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[PODCAST] Expectations, Unemployment, and Heartache

Expectation is the root of all heartache, and Hedgeye CEO Keith McCullough talks through expectations and unemployment by the numbers on today's morning call.

 


Awaiting The Employment Number

Client Talking Points

YEN

Japanese equities have loved a weak Yen in as much as the SPX has loved #StrongDollar and this week was rock solid for the USD/YEN cross as US Economic data for July (jobless claims 326k and ISM 55.4 yesterday) smoked the US #GrowthSlowing bears out of their holes - again.  Yesterday was a strong dollar, strong stocks day in the U.S. and, on a TREND duration, the Dollar-SP500 correlation remains strong at +0.76.   The Nikkei matched the U.S.’s performance and raised it one - closing +3.3% on the session and now up +40.5% year-to-date.   

EUROPE

What matters in Macro happens on the margin and, on the margin, the European data has been better.  Both the DAX and FTSE are back in Bullish Formations (Bullish across TRADE, TREND, & TAIL durations) but signaling immediate-term TRADE overbought here this morning.  With domestic, pro-growth leverage (XLF, XLY, etc) overbought yesterday also, there is a growing list of (very short-term) mean reversion factors that could take US and European stocks down if this jobs print is either too hot or too cold.

UST 10YR

What is too hot of an employment number? A print north of 200k in payrolls could easily push the yield on 10Y treasuries to the 2.8-2.9% range and, in the process, freak out consensus which isn’t positioned for a redo of June. What number would be too cold is easier  – a jobs miss this morning would be the 1st in 6 months, and the bears need a bone here.  Oh yeah….and #RatesRising is crushing Gold again too.  We covered our gold short yesterday and would not be buyers of weakness.   

Asset Allocation

CASH 36% US EQUITIES 24%
INTL EQUITIES 16% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
WWW

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.

MPEL

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. 

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

Securities have multi-standard deviation events though, so you need a real research team to have your back on that

@KeithMcCullough

 

QUOTE OF THE DAY

"The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics."

-Thomas Sowell

STAT OF THE DAY

Today is the 16th consecutive day where all 9 sectors in Hedgeye's S&P Sector model are bullish on both TRADE and TREND durations.


THE M3: NEW AUSTRALIA CASINO PLANS

THE MACAU METRO MONITOR, AUGUST 2, 2013

 

 

CHINESE TYCOON PLANS $3.8 BLN CASINO RESORT IN AUSTRALIA Reuters

Chinese tycoon Tony Fung has proposed to build a A$4.2 billion ($3.75 billion) casino and resort project in Australia's Cairns city, close to the world-heritage Great Barrier Reef.  The Queensland state government said on Friday that Fung's casino proposal was declared a "coordinated project" on Aug. 1, the first step in the government's approval process.

 

Fung, a billionaire son of one of the founders of Hong Kong conglomerate Sun Hung Kai & Co. Ltd, is planning to build an integrated resort 13 kilometres north of Cairns that will include an "international class" casino with 750 tables and 1,500 machines, one of the world's largest aquariums and a 25,000-seat sports stadium.  Fung's planned Aquis resort "gives Queensland an opportunity to fend off its southern and regional competitors for the increasingly important Chinese tourism market," Fung said in an open letter published on the project website.

 

The Aquis Resort at the Great Barrier Reef project has a targeted opening of 2018 and could create 26,700 jobs when fully operational, according to information on Aquis' website.  The resort is also set to include 13,500 square metres of high-end retail and two 2,500-seat theatres.

 

 

 


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August 2, 2013

August 2, 2013 - dtr

 

BULLISH TRENDS

August 2, 2013 - 10yr

August 2, 2013 - spx

August 2, 2013 - nik

August 2, 2013 - dax

August 2, 2013 - dxy

August 2, 2013 - euro

August 2, 2013 - oil

BEARISH TRENDS

August 2, 2013 - VIX

August 2, 2013 - yen

August 2, 2013 - natgas
August 2, 2013 - gold

August 2, 2013 - copper

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 2, 2013


As we look at today's setup for the S&P 500, the range is 22 points or 0.99% downside to 1690 and 0.30% upside to 1712.                                 

