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Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

When French People Say the State Is Too Large, Something Huge is Happening

 

A not-so-quiet revolution is sweeping the globe.

 

From Donald Trump’s surprise election win to Britain’s bombshell vote to leave the European Union, entrenched political elites are being uprooted and taken behind the woodshed by an irate electorate.

 

It’s easy for investors to view these events in isolation, says Pippa Malmgren, founder of economic consultancy DRPM Group and author of the best-selling book Signals.” But to truly understand the global zeitgeist, however, investors should consider this shocking fact:


On April 23rd, French voters will decide between the country’s two current political frontrunners. Marine Le Pen is president of the right-wing populist party National Front and Emmanuel Macron leads, En Marche!, a liberal political party he founded just last year. The two are neck and neck (and depending on the poll data you’re looking at, either candidate inches out the other, getting between 26% and 28% of the vote).

 

Both are outsiders. And both want to shift the balance of power from the government, back to the people, Malmgren says in the Real Conversations interview above with Hedgeye CEO Keith McCullough. (Meanwhile, embattled establishment candidate Francois Fillon has likely tanked his political ambitions. He is under formal investigation on suspicion of embezzling state funds. A recent poll found that three-quarters of French voters want Mr Fillon to pull out of the presidential race.)

 

Here’s the big picture takeaway from Malmgren in the video above:

 

“All of these European nations – Austria, Sweden, France, Denmark – they are all moving in the way of a Brexit but they may not go all the way to the exit door. What they’re moving toward is a smaller state, more personal freedom, especially more entrepreneurial freedom. More ability to build a business yourself because you can’t depend on the state. They’re broke.”

 

To better understand what this all means for investors, we encourage you to watch the entire Real Conversations interview between Malmgren and McCullough, “Pippa Malmgren Unplugged: Investing In An Age of Global Angst.” 

 


McCullough: My Top 3 ‘Trades of the Day’

 

 

In the highlight reel above from The Macro Show this morning, Hedgeye CEO Keith McCullough digs into three things investors should be watching today.

 

Here’s a taste:

 

  1. Raise Cash, Buy This Sector: The sector to buy first on any correction is Financials, within that specifically the company Franklin Resources (BEN).
  2. Fed Rate Hike = Rates Down, Dollar Down… What’s Next?: Last week’s Fed rate hike news caused bond yields and the dollar to fall. But both remain bullish from an intermediate-term to long-term perspective, McCullough says. “So provided that we’re right on growth, that’s why not only would I be raising cash, I’d be buying dollars today.” Buy the U.S. Dollar (UUP).
  3. Stay Away From Junk: Junk bonds (JNK) are highly-tethered to oil prices so be careful. “There’s been so much secondary stock and debt to paper over this energy bubble so the reality is there’s an oversupply situation and the trend is bearish,” McCullough says.

 


Cartoon of the Day: 5 Stages of Grief

Cartoon of the Day: 5 Stages of Grief - 03.20.2017 bear denial cartoon

 

Stock market bears are in denial.

 

 

 

Click here to receive our daily cartoon for free.


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Europe Is Exuberant Today! Short It.

Europe Is Exuberant Today! Short It. - Eurozone cartoon 02.21.2017

 

Investors swooned over the apparent victory of centrist party candidate Emmanuel Macron in last night's French Presidential debate. The consensus among pundits is anti-E.U. candidate Marine Le Pen took a drubbing.

 

The euro "surged" to a seven-week high on the news. 

 

The pleasant narrative being passed around now is that in the wake of national election voting out of the Netherlands, where the far-right party did far worse than expected, fears of political tumult are waning. This has pushed European stock markets to their highest level since 2015. 

 

It's a nice story.

 

But as geopolitical expert Pippa Malmgren points out in a new HedgeyeTV video, France's Le Pen and Macron are both political outsiders looking to shake up establishment Euro-area orthodoxy.

