Client Talking Points
US Stocks Hit New Highs
As we often say at Hedgeye, all-time is a long time, and that’s just what happened to US stocks, which hit their all-time closing highs last week. Those highs were driven by our fulcrum point for the bull case – a strong US dollar. That drives US and Chinese consumption, which drives economic growth.
Strong Dollar, Lower Food Prices
As the US dollar strengthens – up for the seventh week in the last eight – food prices are heading lower. On a week-over-week basis, wheat fell 5.8%, corn fell 4.3% and soy prices dropped 2.5%. Cheaper food prices make things easier on a consumer’s wallet, which in turn could help drive consumption elsewhere.
|FIXED INCOME||6%||INTL CURRENCIES||24%|
Top Long Ideas
Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.
With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.
HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.
Three for the Road
TWEET OF THE DAY
“Happy Opening Day” – John Sterling, New York Yankees’ play-by-play radio announcer
QUOTE OF THE DAY
“Live as if you were to die tomorrow. Learn as if you were to live forever.” – Mahatma Gandhi
STAT OF THE DAY
22 points, the margin of victory for Louisville in its NCAA basketball tournament game against Duke Sunday night
This note was originally published at 8am on March 18, 2013 for Hedgeye subscribers.
“Let no such man be trusted.”
According to John Meacham (author of Thomas Jefferson: The Art of Power), that was one of Jefferson’s favorite passages from Shakespeare’s Merchant of Venice – the tragic comedy about a man (Shylock) lending to another man (Antonio) for a pound of his flesh.
Thank goodness for Portia – in the end, she reminded Shylock that he must remove Antonio’s “flesh” (not the blood) and warned him that if he went a hair beyond a pound, “Thou diest and all thy goods are confiscate."
Written at the end of the 16th century (between 1596 and 1598), these were some pretty serious times of debate about debt and default. But looking at today’s consensus fear-mongering about Cyprus screwing its depositors, what has changed? Is the world about to end, again?
Back to the Global Macro Grind…
I realize that’s maybe a little too philosophical for the monkey getting whipped around by the futures this morning. As Meacham himself points out, “Plenty of philosophical men live in abstract regions, debating types and shadows.”
But, my friends, behold! “The rarer sort is the reader and thinker who can see the world whole.” (Jefferson: The Art of Power, pg 47) And our risk management duty this morning is not to freak-out Italian Election style; it’s to see the world for what it is, not what Fear-Dwellers who have been getting run-over shorting US stocks for all of 2013 want it to be.
“To be, or not to be”, scared out of your mind this morning - remains the question. Todd Jordan and I took our wives to see Paul Giamatti in Hamlet this weekend so, admittedly, I have the Shakes; please bear with me as you read the Top 3 Most Read on Bloomberg this morning:
- “CYPRIOT OUTRAGE COULD DERAIL EURO-AREA BAILOUT”
- “ASIA STOCKS DROP ON CYPRUS BANK LEVY”
- “GOLD, GERMAN BONDS RALLY ON CYPRUS”
I know, I know – this is some scary stuff. If you’d like to freak-out alongside Old Media (must have crisis for ratings to stop crashing), I have a new hash-tag for you: #EOW (End Of World).
All of this comes after the US Dollar had its 1st down week in the last 6 (one week does not a new intermediate-term TREND make) – so what is a man or woman to do this morning but look at everything else that’s born out of the horror that is Cyprus:
- German and British stocks (after hitting new highs last wk) are down a whole -1% and -0.7%, respectively
- The Euro is actually now up on the session (versus the USD) at $1.29
- Irish stocks are up on the day too
Irish stocks? Yes me friends – ‘twas Saint Patty’s day yesterday. So, if the world is going to end today, have another pint, and smile about it will ya!
To be sure, at some point we will actually see the end of the world (and that day I will not be writing an Early Look), so I don’t want to be too complacent here. But I don’t want you freaking-out at another lower-high for the VIX and higher-low in the US stock market either.
Contextualizing where people are freaking-out from is usually more important than the why (their storytelling) after the correction (it’s called mean reversion, and yes it happens after stocks are up for 10 of the last 11 weeks).