                                                                                              

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1A

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.40 from 2.38
  • VIX closed at 13.45 1 day percent change of 0.45%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in Nonfarm Payrolls, July, est 185k (pr 195k)
  • 8:30am: Personal Income, June, est. 0.4% (prior 0.5%)
  • 9:45am: ISM New York, July (prior 47)
  • 10am: Factory Orders, June, est. 2.3% (prior 2.1%)
  • 12:15pm: Fed’s Bullard speaks on economy in Boston
  • 1pm: Baker Hughes rig count

GOVERNMENT:                                                       

  • Obama nominates Hersman for another term as NTSB chairman; GFI Group’s Giancarlo as CFTC commissioner; O’Rielly named to FCC Republican seat
  • Natl Governors Assn holds annual mtg in Milwaukee

WHAT TO WATCH:

    • Dell holders to vote on Silver Lake, Michael Dell LBO
    • Icahn in suit accuses Dell board of trying to force buyout
    • Swaps probe finds banks manipulated rate, hurting retirees
    • Apple seeks Obama reprieve on iPhone import ban from ITC
    • Apple decision in case vs Samsung delayed until Aug. 9
    • Dodd-Frank stands; suit by states, Texas bank thrown out
    • Payrolls probably grew in July, helping trim jobless rate
    • Hewlett-Packard ends LCD pricing suit vs Chunghwa, Tatung
    • BofA faces claims from regulators on jumbo mortgages, CDOs
    • Tourre’s “junior employee” defense seen leading to loss
    • Halliburton, SLB sued on fracking price-fixing claims
    • ICU Medical said to be in exclusive talks on sale to GTCR
    • Canceling Lockheed F-35 said to be option in Pentagon review
    • RBS appoints Ross McEwan as CEO as lender swings to profit
    • Potash split has India’s biggest buyer seeking lower price
    • Japan exchange in talks with Tocom on trading system
    • U.S. Services, BOJ, Carney, HSBC, Rohani: Wk Ahead Aug. 3-10

EARNINGS (AM):

  • Alliant Energy (LNT) 6am, $0.56
  • Alpha Natural Resources (ANR) 7am, $(0.58)
  • American Axle & Manufacturing (AXL) 8am, $0.30
  • Bell Aliant (BA CN) 6am, C$0.41
  • Berkshire Hathaway (BRK/A) 5pm, $2,166.00
  • Brinker International (EAT) 7:45am, $0.74
  • Buckeye Partners (BPL) 7am, $0.79
  • Cablevision Systems (CVC) 8:30am, $0.05
  • CBOE Holdings (CBOE) 7:30am, $0.51
  • Chevron (CVX) 8:30am, $2.96 - Preview
  • Church & Dwight (CHD) 7am, $0.59
  • Eaton (ETN) 6:28am, $1.11
  • Eldorado Gold (ELD CN) 7am, $0.08
  • Exelis (XLS) 7am, $0.37
  • Gartner (IT) 7am, $0.52
  • Host Hotels & Resorts (HST) 6am, $0.42
  • ImmunoGen (IMGN) 6:30am, $(0.30)
  • Manitoba Telecom Services (MBT CN) 4:03pm, C$0.48
  • Och-Ziff Capital (OZM) 7:30am, $0.13
  • Pinnacle West Capital (PNW) 8am, $1.15
  • PNM Resources (PNM) 8:30am, $0.33
  • Power of Canada (POW CN) 12:05pm, C$0.60
  • Sealed Air (SEE) 6am, $0.25
  • Sirona Dental Systems (SIRO) 6:30am, $0.91
  • SNC-Lavalin Group (SNC CN) 8:27am, C$0.53
  • Telephone & Data Systems (TDS) 7:32am, $0.09
  • Ultra Petroleum (UPL) 8am, $0.43
  • United States Cellular (USM) 7:32am, $0.17
  • Viacom (VIAB) 6:55am, $1.30 - Preview
  • Washington Post (WPO) 8:30am, No est.

