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What’s Moving Oil Prices? Supply And Demand or The Dollar?

 

In response to a subscriber’s question on The Macro Show this morning, Hedgeye CEO Keith McCullough explains his thinking and process on the move in oil prices.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

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McCullough: Quick Thought Heading Into Thursday's Fed Meeting

Takeaway: Bets continue to mount on a dovish Fed meeting…

Here’s a quick, general market observation: the U.S. stock market looks increasingly suspect heading into Thursday’s Fed meeting. (I can get you to 32 VIX, no problem).

 

Question: What if people start reading "bad" economic news as bad?

 

McCullough: Quick Thought Heading Into Thursday's Fed Meeting - Fed tightening cartoon 09.09.2015

 

If the Fed goes dovish (they should), our omnipotent policymakers will have to tell the truth about a slowing economy.

 

That should scare people.

 

On a related note, the US Dollar Index closed on its low for the week (down -1.1% ). What’s most interesting about that is that on 30-day correlation, the S&P 500 has a POSITIVE correlation to USD of +0.8.

 

In other words, a dovish Fed could be bad news for stocks.

 

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Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

9/11/15 REPLAY | GOING LONG UNFI BLACK BOOK

9/04/15 GIS | Sends the Jolly Green Giant Packing

9/02/15 HSY | THE CURRENT SET UP IS LEANING LONG

8/31/15 HAIN | LOW QUALITY & INCREASED BUSINESS RISK

 

RECENT NEWS FLOW

Friday, September 11

MNST | Board of Directors have authorized a new share repurchase program of up to $500mm (click here for article)

PEP / SODA | PepsiCo is expanding its distribution partnership with SodaStream (click here for article)

 

Thursday, September 10

MDLZ | Provided an update on cost savings initiative and reaffirmed 2015 guidance (click here for article)

 

Wednesday, September 9

FLO | Announced the acquisition of Alpine Valley Bread Company, for $120mm in cash. FLO anticipates FY16 sales for the Alpine business to be $85mm - $95mm, the business has been growing at a CAGR of 51% over the last three years (click here for article)

 

Tuesday, September 8

MKC | Plans to expand organic and non-GMO offerings in 2016 (click here for article)

Angie’s | Adding popcorn production capacity in Reno, NV as the competition in RTE-popcorn heats up (click here for article)

 

SECTOR PERFORMANCE

Food and organic stocks that we follow outperformed the XLP last week. The XLP was down -0.4% last week, the top performers on a relative basis from our list were B&G Foods (BGS) and United Natural Foods (UNFI) posting increases of +6.3% and +4.7%, respectively. The worst performing company on a relative basis on our list was Lifeway (LWAY), which was down -2.8%.

Monday Mashup - CHART 2

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is bearish on a TRADE and TREND duration.

Monday Mashup - CHART 3

 

Food and Organic Companies

Monday Mashup - CHART 4

Monday Mashup - CHART 5

Monday Mashup - CHART 6

 

Keith’s Three Morning Bullets

Bets continue to mount on a Dovish Fed meeting…

 

  1. USD – US Dollar Index closed on its low for the wk (-1.1% on the wk) and is seeing follow through selling this morning vs. both Euros and Yens – what’s most interesting about this to me is that on 30-day correlation, SPX has a POSITIVE correlation to USD of +0.8 (meaning a Dovish Fed could be bad for stocks)
  2. JAPAN – Down Dollar is definitely bad for Japanese Stocks – that INVERSE correlation has not changed; Yen +0.3% took another -1.6% out of the Nikkei overnight – it’s -12.5% in the last month with the US Dollar -2.7% (and Yen +3.8%)
  3. UST 2yr – yield tested a “breakout” above 0.75% for the 6th time in 6 months last wk… and failed; back down to 0.71% on Dovish Fed spec this morning and, with Fed Fund Futures this low, I still think the Fed could train wreck macro markets if they tighten

 

SPX immediate-term risk range = 1; UST 10yr Yield 2.13-2.24%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE

Takeaway: Last week some positives, but mostly negatives with the intermediate term framework remaining decidedly negative.

Key Takeaway:

Risk parameters remain decidedly negative over the intermediate term, but appear to have struck a balance between positive and negative in the shorter term and longer term.