 

While frontrunner Macron isn't a populist hardliner like Le Pen, Malmgren points out that both support policies reflecting broader trends on the Continent (and globally) toward "a smaller state, [with] more personal freedom, especially more entrepreneurial freedom... because you can't depend on the state. They're broke."

 

Our take: Don't expect placid markets or exuberance to rule the day for long...

There's a lot of time before French voting on April 23rd...

 

So what should investors do today?

 

  1. Short Euros (vs. U.S. Dollar)
  2. Book gains in European Equities

 

Today's Chart of the Day shows our proprietary and dynamic daily trading ranges for the Euro versus the U.S. Dollar. The trading ranges suggest that, on a period of 3-weeks or less, the Euro would likely trade in a range of 1.05 to 1.08. With the euro tapping the top end of that range, now is a good time to sell or short euros. 

 

There's a bigger picture headwind for the euro too. As economist and author Daniel Lacalle points out in a Guest Contributor post titled "Are You Prepared For The End Of The Bond Bubble?," the U.S. and Europe are pursuing diametrically opposing fiscal and monetary policies that should cause U.S. dollar strength and euro weakness.

 

Check it out.

 

Europe Is Exuberant Today! Short It. - 03.21.17 E chart

Has the European Project Come to an End?” 

We have some thoughts on this important question. On Thursday, March 23rd at 11:00am ET, Macro analysts Matt Hedrick and Darius Dale will be hosting an institutional research call on this very subject.

 

We’ll offer our view on the changing political nature of the EU and Eurozone and provide a detailed quantitative and fundamental outlook on the region. (Institutions can ping sales@hedgeye.com for access.)


What Kim Jong-un Learned From Qadafi and Saddam Hussein

Takeaway: It is imperative that Secretary of State Tillerson have a team in place to deal with the growing existential threat posed by North Korea.

What Kim Jong-un Learned From Qadafi and Saddam Hussein - kim jong

 

The departure of South Korean President Park Geun-hye from the Blue House executive mansion last week was not unexpected; the long-running corruption scandal and eventual impeachment of Park brought to an end a tumultuous and unsettling period for South Korean democracy.

 

Encouragingly, it also demonstrated the resilience of democratic institutions for one of America's key allies and our 7th largest trading partner. New elections are now set for May 9th, to choose a successor to Park.  

 

But while streets in Seoul are now quiet, the future direction of South Korean foreign policy is still very much up-for-grabs. At this point, domestic weariness with Park's hard-nosed approach with the North appears to give South Korean "progressives" the upper hand in the May elections; election day surprises are, however, a staple of South Korean politics.

 

Should "progressives" -- the South Korean Democratic Party in particular -- gain the Blue House, their tradition of a "Sunshine" policy toward the North is likely to be revived. This means:

 

  1. Reopening economic engagement with the North;
  2. Attempting a diplomatic outreach with Pyongyang; and
  3. Judged by recent statements, pushing back on the stationing of U.S. anti-missile batteries ("THAAD") that are currently driving dyspepsia both in Pyongyang and Beijing. 

 

These shifts in South Korean politics are nothing new. North Korean missile testing, however, is. Earlier tests have been described by Council on Foreign Relations President Richard Haas as "station identification" - reminding the world not to forget Pyongyang.

 

But testing earlier this month -- salvo-launched solid fuel missiles from mobile transporters -- signals a very different and far more dangerous path by North Korean leader Kim Jong-un: a war-fighting capability with weapons of mass destruction, including, eventually, nuclear-capable intercontinental missiles, to hold the U.S. hostage in the event of future crises on the Korean peninsula.

 

Kim has learned the lesson from the collapse of governments in Libya (Qadafi) and Iraq (Saddam Hussein): dictatorial leaders threatened by the west are doomed in the absence of nuclear capability. 

Tillerson's Travels

Thankfully, Secretary of State Rex Tillerson was just on the road -- to the two countries in NE Asia that need U.S. reassurance (Japan and South Korea), and to the one country (China) at least partially complicit in Pyongyang's missile and nuclear madness.

