and -5.1%, respectively).

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - CURRENT ACCOUNT BALANCE

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - BUDGET BALANCE

 

Now, the country is at risk of meaningful capital outflows, while at the same time seeing reduced current account inflows from falling commodity prices. It’s worth noting that raw materials account for over half of South African exports (55%), with the slowing Chinese economy being its key export market at 14% of the total.

 

In light of the aforementioned dynamics, it’s no surprise to see the South African rand (ZAR) has dropped -5.2% vs. the USD over the past month; that’s the third worst spot return of the 24 EM currencies tracked by Bloomberg. We anticipate further downside over the intermediate term.

 

Our Model Suggests Cyclical Risks Are Mounting As Well In South Africa

The South African Reserve Bank (SARB) finds itself in quite the policy conundrum. On one hand, the Monetary Policy Committee (MPC) is projecting full-year growth in a range of +1.5-1.7%, which would be the slowest pace since 2009. On the other hand, inflation has exceed their +3-6% target for the past five months.

 

Layer on the fact that the SARB needs to find a replacement for Governor Gill Marcus who is stepping down from her post in November after just one term, and we clearly have a central bank that is squarely under pressure from both an economic and political standpoint. Pressure bursts pipes in emerging markets.

 

One key overhang on South African growth specifically are “managed” blackouts that are weighing heavily upon Industrial Production growth and Business Confidence trends. The state-owned Eskom Holdings SOC Ltd, which provides 95% of the country’s electricity, is facing a 225B ZAR ($20B) funding shortfall through 2018, which is forcing it to ration power during peak periods. Its 33.2 gigawatts of daily available capacity in the YTD is a mere 4% above estimated peak demand of 31.8 gigawatts, which is well shy of the 15% international norm. The current blackouts are eerily reminiscent of the 2008 blackouts that forced mine closures and were declared a national emergency.

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - INDUSTRIAL PRODUCTION

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - BUSINESS CONFIDENCE

 

This net result of these economic factors is that we see the South African economy mired in the stagflationary scenario that is Quad #3 on our GIP model for the balance of the year.

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - SOUTH AFRICA

 

Investment Conclusion: Short the EZA

Our Tactical Asset Class Rotation Model (TACRM) is generating a “SELL” signal for the iShares MSCI South Africa ETF (EZA). Moreover, TACRM is also generating “high-conviction SELL” signals for both EM Equities and Commodities, as well as a “low-conviction SELL” signal for Foreign Exchange. All three of these primary asset class signals corroborate the aforementioned “SELL” signal being generated for South African equities.

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - TACRM Heat Map

 

HUNTING FOR SHORT IDEAS IN THE EM SPACE? LOOK NO FURTHER THAN SOUTH AFRICA - TACRM Summary Table

 

In the context of these quantitative signals and the fundamental risks highlighted above, we believe South African equities are great short opportunity at current prices. We see probable downside to at least the 2013 lows of $53.61 (-16.2%) over the intermediate term.

 

Have a great night,

 

DD

 

Darius Dale

Associate: Macro Team


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next