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Instructing The Masses

This note was originally published at 8am on November 16, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If the masses were going to run the world, they would need a lot of instruction.”

-Sylvia Nasar

 

That’s a quote from Nasar’s recently published book “Grand Pursuit” where she explains how one of Yale’s “great men”, J. Willard Gibbs (chemist, mathematician, physicist), thought about a globally interconnected world at the turn of the 20th century (page 147).

 

The late 1800s and early 1900s were a very formative time for the study of economics. That’s when mathematicians got involved. Quantifying the qualitative is important. The fear-mongering styles of Malthus, Carlyle, and Marx were replaced by new lines of thinking from the likes of Marshall, Schumpeter, and Fisher. Re-thinking was good.

 

Since then, we’ve had a long, hard, muddle through nerdy economic debates about Hayek vs Keynes, Rand vs Bureaucrats, and Capitalism vs Socialism. But we really haven’t evolved the process by which we apply modern day math (Chaos and Complexity Theory) to how we’re thinking about economies and markets.

 

Since Chaos Theory is the most relevant mathematical conclusion since relativity, I think there is plenty of re-working and re-thinking to be done. Instructing The Masses on how markets work will take time. It’s time that I am personally willing to make.

 

Back to the Global Macro Grind

 

One of the gaping voids that’s obvious to anyone who has studied a Yale or Princeton economics textbook is the behavioral side of markets that plays such a critical role in the decision making of market participants. Kahneman, Tversky, and Taleb have all contributed significantly to qualifying the impact psychology has on markets, but we are still in the very early days of applying these learnings.

 

Quantifying sentiment is very difficult. I’ve been on the road seeing clients from Denver to Kansas City to San Diego, Boston, and New York in the last 6 weeks – and the #1 question I get is “what are you hearing.”

 

What I am “hearing” and what my risk management models are seeing are quite often very different things. But since our industry has effectively become one gargantuan front-running exercise of trying to beat the market’s beta, it’s a question that modern practitioners of asset management have to constantly evaluate.

 

What’s sentiment right now?

 

Well, from a Global Macro perspective, there’s not one answer that fits nicely in a baby blue box with a Tiffany bow on it. Sorry. Asian stock markets continued to fall, hard, last night. China was down another -2.5%, and India remains under inflation’s pressure (Sensex down another -0.6%). The Euro, European Bonds, and European Equities remain a mess.

 

From a US stock market “sentiment” perspective, one of the best contrarian readings I can give you is measured by looking at the spread between Bulls and Bears in the II Survey (comes out every Wednesday):

  1. In late September, the spread was bearish (meaning more Bears than Bulls) on the order of -1900 basis points (19%)
  2. After October’s rally (the biggest ever in US stock market history), the Bullish to Bearish spread flattened to even
  3. This morning, the spread has widened to +1500 basis points (Bulls 47.4% minus Bears 32.6% = +15%)

And while that’s only 1 factor I’m observing in my multi-factor, multi-duration, risk management model – my spidey senses say that sounds just about right. Hedge Funds fear being short. Mutual Funds fear missing Santa Claus. Central planners fear-monger.

 

Back to where I started this morning’s note, I think we’re a lot smarter than staring at the futures on TV this morning looking for an emotional direction. Mediocre minds are not going to lead us anywhere but lower. We need to be the change we all want to see in our analytics.

 

While Big Government Interventionists and the ad dollars that support them think that all of this is going to end according to their central plan, globally interconnected markets have a not so funny way of getting in the way of that…

 

My Top 3 globally interconnected points confirming Asian, European, and North American stock market weakness this morning are:

  1. Chinese Demand: Hong Kong trading down -2% well below TREND line support of 20,297 on the Hang Seng
  2. Dr Copper: down another -1% to $3.48/lb, remaining in what we call a Bearish Formation (bearish TRADE, TREND, and TAIL)
  3. US Treasury Yields: continue to signal that both US and Global Growth are slowing (TRADE resistance for 10-yr yields = 2.15%)

Of course the Euro collapsing versus the US Dollar remains the #1 Correlation Risk factor affecting Global Macro markets. But you already know that – because our Instructing The Masses since founding the firm in 2008 has been consistently backed by the math.

 

My immediate-term support and resistance ranges for Gold, Oil, France CAC, German DAX, and the SP500 are now $1747-1810, $96.92-100.33, 3037-3176, 5820-6089, and 1237-1269, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Instructing The Masses - Chart of the Day

 

Instructing The Masses - Virtual Portfolio


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THE M3: S'PORE GDP OUTLOOK; CPI; VISITOR EXPENDITURE

The Macau Metro Monitor, November 21, 2011


 

SINGAPORE SAYS ECONOMIC GROWTH MAY SLOW TO 1% TO 3% IN 2012 BusinessWeek

3Q GDP grew a seasonally-adjusted 1.9% QoQ, missing estimates of 2.0% growth.  Retail sales weakened, falling for the first time in seven months in September, while growth in credit-card billings has slowed, signaling spending at hotels, restaurants and department stores may moderate.  Singapore Ministry of Trade and Industry (MTI) said the economy will likely weaken in 4Q alongside deteriorating external macroeconomic conditions and a pullback in biomedical output growth.

