“Pretend inferiority and encourage his arrogance.”
On this day in 1815, Napoleon Bonaparte began his exile on the island of St. Helena. For the next six years, mostly in isolation, Napoleon would write his memoirs before eventually succumbing to what most physicians now believe was stomach cancer. Despite an ending that was less than triumphant, Napoleon had a pretty stellar career for a short guy.
At the age of 29, when most of us were just finishing with our MBA studies, or just finishing the third level of the CFA if we were really contrarian and didn’t get an MBA, Napoleon took control of France via a coup d’etat and named himself First Consul. Four short (no pun intended) years later, Napoleon named himself Napoleon I, Emperor of the French.
Over the next decade he would lead France in the Napoleonic wars and eventually conquer most of continental Europe. It is believed that Napoleon fought 60 battles and lost only seven, a record of conquest that is almost unprecedented. So much so that the great English General Wellington, when asked who the greatest general of the time was, he responded:
“In this age, in past ages, in any age, Napoleon.”
But, alas, even the great Napoleon eventually had an off day of performance. While he was eventually and finally defeated at the famous battle of Waterloo, his off performance actually came a few years earlier in the Invasion of Russia. Although French troops were able to beat back the Russians past Moscow, by the time Napoleon’s army returned to France its numbers had dwindled down to some 40,000, despite starting at more than 400,000.
Speaking of performance, Blackrock recently published a report that showed in aggregate the hedge fund industry has produced negative alpha for the first half of the year. Similar to this, a recent report by eVestment showed “in the first seven months of the year, 79.58% of the overall portfolio volatility within the 30 largest hedge funds in its data universe could be explained by systemic or market risk.” Levered beta anyone?
If there is a moral of the story it is that even the best generals have off days. So if this year has been challenging from a performance perspective . . . channel your inner inferiority complex, go back to your contrarian roots, and fight on!
Back to the Global Macro Grind…
We’ve obviously been tooting our revolutionary horns fairly loudly on the concept that the economy is, or has, entered #Quad4, which is characterized by slowing growth and decelerating inflation. For those that are holding out that the economic growth may be better than expected, they point to the U.S. employment picture, which, admittedly, has been strong.
In the Chart of the Day, which is titled “Payroll Growth That Would Even Make Napoleon Proud”, we highlight the dramatic improvement in the labor market, but the caveat of course is that the labor market is unlikely to get much better from here. As my colleague Christian Drake (@HedgeyeUSA ) wrote when posting the note with this chart in it:
“At +1.93% YoY, Nonfarm payrolls in September recorded their fastest rate of improvement since April 2006. The current pace of improvement is inline with peak growth in the last cycle and may be as good as it gets given the demographic and labor supply headwinds and the secular slowdown in employment growth over the last 30 years.”
In terms of global growth, the Bank of Korea this morning lowered their domestic growth forecast for 2015 and cut rates to a four year low. While Korea certainly doesn’t yield the economic power of the U.S., it is still one of the largest 15 economies on the planet and this is just another sign that growth expectations are being lowered globally.
With global growth continuing to decelerate and U.S. growth and employment likely peaking at best, the only risk to the Fed not getting incremental dovish is inflation. Unfortunately, signs of inflation are benign at best. One of the best commodity proxies for inflation, oil, is down more than 10% in a straight line over the past two weeks (making our MLP Short thesis even juicier!). As well, 10-year break evens shrank to 1.9%, the narrowest spread since June 2013. #Quad4 anyone?
The question, as always, of course is where to find the alpha even if we are right on the economy. One area that we believe continues to be ripe with short ideas, as noted above, is the Upstream MLP Sector. Our Energy Sector head Kevin Kaiser will be doing a conference call this coming Wednesday to provide his updated thoughts on the sector. With oil in free fall and likely to decline further due to U.S. production growing and global demand at five year lows, cash flow coverage will be very, very tight for MLPs. If you’d like to join the call, please ping firstname.lastname@example.org.
The other area we’ve been pounding the table on in terms of finding shorts is the small cap space in general. Interestingly, according to a Bloomberg article this morning the most shorted stocks in the Russell 2000 have fallen 15% in the last month, which is almost three times the underling gauge.
Even as the Russell 2000 has underperformed dramatically in the year-to-date, it is important to note that stocks in the Russell are trading at 24.8x P/E versus 15.6x for the SP500. Given that valuation dichotomy, the Russell may well still be the Waterloo of small cap growth investors this year who try to buy the dip.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.19-2.36%
WTI Oil 80.07-86.20
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Takeaway: Purchase demand declined -0.7% W/W and is tracking +2.5% Q/Q. The largest retreat in rates in over a year juiced refi activity +10.6% W/W.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.
Today's Focus: MBA Mortgage Applications
MBA Mortgage Applications
The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended October 10th.
