Client Talking Points
Per the Japanese press, Larry Summers is in. The US Dollar and #RatesRising both like it. Gold? It hates it. The Great 2013 Gold Crash continues. It's down -22% year-to-date as it moves toward our immediate-term TRADE oversold line of $1307 (within a bearish intermediate-term TREND). Meanwhile, Silver’s losses? They are 2.5x Gold’s this morning, but that’s been the story all year. Gold’s best buddy was Ben Bernanke. Bottom line? #ItsAllOver
Despite the Russians moving some of their eye-candy into the Mediterranean, Brent is down -0.5% this morning. Our immediate-term TRADE momentum line of resistance on my radar is $114.67. The TAIL risk support is still very much in play down at $108.59. So clearly Barack Obama has some communication tooling to do.
Witness the well-deserved higher-lows and higher-highs as yesterday’s US Jobless Claims print trumpeted the best in 7 years on a seasonally adjusted basis. Incidentally, it was the best in 13 years on a non-seasonally adjusted basis. But alas, partisan people will keep whining about this, and that, and the next thing. Guess what? That is a very bullish thing (but bearish for Gold and Bonds).
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Top Long Ideas
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.
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.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
QUOTE OF THE DAY
In my mind, I'm always the best. If I walk out on the court and I think the next person is better, I've already lost. -Venus Williams
STAT OF THE DAY
According to a recent study, the US is home to about one in every three ultra-high net worth individuals — those with $30 million or more in total assets. At last count, 65,000 U.S. residents possess more than $9 trillion.
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“There lived a certain man in Russia long ago,
He was big and strong, in his eyes a flaming glow,
Most people looked at him with terror and with fear,
But to Moscow chicks he was such a lovely dear.”
Over the course of history, Russia has certainly been known for its strong leaders. The Boney M song, “Rasputin”, from which the verse above was taken, is about one of the most enigmatic of Russia’s leaders: Grigori Rasputin.
Rasputin was a Russian mystic that lived from 1869 – 1916. He became an advisor to the Romanovs, the reigning royal family in Russia at the time, after being asked to try and heal their son Alexei, who suffered from hemophilia. Probably more by the stroke of luck than any knowledge of medicine, Rasputin was successful in healing Alexei and became a key advisor and intimate to the Czar’s family, especially his wife Alexandra Feodoronva.
From 1906 – 1914, many Russian politicians and journalists used Rasputin’s influence over the Romanovs to discredit them. His influence only accelerated with the advent of World War I when the Czarina took over domestic policy, with Rasputin as her key advisor.
Eventually, Rasputin’s influence created contempt amongst the Czar political allies and rivals. Ultimately, a group of conspirators led by the Czar’s first cousin Grand Duke Dmitri Pavlovich, murdered Rasputin. Rasputin had the last laugh as he wrote to Czar Nicholas shortly before his death that if he were killed by government officials, the entire imperial family would be killed by the Russian people.
Rasputin’s prophecy came true a short 15 months later when the Czar, his wife and all their children were murdered by assassins during the Russian Revolution. Directly and indirectly, Rasputin has been pointed to as a key catalyst for the fall of the Romanovs.
Certainly, the current situation in Syria does not have direct parallels to the Russian Revolution, but to be seen to be under the influence of a Russian, especially the Botox laden Putin, will not be a positive turn of events for President Obama. In part, Obama backed himself into a corner by deciding to go to Congress to get approval to use military force in Syria, even as he acknowledged he didn’t legally need Congressional approval.
When it became clear that Congress wasn’t going to support the action, the door was left open for the Russians to propose a more “commercial” solution. Of course now President Obama has lost all leverage and, as a friend of mine who runs a major investment bank said, has been completely re-traded. So much so that President Assad is now making demands on the United States (via Russian TV of course)! As the state-owned Syrian newspaper put it bluntly in a headline on Thursday, “Moscow and Damascus have pulled the rug out from under the feet of Obama.”
Given the turn of events, it is no surprise then that President Obama’s approval rating has plummeted close to all-time lows. Currently, on the Real Clear politics poll aggregate, 7.6% more people disapprove then approve of Obama. As it relates to foreign policy, 17.6% more Americans disapprove of the job he is doing. It seems the President has become a lame duck quicker than most second term Presidents.
My colleague Keith McCullough proposed a unique idea yesterday to James Pethokoukis at the American Enterprise Institute yesterday, which was to turn Larry Summers loose on the Russians. As Keith said in the interview:
“We really need to embrace the weapon that we have as a country, which is the most powerful weapon that we’ve had for a very long period of time, which is, of course, the currency of the people, and that currency has basically been de-botched and devalued ’til the cows come home. We need to start to stand up for these things and that’ll help us stand up against guys like Vladimir Putin. Bring in, probably, a guy like Larry Summers to deliver the message because you do need somebody to stand up with a backbone and actually say it in a really forceful way, which, at a bare minimum, that’s what Larry Summers can do. $65 oil would be fantastic for the American people and it would be absolutely pulverizing to Putin’s power.”
As we’ve been writing for a while, a strong dollar equals a strong America. If the rumors from the Japanese press this morning are even remotely true and Larry Summers is destined to be the next Chairman of the Federal Reserve then it is very bullish for the U.S. dollar and bearish for commodities. The action this morning, with gold down, oil down and the U.S. dollar up, is likely only the beginning of the sustained move we will see if Chairman Summers becomes more than prophesy.