 

MTI also mentioned that 2012 growth may slow to 1-3%.  Furthermore, the government’s 2012 GDP forecast “does not factor in downside risks to growth, such as a worsening debt situation or a full-blown financial crisis in the advanced economies,” it said. “Should these risks materialize, growth in the Singapore economy in 2012 could come in lower than expected.”

 

CONSUMER PRICE INDEX FOR OCTOBER 2011 DSEC

Oct CPI increased 6.71% YoY and 0.58% MoM.

 

VISITOR EXPENDITURE SURVEY FOR THE 3RD QUARTER 2011 DSEC

Total spending (excluding gaming expenses) of visitors reached MOP 12.1 BN in 3Q 2011, +25% YoY; per-capita spending of visitors amounted to MOP 1,633, an increase of 7% YoY.  The average length of stay of visitors was identical to 3Q 2010, at one day.  


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 21, 2011

 

The bull markets we see are in the US Dollar (UUP), Long-term Treasuries (TLT), and Growth Slowing (FLAT).  As we look at today’s set up for the S&P 500, the range is 40 points or -1.29% downside to 1200 and 2.00% upside to 1240. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 1121

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 


EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +411 (+2289) 
  • VOLUME: NYSE 955.68 (-6.73%)
  • VIX:  +32.00 -7.27% YTD PERFORMANCE: +80.28%
  • SPX PUT/CALL RATIO: 1.05 from 2.14 (-50.93%)

 

CREDIT/ECONOMIC MARKET LOOK:

 

  • TED SPREAD: 48.78
  • 3-MONTH T-BILL YIELD: 0.00%
  • 10-Year: 2.01 from 1.96    
  • YIELD CURVE: 1.72 from 1.69

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed, est. 0.19, (prior -0.22)
  • 0am: Existing home sales, est. 4.8m, prior 4.91m
  • 11:30am: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 1pm: U.S. to sell $35b 2-yr notes
  • 2:30pm: Fed’s Lockhart to speak on economy in Brazil
  • 8 pm: Fed’s Bullard gives welcoming remarks in St. Louis

 

WHAT TO WATCH: 

  • Bipartisan supercommittee said to be on brink of failure, setting stage for $1.2t in automatic spending cuts
  • Deutsche Bank CEO Josef Ackermann said yesterday Europe needs a “firewall” to prevent its debt crisis from spreading and should increase the size of its rescue fund
  • Deadline today for the Congressional Budget Office to receive information for scoring a proposal in advance of supercommittee target date of Nov. 23; Democratic aide says supercommittee likely will announce today that it can’t reach agreement on deficit savings

 

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Hedge Funds Cut Bullish Bets by Most in Seven Weeks: Commodities
  • Gold May Drop as Spanish Opposition Victory Curbs Haven Demand
  • Oil Falls to Lowest in a Week on Asian Demand, European Crisis
  • New Cameco Bid Topping Rio Seen in Record Hathor Value: Real M&A
  • Oil Bets Jump to Six-Month High Before Seaway: Energy Markets
  • Dana Gas Yields Jump Most in Month on Debt Risk: Islamic Finance
  • Copper Set for ‘Strong Rally’ in 2Q on Deficit, Goldman Says
  • Mechel ‘Lucky’ Paying Less Than Norilsk on Loans: Russia Credit
  • Graff Diamonds to Use Planned IPO Proceeds on Asia Stores
  • Gold Falls to 3-Week Low as Stronger Dollar Cuts Investor Demand
  • Tin Exports From Indonesia May Drop 26% This Month on Curbs
  • Copper Imports by China Gain for a Fifth Month on Arbitrage
  • Rubber Blacklist Proposal May Cut Defaults, Thai Group Says
  • Copper Falls for Third Day as Growth Concerns Threaten Demand
  • Temasek, ADM, Mitsui to Invest in New Hope Agriculture Fund
  • Newfoundland’s Oil Royalties Fund Debt Reduction: Canada Credit
  • ABB, Siemens to Benefit From Commodity Mkt Strength: Citigroup
  • OPEC’s Meeting in December Will Be ‘Comfortable,’ Badri Says
  • UniCredit Names Fischer Co-Head of Project & Commodity Finance

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

CURRENCIES

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

 

SPAIN  - center right government = austerity = European Stagflation; if Singapore thinks they only to +1-3% GDP growth in 2012, the Europeans could be down -2-4% GDP in no time. European stocks getting rocked and now all major European tapes back in Bearish Formations (bearish across all 3 of my risk management durations); Greece -60% since FEB


THE HEDGEYE DAILY OUTLOOK - euro performance

 


ASIAN MARKETS

 