- Total Mortgage Applications rose +5.6%% W/W buoyed by the +10.6% rise in refi activity alongside the largest sequential decline in rates in over a year
- Purchase Activity declined a modest -0.7% W/W after last week’s bounce above the 170-level on the index. 4Q is currently tracking +2.5% Q/Q with the YoY improving to -4.1% in the latest week. Comps continue to ease significantly against 4Q13 and into 1Q next year as we lap the collective shock of rising rates, QM implementation, and FHA loan limit reductions.
- Refinance activity rose +10.6% W/W, on the back last week’s 5% rise, as rates retreated a full -10bps to 4.20%. After dropping -13bps in the last two weeks, rates are now back at their lowest level YTD and the lowest level since June of last year.
About MBA Mortgage Applications:
The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
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.
This note was originally published at 8am on October 01, 2014 for Hedgeye subscribers.
“The triumphant success of Hong Kong demands - and deserves - to be maintained.”
Charles, The Prince of Wales
The crowds of tens of thousands in Hong Kong are swelling in number. Today, Chinese National Day, the numbers are likely to increase significantly. While started by students, all facets of the population are represented. One can only be in awe at how so many can demonstrate peacefully, even in the face of harsh and utterly unnecessary police tactics: Not one single shop window has been broken in 5 days of protest.
Back to the Global Macro Grind…
How did this all get started?
In the run-up to the 1997 Handover of Hong Kong, Universal Suffrage was promised under Article 45 of the Basic Law. In 2004, the National People’s Congress said this would not occur before 2012. In 2007, the NPC pushed the date to 2017. In 2014, Universal Suffrage is redefined: Everyone can vote, but only for the 2 or 3 candidates pre-selected by Beijing. The serious matter of a peoples’ freedom to elect their leaders has been made a farce by the Central Government and the current Hong Kong leadership.
Over the summer, Beijing completely misread the situation thinking that its version of a seemingly democratic process would be sufficient to keep the Hong Kong people at bay. Yet the proposal was so far off the mark and without any room for negotiation that a tipping point was reached.
While Beijing is known for digging in and using all means necessary to obtain its will, it appears the people of Hong Kong are willing to do the same this time around. There is no quick solution given Hong Kong Chief Executive CY Leung’s unwillingness to work for the Hong Kong people he supposedly represents. Leung’s administration has fantastically mismanaged this situation.
The Central Government needs this win. A loss of face isn’t the primary concern: The very survival of the Communist Regime is at stake in the eyes of China’s leaders. No progress is being made at containing unrest in Xinjiang Province where Uyghur separatist are claiming the region.
To add to Beijing’s woes, the Chinese economy is cooling quickly. Fixed assets investment is slowing both sequentially (as of AUG) and on a trending basis – as are retail sales, exports and imports. Manufacturing PMI and consumer confidence are also slowing on a trending basis as of SEP and AUG, respectively. Additionally, the property market is in dire straits, as Darius Dale details in a note yesterday titled, “DEFCON 2.5: The “China Overhang” Is Likely To Continue”.
Already, we have seen a few, albeit small, public gatherings in large cities supporting the protesters in Hong Kong. What if demonstrations spread beyond Hong Kong?
In the last few days, the world has experienced an unprecedented crack-down on social media and freedom of speech to prevent just that from happening. But we know very little about it in the United States. One would need to live in the PRC to experience it. It’s hard for us to imagine what the internet looks like when one only gets to see a carefully selected portion of it. Overnight, there are reports of a Trojan virus aimed at infiltrating the iPhones of HK protesters. Make no mistake, this is a first rate electronic communications war being played out in front of us.
How will the world react to all of this? The United Kingdom, as former colonial masters, surely has a moral responsibility. But the West is and will be reluctant to take a stand against China. Cross-strait relations also play a factor: Beijing continues to strive for a unified China, inclusive of Taiwan. The wrong action in Hong Kong could further alienate the Taiwanese people.
Unless the protesters get tired we will all be watching this for some time. There will be economic impact. But the big changes will play out in the long term.
Can democracy thrive in Hong Kong? And will this lead to a softening of the regime in Beijing?