 

  • Rex made headlines by stating that Obama's "strategic patience" policy toward the North was at an end, and that "all options are on the table" -- the latter statement containing an implicit U.S. military threat.
  • Despite the press frenzy, however, these are largely self-evident conclusions. But they did provide some long-overdue markers to Beijing, where Tillerson's visit last weekend was largely rhetoric-free and focused where it should be: on North Korea.

 

Next steps for Rex? Pave the way for a Mar-a-Lago U.S.-China summit, tentatively scheduled next month between Presidents Trump and Xi. This meeting looms as monumentally significant -- both to chart an agreed course ahead on North Korea, and to smooth Beijing-Washington relations roiled by nationalistic "China Dream" and "America First" rhetoric.

 

Setting the stage for a successful summit may well be the toughest and most important challenge of Rex Tillerson's entire foreign policy stewardship. 

 

In this light especially, it is imperative that the White House give Tillerson the ability to form a foreign policy team whose competence is commensurate with the challenges he and his department face. Political constraints on that personnel-selection process are incredibly short-sighted; and with the growing existential threat posed by Kim Jong-un, also highly dangerous. 


Cliggott: Here's the $64,000 Question Right Now

Editor's Note: Below is a Guest Contributor note written by our friend Doug Cliggott. Cliggott is a former U.S. equity strategist at Credit Suisse and chief investment strategist at J.P. Morgan. He is currently a lecturer in the Economics Department at UMass Amherst. 

Cliggott: Here's the $64,000 Question Right Now - Bull and bear extra cartoon

 

On markets...

 

My views on bonds haven't changed a whole lot from six months ago. But I was wrong on 2017 earnings ... I thought they would be down quite a bit this year, but it does not look that way now.  Profit growth has turned positive. 

 

1) I think the 10-year yield is heading higher.

 

Why? Faster inflation caused by rising unit labor costs.  

 

Non-farm productivity growth remains dismal:  0.2% in 2016, following 0.9% in 2015 and 0.8% in 2014.  With hourly compensation growing at 2.9%, BLS reports unit labor costs rose 2.6% in 2016, up from 2.0% in 2015.  A  2.5% 10-year yield seems unsustainable when unit labor costs are rising at 2.6%. 

 

Non-residential fixed investment remained stagnant in 2016, even as after-tax cash flow edged up, so it is hard to see what will push productivity growth higher in the near-term.  The focus of corporate America remains returning cash to shareholders rather than investing in the future.  

 

Share buybacks and dividend payments equaled 53% of cash flow in the non-financial corporate sector in 2016 -- that compares with a 35-year average of 34%. {This is based on Fed data, Cliggott calculation from Table F.103 in the Z1 release - new Fed website looks pretty cool, btw}

 

Meanwhile, cap ex by non-financial corporations equaled 73% of cash flow in 2016 -- that compares with a 35-year average of 84%.  The two numbers combined {shareholder payments of 53% + cap ex of 73%} still looks high relative to the long-term average combined total of the two -- 34% +53% = 117%.

 

So if US corporates slow their borrowing for some reason {higher rates?}, my guess is cutting cap ex will come before cutting payments to shareholders.

 

2) Most LEI's around the world bottomed last summer - including the U.S. 

 

That was a big surprise to me. This data tends to fit well with the U.S. corporate profit cycle.  Hence my change in view on 2107 profit growth.

 

I guess now the $64,000 question is -- Is this the beginning of a new cycle or "noise" on the way down?  I honestly don't know ... but given leverage levels and interest rate trends I am VERY SKEPTICAL that this is the beginning of a new credit / profit cycle. 

 

So my guess is renting {with a short-term lease} rather than owning US equities makes the most sense at this stage. I would note that the IWM hasn't made any net progress in three months ... and the next OECD LEI data release is April 10th!


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