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Baguette Hopes Fade for Some French Farmers on Low-Protein Wheat
  • p Commodities Market, Industry News »             
  • Gold Bears Dominant Again as U.S. Growth Quickens: Commodities
  • WTI Heads for Weekly Advance Before Jobs Data; Brent Tops $110
  • Gold Extends Biggest Weekly Drop Since June on Better U.S. Data
  • Copper Rises on Buying of Metal to Close Out Bets on a Decline
  • Wheat Advances Amid Crop-Quality Concerns From France to U.S.
  • Potash Split Prompts India’s Biggest Buyer to Seek Price Cut
  • Coffee Climbs After Brazil Plans Aid for Farmers; Cocoa Falls
  • Record High-Quality Wheat Prices in China May Spur Imports
  • Iron Ore Rally May Firm on Chinese Demand; More Supply Ahead
  • Olam Defies Russian Grain-Export Slump as Traders Retreat
  • Crude Premium Rises to 2013 High in Asia on Iraq: Energy Markets
  • Obama Nominates GFI Group’s Giancarlo as CFTC Commissioner
  • COMMODITIES DAYBOOK: Gold Bears Regain Dominance on U.S. Growth
  • Wheat Costs in Japan Climbing for Third Time as Abenomics Bites

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 


Dinero Caliente

This note was originally published at 8am on July 19, 2013 for Hedgeye subscribers.

“Never memorize something that you can look up.”

 -Albert Einstein

 

I used to have something of a photographic memory.  Lately, however, a plot of my capacity for short-term recall and a YTD chart of Gold would probably be hard to distinguish. 

 

I’d proffer that my bout with Cognitive Deflation is only transient and simply the byproduct of late nights with infants, serial overconsumption of caffeine, and serial under-consumption of exercise.  At least that’s what I tell myself. 

 

Either way, I’ve come to more closely relate to the aphoristic wisdom embedded in Einstein’s quote above.

 

With some beach time on the August calendar, I’m holding out hope the downtime catalyzes some needed cerebral exfoliation. 

 

Back to the Global Macro Grind….


We have been negative on emerging market debt and equities for most of 2013 with #EmergingOutflows & #AsianContagion headlining our 2Q13 and 3Q13 Macro Investments themes calls, respectively. 

 

The story of emerging market pain is one birthed from emergent strength in the U.S. dollar, acceleration in U.S. growth and the associated reversal in unprecedented Fed policy driving an expedited reversal in Hot Money & Yield Chase Flows out of developing economies.   

 

We’ve presented the principal conclusions of our research and suggested positioning in recent presentations, but it’s probably worthwhile to take an illustrative, didactic tour of capital flows to understand how the cycling of capital into and out of emerging economies can work to propagate negative economic and market impacts in an archetypical scenario.

 

Capital Flows to Emerging Economies for 3 Principle Reasons:

 

1.   External:  “Push” flows occur for reasons external to the capital-importing economy and generally relate to relative investment attractiveness.  Perhaps the simplest way to understand it is in the context of U.S. interest rates.  If growth slows, policy turns easy and interest rates in the U.S. decline, investment yields available in emerging economies become relatively more attractive and capital flows accordingly. Historically, this has been the largest driver of rich-to-poor capital flows.  It’s also generally the most volatile.   


2.   Internal:  “Pull” flows are catalyzed by improving economic fundamentals, sound policy and/or trade & capital market liberalization initiatives.  Pull flows provide firmer bedrock for sustained inflows. 