 

Notable events last week included the US Jobs report, which saw only 173k jobs added in August, less than the 220k expected and China's downward revision to GDP for 2014 to 7.3% from 7.4%. On the flip side, expectations for Chinese stimulus created some optimism and junk bonds saw a small bounce . Additionally, the FOMC meeting announcement coming this week added further uncertainty to the mix.

 

We continue to highlight China as our biggest concern with Chinese steel prices continuing to fall.


Current Ideas:


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM15

 

1. U.S. Financial CDS – Swaps tightened for 16 out of 27 domestic financial institutions with an average move of -1 bps tighter.

Tightened the most WoW: AXP, MS, MTG
Widened the most WoW: SLM, MET, ACE
Tightened the most WoW: CB, ACE, ALL
Widened the most MoM: SLM, WFC, MET

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM1

 

2. European Financial CDS – Swaps tightened for the most part in Europe last week. The median move was a -3 bps, while Greek bank CDS were outliers, tightening between -341 bps and -3087 bps.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM2

 

3. Asian Financial CDS – Swaps for Chinese banks widened between +1 bps and +4 bps last week as the country revised its 2014 growth rate down from 7.4% to 7.3%. 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM17

 

4. Sovereign CDS – Sovereign Swaps were flat to tighter last week. Italian sovereign swaps tightened the most, by -4 bps to 112.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM18

 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM3

 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps were mixed last week. Brazilian sovereign swaps widened by 16 bps to 395. Meanwhile, Russian swaps tightened by -15 bps to 370.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM16

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 7 bps last week, ending the week at 7.09% versus 7.15% the prior week.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM5

7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1870.

 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM6

 

8. TED Spread Monitor – The TED spread was unchanged last week at 31 bps.

 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM7

 

9. CRB Commodity Price Index – The CRB index was unchanged last week at 197. As compared with the prior month, commodity prices have decreased -0.6%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM8


10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM9


11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 13 basis points last week, ending the week at 1.90% versus last week’s print of 2.03%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM10


12. Chinese Steel – Steel prices in China fell 1.5% last week, or 35 yuan/ton, to 2225 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM12


13. 2-10 Spread – Last week the 2-10 spread widened to 148 bps, 7 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM13


14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.7% upside to TRADE resistance and 4.5% downside to TRADE support.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM14


Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

 


CHART OF THE DAY: Strong Dollar, Rising Gas Prices and U.S. Presidents

Editor's Note: The chart and excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information on how you can subscribe and upgrade your market and economic game.

 

CHART OF THE DAY: Strong Dollar, Rising Gas Prices and U.S. Presidents - z Chart of the Day

 

...[Y]ou’ll recall that a #StrongDollar is the only long-term pattern of purchasing power strength that Americans have enjoyed. In fact, a #StrongDollar was coincident with two of the most popular Presidents in US history:

 

  1. 1983-1989 (Reagan) had the strongest of #StrongDollars (see Chart of The Day), sub $20/oil and ~4% real GDP
  2. 1993-1999 (Clinton) had the 2nd strongest USD period and average < $20 Oil with ~4% GDP too

 

So, maybe… just maybe – everyone is staring at the tree ahead of this week’s Federal Reserve decision (Thursday) instead of the forest.

 

 


Coincidences & Curiosities

“Is it just an accident, or is some deeper pattern at work?”

-Gary Klein

 

Both the aforementioned quote and title of this morning’s Early Look come from Chapter 4 of a fantastic #behavioral book I’ve been citing titled Seeing What Others Don’tThe Remarkable Ways We Gain Insights.

 

I don’t mind repeating myself when it comes to great books and great processes. In fact, that’s the most important point about having a repeatable #process - Rinse & Repeat. The 3 core factors in our macro model remain: history, math, and behavioral psych.

 

With that perspective, if we are humble enough to accept that we really don’t know what we don’t know about Global Macro and all of its developing patterns, coincidences and curiosities will reveal that correlations often perpetuate causality. Soros called that reflexivity.

 

Coincidences & Curiosities - z 55

 

Back to the Global Macro Grind

 

“Coincidences are chance occurrences that should be ignored except that every so often they provide us with an early warning about a new pattern… they should be listened to, rather than ridiculed, because they just might be onto something.” (Seeing What Others Don’t, pg 45)

 

Now, instead of “they”, substitute Mr. Macro Market’s signals and now we’re talking the same language. The only way to save and/or make real money in this profession is to understand new patterns before consensus does. We call those Phase Transitions.

