Overnight the Yen rips +1.6%, while the Weimar Nikkei falls -1.5%. We actually covered our Yen (vs USD) short yesterday on our signal as the risk range for USD/YEN just shifted to 96.05-99.55. It should be manageable now, but the meltdown in the rest of Asian Equities might not be. Check out all the red: Thailand -4.7%, Philippines -4.6%, Indonesia -4% as both the KOSPI and HangSeng remain below both our TRADE and TREND lines.
Hello Greece. It's been a while. Welcome back to the matrix. Greek stocks -3.6% this morning after getting smoked yesterday and now move swiftly back into full-blown crash mode (Athex -21% since May 17th). What does it mean? Illiquidity in global equity markets is for sale here, big time (especially in emerging markets).
Both illiquid securities designed to chase yield and Gold absolutely hate bond yields rising like this. This morning’s most important macro move is the 10yr ripping an overbought signal up at 2.26%. Above 2.41% starts driving the convexity function in my model (which leads to higher-levels of volatility). The next 15bps (up or down) really matters here.
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Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014. This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios. They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations. Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes. Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.
Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout. An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona. The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater. Longer term, the objective is for BCN World to have six resorts. The first property is scheduled to open for business in 2016.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Central planners who think they can "smooth" economic gravity will lose control, in the end
“Success seems to be connected with action. Successful people keep moving. They make mistakes,but they don’t quit.”
- Conrad Hilton
$7 billion: The amount of money Citigroup stands to lose if the dollar gains against the yen, euro and currencies in emerging markets, which provide about half the firm’s profit. (Bloomberg)
This note was originally published at 8am on May 28, 2013 for Hedgeye subscribers.
“A coach is someone who can give correction without causing resentment.”
On weekends, I coach 4-6 year olds (hockey). During the week, I sometimes coach adults (macro). All the while, Mr. Market is always coaching me through something. I bear no resentment towards him. To the contrary, I quite enjoy it when he tells me what to do (signals).
With US stocks down for 4 of the last 5 days, there was another choice to be made on Friday – correction or crash? This wasn’t unlike many of the learning opportunities that Mr. Market has provided us in the last 6 months. Buying the correction has been the right choice.
The only thing that seems to be crashing this year is the idea that we are going to crash. The #EOW (end of the world) trade has been the worst place you could be long for the month of May. When you have #GrowthAccelerating, you don’t buy Yens, Gold, and Treasuries. Ask the Coach.
Back to the Global Macro Grind…
After covering all but 4 short positions on red Friday morning, I posted a note titled “Oversold: SP500 Levels, Refreshed.” I also re-shorted the Yen at our immediate-term TRADE overbought line of 101.22.
These aren’t victory laps; they are timestamps – and I am 100% accountable to them. Two of the four short positions we have left are related to Japanese Policies to Inflate (short Yens and JGBs). The other two are short Russia (world’s 3rd worst stock market YTD, next to Peru and Cyprus) and short Emerging Markets (EEM) which do not like #StrongDollar (and are down YTD).
What if I didn’t listen to the Macro Coach? What if I just ignored my signals and went with “feel”? Been there, done that – many times over, in many arenas and markets – and, in general, it doesn’t work. For us what works is the combination of A) Risk Signals and B) Research Views – when we have both, we move.
Last week’s US Equity market risk wasn’t the economic fundamentals – it was Ben Bernanke. He tried his best to confuse economic gravity (#GrowthAccelerating) with his longstanding and dogmatic view that he needs a weaker US Dollar to achieve his goals. #wrong
He got that last week – the Dollar weakened and so did the US stock market in kind (they now have a very positive correlation, Ben). Bernanke’s jawboning arrested #StrongDollar momentarily (-0.65% on the week), and the SP500 corrected -1.2% from its all-time weekly closing high.
Back to the Research View - whether Bernanke wants to acknowledge it or not, last week’s US economic data was decisively bullish:
That’s why US Treasury Yields continued to back up (despite Bernanke trying to talk them down). The US 10yr Yield is up again this morning to 2.04% and has no intermediate-term TREND resistance to 2.41%. So Mr. Market is trying to coach @FederalReserve through this…
Whether Bernanke tells his boys to listen to the market’s message will be his legacy. His boss (President Obama) cares about his political legacy too. On the cover of The Economist this weekend is a picture of Barry looking a little confused alongside the titled “How To Save His Second Term.”
Coach says the best way to make Obama look good is via our #StrongDollar, Strong America strategy. It worked for Reagan and Clinton – and it can work for Obama too. If he doesn’t get it, Hillary will – this isn’t that complicated, folks.