SINGAPORE – these guys are now being as explicit as we have seen them since 2008 about Global Growth Slowing (the Monetary Authority of Singapore: “The world economy and financial system are at their most fragile state since the 2008-2009 global financial crisis”); both HK and India continued to crash overnight (down -25.3% and -22.2% respectively from YTD tops)

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

  • New York Man Charged With Plotting Pipe-Bomb Attacks in City
  • Fatal Egypt Clashes Fuel Investor Concern Before First Vote
  • Dana Gas Yields Jump Most in Month on Debt Risk: Islamic Finance
  • Assad Defiance in Syria Spurs U.S., Allies to Mull New Steps
  • Egyptian Protesters, Forces Clash for Third Day Before Election
  • Saudi Aramco CEO Sees Risk of World Double-Dip Recession
  • OPEC’s Meeting in December Will Be ‘Comfortable,’ Badri Says
  • Iranian Airline Buys Mothballed Merkel VIP Jet, Spiegel Says
  • Kuwait Opposition Groups Plan Protest Tonight to Oust Premier
  • Saudi Arabia’s Oil Minister Says ‘Very Happy’ With Crude Prices
  • Majid Al Futtaim Seeks to Raise About $500 Million From Sukuk
  • Fawaz Al Hokair May Tap Debt Markets in 2012, CFO Says
  • Dubai’s Shares Retreat to Month Low on U.S. Impasse, Europe Risk
  • Iran Says Oil Market Will Suffer If Its Exports Disrupted
  • Al Futtaim Group Says in Final Stage to Raise $1 Billion Loan
  • Yara, Hydro Raise Salaries for Qataris Amid New Rules: DN Link
  • Shuaa Sinks to Eight-Year Low on Firing Plan, Quarterly Loss
  • Majid Al Futtaim Seeks to Raise About $500 Million From Sukuk

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

The Hedgeye Macro Team

Howard Penney

Managing Director


MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER

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* The TED spread made a new YTD high at 49 bps, again signaling that risk in the banking system continues to rise. Until we see either stabilization or a reversal in this trend Financials investors should not assume the systemic risks are being properly addressed.

 

*Despite newly elected governments in Italy and Spain, credit default swaps for Eurozone countries mostly widened on Monday. Spanish and French swaps were particularly noteworthy widening by 8% and 12%

 

Margin Debt expanded in October to $283B, up from $262M in September.  The increase reflects the massive move in the market in that month, and reminds us yet again that the retail investor usually buys high and sells low. As a reminder, our analysis shows margin debt is highly cointegrated with the market over long periods of time, and importantly hit an important cycle peak in April 2011. We walk through this in greater detail below.

  

* Our macro quantitative model indicates that the short term (TRADE) downside/upside setup in the XLF is currently around 1 to 1 (2.3% downside vs. 2% upside).

 

Margin Debt in October

We publish NYSE Margin Debt every month as soon as it’s released. 

 

The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1.

 

While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which retraced back to +0.43 standard deviations in September, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in October’s print of +0.78 standard deviations. But overall, this setup represents an ongoing material headwind for the market.  

 

One limitation of this series is that it is reported on a lag.  The chart shows data through October.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Margin Debt

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 1 of 11 improved / 6 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 6 of 11 worsened / 4 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 8 of 11 worsened / 2 of 11 unchanged

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Summary

 

1. US Financials CDS Monitor – Swaps widened for 26 of 27 major domestic financial company reference entities last week.   

Widened the most vs last week: RDN, MET, XL

Widened the least/ tightened the most vs last week: COF, UNM, MMC

Widened the most vs last month: GS, MS, RDN

Tightened the most vs last month: MBI, GNW, MMC

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - CDS  US

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 39 of the 40 reference entities. The average widening was 8.1% and the median widening was 13.6%.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - CDS  Europe

 

3. European Sovereign CDS – European sovereign swaps mostly widened last week. Spanish sovereign swaps widened by 8% (+36 bps to 463) and French by 12% (+25 bps to 227).

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 24 bps last week, ending the week at 8.06 versus 7.82 the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - High Yield LT

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 5 points last week, ending at 1587.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - LLI LT

 

6. TED Spread Monitor – The TED spread hit another YTD high rising 3.1 points last week. It ended the week at 48.8 versus last week’s print of 45.7. 

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - TED spread LT

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 0.48 points, ending the week at -22.8 versus -23.3 the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - JOC LT

 

 8. Greek Yield Monitor – The 10-year yield on Greek debt fell 26 bps last week, ending the week at 2819 bps.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Gr Bond LT

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads widened, ending the week at 183 bps versus 172 bps the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - MCDX

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index rose 60 points, ending the week at 1895 versus 1835 the prior week.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - Baltic Dry Index

 

11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 172 bps, 9 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.3% upside to TRADE resistance and 2.0% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: TED SPREAD MAKES NEW HIGHS WHILE EU SOV DEBT FALLS FURTHER - XLF macro setup

 

Joshua Steiner, CFA

 

 

Allison Kaptur

 

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Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%
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