 

In macro, many times a “new” pattern is simply a cyclical regurgitation of an old one. In order to respect the “deeper patterns at work”, we simply need to know the #history of it all. While patterns are rarely identical, their #behavioral aspects often rhyme.

 

On that long-term pattern score, let’s consider the multi-duration #history message of the US Dollar:

 

  1. TAIL (long-term): after being devalued to a 40yr low in 2011, the US Dollar put in a long-term bottom and has started to recover
  2. TREND (intermediate-term): after one of its biggest 6-month ramps (ever) starting in Q3 of 2014, it’s up another +5.5% YTD
  3. TRADE (immediate-term): down -1.1% last week and -2.2% in the last month, is now hostage to Dovish Fed expectations

 

Longer-term I think the Dollar is recognizing the pattern of devaluation that European and Chinese planners think they’ll need to engage in as their respective secular (demographic) headwinds become as relevant as Japan’s have been (see Macro Themes deck for details).

 

From an intermediate-term TREND perspective, the US Dollar has been wrestling with not only the aforementioned competitive Currency War devaluations but the weekly back and forth amongst US economic policy navel gazers on a “rate hike.”

 

And while the “dots” on a rate hike continue to be pushed out (anyone remember they were “supposed to hike” in June?), Mr. Macro Market’s most immediate-term message to the Federal Reserve (Fed Fund Futures < 30% probability of a SEP hike) is don’t do it (again).

 

What if they do? You know, “just to get off of zero because it’s time”, or something like that...

 

Well, I say we go backwards and look at TRADE and TREND duration risk for clues on what markets could reverse:

 

  1. EUR/USD is +2.7% in the last month – #FedHike would = Dollar Up, Euro Down
  2. Japanese Yen is +3.8% m/m and Up Yen drove the Nikkei -1.6% overnight - #FedHike = Up Nikkei
  3. Oil (WTIC) is +1.7% in the last month (crushing stocks); Up Dollar = Down Oil #Deflation Risk ON
  4. Copper is +4.9% in the last month (big Dovish Beta); Up Dollar = Copper Crash still ON
  5. Emerging Market Stocks (MSCI) +1.8% last week and would likely resume their crash on #FedHike
  6. Chinese Stocks (Shanghai Comp) +1.3% last week would probably keep crashing no matter what!

 

Then there’s the expectations impact of the almighty FED DOVISH headline on US stocks (“they’re gonna rip, bro!”). And that’s where things are starting to look not only curious, but coincident. Check out the following 1-month correlations:

 

  1. US Dollar Index DOWN -2.2% month-over-month
  2. SP500 DOWN -5.9% month-over-month
  3. USD vs. SPX 30-day correlation POSITIVE +0.80

 

Yep. Maybe Ed has had this right all along. Maybe it’s RISING gas prices on Down Dollar, that is the new pattern of bearish US GDP growth!

 

If you’ve studied post WWII economic #history, you’ll recall that a #StrongDollar is the only long-term pattern of purchasing power strength that Americans have enjoyed. In fact, a #StrongDollar was coincident with two of the most popular Presidents in US history:

 

  1. 1 (Reagan) had the strongest of #StrongDollars (see Chart of The Day), sub $20/oil and ~4% real GDP
  2. 1 (Clinton) had the 2nd strongest USD period and average < $20 Oil with ~4% GDP too

 

So, maybe… just maybe – everyone is staring at the tree ahead of this week’s Federal Reserve decision (Thursday) instead of the forest.

 

Maybe consensus on BOTH bearish US Equities (-205,684 net SHORT position in SPX Index + Emini non-commercial CFTC contracts = fresh YTD high), and Fed Fund Futures (implying no hike) have it right…

 

After all, it would be no coincidence if a slowing US economy was the signal amidst the noise. When the economy is slowing, the Fed gets dovish and the Dollar falls. And yes, from a TREND perspective, stocks probably will too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.12-2.24%

SPX 1
Nikkei 178
VIX 21.71-31.19
USD 94.51-96.13
Oil (WTI) 43.03-48.01

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Coincidences & Curiosities - z Chart of the Day


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