Coaching you through corrections in Yens, Gold, and Treasuries starts with reminding you that these aren’t corrections – in 2 of 3, they are crashes – and for many Americans still choking on Bernanke Yield Chasing trade, the third may very well become his Waterloo.
Just to show you how horrendous being long no-growth “yield” is performing in the last month, here’s the score:
Got that Messrs Bernanke and Obama?”
With the US Dollar +5.1% YTD and Commodities -3.7% YTD, Coach says get the US Dollar right and you’ll start to get America right. Freedom, Liberty, and Growth are the best paths to prosperity – not Dollar Debauchery, fear-mongering, and sketch balls at the IRS.
We can get you guys through this. Yes We Can. Embrace #StrongDollar, and be the change.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1341-1421, $101.48-103.94, $83.62-84.29, 101.21-103.66, 1.96-2.06%, 12.27-14.46, and 1642-1672, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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“I’m going to lie on the sand and watch the world go to hell.”
-William Bullitt Jr.
That’s not a very nice thing to say now is it? Young Yale men can get pretty emotional when they go out into the real world and get told they are wrong. In 1913, William Bullitt was voted the “most brilliant” man at Yale. I am not sure what that means, but trying to do a deal with Lenin probably changed his classmates’ minds on that, eventually.
Brilliant is as brilliant does. Yesterday may have been one of the best days to sell everything and go to the beach for the rest of the summer. I doubt it, but we’ll see. Every morning we reserve the right to change our mind. That’s the upside to not working for the government. Poor Bullitt (he was a rich kid from Philadelphia actually) didn’t share our self-deterministic luxury.
In 1919, “Bullitt and Steffens spent a wonderful week in Moscow: accommodation in a confiscated palace, piles of caviar, nights at the opera…” etc. Life was indeed #brilliant, until he came back to Paris and Wilson bagged his idea to appease the Bolsheviks. Lenin later recalled that the young American diplomats were “useful idiots” (pages 78-81, Paris 1919 by Margaret Macmillan).
Back to the Global Macro Grind…
I don’t do beach. At least not now. I have work to do, a family to feed, and a firm to build. It’s mid-June and its really only the 2nd day in the last 6 months where I woke up thinking, wow – the world might actually start going to hell again.
When I say I “think”, I mean the Global Macro market’s interconnected signals are making me think. When I was Bullitt’s age (28 years old at the Paris Peace Conference) I wasn’t yet married and I thought in very different ways!
I was a lot more bullish on US Consumption oriented Equities < 1601 in the SP500 last week than I was 50 handles higher yesterday. At 11:02 AM EST I wrote a note titled “Sell Some: SP500 Levels, Refreshed.” The research view didn’t change; my risk signals did.
To review the what on that (which is usually more important than the why):
Get the Dollar right, and you’ll get other things right. You don’t have to be brilliant to embrace the uncertainties associated with that. When I make big moves in either Real-Time Alerts or the Hedgeye Asset Allocation Model, it almost always starts with a USD signal.
Since we’ve already beached our asset allocations to both Fixed Income and Commodities (0% on both), our only risk management exercise this summer is deciding how big we get (and when) on this US Consumption LONG versus Commodities SHORT position.
For now, the intermediate-term TREND ranges for US Equities and volatility are as follows:
Again, you’ll note that what’s new in that 2 factor model is:
A) Lower-highs for US stocks
B) Higher-lows for US equity volatility
Plenty will quibble with how my models work, and that’s perfectly fine with me. I don’t have time to do anything other than what we are already doing here at the firm. So my own risk is going to be doing more of that.
The beauty of operating from the opposite perspective as brilliant central planners who promise you certainty (Obama just called his freshly minted Keynesian, 42 year old Harvard boy, Jason Furman, “one of the most brilliant minds of his generation”) is Embracing Uncertainty. We have no idea what tomorrow is going to tell our model.
Here’s all I am certain about as of this morning (this could change by tomorrow, but probably not):
And it goes on and on and on …
Multi-factor, multi-duration. That’s how we roll. And as you’ll quickly note, there are plenty of places to be bearish in this world. The problem with consensus US stock market bears in 2013 is that they weren’t bearish enough on many of these things – primarily because they weren’t bullish enough on US #GrowthAccelerating.
Gold and Sovereign Credits (Japan and USA) loathe growth. And while the Japanese won’t get real (inflation adjusted) economic growth in the end anyway, at least their Keynesian duo of Abe/Aso will get plenty of beach time. We can only pray that they lose their jobs fast. Never mind the beach, dealing with their and Furman’s “brilliance” every morning might just drive me to the bottle.
Our immediate-term Risk Ranges Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Nikkei, and the SP500 are now $1, $100.21-105.04, $81.21-82.42, 96.05-99.55, 2.14-2.26%, 14.07-17.69, 129, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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.