THE HEDGEYE BREAKFAST MONITOR
Comments from CEO Keith McCullough
I couldn’t make up this #1 Headline on Bloomberg this morn if I tried – “STOCKS, OIL CLIMB ON GLOBAL ECONOMIC RECOVERY”:
- RUSSIA – which is obviously a PetroDollar Equity market continues to rage higher as inflation expectations do. The RTSI is up another +2.4% this morning and +22% for the YTD as President Obama blames oil rising on “Wall Street Speculators” (dollar down be damned)
- COPPER – the Doctor just doesn’t agree with this manic media headline at all – neither does the 10yr UST yield – both are failing at critical lines of resistance of $3.85/lb and 2.03%, respectively, this morning. Those who confuse inflation with growth will be doing it for the 3rd time since 2008.
- YEN – How one of the world’s top 3 currencies can collapse like this and it not be called out by consensus is far beyond my reach. The Yen is down -6% for the month-to-date! Its not a straight line down, but its close – reminds me of the Euro falling off its highs in April of 2011 and consensus saying “hey, buy European exporters!” – we continue to see this sov debt maturity spike (March) in Japan as the why on Yen…
I’m net long equities for this morning’s open and I shouldn’t be. High Frequency Gambling at this pt.
YUM: Yum’s Taco Bell will debut a new marketing campaign this weekend centered on a new “Live Más” slogan.
MCD: McDonald’s is offering the McBaguette in France; a Charolais burger served on a baguette.
COSI: Cosi has regained compliance with Nasdaq listing standards.
NOTABLE PERFORMANCE ON ACCELERATING VOLUME:
SONC: No news hitting the tape but we believe that SONC is a big beneficiary of weather this year – the weekend of February 5thsaw Texas covered with snow from the Rio Grande to the Oklahoma border.
THI: Tim Hortons gained 4% on accelerating volume thanks to strong earnings hitting the tape yesterday before market open.
JACK: Jack in the Box declined on earnings.
DRI: Darden is hosting its Analyst Day in NYC today. In an interview with CNBC yesterday, CEO Clarence Otis said that shrimp costs are up and also that he sees good fundamentals at Olive Garden.
TODAY’S S&P 500 SET-UP – February 24, 2012
As we look at today’s set up for the S&P 500, the range is 15 points or -0.69% downside to 1354 and 0.41% upside to 1369.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: 1314 (-1906)
- VOLUME: NYSE 763.09 (4.67%)
- VIX: 16.80 -7.64% YTD PERFORMANCE: -28.21%
- SPX PUT/CALL RATIO: 2.12 from 2.15 (-1.40%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 40.42
- 3-MONTH T-BILL YIELD: 0.09%
- 10-Year: 2.00 from 2.00
- YIELD CURVE: 1.70 from 1.70
MACRO DATA POINTS (Bloomberg Estimates):
- 9:55am: UMichigan Consumer, Feb (F), est. 73 (prior 72.5)
- 10:00am: New Home Sales, Jan., est. 315k, up 2.6% (prior 307k)
- 10:45am: Fed’s Williams speaks in New York
- 11:35am: Fed’s Bullard speaks on housing, monetary policy in New York
- 1pm: Baker Hughes rig count
- 1:30pm: Fed’s Plosser, Dudley speak on monetary policy in New York
- President Obama meets with Danish PM Helle Thorning-Schmidt to discuss European debt crisis in Chicago
- U.S. Dept of Agriculture discusses crop outlook
- Mitt Romney addresses Detroit Economic Club, 11:30am
- House, Senate meet in pro forma sessions
- NRC advisory panel meets to consider NextEra Energy Inc.’s Turkey Point extended power application, 8:30am
- FCC meets on provisions of National Broadband plan, 9am
WHAT TO WATCH:
- Apollo Global, others said to be near deal to acquire El Paso’s oil-exploration business for about $7b
- Purchases of new homes in U.S. probably rose 2.6% in January to a nine-month high, economists est.