The people of Hong Kong appear ready to find out.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.46-2.55% (bearish)
SPX 1957-1986 (neutral)
RUT 1090-1026 (bearish)
EUR/USD 1.26-1.38 (bearish)
WTIC Oil 90.16-94.42 (bearish)
President and Resident of Hong Kong
TODAY’S S&P 500 SET-UP – October 15, 2014
As we look at today's setup for the S&P 500, the range is 68 points or 0.94% downside to 1860 and 2.68% upside to 1928.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.82 from 1.83
- VIX closed at 22.79 1 day percent change of -7.51%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, Oct. 10 (prior 3.8%)
- 8:30am: Empire Manufacturing, Oct., est. 20.25 (prior 27.54)
- 8:30am: Retail Sales Advance m/m, Sept., est. -0.1% (pr 0.6%)
- 8:30am: PPI Final Demand m/m, Sept., est. 0.1% (prior 0.0%)
- 10am: Business Inventories, Aug., est. 0.4% (prior 0.4%)
- 10:30am: DOE Energy Inventories
- 11am: Treasury Budget Statement, Sept., est. +$90b (pr +$75.1b)
- 11:30am: U.S. to sell $33b 4W bills, $25b 1Y bills
- 2pm: Federal Reserve releases Beige Book
- 2pm: ECB’s Draghi speaks in Frankfurt
- Senate, House out of session
- Sec. of State Kerry travels to Vienna for meeting with EU High Rep. Catherine Ashton, Iranian Foreign Minister Javad Zarif on nuclear negotiations
- 8:30am: PepsiCo CEO Indra Nooyi announces nutrition project hosted by Inter-American Development Bank
- 10am: Supreme Court hears arguments in patent case over generic competition to Teva’s multiple-sclerosis drug Copaxone
- U.S. ELECTION WRAP: Colo. Races; HRC on Trail; Money Reports Due
WHAT TO WATCH:
- AbbVie Weighing Shire Breakup Sends Inversion Target Shares Down
- Toyota Recalls 1.75m Autos to Fix Brakes, Fuel Leaks
- Qualcomm Agrees to Buy U.K. Chipmaker CSR for $2.5b
- Carnival to Help Build China’s First Cruise Ship as Demand Rises
- Second Health-Care Worker Tests Positive for Ebola in Texas
- Lenovo ‘Confident’ of Closing Motorola Mobility Deal This Year
- Obama Pushes Allies as Doubts Grow on Islamic State Strategy
- U.K. Unemployment Falls More Than Forecast as Wages Improve
- ASML Forecasts Quarterly Sales Beating Estimates on Memory Chips
- BofA Said Hired by Buyout Firms to Sell Turkey Memorial Stake
- Broker Lobby Group Sees Conflicts in Nasdaq SIP Upgrade Process
- Trump Casino’s Fate, Union Fight to Be Decided by End of Week
- Bank of America (BAC) 7am, $0.32 - Preview
- BlackRock (BLK) 6:30am, $4.66
- Charles Schwab (SCHW) 8:45am, $0.24
- Commerce Bancshares (CBSH) 7am, $0.71
- IGate (IGTE) 6:09am, $0.52
- KeyCorp (KEY) 6:30am, $0.26
- MGIC Investment (MTG) 7am, $0.11 - Preview
- PNC Financial (PNC) 6:30am, $1.70
- St Jude Medical (STJ) 7:30am, $0.96 - Preview
- American Express (AXP) 4:05pm, $1.37
- Boston Private Finl (BPFH) 4:05pm, $0.21
- eBay (EBAY) 4:15pm, $0.67 - Preview
- El Paso Pipeline (EPB) 4:07pm, $0.39
- Kinder Morgan (KMI) 4:05pm, $0.32
- Kinder Morgan Mgmt (KMR) Aft-Mkt, $0.56
- Las Vegas Sands (LVS) 4:01pm, $0.82
- Netflix (NFLX) 4:05pm, $0.91 - Preview
- Platinum Underwriters (PTP) 4pm, $1.32
- RLI (RLI) 4pm, $0.59
- Umpqua (UMPQ) 4:05pm, $0.29
- United Rentals (URI) 4:15pm, $2.08
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Brent Extends Biggest Plunge Since ’11 on Glut; WTI Nears $80
- OPEC Finding U.S. Shale Harder to Crack as Rout Deepens: Energy
- Brent Slump Seen Stalling Near $80 as Bear-Market Oil Oversold
- Gold Imports by India Seen Rising More Than Fourfold Last Month
- Bugs Join Robots to Overcome Global Copper Shortage: Commodities
- Bloomberg Commodities Index Falls to Lowest Since July 2009
- Palm Imports by India Surge for Third Month on Tax-Free Sales
- Australia, Brazil Seen Taking 90% of Worldwide Iron Ore Trade
- Copper Falls From Three-Week High on Chinese Inflation Figures
- Palm Tumbles to Three-Week Low as Crude Oil Slump Reduces Demand
- Gold Drops a Second Day on Dollar to Lower Demand After Advance
- Corn Drops From Five-Week High as Drier Weather May Help Harvest
- Palm Declines to Two-Week Low as Crude Oil Slump Reduces Demand
- Rio Says Don’t Panic on Iron Ore And Won’t Halt Returns
- Rubber Drops From Two-Week High as China Data Signal Weak Demand
The Hedgeye Macro Team