 

3.   Financial Globalization:  Here we’d highlight the ongoing, global trend towards Financial & Capital market integration and the proliferation of conduit investment vehicles allowing broad institutional and retail access to developing economies.   A secular shift in portfolio allocations towards international diversification holds positive longer term opportunity for developing economies.  However, in compressed periods in which flows chase performance, it can work to amplify volatility in market prices.     

 

It’s the potential transience of “push” and portfolio (i.e. equity & debt) flows that are of most concern to capital-importing countries, particularly given the reality of hyper-fast capital mobility.

 

So, what happens when the Hot Money starts to flow?

 

In a generalized model, the body of empirical evidence points to a number of discrete macroeconomic impacts:

 

1.   Currency Appreciation:  Absent Central Bank intervention the demand for foreign currency drives the exchange rate higher.

 

2.   Consumption Growth:   The influx of foreign capital provides for a higher level of domestic investment.  This higher level of investment is generally accompanied by a decline in the domestic savings rate.  Consumption rises as consumerism displaces saving.  

 

3.   Rise in the Money Supply & Inflationary Pressure: Stemming from a rise in economic activity along with any attempts by the central bank to quell the currency appreciation.

 

4.   Widening of the Current Account Deficit:  Don’t worry if you don’t remember the details about what the Current Account is.  Here, it’s sufficient to understand that imports rise relative to exports generally due to an appreciating currency and rising consumption. 

 

It’s not difficult to understand how the confluence of the above dynamics can work to drive recurrent boom and bust cycles for emerging and formerly, capital-rationed, economies.  Consider how the interaction of the above factors, which initiates with a large influx of foreign capital, can work to drive a self-reinforcing cycle in both directions:

 

U.S. growth slows, Bernanke cuts to 0%, institutes financial repression and forces capital to search out yield. Capital flows into the EM economy causing increased investment, falling domestic savings and rising domestic consumption.  Incomes rise alongside accelerating growth, driving a further increase in consumption in a positive, reflexive cycle.  Further, foreign capital inflows along with diverted domestic savings provide a bid for real (i.e. housing) and speculative financial assets.  Net wealth increases alongside inflating asset values.  Faster growth, higher incomes, and rising net wealth all serve to increase capacity for credit. Credit expansion then serves to amplify the cycle.  Everything is great, until…….


U.S growth starts to inflect to the upside, #StrongDollar starts to sniff out a Fed Policy reversal, and “push” flows begin to reverse.  

 

When portfolio capital starts to exit, asset prices deflate and credit gets tighter, investment and consumption both decline.  The currency depreciates, driving local inflation higher at the same time that aggregate demand accelerates to the downside. If demand is local and the debt is denominated in foreign currency, the debt burden on business is amplified.  Declining demand in the face of a crashing currency and elevated inflation can leave policy makers handcuffed. 

 

Thus, capital flows, this time the expedited exportation of foreign capital, catalyze a reversal of the boom cycle described above with some version of a self-reinforcing, contractionary cycle playing itself out.   

 

Of course, country specific fundamentals, policy decisions, and monetary systems matter and understanding the prevailing risk for a particular country is more nuanced, but the generalized model described above captures the broader dynamics that tend to drive the cycle. 

 

Further, given the large-scale proliferation of EM related investment vehicles whereby investors indiscriminately bought ‘international diversification’ without a real understanding of the underlying exposures, it’s unlikely they will be overly discriminate in their selling.  Historical precedent suggests #StrongDollar driven outflows from emerging markets are protracted. 

 

In short, we don’t think #EmergingOutflows have bottomed yet. 

 

Hopefully the decline in my recollective ability has.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr yield 2.49-2.74%
SPX 1670-1701
VIX 13.23-14.78

USD 82.61-83.48

Brent 106.99-109.27

Gold 1216-1306 

 

Enjoy the weekend.  

 

Christian B. Drake

Senior Analyst

 

Dinero Caliente - vv. EL

 

Dinero Caliente - vp 7 19


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