- Bank of America is stopping sale of new home loans to Fannie Mae
- Wynn Resorts’s Macau unit ejected Kazuo Okada from its board; Phillipine President Aquino orders probe
- Lloyds posted full-year net loss that missed est.; Volkswagen reported record profit
- U.K. GDP shrank 0.2% in 4Q, in line with forecast
- Apple said to buy search startup Chomp for $50m
- Watch Watson Pharma; last business day before Feb. 26 PDUFA decision date on Prochieve for prevention of preterm labor
- G-20 finance ministers, central bank presidents to meet in Mexico City this weekend
- Warren Buffett to release annual letter to Berkshire Hathaway shareholders tomorrow
- Enerplus (ERF CN) 6 a.m., C$0.23
- Alpha Natural Resources (ANR) 7 a.m., $0.26
- Endo Pharmaceuticals Holdings (ENDP) 7 a.m., $1.32
- Interpublic Group (IPG) 7 a.m., $0.39
- Pepco Holdings (POM) 7 a.m., $0.19
- Telephone & Data Systems (TDS) 7 a.m., $0.25
- Warner Chilcott (WCRX) 7 a.m., $0.90
- United States Cellular (USM) 7:04 a.m., $0.24
- Eldorado Gold (ELD CN) 7:30 a.m., $0.20
- EW Scripps (SSP) 7:30 a.m., $0.10
- J.C. Penney (JCP) 7:50 a.m., $0.67
- Pinnacle West Capital (PNW) 8 a.m., $0.04
- Washington Post (WPO), 8:30am, NA
- American Water Works (AWK) 4:30 p.m., $0.33
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
We couldn’t make up this #1 Headline on Bloomberg this morning if we tried – “STOCKS, OIL CLIMB ON GLOBAL ECONOMIC RECOVERY”
COPPER – the Doctor just doesn’t agree with this manic media headline at all – neither does the 10yr UST yield – both are failing at critical lines of resistance of $3.85/lb and 2.03%, respectively, this morning. Those who confuse inflation with growth will be doing it for the 3rd time since 2008.
- Copper Traders Most Bullish in Two Months on Demand: Commodities
- U.S. Soybean Output May Rise to 3.25 Billion Bushels, USDA Says
- Oil Rises a Seventh Day in Longest Winning Streak in Two Years
- Gold May Gain in London as Weaker Dollar Spurs Investor Demand
- Corn Declines as U.S. Acreage Expands, Ukraine Sales to Climb
- Oenophile Chinese Purchase Bordeaux for $470 Mainland Bottles
- Copper Heads for First Weekly Gain in Three Before U.S. Data
- Rubber Caps Best Gain in Five Weeks as Oil Rally Boosts Appeal
- Statoil $1.2 Billion Tanzania Find May Hold Oil in New Play
- Billionaires Vie for Railway to $40 Billion Coal Region: Energy
- Glencore Will Notify EU of Xstrata Bid for Merger Review
- Baosteel Spurs Dim Sum Revival on Cost Advantage: China Credit
- Mentor of Central Bankers Fischer Rues Complacency in New Growth
- Billionaires Vie for Australian Coal Rail
- Gold’s Bull Run May Drive Price to $5,000, Wyke Forecasts
- Cotton Exports From India Slows as Crisis Cools Apparel Demand
- U.S. Corn Crop May Reach Record 14.27 Billion Bushels, USDA Says
RUSSIA – which is obviously a PetroDollar Equity market continues to rage higher as inflation expectations do. The RTSI is up another +2.4% this morning and +22% for the YTD as President Obama blames oil rising on “Wall Street Speculators” (dollar down be damned).
YEN – How one of the world’s top 3 currencies can collapse like this and it not be called out by consensus is far beyond my reach. The Yen is down -6% for the month-to-date! It’s not a straight line down, but its close – reminds me of the Euro falling off its highs in April of 2011 and consensus saying “hey, buy European exporters!” – we continue to see this sovereign debt maturity spike (March) in Japan as the why on Yen…
The Hedgeye Macro Team
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This note was originally published at 8am on February 10, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“You have to be realistic even if you’re an idealist.”
Ideally, the US stock market would never go down (its biggest down day of 2012 = -0.57%). Realistically, that’s not going to happen.
Ideally, you can wrap a Global Macro Risk Management Process up in a baby blue Tiffany box and slap a white ‘here’s what will happen in 2012’ bow on it for your clients. Realistically, you need to do the opposite of that and Embrace Uncertainty, every day.