First, here’s the context of Cyprus’ stock market:
- Down -8% in the last month
- Down -16% in the last 3 months
- Down -62% in the last year
Evidently, aside from some Russian money launderers (who don’t do Macro) getting smoked this morning, someone down there in the Socialized South of Europe knew something was going on, for a while now.
Then, there’s the US stock market’s context:
- Immediate-term TRADE overbought line = 1567
- Immediate-term TRADE support line = 1535
- Intermediate-term TREND support = 1486
In other words, with US Equity Volatility (VIX) down another -10.2% last week to a fresh 5-yr weekly closing low of 11.30, the Fear-Dwelling (front-month VIX) is down -41% from the last day you could have freaked right out and sold low (February 25th, Italian Election Day). So you might not want to do that again today. After selling some on green last week, we’ll be covering shorts and getting longer again, on red.
Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000 and the SP500 are now $1569-1605, $107.27-110.17, $81.94-83.04, 93.64-97.39, 1.91-2.01%, 10.72-14.47, 938-958, and 1535-1567, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
“Well, I understand that you are to beat me in this contest.”
That, of course, is what Adams told Thomas Jefferson when it became clear to him in 1800 that Jefferson was going to replace him and become the 3rd President of the United States.
“Mr. Adams, this is no personal contest between you and me… Two systems of principles on the subject of government divide our fellow-citizens into two parties. With one of these you concur, and I with the other.” –Thomas Jefferson (The Art of Power, page 327-328)
In all great contests, there are two competitors, teams, and/or ideas. In all great contests, someone wins and someone loses. In the greatest of contests, the winner is gracious in victory – and the loser learns from defeat.
Back to the Global Macro Grind…
“Let us, then, fellow-citizens, unite with one heart and one mind” (Jefferson during his inaugural address of 1801), and become Yale Hockey fans as they head to the Frozen Four, for the first time since 1952!
(I had to find a way to slip that in there)
In other news, crisis-mongering remains in crisis and US stocks hit an all-time high last week.
As we like to say here at Hedgeye Risk Management – all-time is a long time, and this all-time high was driven by the fulcrum point of our bull case for US (and Chinese) Consumption Growth – a Strong US Dollar.
With the US Dollar up for the 7th week in the last 8 (+0.74% to 83.14 on the US Dollar Index):
- Down -3% in the last 2 months, Brent Oil Prices stopped going down last wk (+2.2% to close the wk at $110.02/barrel)
- Food Prices continued to get pulverized week-over-week (Wheat -5.8%, Corn -4.3%, and Soy -2.5%, last wk alone)
And the net long positions in commodities (futures and options contracts) continue to go squirrely:
- Gold – net long positions fell another -14% on the wk after Gold’s price fell -0.7% (net long position -41% YTD)
- Silver – net long position continued to crash (-77% on the wk!) to its lowest level since 2007
- Copper – built a record net short position of -30,036 contracts
The thing about shiny metals is that (after Gold went up for 12 years in a row) a lot of people own them now in lieu of what were Burning Bernanke Bucks. That (and all those Gold commercials you still hear on the radio) is a rear-view looking thesis. So is the end of the world.
As the great USA Olympic Hockey Coach, Herb Brooks, might say about this morning’s metals update – “Again!”:
- Gold is flattish around $1598/oz (down -4.6% YTD)
- Silver is down another -0.9% to $28.04/oz (down -13% from its early 2013 high)
- Copper leads losers in Global Macro trading this morning, down another -1.3% to $3.35/lb
All the while, The Great Contest between #PTCs (professional top callers) and those of us who change as the game does rages on. Are Food, Energy, and Metals prices deflating a good or a bad thing for the global consumption economy?
What do we know, but the last time our models were this bullish on US economic growth prospects relative to consensus was in 2009 when many of these same factors rhymed. The Dollar rose from its ashes and Commodity prices kept crashing well into Q209.
But if you sold in May of 2009 and went away, was that a good decision or a bad one? What if you sold in April of 2009? My keen sense from my latest institutional client meetings is that a lot of people are still looking for a big Q2 correction. What if it doesn’t come?