Of course, there is economic data at play here as well. On that note, jobless claims came in at the lowest absolute number since 2000 at 228,000 yesterday. Year-over-year improvement on this data series moves to -23.8% versus -13.2% last week and the rolling 4-week average is -14.5%.
In the Chart of the Day, we show what this improving data series means for interest rates as we chart the 10-year yield versus the 4-week rolling initial claims. As you can see from the chart, there is a very tight correlation between the labor market improving and interest rates going up.
The combination of a continued improvement in the U.S. labor market and increasing chatter of the likelihood that Larry Summers takes over the Federal Reserve will combine to be an economic weapon of mass destruction for bonds, gold, oil and the Russians alike.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.86-3.03% (bullish)
SPX 1 (bullish)
Nikkei 14117-14638 (bullish)
USD 81.39-81.93 (bullish)
Brent 110.54-113.91 (bullish)
Gold 1 (bearish)
Enjoy your weekend.
Daryl G. Jones
Director of Research
This note was originally published at 8am on August 30, 2013 for Hedgeye subscribers.
“Neither a borrower or a lender be; For loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.”
-William Shakespeare, “Hamlet”
Shakespeare taught us many lessons in his writings. But the quote from Hamlet above is very apropos for those of us who are stock market operators. The lesson is simple: be careful with financial leverage.
Financial leverage is like the blue meth sold by Walter White and his colleagues in the acclaimed TV show Breaking Bad. It is both very addictive and hard to get off the streets. It can also make the sellers very rich in a short period of time.
In the last fifteen or so years, we’ve seen innumerable debt fueled bubbles. The Asian debt crisis, the stock market bubble of the early 2000s, the housing bubble, the sovereign debt crisis, and the list goes on. Shakespeare is correct: returns generated from borrowing dull our analytical focus.
In the spirit of another quote from Shakespeare, “brevity is the soul of wit”, let’s get directly to the global macro grind . . .
Next Wednesday, with all of Wall Street well rested and back from the Hamptons, we are going to update our emerging market outflows theme. Like most macro trends, emerging market outflows is unlikely to be a month or quarter long trend. With the dollar and interest rates being key supporting factors, this one also has legs.
In fact, my colleague Darius Dale looked at the last strong dollar period, from 1995 – 2001, and the MSCI Emerging Market Index CAGR’ed at -5.3% versus the SP500 at +15.8%. So, reasonably, if interest rates are just starting to turn, and the dollar is only in the early stages of a long term strengthening, then emerging markets can be expected to underperform for some time.
In the Chart of the Day, we’ve highlighted recent emerging market equity and bond outflows. As the chart shows, the last four months have been staggering for outflows and emerging market asset classes have performed commensurately. As they say, follow the flows (or at least the projected flows).
After the first big correction is when the “value” investors usually start to get interested in a stock or asset class. No doubt that guy from Franklin Templeton who originally cut his teeth marketing Snoopy is licking his chops right now on emerging markets. The problem is that cheap can get a lot cheaper.
Currently, on an EV/EBITDA basis emerging market equities are still trading at slight premium to the long run mean versus the MSCI World Index. In times of crisis, like in the 1998/1999 period, emerging markets trade at a multiple that are closer to the 30% of the rest of the world (versus north of 70% now). When the proverbial brown stuff hits the fan, emerging markets go no bid.
We will be sending out an update of our emerging market chart book later this morning (ping email@example.com if you don’t get it) and will also be hosting a call on Wednesday, September 4th at 11:30am eastern. Even if you aren’t invested in emerging markets, this will be an important call in helping to understand global asset allocation flows. Or as we like to call it: The Flow Show.
Speaking of flows, EPFR Global came out with some date this week that highlighted some of the key fund flows in the year-to-date. No surprise, emerging markets lead in outflows with almost $7.8 billion in outflows. On the positive is the United States, which has seen $83 billion in inflows, but in the category of sneaky positive is Europe, which has $9.4 billion of YTD inflows mostly over the past nine weeks.
Europe may only be bouncing on the bottom in terms of an economic recovery, but the money has to flow somewhere. Even more sneaky has been the improvement of sovereign yields in the European periphery, with both Italy and Spain both solidly at 4.5% or below (some of the best levels in years). If the sovereign debt issues in Europe are truly behind us, the flows into Europe will only continue.
It only helps the investment outlook in Europe to have more sane central bankers like Mark Carney, formerly head of the Bank of Canada, running things. In his first newspaper interview since taking over the Bank of England, Carney directly acknowledged the risks of low interest rates when he said:
“We have the responsibility to assess emerging vulnerabilities in the economy such as housing, make those assessments and recommend action. Interest rates are principally an instrument of monetary policy for achieving the inflation outcome and there are other tools that address risks."
Well said, Mr. Carney. Well said.
Speaking of central bankers, this long weekend will give us all some time to consider what might happen at the Fed next if either of the two front runners, Janet Yellen or Larry Summers, take over. Hawk or Dove? Shakespearean tragedy or comedy? To flow, or not to flow?
All joking aside, policy matters so this choice will be critical in contemplating asset allocation in coming years. As Shakespeare said about vision and strategy:
“See first that the design is wise and just; that ascertained, pursue it resolutely.”
As it relates to the leadership change at the Federal Reserve, we can only hope this is the path that is pursued.
Our immediate-term Macro Risk Ranges are now as follows:
UST 10yr Yield 2.70-2.93%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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