The aforementioned quote comes from a book I am in the middle of reading right now called “I Shall Not Hate” – a Gaza Doctor’s story about managing life’s risks – those that are far greater than that of a Greek politician’s career this morning.
Back to the Global Macro Grind…
After spending the last few days risk managing with some of our most thoughtful clients in Boston, I came to the simple conclusion that Greece has become a tree within a forest of globally interconnected risks.
The deep simplicity of that conclusion shouldn’t be a surprise. What’s happening to the rest of the world’s Growth and Inflation Expectations certainly didn’t cease to exist because the manic media doesn’t have an analytical process to absorb it.
The Top 3 Risk Management Topics our clients wanted to focus on in the last few days had nothing to do with Greece:
- Japan’s Sovereign Debt Maturity spike in March
- China’s Inflation Rising Post #BernankTax
- Down Dollar = Rising Inflation = Slowing Growth
Unlike some pundit spewing their qualitative views, a Realist Risk Manager (a Buy-Sider) is held accountable to real-time risk ticking on their screen every hour of every day. Being early in this business can also mean being wrong. Being late can also mean you blow up.
Maybe that’s why Japan was such a hot topic on the road. People are no longer allowed to blow up. Blowing up client moneys in 2008 was, allegedly, what “everyone” (other than those of us who didn’t) missed. Getting tagged for another -10-50% loss of capital in 2011, for some, made 2008 + 2011 a trend. And a 3rdtime probably means prepping your resume for an interview at Chipotle.
Why Japan? Why now?
We’ve been making this call since 2010, “The Sovereign Debt Dichotomy”, which attempts to simplify trading the short side of stock markets (long CDS) by waiting and watching for the Keynesian policy makers of that country to bump up against the biggest sovereign debt maturity within their economic region. Timing is critical.
That’s why we got bearish on Spain, then Italy, then France – in that order – in the order that their respective monthly sovereign debt maturities ballooned. After their stock markets imploded, we covered and got out of the way.
In today’s Chart of The Day, you’ll see that Japan’s March Debt Maturity Spike is:
- The largest, nominally, that Japan will ever have to bring to market
- Larger than any other European debt maturity by a considerable margin
Every client pushed our lynx-eyed Asia analyst, Darius Dale, and I on the next obvious question – why aren’t Japanese spreads and CDS blowing out yet?
A: throughout the entire European Sovereign Debt crisis, they didn’t either. They started to when it became clear to the market that their largest maturities couldn’t be absorbed at lower/stable yields.
Ideally, everyone would be able to price everything’s risk, efficiently, in real-time. Realistically, markets don’t trade that way. They trade on the expectations and emotions associated with last price.
Sometimes markets don’t go down, literally, until the day of the “new news”. Look at China in the last 48 hours:
- Inflation Rising = Consumer Price Inflation (CPI) up to 4.5% y/y (versus 4.1% last month)
- Growth Slowing = Chinese Exports down -0.5% y/y (down y/y for the first time in 2 years)
On that “news” this morning, US centric stock market investors who are still staring at the tree (Greece), now have to react to “China Slowing” as a Top 3 Most Read Bloomberg story. Unlike the US stock market, which has not yet had a -1% down day in 2012, Hong Kong was down -1.1% on that (Indonesia -1.7%, South Korea -1.3%, etc.).
Ideally, I’d like to sleep once in a while. Realistically, that’s not going to happen either. Global Macro market risk never sleeps.
My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Shanghai Composite, France CAC, and the SP500 are now $1717-1761, $114.12-119.02, $1.31-1.33, 2319-2357, 3391-3565, and 1334-1360, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
"It's the easiest thing in the world to make phony election-year promises about lower gas prices."
Markets don’t lie; politicians do. With the US Dollar getting pulverized to fresh YTD lows yesterday ($78.82 US Dollar Index), the price of oil ripped to new YTD highs.
The President of the United States said nothing about gasoline’s immediate-term -0.8 correlation to the US Dollar – he blamed “the Middle East and Wall Street Speculators.”
Storytelling can be sad.