Risk obviously happens fast, so we’ll be sure to let you know if anything changes in terms of our intermediate-term TREND view (bullish on Asian and US stocks; bearish on Commodities, Yens, Treasuries). In the meantime, may the great contest between bulls and bears continue!
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $106.75-110.39, $3.34-3.44, $82.61-83.49, 93.44-96.35, 1.84-1.95%, 12.13-14.26, 947-955, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – April 1, 2013
As we look at today's setup for the S&P 500, the range is 16 points or 0.84% downside to 1556 and 0.18% upside to 1572.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.62 from 1.61
- VIX closed at 12.7 1 day percent change of -3.42%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:58am: Markit US PMI Final, March, est. 55.2
- 10am: Construction Spending M/m, Feb., est. 0.8% (prior -2.1%)
- 10am: ISM Manufacturing, March, est. 54.2 (prior 54.2)
- 10am: ISM Prices Paid, March, est. 59.5 (prior 61.5)
- 11am: Fed to buy $2.75b-$3.5b in 2020-2023 sector
- 11:30am: US to sell $35b 3-mo., $30b 6-mo. bills
- U.S. Rates Weekly Agenda
- Washington Week Ahead
- Rule governing high-risk loans takes effect; may change how FDIC-insured banks invest in CLOs
- USTR releases annual assessments of global trade barriers, incl study on technical, health, safety trade restrictions
- Homeland Security to begin cutting staffing hours
- FAA will begin furloughing staff, closing more than 230 control towers at smaller and midsize airports
WHAT TO WATCH
- Federal court judge dismisses civil claims against U.S. banks over Libor manipulation; rules some commodities-related suits may proceed
- Verizon sued for $2.85b in debt, interest from Idearc spinoff
- Dell said to consider Blackstone LBO with CEO guarantee
- Proxy statement has PC sales falling by $10b over 4 years
- Chesapeake names Dixon acting CEO, to hold conf. call on ops
- Beijing, Shanghai boost home curbs as China acts to cool mkt
- Wal-Mart to spend 500m yuan ungrading Chinese stores, China National Radio says
- All Nippon Airways plans for June restart of Dreamliner flights
- Boeing canceled test flight of 787, Seattle Times says
- Cerberus may begin more formal steps in Freedom Group sale
- Exxon to excavate Pegasus oil pipeline to find cause of leak
- Google is biggest threat to TripAdvisor, CEO Steve Kaufer says in FT
- Panasonic said to be under U.S. probe over bribery: WSJ
- Apple iRadio may be introduced in summer 2013, AppleInsider says
- Tesla turned profitable in 1Q; Model S sales exceeded forecast
- Amazon buying Goodreads book-review site irks author group
- U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
- North American M&A Agenda
- Canada Weekly Agendas: Energy, Mining
- BOJ Meeting, U.S. Jobs, China Index: Wk Ahead April 1-April 6
- Cal-Maine Foods (CALM) 6:30am, $1.40
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Corn Heads for Bear Market After U.S. Stockpiles Beat Estimates
- Bullish Bets Rebound at Fastest Pace in Four Years: Commodities
- Rubber Falls Into Bear Market as Stockpiles Swell, Demand Eases
- Indonesia to Review Rubber Exports After Prices Tumble in Tokyo
- Brent-WTI Crude Spread Widens as Exxon Shuts Pipe to Texas
- Spot Gold Little Changed as Silver Nears Bear-Market Threshold
- Copper Drops to 8-Month Low in Shanghai on China Manufacturing
- Hedge Funds Backing $100 Crude Lift Bullish Bets: Energy Markets
- Asia Gasoil Contango Narrows; Fuel Oil Crack Drops: Oil Products
- Mitsubishi Materials to Cut First-Half Copper Output by 6.8%
- Palm Oil Drops to Two-Month Low as Europe Crisis to Curb Demand
- Russia Sets Minimum Prices for Grain Purchases for Stockpiles
- China Manufacturing Rises at Faster Pace in March, Gauges Show
- Coffee Exports From Indonesia’s Sumatra Fall as Inventories Drop
The Hedgeye Macro Team
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