Back to the Global Macro Grind…
This whole “clean energy” rant appeals to people. My office is on an Ivy League college campus – trust me, I get it. What I clearly don’t get is how both Bush and Obama’s economic “advisors” concluded that the best long-term path to economic prosperity is through currency devaluation. Both Carter and Nixon tried this. So did Charles de Gaulle. It doesn’t work.
“You know, there are no quick fixes to this problem.” –Obama (in Miami yesterday)
Really? There actually is a quick fix. And since our central planners love those, you’d think they’d at least be forced to debate it. A Strong Dollar Policy – in both MONETARY and FISCAL action = down oil, hard.
I know the Energy “experts” disagree, and that’s fine – all the more reason to try the one policy idea neither Bush nor Obama tried. Give one of these “experts” some inside info that Ben Bernanke is going to come out with a “surprise rate hike” on Sunday night, and you’ll see more Oil men buy puts than a Congresswoman from the 112th.
I wrote about this yesterday and had a proactively predictable responses from partisan people. The minute you credit Reagan for anything, the Democrats cringe. The second you compliment Clinton on anything fiscally conservative, the Republicans whine.
Only inside the Bubble in American Politics could partisanship make us all feel so willfully blind…
Back to the data: look at the long-term chart of Oil vs the US Dollar. It doesn’t lie.
- US Dollar Index > $90 = bearish for Oil
- US Dollar Index < $90 = bullish for Oil
Again, during the 1980s and 1990s, not only did the price of oil routinely trade in the $18-22/barrel range (using long-term decade averages here folks, not Iraqi points on the cart), markets EXPECTED it to.
- 1 = average price of oil (WTI) = $22.16/barrel
- 1 = average price of oil (WTI) = $18.63/barrel
*note, I use 1983 and 1993 to take out the 1981-82 and 1991-92 US recessions, which, ostensibly, would be your “low demand” years - if you’re asking a run-of-the-mill supply/demand Keynesian, that is…
Expectations drive markets. Period. And the entire world expects Ben Bernanke and Tim Geithner to debauch the US Dollar with the President of the United States having their backs.
How else can you explain Obama not mentioning the US Dollar once during the State of the Union address? Correlation isn’t causality. We get that. But correlations on a 30-day to 3-year basis are extremely high, and so is causality on a 40 year-basis. It was a Republican President (Nixon) who abandoned the Gold Standard in order to debauch the dollar in 1971 and proclaim “we are all Keynesians now.”
Reality 101: In an America where we try to make it ok for losers to win, I’m not going to convince someone that they are accountable for something that is very wrong in this country in 900 words or less. So now I’ll just get on with my day.
I couldn’t make this up if I tried, but Bloomberg’s #1 Economic Headline today is “STOCKS, OIL CLIMB ON GLOBAL ECONOMIC RECOVERY.”
Meanwhile, everything other than Gold, Energy, and Basic Materials stocks (inflation expectations rising), is signaling that Global Growth Slowing here sequentially in February is the case:
- The SP500 is still down -13% from its 2007 peak (tell your broker you need to be up +15% from here to get back to breakeven)
- US Treasury Yields (10-year) have dropped back below my intermediate-term TREND line of 2.03%
- The Yield Spread (10s minus 2s) is down 3bps day-over-day
- Spain, France, and Italy are all making lower-highs in the face or Economic Stagflation
- CRB Commodities Index (18 commodities) = +2% for the week vs the SP500 +0.1%
- Oil prices are up +3.4-4.8% on the week with the US Dollar down almost 1% (and the Yen is collapsing)
Japanese Yen collapsing? Yes, it’s not headline news, yet – but it will be. The Yen is down, literally, in a straight line to the tune of -6% for the month of February to-date. I think this looks eerily similar to the initial cliff dive of the Euro in April of 2011. Japan, like Europe at this time last year, is about to enter a phase of massive sovereign debt monthly maturities (57.1 TRILLION Yen in March).
Is it going to be different this time? USA and Japan have to rollover $3.0 TRILLION and $3.2 TRILLION in debt (in debauched dollars) in 2012 and oil prices over $100/barrel have never not slowed Global Economic Growth. Or are we hearing Phony Promises about an economic recovery, again, during an election year?
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $119.81-124.61, $78.70-79.07, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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.